High reserve price likely to mar upcoming spectrum auction

After four years, the government is venturing into auction of spectrum once again. A total of 2,251.25 mhz are being offered at a reserve price of Rs 3,92,332.70 crore at the auction, slated to begin on March 1, 2021. The airwaves that will be auctioned off are expected to help telecom operators boost their network capacities.

In May last year, the Digital Communications Commission – the apex decision-making body of the Department of Telecommunications (DoT) – had approved the spectrum auction plan. Later, last December, the Union Cabinet had approved the next round of auction.

A single auction process will be carried out for assigning spectrum blocks in various bands, ranging from 700 mhz to 2,500 mhz. Telecom operators have been asked to submit their applications by February 5, and they can withdraw their applications by February 22.

Validity of the spectrum won in the upcoming auction will be for 20 years from the effective date. MSTC has been appointed as the adviser to the government in this spectrum auction and will act as the auctioneer for the e-auction.

Successful bidders will have to pay the bid amount within 10 days of the issue of demand note. The government has eased the payment process for winning bidders in the auction, given the precarious, financial condition of telecom companies. As a part of the payment conditions, successful bidders can either pay the entire bid amount upfront or shell out a portion of the amount upfront.

In case of part payment, telecom companies will have to pay upfront 25 per cent of their respective bid amounts for spectrum won in 700-, 800- and 900-mhz bands. The upfront payment will have to be 50 per cent for bid amounts in case of spectrum won in 1,800-, 2,100-, 2,300- and 2,500-mhz bands. The remaining amount can be paid in up to a maximum of 16 equated annual instalments after a moratorium of two years. A 7.3 per cent interest will be charged for the instalments. The successful bidders will also have to pay 3 per cent adjusted gross revenue (AGR), excluding wire-line services, as spectrum usage charges.

Muted response

The telecom industry appears to be relieved with the auction timeline finalised. The industry had been pitching for the 4G auction to take place as some licences in the bands are expiring in 2021. The incumbents are likely to bid for spectrum where they need renewal or their spectrum is about to expire.

The incumbents have been reframing 2G and 3G airwaves to suit the needs of 4G subscribers. Besides, the incumbents have seen the quantum of their spectrum growing with merging of telecom companies that exited the industry in the consolidation process. There is hence acute demand for spectrum in some bands, which are likely to see stiff competition from bidders. “We expect moderate participation in the upcoming auction, largely limited to renewal of the expiries in the 800- and 1,800-mhz bands. This would leave little participation in the 700-mhz band,” points out ICRA Assistant Vice-President Ankit Jain.

The ensuing spectrum auction, in the meanwhile, will not include bands in the range of 3,300 to 3,600 mhz that support 5G services. As such, no clear timeline has been drawn up for the 5G rollout yet. Most of the mobile operators – except for Reliance Jio (RJio) – were against the auctioning of 5G spectrum in the March auction, as they are not able to find a strong business case in India at present. Besides, the telecom companies are right when they add that India currently woefully lacks the infrastructure required to support 5G services.

But RJio has already announced its plan to roll out 5G services in the second half of 2021. With 5G spectrum not on the block, analysts opine that RJio may have to use spectrum in other bands bought through the auction to launch 5G services. RJio has already revealed that it has developed an in-house 5G solution that it plans to deploy to launch services.

Need for rethink

Meanwhile, the Cellular Operators’ Association of India (COAI), the telecom industry body, is relieved that the upcoming auction will enable the industry to cater to exponential increase in data usage. However, the industry body is unhappy with the high reserve price of the spectrum.

“The government has addressed the requirement for availability of additional spectrum. But lowering the reserve prices would have provided telecom companies with additional resources for their network expansion. High reserve prices in the past auctions have resulted in large amounts of spectrum remaining unsold,” points out COAI Director General S P Kochhar.

The last spectrum auction of 2016 was rather disappointing. The government had offered 2,354.55 mhz at a reserve price of Rs 5.60 lakh crore, which the telecom companies had found too exorbitant. Ultimately, the government managed to sell only 965 mhz or about 40 per cent of the spectrum that was put up for sale, mopping up a total amount of a mere Rs 65,789 crore.

Following the 2016 spectrum auction debacle, the Telecom Regulatory Authority of India (TRAI) in August 2018 recommended a lower reserve price for the next spectrum auction compared to the reserve price of 2016. For instance, the telecom regulator reduced the reserve price of the premium 4G spectrum in the 700-mhz band for the March auction to Rs 6,568 crore per mhz. This works out to a 43 per cent discount to the 2016 auction reserve price of Rs 11,485 crore for the 700-mhz spectrum.

But telecom companies find the new, discounted price too on the higher side. In fact, at Rs 6,568 crore per mhz, each of the telecom companies would still have to shell out Rs 32,840 crore for a pan-India, 5-mhz block in the premium 700-mhz band. The high reserve price comes in the backdrop of a financial mess that telecom companies find themselves in.

Currently, liability level of Indian telecom companies is collectively pegged at about Rs 3 lakh crore. Bharti Airtel had about Rs 1.29 lakh crore in debt, while that of Vodafone India stood at around Rs 1.7 lakh crore. RJio is the only telecom company that has managed to turn debt free, having sold nearly a third of its equity to top foreign entities. Top bankers expect the debt to expand further, as companies bid for 4G spectrum in the upcoming auction.

The bankers opine that upfront payments by telecom companies for spectrum would be far less, with the rest to be paid over 16 years in equal instalments. However, the upfront payment of nearly Rs 1.5 lakh crore still represents a fat sum, the access to which would require companies to furnish corporate guarantees and stronger proof of cash flows. Most telecom players in India are bleeding currently, with the AGR dues – despite having got deferred payment concession – battering their balance sheets.

The upcoming auction against the backdrop of this bleak situation is likely to see a tepid response from the telecom industry. Analysts note that companies looking to renew their licences in bands that are expiring in 2021 and those seeking to plug existing gaps may pick up spectrum in less-expensive bands. Premium spectrum bands are set to witness muted demand, they add. Rating agency ICRA estimates that the auction may fetch the exchequer between Rs 55,000 crore and Rs 60,000 crore or about 15 per cent of the amount targeted by the government.

According to industry experts, the government does not seem to have learnt any lesson from the past auctions. The government has been advocating all along that beyond revenue maximisation, the main aim of the auction is to expedite pace of mobile revolution and usher in a robust digital ecosystem. Sadly, pricing of airwaves at every auction reflects the government’s obsession with maximising its revenue. It is time that the government introduced industry-friendly prices to realise the objective of digital India.

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