Telecom Sector Falls Out Of Favour With Proposal Of Levies On Operators

The Union Cabinet on Thursday, November 08, 2012 accepted the recommendations made by the Empowered Group of Ministers (eGoM) that one-time charges on airwaves would be levied on GSM-based operators. A similar decision for CDMA operators was recently deferred by the government since the withdrawal of Tata Teleservices and Videocon from the upcoming auctions left no buyers for 800 MHz (megahertz). Though this move marks the end of uncertainty on one of the regulatory fronts, there are more issues surrounding the industry that still leaves a reason to worry about. 

In accordance with the proposed charges, existing operators holding spectrum above 6.2 MHz would be charged retrospectively from July 2008 to January 2013. At the same time, operators would have to prospectively pay for spectrum above 4.4 MHz for a duration corresponding to the remaining period on their licenses starting January 2013. Auctioning of the 1,800 MHz and 900 MHz spectrum bands would hold as follows:

• 1,800 MHz spectrum auction to be held next week.
• 900 MHz spectrum auction to be held by the end of March – price to be determined based on the price discovered in the 1,800 MHz auction. Money paid by the operators would be adjusted on the price discovered in the auction.
• Operators holding spectrum in the more efficient 900 MHz band will have to pay twice the reserve price for the 1,800 MHz spectrum as a one-time fee.

On the payment of the fees, operators would be allowed to pay the full amount upfront or pay for the spectrum in annual installments at an interest rate of 9.75 per cent or prepay the installments as well as surrender the spectrum they don’t wish to pay for. 

As per the Department of Telecommunications, the final list of bidders for the 1,800 MHz band auction includes Bharti Airtel Limited, Idea Cellular Limited, Vodafone South Limited, Videocon Telecommunications Limited and Teleswings Communications Services Private Limited. 

Bharti Airtel is expected to be the worst hit as it holds beyond 4.4 MHz in 22 circles which would force the company to pay anywhere between Rs 3,500 crore and Rs 4,250 crore. Idea Cellular would be relatively lesser affected as it holds the spectrum in 12 circles, amounting to an estimated sum of Rs 1,750 crore to Rs 2,000 crore. The impact on R-Com is expected to be even lesser since it holds 4.4 MHz of spectrum in eight circles, out of which five are in C (economically underdeveloped) category. Minimal impact would be felt by newer operators as they don’t hold more than 4.4 MHz in most parts of the country. MTNL and BSNL would be safe from payments since the government would be shelling out the fees for these companies. 

The direct impact of this move is going to be on the costs to subscribers. India has seen a constant downward trend when it comes to voice rates. This has aided growth in subscribers so far. However, with these charges in place, it is estimated that call rates could go up from the current 0.9 cents/minute to 2.5 cents/minute. Also, considering the time horizon of these auctions, the effect on subscribers is expected to pan out in the coming quarters. 

Although the move significantly reduces the uncertainty over spectrum usage and payment, the industry faces pressure in terms of the government’s prospective move to get rid of roaming charges, a drop in the number of subscribers, lacklustre financials and a threat of increased competition with the entry of Reliance Industries Limited. Thus, though the stocks are trading higher, it is definitely not the time for investors to be optimistic about the sector.