India to allow consolidation in crowded cellular sector

Reuters News
|
Posted: Oct 10, 2011 8:54 AM

By Devidutta Tripathy

NEW DELHI (Reuters) - India will let cellular carriers share airwaves and allow for consolidation in a crowded industry that has been battered by ferocious competition as well as a licensing scandal that may have cost New Delhi up to $39 billion in lost revenue.

Under the new policy, second-generation mobile spectrum that now comes bundled with a telecoms license will separated and priced on a market basis, which means operators will have to pay for additional network capacity, driving up costs.

With more than 850 million users, India's mobile market trails only China's. The difference is that 15 players slug it out in India; in China there are only three. Investors have long sought consolidation in the Indian industry.

The draft policy will "facilitate consolidation in the converged telecom service sector while ensuring sufficient competition," Telecoms Minister Kapil Sibal told a media briefing, where he announced several initiatives but gave few details.

He has said the government will not let the number of players in any telecoms zone fall below six. India allocates mobile phone licenses by zone, of which there are 22.

India decided to overhaul its decade-old rules for the industry after alleged rigging in the grant of licenses in 2007/08 came to light late last year, forcing the then-telecoms minister to resign. Police have charged 14 people in an ongoing probe into the case, including the former minister.

Even before the scandal, investors had been scared off from an industry whose rock-bottom tariffs have been a boon to customers in the world's second most-populous country but have squeezed margins for operators.

Carriers, however, have continued to invest to capture what they hope to be vast potential, stumping up $22 billion -- far more than expected -- in government auctions last year for third-and fourth-generation airwaves.

The new policy, which is focused on boosting the availability of broadband and improving rural telecoms access is expected to be a mixed blessing for operators, who will be required to provide free roaming across the vast country.

"The draft policy talks about exit option, which could be the entry point for some new players," said Jaideep Ghosh, a partner at KPMG.

"Whether consolidation will happen or not will be more of a business decision depending on valuations and other things, but I expect the policy to come out with a roadmap for this," he said.

Shares in two of the biggest listed players, Bharti Airtel <BRTI.NS> and Idea Cellular <IDEA.NS>, were initially lower on Monday before closing higher. Bharti ended nearly 2.5 percent higher, Idea gained 2 percent, and Reliance Communications <RLCM.NS> ended 1.7 percent higher.

The broader market <.BSESN> closed 2 percent higher. Sibal's briefing was still in progress when the market closed.

Vodafone <VOD.L>, the world's biggest mobile phone carrier by revenue, has faced a host of problems since entering the fiercely competitive Indian market in 2007, including a 2.3 billion pound charge it took last year due to stiff competition and escalating spectrum costs.

Vodafone's experience is often cited as a cautionary tale for foreign companies in India, and Chief Executive Vittorio Colao has in the past criticised Indian telecom rules.

"These are broad contours which have been announced. What remains to be seen in what manner these are implemented," said Naveen Kulkarni, a sector analyst with brokerage MF Global.

"What seems to be the idea is they want to promote more of data and broadband, for which they are willing to provide more spectrum."

Sibal said generating revenue for the government was not the priority.

"In achieving the goals of national telecoms policy 2011, revenue generation will play a secondary role. Our vision is to have broadband on demand," he said on Monday.

(Additional reporting by Sumeet Chatterjee; Editing by Tony Munroe, Aradhana Aravindan)