New entities have been barred from selling equity for three years

The Department of Telecommunications (DoT), on Thursday, issued much-awaited merger and acquisition (M&A) guidelines for various telecom services. It allows firms to enter into M&As within the lock-in period, but the merged firm cannot exceed 50 per cent market share. Similarly, new entities have been barred from selling equity for three years, while the lock-in period will apply to the company resulting from the M&A.

The guidelines also say that acquirers of companies holding 4.4 MHz spectrum, allocated at old rate, will have to pay to the government the difference between the initial amount (Rs.1,658 crore for pan-India as per 2001 auction) and the market rate determined through the latest auction. The market rate determined through auction will remain valid for one year. Thereafter, additional price calculated based on prime lending rate of State Bank of India will be added to determine the market rate. The merged entity will be allowed to hold a maximum of 25 per cent spectrum allocated in a service area and 50 per cent in a particular band, it adds.

In the case of CDMA spectrum (800 MHz band), the government has fixed the upper limit of the total spectrum holding at 10 MHz. A merged entity will be allowed to hold a maximum of two blocks of 3G spectrum in a service area. This will check amalgamation of more than two 3G spectrum holding companies. Similarly, if companies holding spectrum at the old rate opt for buying another company, they will have to submit one-time spectrum fee as bank guarantee to the DoT.

The Cellular Operators Association of India (COAI) that represents GSM industry has welcomed the move. “We now expect four-five operators in each circle (currently there are a total of 12 operators in India).

However, step-up cost on spectrum that was not acquired through auction and lock-in period are matter of concern…When a company is already paying a market determined rate for spectrum, while acquiring another firm, there should be no lock-in period,” said COAI Director-General Rajan S. Mathews.

Similarly, Deloitte Haskins & Sells’ Partner Hemant Joshi said: “Consolidation is the need of the hour. M&A guidelines may not provide full benefits of the consolidation in terms of costs especially of spectrum…The larger question is whether the so-called ‘market discovered price’ of the auction is a fair price for determining the differential to be paid at the time of the merger considering that auctions were held when the telecom companies were under compulsion to bid aggressively for the spectrum to remain in business.”

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