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Strategic Focus
Drafting a better future?
The Draft National Telecom Policy 2011 has introduced amendments which benefit the industry. Changes have also been made to clauses pertaining to M&As and exit routes. However, a lot more needs to be done in order to ensure welfare of telecom operators.
Issue Date - 24/11/2011
One look at the Indian M&A outcomes of 2010, and the dynamics of the Indian telecom industry instantly become clear. According to statistics compiled by Assocham, the combined value of the telecom M&A deals in India stood at $22.7 billion in 2010, which roughly makes up for 67.19% of the entire deal volume across India Inc. In fact, at any given point of time, there are 14 odd players competing to extend their presence in the world’s second fastest growing telecom market after China.

No doubt, Indian telecom has emerged as one of the greatest economic success stories, registering a consistent overall growth rate of more than 35% over the past decade in terms of subscribers (according to a World Bank study, a 10% increase in teledensity is known to boost GDP growth by 1.3%), but when it comes to regulatory framework the industry still lags behind it global counterparts and as such needs radical reforms. More so because the dream run of new entrants (including Videocon, Etisalat, STel, and MTS) – who ended up paying Rs.81 crore for acquiring 3G licences – keeps hitting roadblocks as more players join the bandwagon further increasing competition in an already cluttered business segment.

Further, entry costs are exorbitantly high and operating margins are overwhelmingly low. In fact, currently only the top four private telecom companies are EBITDA-positive. Although the operating environment has improved after Bharti’s July 2011 initiative to increase on-net, pre-paid and SMS tariffs by 20% was followed by major competitors, their margins still remain under pressure. This leaves telecom operators with no choice but to consolidate in order to put a cap on the ever rising costs. However, under the current contours of the regulatory norms established by the Telecom Regulatory Authority of India (TRAI), the largest telecom entity can consolidate to command a market share of up to 30%. Anything beyond that is subject to scrutiny and does not get necessary regulatory approvals. As such, while players like Bharti Airtel consolidated their position both nationally as well as globally (it acquired Zain’s African business for $10.7 billion), others such as BPL, Max Hutchinson, AT&T, Telstra had no choice but exit.

Therefore, consolidation and exit are two of the most important issues that need to be addressed in order to make the Indian telecom industry more efficient. This is where the new Draft Telecom Policy 2011 (introduced on October 10, 2011) becomes significantly important. As per the recent amendments incorporated, a deal giving birth to an entity with up to 35% market share will have no interventions from regulatory authorities. Deals which gives a company market share of up to 60% will be examined on a case to case basis. However, any deal where the new entity crosses the 60% barrier will come under strict interventions from TRAI. This seems like a move that will boost consolidation. But the fact that the draft NTP does not provide relaxations on restrictive M&A regulations offsets any benefit. As per a recent report issued by Fitch Ratings titled Indian Telecom Services: Regulatory Uncertainty to Continue, “TRAI’s recommendations to require a minimum of six operators per circle, for entities not to have over 30% market share or maximum spectrum of 14.4Mhz for GSM and 10Mhz for CDMA, effectively block consolidation in the sector.” But having said that the agency still believes that consolidation among the existing 10-13 service providers in each circle is inevitable and that the Indian telecom sector can sustain at most six or seven players in the long run.

In fact, most experts do agree that the market is ripe for another round of M&As. After all, that is the only way to cut cost and boost efficiencies. Agrees Ranjan Mattews, Director General of COAI as he tells B&E, “The market is ripe for another round of M&As to prune the market to a more sustainable six operators. This conforms to what is seen in most other international markets where there are no more than 3-5 operators.” Another area where the Draft NTP focuses is on developing an exit policy for telecom players who are significantly small and want to exit the business. The move will not only give needy operators access to spectrum, but will also help the exchequer earn more revenues.

Though one can expect regulatory uncertainty to continue over the short-term until the final policy, due by January 2012, provides specific policy details, but one thing is sure, the draft NTP 2011 certainly facilitates consolidation in the telecom service sector while ensuring sufficient competition in an industry, which has been mired in controversy, particularly after the grant of new licences in 2008. Well, this seems like a new beginning for Indian telecom industry!

Anirudh Raheja           

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