Reduced spectrum auction reserve price likely to trim govt deficits

The Telecom Regulatory Authority of India's (Trai) recommendation to drastically cut the reserve price in spectrum auctions will come as music to the ears of major telecom players such as Bharti Airtel and Vodafone.

Most of the top Indian telcos had stayed away from the auctions earlier this year saying the reserve price set then were beyond them. The new floor price for spectrum in the 900 and 1800 MHz bands is likely to bring them back into the fray.

There are two benefits of Monday's recommendation, which the government has to accept before it becomes a rule: one, the companies will be able to get more spectrum to offer better quality of services to phone customers and, two, the Union government, staring at galloping deficits, could garner precious revenues.

The government plans to auction about 50 MHz of 1800 MHz band along with 48MHz of 900 MHz band. The last two auctions - in Novermber 2012 and March this year - received a lukewarm interest from telcos.

But, auctions in 2010 for 3G and broadband wireless spectrum were successful from the government revenues point of view and brought in over Rs 100,000 crore, exceeding its expectations of Rs 38,500 crore. This year, the government expects to raise some Rs 40,800 crore.

The reserve price is the minimum price set in an auction and signals to the market the price below which the auctioneer, the government in this case, will not sell the asset (spectrum here). It sets the trend for auctions.

Companies like Airtel and Vodafone have been complaining that it is becoming increasingly difficult to continue doing business in India if the spectrum rates keep going up at a time when their margins are coming down drastically. Incidentally, having been the earlier entrants in the market, Airtel and Vodafone are scheduled to renew their licences next year.

"With all big operators staying away from the last auctions it seems the Trai had no option but to do what is fair," explained Amit Goel, CEO of Bangalore-based telecom consulting and research firm Knowledgefaber.

In Monday's recommendations, Trai has recommended that the floor prices be cut by almost half of what they were till now. For instance, the reserve price in Delhi circle will now be auctioned at Rs 175 crore per block compared to the Rs 450 crore earlier. For all-India spectrum, the reserve price has been set about 37 per cent lower - at Rs 1,496 crore - from the earlier price. The Trai recommendations can be viewed at: http://bit.ly/traireco

"It might not be good news for newer players who don't have to bid for spectrum for some years to come, but overall it is good news for the sector," explained Goel.

While Bharti Airtel refused to comment on the developments, industry lobby Cellular Operators Association of India (COAI) said it has to study the recommendations in detail before commenting.

A second recommendation made Monday by Trai is about the option of trading spectrum.

While it is not clear how exactly such trading will work, Goel said the chances are it will have to be done in the public domain. "With some players thinking of leaving India there could be some consolidation of spectrum if this is allowed," Goel said, adding that till last month the Department of Telecommunications (DoT) had maintained that it will not permit sharing of spectrum, let alone allow trading in it.

Just last week, COAI had requested DoT to allow the same as part of the merger and acquisition policy for the telecom industry.

Regulators in countries like the UK, Germany and Australia already allow spectrum trading.

There are two ways by which spectrum trading can be done. One in which both allocation as well as assignment rights can be changed and the second where only assignment rights are changed.