Karvy Daily Insights – India Telecom: Government Initiates much-needed "Exit Policy" process

India Telecom: Government Initiates much-needed "Exit Policy" process

Analysts: Amit K. Ahire, Sameer Pardikar

In what can be termed as a "Game Changer" move for the Indian telecom sector the TRAI on Friday, January 06, 2011 kick started consolidation process and came out with much awaited pre consultation paper on "Exit Policy for Various Telecom Licenses".

The current guidelines allow entry of unlimited number of players, while the exit is restricted. As a result of this, there are around 12-13 operators providing services in each circle. This apart from increasing competition has also resulted in fragmentation of spectrum, which has created scarcity of spectrum leading to substantial increase in base 2G spectrum price.

It is to be noted that in Jan'08, the DoT issued 122 new licenses, out of which 85 licenses were issued to five new operators i.e. Uninor, Videocon, Swan-Etisalat, Loop Telecom (all nearly pan-India) and S-Tel (in 6 circles). Even after four years of getting license no operator except Uninor has been able to make a mark in the industry, while the coverage and subscriber base have remained pathetic. In statistical terms, these five operators hold 27% of country's spectrum, but account for merely 7.5% of total subscriber base, and 3% of industry mobile revenue, and at the same time their contribution to the Government's revenue is further lower (in terms of license fees and spectrum charges).

Apart from this, the CAG in its report dated November 08, 2010 highlighted that above-mentioned 85 out of 122 new licensees did not meet the eligibility criteria prescribed by the DoT. Moreover, 45 out of these 85 licenses failed to satisfy basic conditions of the main object clause in their Memorandum of Association. Subsequent to that the Government issued a show cause notice to all 85 licences and post that all these operators are embroiled in regulatory and legal problems and court cases are pending against most of them. Further to this, the companies like Loop Telecom have given submission in the Supreme Court that they would like to surrender license. Owing to this, in our view, despite relaxed M&A norms no operator would dare to acquire these tainted companies.

On this backdrop, we indicated in our previous report and e-mail updates that the consolidation process has to be initiated by the Government and it needs to come out with suitable exit policy for the same. The DoT also on its part had indicated in its Draft Policy (dated October 10, 2011) that the TRAI needs to come out with suitable exit policy to address these issues.

Accordingly, the TRAI came out with pre-consultation paper, wherein it asked all the stakeholders to submit their views on various issues related to the exit policy.

Issues raised in the paper on which the TRAI is seeking opinion include:

- Whether partial exit (surrender of spectrum only-in part or complete) from the business should be allowed?

- What should be the terms and conditions for exit?

- Desirability and feasibility of refund of part of entry fee;

- Release of bank guarantees;

- Policy on surrender of spectrum; Policy on refund in case of partial/full compliance or non-compliance of roll-out obligations;

- Time frame for exit from the business/service; Modus-operandi to shift the customers from one service provider (who desires to exit from the business) to another service provider;

- Settlement of liabilities/claims of the service provider exiting from provisioning of telecom services under a licence.

Although delayed, we believe that this is a step in right direction, which will provide relief to the industry, which is already mired in competitive, regulatory and legal problems. The exit by some of the operators will not only bring down the level of perceived competition, but also will release the much-needed 2G spectrum, which is the need of the industry currently. From the incumbent operators' perspective, this will also have positive implication on the pricing of excess spectrum and spectrum renewal.

We reiterate our "BUY" recommendation on Bharti Airtel and Idea Cellular.

Source : Equity Bulls

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