After EGoM’s decision paralysis, Presidential Reference disrupts telecom firms’ 2G auction planning

A high bid for auctions, coupled with levy of one-time charge is the worst case scenario for operators

The Empowered Group of Ministers (EGoM) deferring on Tuesday, its decision on the one-time spectrum charge payable by existing operators has gone beyond contributing to the paralysis in the government’s decision-making, to have ripple effects on the upcoming 2G spectrum auctions.

The implications are fairly serious because the EGoM has postponed the decision till the Supreme Court gives its opinion on the Presidential Reference. Since it is unclear how long the court will take to reach its final opinion, the lack of a decision by the EGoM and extension by the Cabinet, could throw all attempts at financial planning by telecom companies out of gear.

A policy decision has established that the auction price will determine the eventual one-time fee payable by telecom companies. So, unless telecom companies know what and how much spectrum will be subject to a one-time entry fee, they could face a larger-than-budgeted payout post the 2G auctions.

Additionally, in its Presidential Reference, the government, in Question No. 6 has asked the court whether or not licences given since 1994 are valid, whether spectrum in these licenses should be taken back, and most importantly, if such licences survive the legal test, then what should be the charge on these licences. This would mean determining whether such one-time spectrum charge should be payable from 0 MHz to 4.4 MHz, or above 4.4 MHz, or above 6.2 MHz.

Depending on the court’s view, there could be a radical difference in the price payable by companies who possess spectrum regardless of whether they participate in the auction or not. In effect, the costs of existing operators could easily get determined by their rivals who participate in the 2G auctions and not necessarily the operators themselves. Moreover, since these companies are unclear about the size of their eventual spectrum bill, they are at loss to firm up their bidding strategy, particularly, how much to bid.

A high bid for 2G spectrum auctions, coupled with the decision to levy a one-time charge for the entire range of spectrum is the worst case scenario for all operators. On the other hand, the charge being levied on spectrum only beyond 6.2 MHz would merely impact companies such as Airtel and Vodafone — for the most part.

Uncertainty for potential bidders

Rajan Mathews, Director General, Cellular Operators Association of India (COAI) says lack of clarity on the one-time spectrum charge creates damaging uncertainty for potential bidders, while Secretary-General, AUSPI S.C. Khanna opposes the idea altogether. He told The Hindu that any attempt to announce this fee would lead to immediate litigation.

The only respite for all stakeholders will be an early opinion by the Supreme Court on the Presidential Reference. However, given that only four of a total of eight questions are being argued in the first phase, such a reprieve appears wishful. In the absence of absolute clarity, speculative bids are expected, which is also one of the reasons why the industry is battling with the government to reduce the reserve price.

The impact of the auction price, in most cases, will go way beyond what spectrum is allocated in the bidding, with a legacy impact on spectrum that companies already hold, in some cases, for nearly a decade.