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Commentary

122 2G Licenses Cancelled By SC Order, Reauctions To Happen In Four Months

The Supreme Court has cancelled 122 licenses issued by then telecom minister A Raja to telecom companies, saying that they were granted in an arbitrary and unconstitutional manner. Raja had, in 2008, granted spectrum licenses to many companies at a price of Rs. 9,000 cr. which was strangely much lower than the 3G auctions which fetched 69,000 cr for a much smaller number of licenses. Some of these companies turned around and sold stake to foreign companies at a much much higher valuation, meaning that the spectrum had been underpriced, and the process was manipulated so that other parties don’t bid.

The losers are Uninor (Unitech + Norway’s Telenor), Loop Tele, Sistema Shyam (Shyam Tele + Sistema), Etisalat DB (Swan tele + Dubai’s Etisalat), S-Tel, Videocon, the Tata Docomo piece and (some) Idea.

Of the newer players, the bulk of the subscribers are with Uninor.

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These guys, as a whole, don’t have a lot of subscribers. Only 66 million (6.6 crore) out of total of 89.3 crore subscribers are with the new fellows – though honestly I don’t have bifurcated figures of Tata Docomo versus Tata’s other services.

These licenses will be auctioned. We don’t know when, how or how much. The court has said four months – within which time the current licensees can continue to operate.

My Notes

  • The govt must be thanking their stars – an auction means money for financing what seems to be a horrendous fiscal deficit. If so, they’ll auction the spectrum before March (or if not, it’s something worthwhile next year).
  • There’s a large ecosystem that the licensees had created – from hiring people to buying equipment to taking debt to working with partners like call centers and data providers. This ecosystem will suffer, or at least stay in limbo.
  • Banks have talked a little about their exposure, which they say is not significant. But I don’t think they currently have an idea of how much they are exposed to. The domino effects will ensure there are bits of bad news on a regular basis in the next few months.
  • The uncertainty may cause certain users to attempt to move, but I honestly doubt that’s an issue. If you were a Uninor prepaid subscriber, you might not explicitly move, you’ll just let your currency expire and buy another sim from someone else.
  • Most of these subscriber numbers are overreported anyway. Do you really believe, honestly, that India has 89 crore mobile connections currently active? Of a population of 120 crore, where a good number are non mobile wielding children, others live in areas too remote for cellphone coverage, and only a tiny percentage has more than one mobile?
  • Is this good for Airtel or Idea? Well, to be honest, when there are auctions, there will be more players coming in and they will have the supreme court sanction that their entry is clean. Airtel has a murky past as well, when they got spectrum in a non-auction method – if someone goes to court, even that spectrum may be deemed to have been underpriced and may go to auction. There is no clarity; and the guys that are “clean” will have a slight advantage. I don’t think the advantage is so much, even if it’s temporary.
  • This is not really about auctions versus first come first serve. That would be too silly. The point is that there were bribes given to subvert the specific process that was used to get spectrum, by the parties involved. So they suffer. It is entirely likely that earlier granted spectrum was also mired in bribery, and if that is found, then those licenses will also be cancelled. The court has made it fairly clear that it is this particular case that is a bother, and that will explain why their action seems so harsh.

Even then, the Airtel stock is up big, and the Unitech stock is down big. But after much analysis the issue will throw up news over a regular period, and will cause some level of uncertainty about investing in India. However, it is a good step that will strengthen the process of handing out lucrative pieces of what is public property.

I would like to also see such a transparent auction process on media advertisements by the government (for tenders, or regular ads of performance, or notices). Also for mines, for iron ore, for coal. This will stifle industry for a while, but we can handle it. The auction-versus-FCFS argument does hold water, especially in the context of a transparency act like an RTI.

  • Hardik Shah says:

    Good post….couple of points
    1) TRAI reports active subs every month…the number for december is about 65 crore.
    2) You are right on the ecosystem…includes equipment vendors (who have also financed the network rollouts through vendor financing) and tower companies – Big debt on both these fronts, currently largely unreported.
    3) Most importantly, this will definitely impact FDI inflows in the short to medium term. People are really freaking out about this.
    H

  • raghavendra shenoy says:

    Not sure if the Govt. would thank itself thinking of the money it could garner via auctions. There is also a possibility of some of the entrants going to court over the judgement, saying that one of the Govt. functionaries himself was involved, which could make the present Govt. culpable. I foresee a situation where the Govt. will provide an exit to players like Videocon, Stel,Loop etc coz their other biz interests too will have to be protected. Etisalat and Loop will most likely want to sell off their licenses coz they’ve not fulfilled rollout obligations anyway. Videocon too might want to look for a buyer. All in all, things could get more complex in the near future for these new cos.
    Idea’s case is a matter of interpretation and a case of surrender of licenses in Karnataka and Punjab, owing to merger with Spice Telecom. But here, Govt’s delay is to blame, not Idea. RCOM and Tata Docomo have a chequered history – both started as WLL players, graduated to full blown mobile service providers and then acquired a Dual Technology License by virtue of a liberal telecom policy ( read arm twisting or ‘managing the Government’). Net net, i believe Idea, RCOM and Tata Docomo are safer along with Bharti Airtel.
    I am not sure what ecosystem you are talking about – most of the new entrants have entered into tower rental deals with either Airtel/RCOM/Tata/Idea/Vodafone – so their cost is anyway less than older operators. Plus, they’ve got equipment @ a cheaper cost as well. For VAS, network management and IT Infra mgmt, there are firms like Onmobile/InMobi/Comviva/Ericsson/Nokia Siemens/Wipro/TechM etc with whom the newer folks have tied up. Those contracts would be in limbo, as would be some banks which have huge exposure to this sector – but i don’t think the newer folks have created any ecosystem.
    Given the high degree of over-reporting of subscriber numbers, it would be fair to discount each figure by 25% atleast. Add to that the multiple sim users, which means that active SIM’s are a better way to measure subscriber numbers (using VLR registrations of course).
    Pick up of additional spectrum by the incumbent operators is again dicey – show me the money please. All of them, (Bharti Airtel/RCOM/Tata Tele/Idea) are neck deep in debt – am sure they would be concerned about debt servicing problems and so would be banks – which means funding spectrum purchase by these incumbents is going to be a tough task for banks.

    • Great comment! The issue is: even if the govt was culpable, the licenses will stay cancelled. The govt official will go to jail, thats all, and the case is still on.
      Thanks for all the individual notes about hte companies – I agree, the system is in flux. The ecosystem = whover these people dealt with. Like spectramind had some contract, Daksh another, and so on, which are likely lost now. Banks – now that’s a different ball game, I wonder if we’ll know what the numbers are.
      Yes, the incumbents picking up more, at very high prices, with all that debt = not likely to happen. I wonder how the auctions will go this time around!

  • raghavendra shenoy says:

    Cancellation of licenses is too good to be true, if you consider the below
    Uninor- Telenor+Unitech partnership
    Cheers Mobile – Etisalat+ DB Realty
    MTS – Sistema+Shyam Telecom
    STel – Bahrain Telecom (BATELCO)+ Sivasankaran (Siva Group)
    The first partner in each of the above is either an entity majority owned by the respective Government or has a significant stake ( Telenor – Govt.of Norway, Sistema- Govt. of Russia, BATELCO – Bahrain rulers, Etisalat – UAE ). Given the involvement of sovereign interests, CONGRESS will surely have to cook up some formulae to keep everyone happy