Govt clears biggest spectrum auction

Big 3 telcos not to bid for 700 Mhz band, putting at risk 74% of govt's estimated spectrum proceeds

The Union Cabinet on Wednesday approved the largest auction of telecom spectrum, likely in September and expected to fetch the government Rs 5.44 lakh crore, if all the airwaves are sold at their base prices.

This is the first time the government has put up the entire available spectrum for sale. The Cabinet approval will kick start the process of sale of spectrum in seven bands.

"The Cabinet has approved the entire proportion, laying down the road map for the biggest-ever auction of spectrum," said Union Minister for Telecom & Information Technology Ravi Shankar Prasad.

The potential revenue of Rs 5.44 lakh crore from spectrum sales is more than double the Rs 2.54 lakh crore gross revenue of the telecom industry in 2014-15. While Prasad was bullish about the appetite for spectrum at the base price, industry players are not.

That's because Idea, Vodafone and Airtel are not planning to bid for spectrum in the 700 megahertz (Mhz) band, putting in jeopardy 74 per cent of the estimated proceeds. Although spectrum in bands below one gigahertz is efficient for data services, the three telecom companies have said they will not bid for the 700 Mhz band. The telecom sector is sitting on Rs 300,000 crore of debt and is unlikely to bid aggressively.

"We do not expect irrational bidding in the auctions, given the telecom companies' stretched balance sheets," Bank of America Merrill Lynch said in a note.

Experts do not expect the smaller players to bid aggressively either because their financials are stretched.

Airtel has spruced up its spectrum portfolio ahead of the auctions by acquiring airwaves from Videocon and Aircel. However, Airtel may buy spectrum in the 2,100 Mhz band.

"There is one circle in which we do not have 3G spectrum. Wherever there is additional capacity needed, we will take a look," Gopal Vittal, chief executive officer, Bharti Airtel, told analysts. The company does not have 3G spectrum in Kerala.

In an interview with Business Standard, Himanshu Kapania, chief executive officer, Idea Cellular, said, "Our auction strategy will be selective. We will focus on coverage expansion, rather than increasing capacity." Idea has 3G or 4G spectrum in 17 of the 22 telecom circles.

The government will put around 2,300 Mhz of spectrum up for auction, from which it expects at least Rs 64,000 crore. Overall, it expects revenue of Rs 98,995 crore from communication services in 2016-17, which includes auction proceeds and other fees levied by the department of telecommunications.

A key aspect of spectrum usage charges will, however, be sent back to the Telecom Regulatory Authority of India (Trai) for clarification. The Trai had proposed flat spectrum usage charges but the attorney-general has pointed out that flat fees for past, present and future spectrum may not be appropriate in legal terms.

After receiving the attorney-general's opinion, the Telecom Commission decided for spectrum acquired in the upcoming auctions, three per cent of the adjusted gross revenue would be charged from telecom operators and a weighted average formula would be applied for calculating the usage charge on the total spectrum holding for all bands. The commission's decision will be sent back to the Trai for referral.

The auction will include sale of the premium 700 Mhz band at a reserve price of Rs 11,485 crore per Mhz. The cost of delivering mobile services in this band is estimated to be around 70 per cent lower than the 2,100 Mhz band, used for providing 3G services.

A company interested in buying spectrum in the 700 MHz band will need to cough up a minimum Rs 57,425 crore for a nationwide block of five megahertz. This band alone has the potential to fetch bids worth over Rs 4 lakh crore.

Regarding the payment conditions, the panel had favoured that companies winning spectrum in higher frequency bands like 1,800 Mhz, 2,100 Mhz and 2,300 Mhz should pay 50 per cent upfront and the rest in 10 years after a two-year moratorium and for 700 Mhz, 800 Mhz and 900 Mhz, companies should pay 25 per cent upfront and rest in 10 years after a two-year moratorium.