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Will SC verdict hurt telecom sector's future? - Views on News from Equitymaster
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  • Feb 3, 2012

    Will SC verdict hurt telecom sector's future?

    The Supreme Court (SC) of India came up with an epic verdict that has consequences for the entire telecom sector. The apex court declared that 122 2G licenses issued by the erstwhile telecom minister, Mr A Raja should be cancelled. This means that all the 2G licenses issued on or after January 2008, have been quashed. Some feel that this ruling is the triumph of governance over greed. Some others feel that this is another sign of the government not looking after the interests of the business community. Some have even gone ahead and stated that such moves would make it difficult for foreign investors to look at India as an investment option.

    The past

    In 2008, the telecom minister at that time, Mr. A Raja, decided to award 2G licenses and spectrum to several companies. Many of these did not satisfy the basic conditions that were required to be met for the license. But Mr. Raja still issued the licenses to nearly every Tom, Dick and Harry. And that too at a considerable loss to the government. Rather than adhering to the rules and regulations and auctioning the licenses, he sold them at a randomly decided price. Thus denying the exchequer the opportunity to realize the actual value of the licenses.

    The result was that there were several new players who entered the telecom market thus leading to hyper competition. The price war that followed led tariffs to plummet to new lows and squeezed the profitability of the incumbent operators while forcing the new players to bleed.

    The present

    The matter remained under the carpet till 2010. In 2010 the government realized the amount it lost due to the random decision when it auctioned the 3G license and spectrum. Since then the government came under the assault for its poor governance and the entire incident was termed as a scam. Though the government promised to take severe action against the wrong doers, nothing much happened for quite some time except for political debates. Finally, the Supreme Court came up with its ruling deeming all the licenses issued at that time to be illegal.

    In all 9 companies stand to lose the licenses issued to them at that time. This includes Uninor (the joint venture between Unitech and Norway based Telenor), Videocon, Sistema Shyama (a JV between Shyam Telecom and Sistema of Russia), Loop, Etisalat DB (a JV between Swan Telecom and Etisalat of UAE), Idea Cellular, Spice (now a subsidiary of Idea) and Tata Telecom. The companies, particularly the foreign players, have complained that this ruling completely disregards the interests of the business community. They further state that such moves by the government would make investors increasingly cautious against investing in India, which in turn would hurt the country in the long term.

    In reality, much of the hue and cry is simply because this is a first of its kind decision wherein the need for justice outweighed the nexus between politicians and businessmen. This is why we applaud it.

    The future

    The bigger question now is what would happen to the telecom sector? The ramifications of the decision can best be understood in three parts.

    • Impact on the subscribers: As per a report by TRAI (Telecom Regulatory Authority of India), nearly 5% of the total active mobile user base of India would be impacted by this decision. This would mean that nearly 45 m of the country's 894 m subscribers would see their services go off when the licenses are cancelled. However, SC has given four months to the companies. This means that these subscribers have some time during which they can change their operators. This is where Mobile Number Portability (MNP) would play a big role as subscribers can retain their phone number and still switch their network provider.

    • Impact on companies: The 9 companies facing license cancellation have two choices. They can either appeal for a reversal of the verdict, which means expensive legal costs. Or they can bid for new licenses whenever the government decides to auction the same. Or they can completely move out of telecom space. If they choose to bid for new licenses they would be looking at high license costs (the 3G auction was an example). To add to this, the incumbents would be participating in the auction as well as they would seek to expand their networks.

      For incumbent players like Bharti Airtel, Vodafone as well as Idea Cellular (the company draws nearly 85% of its revenues from the 13 old circles) this verdict is a blessing. They would stand to gain from the subscribers who would be moving out of the affected companies' networks. They would also get a chance to bid for the additional spectrum as and when that is made available.

    • Impact on the sector: The verdict would lead to the much needed consolidation in the sector. With players moving out, the level of competition is expected to come down. In the absence of hyper competition, the existing players would have the opportunity to increase tariffs too to be able to increase their profitability levels. But we feel that the companies would be cautious when it comes to increasing prices. Indian consumers are extremely sensitive to prices as a result of which price elasticity is high. Therefore so as to not lose out in terms of minutes of usage, operators would be careful when adjusting tariffs upwards.
    The decision to cancel the 2G licenses would lead to short term pains for the affected companies as well as investor sentiment in the short term. But in the long run, this same decision would serve as a boon for the Indian telecom sector.



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    1 Responses to "Will SC verdict hurt telecom sector's future?"


    Feb 8, 2012

    The article doesn't mention anything about the investment made by the foreign firms like Uninor who haven't done anything wrong just by buying spectrum from a firm who acquired it illegally. The SC has not given any directions about the capex made by such genuine telecom players would be reimbursed. The error was committed by the government and the government should be made to compensate for such errors

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