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Will the spectrum auction succeed?
Thu, 6 Feb Pre-Open

After two consecutive failed attempts the Indian government restarted the process of auctioning 2G telecom spectrum from Monday 3rd Feb 2014. Just two days into the auction, it seems that the government will be 'third-time lucky'. On the very first day, bids were received for about Rs 393 bn. There was no slow down on the second day either. On day 2, after twelve rounds of bidding, the amount has increased to over Rs 446 bn, according to the financial express.

This is definitely good news for the government which is looking for ways to peg the fiscal deficit for FY 13-14 at 4.8% of GDP. It is auctioning 385 MHz in the 1,800 MHz band in all 22 circles and 46 MHz in the 900 MHz band in the 3 metro cities of Mumbai Delhi and Kolkata. For the telecom industry, the lower reserve price for the spectrum will certainly be an important factor in these auctions. For the 1,800 MHz band, the reserve price has been set at Rs 17.65 bn per MHz for a pan-India bid. This is about 26% lower than the base price set at the last auction. In the 900 MHz band, the pan-India bid price is lower by about 53%.

At this price, there certainly is demand for spectrum. This is especially true for the 900 MHz band. Incumbent telcos Bharti Airtel and Vodafone have licences in the three metro cities which will expire in November 2014. They will look to retain the spectrum they hold to continue their operations. Aggressive bidding can be expected here if the new entrant, Reliance-Jio, was to try and get a foothold in these circles. The Mukesh Ambani owned company, has plans to enter the voice market along with an entry into the 4G space for which it already owns a pan-India licence. This would spell big trouble for incumbents like Bharti who would then have to compete with a well capitalized new entrant. Reliance Jio, if it were to win 2G spectrum licences at this auction, could come into the market, with possibly lower call rates, thereby hurting the operating margins of the incumbent telecom firms However, we will have to wait and watch if Reliance Jio gets the spectrum. All in all, we believe that this auction might well turn out to be a success due to increasing competition (results in higher bid price) and lower reserve price.

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