Govt sets stage set for largest ever spectrum auction

New Delhi: The Union government on Wednesday cleared India’s largest auction of telecom  pectrum.Based on the base price, the spectrum is valued at Rs.5.66 trillion. The auction of the seven spectrum bands will also, for the first time, offer the highly efficient but expensive 700 megahertz (MHz) frequency. While the receipts from the auction will boost the Union government’s exchequer, the availability of spectrum will

expand the bandwidth and the ability of telecom companies to service consumers and address the problem of call drops. In the event of aggressive bidding, the balance sheets of telcos, already overburdened by debt, will come under greater pressure.

The government is putting on sale spectrum bands of 700MHz, 800MHz, 900MHz 1,800MHz, 2,100MHz, 2,300 MHz and 2,500 MHz. The 700 MHz band, which is the most expensive and most effective, is likely to generate less interest from telecom service providers.

The auctions should help telcos improve quality of service as the ecosystem of data consumption in the telephony space is driven by content. The Telecom Regulatory Authority of India’s (Trai’s) first independent test drive on dropped calls, conducted in Delhi, showed that most telecom operators failed to meet the benchmark. Studies conducted in Hyderabad, Bhopal and Mumbai came up with similar results.

The spectrum auction plan was recommended by Trai and reviewed by the Department of telecommunications before being put before the Union cabinet for approval.

Finance minister Arun Jaitley called it the biggest spectrum auction in Indian history. He added that fresh consultations were needed on the issue of spectrum usage charges (SUC), and Trai has been asked to make new recommendations.

“For spectrum usage charges, it has been thought through that a flat rate may not be particularly appropriate for the past, present and future, so a referral limited to SUC needs to be done again and Trai has been asked to respond at the earliest,” said Ravi Shankar Prasad, minister of communications and information technology.

On 7 June, the Telecom Commission announced a weighted average methodology to calculate SUC and lowered the rate to 3% for the upcoming auction from 5% in earlier auctions. The weighted average calculation was based on the time and frequency band of acquisition.

“In case of spectrum usage charges, the right thing would be to simplify it with a uniform rate instead of making it complex by charging multiple rates,” Hemant Joshi, partner, Deloitte Haskins & Sells Llp, said.

The cabinet approved Trai’s proposal on pricing of the spectrum.

“Almost 2,000 MHz of spectrum will be auctioned and the pricing remains same as recommended by Trai,” a top official in the department of telecom said on condition of anonymity.

The official added that the lock-in period for the payments made for purchase of spectrum has been reduced to one year from three years to encourage competition.

To be sure, this will also allow a company to exit the sector if it finds its business to be unviable.

The cabinet has cleared the payment terms suggested earlier—25% upfront for all bands under 1 gigahertz and 50% upfront for 1,800 MHz, 2,100MHz, 2,300MHz and 2,500MHz bands and the rest to be paid on two years moratorium and ten years instalment, the official said.

“The notice inviting applications will come out after clarification on SUC is received from Trai,” he said.

Normally, it takes 60 days for the government to conduct the auction after cabinet approval.

Joshi said the government may not be able to meet its expectations of revenue generation. “There is no do-or-die situation for spectrum in terms of need in the industry and the ecosystem for the 700 MHz band is yet to develop. Therefore, considering the debt size and hovering uncertainty due to enhanced competition, there is a doubt that the government will be able to meet their expectations,” he said.

To enable better operability, it makes sense to have a pan-India presence, which in the past has triggered aggressive bidding. The 2015 spectrum auction, in which the government had put up a total of 380.75MHz of spectrum for sale in the 800MHz, 900MHz, 1800 MHz and 2100 MHz bands, raised Rs.1.1 trillion.

The most expensive spectrum band is 700MHz, at Rs.11,485 crore for 1 MHz. This makes the industry liable to payRs.57,425 crore for 5MHz on a pan-India basis.

Speculation is rife in the industry about the participation of telcos in the auction, especially in the 700MHz band, because of the ambitious base price and the significant amount of debt on the balance sheets of telecom companies, which makes affordability a question. This band alone has the potential to fetch bids worth over Rs.4 trillion.

“The good news is we will have more spectrum available than required in the immediate future; the supply side is being catered to with this. However, an artificial price fixed by government is the constraint,” said Rajan S. Mathews, director general, Cellular Operators Association of India.

“The 1,800MHz, 2,100 MHz and 2,300 Mhz have fair amount of interest and the industry would prefer getting 700Mhz but the participation seems unlikely because the telco’s pockets don’t allow arranging funds of such magnitude and this would create a lot of burden on already debt-stressed industry. Even the sale of 2,500MHz is questionable because it is an untested band and doesn’t have the adequate ecosystem,” he added.

The entry of Mukesh Ambani-controlled Reliance Jio Infocomm Ltd is likely to change the dynamics of the telecom industry significantly.

Ambani has announced an investment of $22 billion in his telecom venture, leaving him with enough cash to bid for the 700MHz band and putting existing telecom companies, hamstrung by combined debt of Rs.3.8 trillion as of December, on the back foot.