Rumblings in the telecom sector

The Economic Times, January 18, 2007

The emerging scenario in the telecom sector requires both policy as well as regulatory actions. The government on its part should revisit some of the pending issues, and Trai should be geared to keep a constant vigil on the behaviour of the big players, say Pradeep S. Mehta

Large restructuring changes in the corporate world resound in the stock exchanges and government corridors, while ordinary consumers and competitors worry about the outcome of the changes. Our telecom sector is one such area, which is currently witnessing billion dollar conversations, with the news that UK’s Vodaphone will take over Li Ka Shing’s 67% stake in Hutchison-Essar for around $14 billion, or more.

Close on its heels, Anil Ambani’s Reliance Infocom is mounting a bid for Shing’s share. Ambani is also following Vodaphone’s Arun Sarin in a hectic round of meetings with ministers. Essar, the one-third partner is also in the race. Hindujas are the latest entrants.

According to the current M&A guidelines of DoT, an operator cannot acquire more than a 10% stake in a competing company in the same circle; total market share of the combined entity cannot exceed 67% in any circle; the combined entity cannot hold spectrum of more than 15 Mhz in metro and A category circles and 12.4 Mhz in B and C class circles, and any combination should not reduce the number of operators to less than three.

If Reliance Communication takes over Hutch it will have over 36% market share in the mobile segment at the national level, and emerge as the largest mobile operator with around 52 million subscribers. In such a scenario, DoT will need to do a circle wise study to assess if Reliance’s takeover would violate the M&A guidelines.

Secondly, with a market share exceeding 30%, Reliance would come under the category of an operator with ‘significant market power’, and governed by additional rules and regulations set by Trai. If Vodafone or Essar or Hindujas take over the stake in Hutch, these issues will not arise.

Who takes over Hutch is subject to several legal and price hurdles. Hutchison and Essar hold different interpretations of the right of first refusal clause. Bharti is contemplating invoking the non-compete clause with Vodafone (it currently owns 10% stake in Bharti Airtel) that prohibits the UK-based company from acquiring stake in a competitor for a period of one year after it exits. For Reliance, the challenge lies in that it must buy all or none of Hutchison-Essar.

Irrespective of who finally wins the bid, Reliance and Vodafone have both shown they are serious players for the Indian telecom market. The same cannot be said about Ruias, who have in the past been in talks with Reliance to sell their remaining share in Hutch.

If Reliance takes over Hutch, the number of large players would be reduced to three: Reliance, BSNL/MTNL and Bharti. On the other hand, if Vodafone takes over Hutch, this would imply emergence of four big serious players in the Indian telecom sector. What does this imply for the sector?

Increased concentration could increase the likelihood of collusive practices. In the past, telecom minister Dayanidhi Maran had alleged cartelisation in NLD/ILD sectors, involving private operators: Reliance, Bharti and VSNL. By drastically reducing the entry fees for NLD/ILD licence, the minister attacked the cartel and facilitated entry of more players to enhance competition.

Consequently, the numbers of NLD/ILD operators have increased. Alas, you and I have not benefited, as our long-distance calls continue to be routed through the same state access provider. The real competition in the long-distance segment would come when the long pending issue of Carrier Access Code is implemented.

Emergence of big players with pan-India operations defeats the logic of continuing with circle-wise restrictions. This leads to unnecessary costs for the operators and consumers. Thus, if every mobile operator is permitted to offer services anywhere in the country, like in the UK, Pakistan, Egypt, etc, there would be no national roaming charges. It would promote market integration and lower costs to consumers.

Trai has hinted that operators could be forming a cartel in keeping the domestic roaming tariffs at the same level for the past few years, and by one policy decision, the telecom minister can once again rein in an alleged cartel. The government has been pitching for a single internal market, and the minister has moved forward by promoting the one-India call. It is time to take this a step ahead.

Surprisingly, in the debate surrounding this acquisition, the role of Competition Commission of India has not found any mention. True, the CCI is presently in a limbo and is of little consequence for the impending takeover. But such cases would set a precedent for future.

The takeover does cross the thresholds provided in the Competition Act and CCI should be involved in its analysis. Other than M&As, anti-competitive practices have been observed and will happen in future as well. So such cases require using the expertise of both the competition regulator and sector regulator.

The emerging scenario in the telecom sector requires both policy as well as regulatory actions. The government on its part should revisit some of the pending issues, and Trai should be geared to keep a constant vigil on the behaviour of the big players.

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