Telecom shakeout: Why 2012 will see more exits, price hikes

The telecom industry must thank the Supreme Court for hastening the process of consolidation of the industry by cancelling the 122 licences given by Andimuthu Raja in 2008 and asking the government to reissue them at market-driven prices.

This means, sooner or later, the UPA government will have to conduct another auction to fix higher prices for spectrum. The Supreme Court judgment has said that the process of issuing licences has to now be delinked from the purchase of spectrum - and the only implication of this part of the order is that scarce spectrum will come at a higher price for everyone in future.

In January 2008, Raja scattered telecom licences like confetti - with some shown special favours - and unleashed hyper competition. This has made large parts of the industry unviable. Like the airline industry, which is unable to raise fares and invest adequately in safety and new aircraft, the telecom industry - to stay afloat - has cut corners in terms of the quality of service and is grossly underinvested in infrastructure. This is why call quality in several areas is below par.

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The second impact of Raja’s decision to sell spectrum at 2001 rates was that it created huge rent-seeking opportunities for those who won the bids, fairly or unfairly. It made no sense for real estate players like Unitech and Swan Telecom to get into telecom given the scale of investments required. Since both of them sold shares to foreign parties a soon as they got their spectrum at huge premiums - it seems they came into the picture only to claim unearned moolah from scarce spectrum.

This, in fact, is the crux of the 2G scam: how a scarce resource was sold to give some unscrupulous parties unintended profits.

What the trial courts will have to determine is whether this underpricing of spectrum was done for deliberate policy reasons (as Raja claims) or for malafide reasons, including payoffs and favours given elsewhere. The CBI’s case against Raja, Swan and Unitech is that there were illegal quid pro quos being offered.

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Whatever the future holds, one thing is clear: the total number of players remaining in the field after the licence cancellation will be smaller than what Raja unleashed. Not all players will want to remain in the business if they have to pay even more for spectrum when business is tough anyway.

Even today, Unitech and its foreign partner Telenor of Norway are fighting over the scale of investments required in their Uninor joint venture. While Telenor wants to invest equity, Unitech wants to fund the whole investment with debt - indicating that it does not want to put in too much of its own money to keep the company low on debts. Without more equity funding, few telecom companies will be able to weather the storm.

The net fallout is simple: the stronger financial players with the capability to invest more upfront will have to buy out weaker partners or smaller players through mergers and acquisitions (M&As).

In fact, the first aim two objectives of the New Telecom Policy 2011, whose draft was announced by Kapil Sibal last year, will have to be narrowed down to important things: reselling spectrum, and enabling consolidation through easier M&A rules.

Pressure for easier M&A rules will come from the banks, which are already reeling under the pressure of bad loans to aviation, real estate, power and textile companies. They cannot afford to have one more gigantic sector sinking slowly into a morass.

All the signs are that India will have to opt for fewer telecom players and higher mobile service costs.