Unholy ring

Like any other merger idea, this one, too, looks good on paper. Since MTNL and BSNL operate in different parts of the country, they clearly complement each other geographically. The business fit also appears good.

MTNL has some of the best high-value corporate accounts in Delhi and Mumbai; BSNL has a national long-distance network that will enable the two companies to route the bulk of their STD calls within the same network, reducing the need to share revenues with others.

While MTNL's STD calls are even now carried on BSNL's long-distance networks, there is no guarantee that things will remain this way. Especially, if the telecom regulator finally decides to get proactive and forces telecom companies to give consumers the right to choose the long-distance network they wish to use.

In theory, an MTNL-BSNL merger should make two and two add up to five, but ground realities point in another direction.

For example, any merger makes sense only if bloated staff costs can be reduced and other synergies are exploited to the full.

In the current create-jobs-at-all-costs environment, there is little chance of that happening. In any case, most global studies show that merged companies seldom do better than the individual companies did before tying the knot.

A more important objection to the proposed merger is the likely creation of the biggest monopoly of all times. No government that believes in competition should allow this kind of deal to go through without carefully vetting this aspect.

Take the case of STD calls. Since BSNL and MTNL between them control almost all of the country's land lines, it is almost certain that no one else will be allowed to carry STD calls emanating from the combined company.

So, if a merger is to happen, the telecom regulator must ensure that other STD/ISD carriers like Reliance, Bharti, and Data Access are freely allowed to carry STD/ISD calls from BSNL-MTNL.

And since BSNL-MTNL will naturally not be too keen to allow this, it may be necessary to force a legal separation of the local and long-distance business before clearing any merger.

Once this is done, the long-distance service arm of BSNL-MTNL will have to compete for the merged firm's long-distance traffic on equal terms with the Reliances and Bhartis of the country.

BSNL is already in the midst of a controversy where private cellular operators have accused it, with some justification, of subsidising its mobile services with the help of cash from the Access Deficit Charge (ADC).

The cellular operators claim they are paying 70 paise per minute as ADC, which is meant to subsidise rural telephony, but BSNL may be using it to slash charges on mobile services.

After a merger, the opportunities for such cross-subsidisation will multiply. This means landline and mobile businesses may also need to be operated separately.

Normally, just keeping separate accounts should be good enough, but we've seen that the telecom regulator has not been able to get BSNL to do this for several years.

While regulators the world over bend over backwards to rein in the incumbent's monopoly powers, this hasn't been done in India. Quite simply, a BSNL-MTNL merger should not go through without addressing the monopoly issue.