2G auctions: It's all about that reserve price

Despite the 2G spectrum auction turning out to be a damp squib, telecom minister Kapil Sibal is optimistic that the government will be able to raise way more than the Rs 9,407 crore it did in the recently conducted auctions by reacutioning spectrum in the four circles, that did not find any bidders.

While Sibal blamed the circumstances for the outcome of the 2G auction, he believes that lowering of the reserve price would not have netted more money. "We would have in fact sold this very valuable spectrum at a throw away price," he said yesterday in an interview to CNBC-TV18.

The response to the 2G auction was in sharp contrast with the 2010 sale of faster 3G licences, which fetched the government more than $12 billion and helped contain the deficit that year at 4.7 percent.

What is the right auction price?

However, the government has already garnered Rs 17,000 crore in its kitty (Rs 9,400 crore from the auctions and Rs 8,000 crore from one-time spectrum fee) and only requires to raise Rs 27,000 crore to meets its target of Rs 40,000 crore.

The telecom industry, however, is rooting for a lower Rs 3,000-4,000 crore reserve price to start the bidding process in March. Market determined price in key circles (Delhi, Mumbai, Karnataka and Rajasthan) remained undiscovered due to lack of participation, which clearly indicates the intent of operators for not paying such high reserve price.

Experts too have blamed the high reserve price for the failed auction but agree that fixing reserve price was crucial as licence renewals will begin soon.

A lower base price will reduce outgo for existing players towards the one-time prospective fee for existing airwaves and it will also be cheaper for the cash-strapped sector to renew licences.

Industry players like Idea and Airtel had cautioned before the auction that the reserve price was too high - at around nine times the 2008 spectrum sale price. Using the 3G price as the benchmark for fixing the reserve price of 2G spectrum is flawed as unlike 3G, which is data driven, 2G is used mainly for low revenue voice telephony.

"First and foremost among the many causes, is the clear recognition that an artificially high reserve price that bore no congruence to market realities was the key reason for the failure," GSM industry body COAI said in a statement.

The second factor is that the majority of the bidders are actually operators who had lost their licences and are compelled to participate in the auctions despite the high prices and the limited availability, simply in order to sustain their customers, businesses and to protect their years of investments, it said.

COAI further said the government's move to limit the amount of airwaves for sale, which it alleged contradicted the Supreme Court's ruling, had added to the 'sense of uncertainty and fear of "irrational bidding" for many potential bidders.

Research firm Nomura said the muted response to the 2G auction presents an opportunity for regulator and government to work together to make effective policies in the future.

Mohammad Chowdhury of PricewaterhouseCoopers echos similar views. " The real opportunity for the government is to get the policy balance right so that it will enable growth for the next decade. When it comes to auction of spectrum in the 900 Mhz and 1800 Mhz bands, the government could look at a low reserve price and let the market determine the fair price. Also, the government should look at periodic auctions so that there is no scramble for spectrum," he was quoted as saying by the Times of India.

However, going forward, regulatory overhang still continues on the sector as there are many unanswered questions from regulator's end. "Exact payout towards spectrum renewals, spectrum re-farming and excess charge remains uncertain as pan India reserve price remains undiscovered. Further, competitive landscape remains intense resulting in continued pressure on the profitability of the operators," said brokerage Emkay in a research report.

Goldman Sachs on the other hand is more optimistic. "We believe the government will likely reduce the reserve price in circles where there was not even a single bid," it said in a note.

Some observers, on the other hand, say that even a minimal token amount of say Rs 500 crore will prevent frivolous bidding.

Mahesh Uppal, director at Com First India, told the Economic Times that it "could be as little as 500 crore because the market will eventually determine the value of spectrum, regardless of the low reserve price."

But as Firstpost's R Jagannathan pointed out earlier, rather than a mere token amount, if the government is able to re-price spectrum at regular intervals, one would neither have sub-optimal usage nor overpricing.

Updated Date: Dec 20, 2014 13:57 PM

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