Plea for extension of deadline pushes auction to March 2013

With the TRAI submitting its recommendations on auctions on Monday, the clock has started ticking for the Department of Telecom (DoT) to fulfil the Supreme Court's direction for auction of 2G spectrum returned from the 122 cancelled licences.

The DoT has already sought a 400-day extension from the Supreme Court for the auction. This makes it highly unlikely that the government will be able to realise its Rs. 40,000 crore revenue target from these auctions in fiscal year 2012-13 as provisioned in the union Budget.

This is because a 400-day extension pushes the auction schedule from the original June 2, 2012 court deadline to March 2013 which is the very edge of the fiscal year.

The DoT's request for an additional 400 days is more than reasonable as auctions require meticulous planning. In fact, when compared with 3G auctions, the upcoming 2G auctions will be a rush job.

Under severe attack from the Supreme Court for its faulty and opaque procedure, the DoT is now clearly wary of compromising on the process, even at the risk of missing the budgetary target.

Documents with The Hindu reveal that the DoT has divided the auction process into 2 stages, which in turn, outlines 11 specific steps before the auctions can begin.

Stage 1 involves heavy duty ground work to get the environment ready for auctions beginning with the receipt of the TRAI's recommendations, after which the government will issue a notice inviting applications, which itself will take 30 days.

Before this, eligibility criteria for participation in adherence to principles of level playing field across three categories of participants — incumbents, new entrants, as well as those whose licences have been cancelled — will be determined. Simultaneously, the quantity of spectrum available on a circle-wise basis and how much of it should be placed for bidding will be decided. These two decisions are vital in controlling the outcome of the auction as the quality of participation plays a major role in auction revenues.

Specific spectrum block sizes, which can vary as per the defined objectives and also impact valuations in part, will be firmed up. The plan also provides safeguards to prevent market dominance through the acquisition of spectrum along with spectrum caps, which could be either operator-wise or service-wise.

The DoT maintains that clarity on other related decisions like spectrum sharing and roaming also impacts the bids for spectrum. Disagreement over spectrum sharing on 3G has already boomeranged into a major showdown between successful 3G bidders and the government, with large 3G players, now seeking a refund of their bid money.

Reserve price

Before the auction begins, issues relating to service licences such as terms and conditions for new players, tenure of spectrum assignment, pricing, and its relationship with new licensees will be set. Finally, a reserve price for auction of 2G spectrum in the relevant bands, which is far more complicated as compared to the 3G auctions, will be determined.

As per the CBI's April 2, 2011 charge sheet and the DoT's approach paper of February 9, 2008, a 3.5 times multiplier on the spectrum value of 2001 had already been determined as far back as February 2008. This itself places the value of spectrum at Rs. 5,803 crore for 4.4 MHz of pan India spectrum. The TRAI, in February 2011 recommended nearly double this amount.

It is only after this first stage of activity that the actual auction logistics begin. This requires the use of auction software customised to achieve the stated objectives of the auction, including safeguards against inappropriately high bids, or a cartelisation among operators to keep the bid price artificially low.

The two remaining steps in the second stage are designing a specific auction format (ascending or descending), auction rules vis-à-vis clock rounds, confidentiality, single price/discriminatory price and close of auctions.

The government has allocated roughly 40 days for the completion of these 2G auctions from beginning to end compared to 63 days in the case of 3G, one day to declare results, and 11 days to make the payment. Letters of Intent (LoIs) will be issued within 7 days, and licences issued within 14 days from the date of LoIs. Unlike previous delays and gaps between LoIs, licences and spectrum, the government plans to allocate spectrum within 8 days of granting the new licences.

This detailed preparation reveals that when faced with media and legal scrutiny, the same government that was once defending jailed ex-Telecom Minister A. Raja's illegal actions is entirely capable of putting in place a transparent procedure which balances public interest, affordability, teledensity and transparency with the objectives of achieving mission-critical revenue for scarce, natural resources.

However, it remains to be seen whether the TRAI's recommendations will be palatable to the DoT or whether the recommendations, either in part or in whole, will be referred back to the regulator. In the event of disagreement, especially considering strong industry opposition to the recommendations, the entire process will only take that much longer to complete, although the final decision-making authority vests with the DoT.