2G Auction: Winners And Losers

The government, in order to curb the fiscal deficit, had chalked out a plan that included raising funds from an auction of 2G airwaves. The government expected to raise Rs 40,000 crore to help narrow the fiscal deficit to 5.3 per cent of the GDP in the year ending March 31, 2013 from previous year’s 5.8 per cent. However, these plans faced a massive drawback at the end of the auction on Wednesday with less than 25 per cent of the goal achieved, at Rs 9406.61 crore.

The reserve price for this auction was set at an unreasonable Rs 14,000 crore, which is more than eight times the Rs 1,660 crore in 2008. The final price determined by the auction of this 1,800 MHz band was to determine the opening bid for the 900 MHz band to be sold in March 2013. This auction has come in as a blow, especially after the recent cancellation of the CDMA auction after the withdrawal of Tata Teleservices and Videocon left no buyers, thus leaving the government severely short of the targeted revenue.

As per the provisional results provided by the Department of Telecommunications, Vodafone won a spectrum in 14 circles, paying Rs 1,127.94 crore. Teleswings, the Indian unit of Norway’s Telenor, retained part of its operations that would have been otherwise lost in January 2013 due to the cancellation of 22 of its licenses. The company spent the most among the final bidders by shelling out Rs 4,018 crore for six circles.

Bharti Airtel had not lost any licenses in the Supreme Court verdict and thus benefited out of not having to pay a hefty premium to regain licenses. The company spent a mere Rs 8.67 crore for the Assam circle. With the highest number of subscribers and no additional premium payments to make, the company came out to be a clear winner.

Idea Cellular won airwaves in all the seven zones that it was set to lose permits in and also won an additional auction in Bihar. The company would have to pay a sum of Rs 2,031 crore. With Idea’s consolidated debt for FY12 at Rs 11,249.69 crore, the debt/equity ratio seems under control at 0.86 considering the fact that only 33 per cent of the payment has to be made upfront and the rest spread over 10 years.

Videocon, whose 2G permits are to be revoked, won in six circles. Of the bidders, we think Bharti Airtel has benefited the most. Other players too have benefited on account of the muted response, thus keeping bids from becoming aggressive. This has resulted in a rise in the stock prices of Bharti Airtel, Idea Cellular and Videocon Industries by 3.27 per cent, 3.26 per cent and 0.44 per cent respectively. Moreover, the impact is not expected to cause a one-time blow as the payment option entails that 33 per cent of the amount has to be paid upfront and the rest in instalments, over a period of 10 years. This combined with the fact that the government would be refunding the amount paid by operators for the for their permits in 2008 would leave companies like Telenor, Videocon and Idea Cellular with minimal impact. 

Overall, the auction has resulted in telecom operators benefiting. The government is set to lose out because of the severe shortfall in the target. Moreover, since only 33 per cent of the payment is to be made upfront and since the government would bear the costs for MTNL and BSNL, a fraction of the intended sum would come in the government’s kitty, adding further pressure to the fiscal deficit plans.