Telcos’ wait for airwaves gets longer

17 Jun 2009, 0702 hrs IST, Joji Thomas Philip & Sandeep Gurumurthi, ET Now

The wait for additional airwaves, key for mobile operators to expand their customer base, has just got longer, with the telecom ministry deciding to make any decision on this only after the upcoming auction of third-generation spectrum, according to a top official in the department of telecom (DoT).

Communications minister A Raja and Finance Minister Pranab Mukherjee met twice on Tuesday, but were unable to reach a consensus on key issues related to 3G auctions such as the base price for these radio frequencies as well as the number of players to be allowed to offer these high-end services.

“No consensus as of now on the base price. We discussed various suggestions — whether we should go for uniform base price or opt for differential pricing, according to circle, depending upon commercial viability of that area,” Mr Raja told reporters after his second meeting with Mr Mukherjee.

As a fallout, the telecom ministry has decided that it will take a call on all issues related with second-generation spectrum, the airwaves on which all mobile services are offered at present, including the methodology for future allocations, the pricing for this scarce resource and the usage charges for utilising these airwaves only after the upcoming auctions of third generation spectrum, the official said on condition of anonymity.

The ministries are divided over the base price for the 3G auctions with DoT proposing a reserve price of Rs 2,020 crore for pan-India 3G spectrum and the finance ministry wanting it to be doubled. DoT has said it is open to hiking the reserve price to Rs 3,540 crore as a compromise.

The two ministers said for the first time that they were willing to look at a differential pricing formula to arrive at a base price for 3G auctions, vital for high-end services such as video conferencing and high-speed internet on the mobiles.

Industry analysts, however, say using a new formula to arrive at differential pricing for each circle will be a time-consuming process that will further delay the 3G auctions.

The development implies that existing telcos will not get 2G spectrum till the issue is settled. Now, they will have to invest heavily on infrastructure to ensure that the quality of services do not deteriorate.

At present, all telecom services are offered on 2G spectrum and these airwaves have been given to telcos based on their subscriber numbers. Put simply, additional radio frequencies are dished out as telcos as they add more subscribers. Currently, India follows a controversial practice of allocating spectrum based on companies’ subscriber base, and is the only country in the world that follows this method.

There are two key factors that have led to the communications ministry deciding to stop all 2G allocations until the completion of 3G auctions.

First, the spectrum panel in its report submitted last month had said the country should adopt the internationally-accepted auction system for issuing additional 2G airwaves to telcos. This committee, consisting of academicians, industry representatives, government officers and industry representatives, had suggested that the 2G pricing be market-linked and be related to the auction price of 3G spectrum.

Second, the committee had also suggested that all telcos who hold radio frequencies beyond the 6.2 MHz mark be charged a one-time fee for all the extra radio frequencies they hold, while adding that this one-time fee be calculated based on the 3G auction price.

The communications ministry can act on these recommendations only after the 3G auctions take place.

The larger implication is that all telcos will have to shell out huge amounts, both for the excess 2G radio frequencies they hold as well as for all additional allocations in the future.

Additionally, DoT’s move to freeze all 2G allocations is also set to impact all telcos. For instance, India’s largest telco, Bharti Airtel, is awaiting additional spectrum allotment of 1 MHz each in five circles.

Reliance Communications, which has start-up spectrum in all 22 circles in the country, is now eligible for the next tranche in six circles as it has reached the prescribed subscriber numbers in these areas. Other telcos such as Vodafone Essar and Idea Cellular too are awaiting additional spectrum in several circles.

With no airwaves allotments over the next couple of months, these operators will have to spend significant amounts in setting up new cellsites. Analysts say for most operators, it is, therefore, a tradeoff between increased capex and allowing the quality of services to deteriorate on account of the spectrum crunch.

This is because it is technically possible to have increased number of subscribers using the same amount of radio frequencies, provided operators spend significant amounts in building more base stations and subscribing to the latest technological innovations.

It is not just the large players that are impacted by the latest policy logjam. The government’s move to put all allocations on hold will also pinch small players and new entrants like Datacom, Unitech Wireless

and Swan Telecom, who are awaiting start-up spectrum in many regions.

Datacom row ends as Nahata agrees to sell stake to Dhoots

15 Jun 2009, 0040 hrs IST, Chaitali Chakravarty & Joji Thomas Philip, ET Bureau

NEW DELHI: Mahendra Nahata of Himachal Futuristic Communications (HFCL) has finally agreed to sell his 36% stake in telecom service provider Datacom Solutions to the Dhoots of the Videocon Group to end a year-long corporate battle that had spilt over to lenders, regulators and even potential foreign investors, two people familiar with the negotiations said.

The Dhoot family, which owns a 64% in Datacom, is already negotiating with a European company to pick up a strategic stake in the company to bankroll its pan-India rollout plans, a person familiar with the settlement said on condition of anonymity.

While Mr Nahata’s 36% stake is valued at around $300 million (about Rs 1,422 crore), the HFCL chairman will not get this payment immediately, top executives said. As of now, the Dhoots had paid Mr Nahata a ‘token payment’ and the remaining would be paid in tranches, they added.

Datacom, which had got licences to offer telecom services in all circles in India except Punjab early last year, has yet to start operations mostly due to the standoff between its two partners.

Both Mr Nahata and Mr Dhoot denied that any such deal has taken place.

Mr Nahata said that talks of any settlement between the two partners of Datacom were baseless, adding that he would continue to remain a stakeholder in the telco. Similarly, Videocon group chairman VN Dhoot, in reply to an email query, said: “There is no question of shareholding changes or settlements or payouts between the two parties.”

A person familiar with the deal said that it is likely to involve a merger of HFCL Infotel’s telecom operations in Punjab with Datacom.

But Mr Nahata will not get any additional cash consideration for HFCL Infotel, as its debt of more than Rs 400 crore will be transferred to the books of Datacom.

Mr Dhoot denied this too. “It is denied that any deal involving HFCL Infotel’s telecom operations in Punjab being merged with Datacom has taken place with Mr Mahendra Nahata,” he said.

He said Datacom has engaged Morgan Stanley to find a strategic partner, but refused to name any likely foreign partner due to the non-disclosure clause with Morgan Stanley.

The negotiations between Mr Nahata and the Dhoots had been deadlocked for close to 15 months with Mr Nahata demanding Rs 2,116 crore for his stake.

Last year, he had rejected an offer by the Dhoots to buy him out for Rs 1,360 crore. The valuations of telecom companies, which got licences last year, have crashed over the past nine months.

Datacom, which commanded a valuation of nearly $3 billion in early 2008, is now valued by analysts at around $1 billion. It had announced that it would begin operations in Chennai by August 2008, but the deadline was postponed to December 2008.

The company failed to meet this too. The standoff between the partners had also resulted in several potential international investors refusing to buy into the company.

UAE’s Etisalat held several rounds of talks with Datacom, but eventually picked up 45% stake in another new telco Swan for $900 million.

Some foreign telcos had even set a pre-condition that they would only invest in Datacom after both the warring stakeholders exit the firm.

The foreign telcos then wanted to bring in their own Indian partner to hold 26% in the telco. Indian regulations allow 74% foreign direct investment in the telecom sector.