Is it Diwali time for India's beleaguered telcos?

Last Diwali, the Government hosed down the prospect of a return to fireworks in the telecoms industry by announcing sky-high reserve prices ahead of a new round of spectrum auctions. This year, the possibility of festive telecoms cheer is brighter, following the proposal of merger rules which should allow more consolidation possibilities than ever seen before in India.  Here are initial thoughts on the proposals, in advance of further news expected to unveiled this week.

A merged entity could be permitted now to hold up to 50% market share of subscribers in any telecom circle in India. That’s far higher than what national competition authorities would normally allow in any market, where usually anything above 40% is deemed “Significant Market Power” status. With India comprising 23 circles, perhaps the Government is ready to allow 50% share in individual circles under the assumption that no merger combination will ever result in such market share levels nationwide. Whatever the reason, the high threshold opens up a range of merger possibilities in India’s still overcrowded telecom market.

The bigger players, such as Bharti Airtel, Idea and Vodafone, who each hold 30% plus market share in several circles, now have the possibility of being able to absorb others without flouting the market share limits.  The appeal to them of acquisitions won't come just from being able to expad their customer base, but actually to get access to more spectrum.

These players lack spectrum today, and in future, as data traffic grows exponentially, they will need more.  Indian operators have an average of 8-10 MHz of spectrum each per circle compared to around 50 MHz in France, and over 100 MHz in Korea.  Auctions provide one route to acquire more, but there is a limited amount of spectrum available through any auction.  Acquisitions provide another route, because when an operator is acquired the spectrum rights will go with it to the buyer, provided they are able to top-up what they pay for the spectrum to today's spectrum market prices.  The proposed guidelines also indicate that players will be allowed to hold more than one block of 3G or 4G spectrum, which is encouraging.

Medium-sized players, of which there are quite a few, have the option to merge or be acquired (giving their investors a chance to exit) including 2- or 3-way deals between themselves to gain access to more customers with proportionately less capital.  We have seen speculation of such combinations in the press recently - the 50% market share limit for a merger would make more such combinations feasible. Merging will allow some of these players to explore new options through which to survive and thrive.  Having said that, India being a large market continues to offer niche players the chance to be successful in specific geographies, specialising in serving focused segment needs.

The M&A proposals signal a refreshing degree of rationality on the part of the policy maker – an acceptance that many individual circles are not huge markets, but good-sized ones where 3 to 4 players offer a more reasonable level of market competition than 8 to 10.  Cleverly (from a fiscal perspective), the guidelines propose that acquirers will have to pay for any new spectrum acquired at market prices.  This means that if spectrum was bought by operators earlier at lower prices, acquirers today would have to top this up by additional payments to the Government to ensure the spectrum is paid for at today's market prices.  Therefore acquirers may have to pay significant sums to Government: good news for the exchequer.  TRAI’s confirmation last week that it will stick to recommended lower reserve prices for spectrum will provide some ballast to this – pushing interest in spectrum auctions and spectrum acquisition higher than it ever was in 2013.  Finally, it seems the tussle between fiscal interest and sector priority might be coming into a more sensible balance.  We will find out more when the Government's plans unravel further this week.

So, can we expect a return to telecom fireworks at Diwali? With an election due in 2014 it is possible that buyers will pause before investing large sums of money until they know who’s going to be in charge post the polls. So we should expect fireworks again in Indian telecoms, but perhaps when we are closer to Diwali in 2014.

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