Seeks recast of Tripartite Agreement and M&A norms

In order to mitigate the stress in the telecom sector, particularly with respect to a near freeze of bank funding, the Finance Ministry has asked the Department of Telecom (DoT) to provide greater security to lenders in the event of termination of licence.

The move comes in the backdrop of the termination of 122 2G licences by the Supreme Court on February 2, 2012 and in an environment of slowing subscriber growth, and shrinking profit margins.

The Finance Ministry wants to secure lenders through the incorporation of “a suitable clause in the draft Tripartite Agreement [for assignment of licence] among the Licensor, Licensee and Lender to provide for termination payment to lenders of an amount equivalent to lower of the licence fee mobilised, or secured loan outstanding, in the event of termination of licence allotted to an operator.”

The need to “permit a suitable stand still period for consultation with secured lenders before cancellation of telecom licence assigned in favour of lenders in the event of default/breach of terms of allotment by the operator” has also been highlighted. It is further seen to be necessary to expedite the assignment of spectrum allotted to operators in favour of lenders in the event of licence cancellation.

In a letter to DoT secretary, R Chandrashekhar, Finance secretary D.K Mittal, calling for a discussion on the matter as soon as possible, has also stressed the need for a liberal merger and acquisition (M&A) policy to facilitate speedy consolidation in an orderly manner so that industry viability and growth is sustained by a reasonable number of efficient and financially strong operators.

Spectrum sharing and a spectrum allotment policy that addresses efficiency of usage and spectrum shortage in 2G coupled with the speedy utilisation of the Universal Service Obligation Fund (USOF) to facilitate rapid rural network expansion by the operators has also been strongly recommended to the DoT.

According to Mr. Mittal, the DoT has failed to address most of these issues in its revisions of the draft Tripartite Agreement (TPA) which has been prepared in consultation with public sector banks and SBI Caps. “Though the clause 2.1 of the TPA provides for assignment of licence [including spectrum] to the new licensee, no time period has been specified by the DoT,” Mr. Mittal observed, pointing to the fact that the DoT has addressed even this one issue only partially.

While the Finance Ministry's concern is justified, it is unclear how it can succeed in pushing the DoT to deliver on speedy consolidation when the government has itself risked the legality of roughly 80 telecom licences allotted since 1994 through its Presidential Reference against the Supreme Court's 2G judgment. The government has gone on to question whether spectrum assigned to these firms should be recalled and complicated matters further for these licensees, by asking what price should be charged for this. These multiple uncertainties over legality of licence, spectrum and pricing, have reduced the attractiveness of these companies as acquisition targets while making it near impossible to ascertain a realistic valuation.

About 281 Unified Access Service Licences have been awarded since 1994 of which 122 have already been cancelled with the legality of roughly another 80 (which include 35 dual technology licences) now at risk. This rules out 202 licences involving virtually every telecom company from any immediate M&A activity. Since the Supreme Court's opinion on the matter is likely to be a long drawn process, clearly, no M&A's can take place till long after that.