Why telecom stocks are pulling the market down

Telecom stocks led the 1.2 percent fall in the BSE Sensex on early Wednesday after the Department of Telecommunications (DoT) rejected the Telecom Regulatory Authority of India's (TRAI) proposal for easing rules on mergers and acquisitions.


While Idea Cellular was the biggest loser, falling 4 percent to Rs 94.35, Bharti Airtel was down 2.6 percent at Rs 368.90. Reliance Communication traded 1.4 percent lower at Rs 69.

According to a report in the Economic Times, the telecommunications department has accepted TRAI's proposal to impose a uniform fee on incumbent GSM players for owning excess spectrum.

The decision will force telecom companies to shell out at least Rs 17,500 crore, said the report. Such restrictive merger and acquisition regulations could make the exit of new licensees difficult. However, there may be no long-term damage as the need for incremental spectrum is limited.

According to another industry report, DoT also wants to retain the cap on revenues and subscriber market share of the merged entity at 35 percent against the 60 percent recommended by Trai. DoT believes that a 60 percent cap would lead to a monopoly market.

Also, DoT might keep the cap on spectrum holding by the merged entity at the prescribed limits of 10MHz in Metros and 8MHz in other circles. TRAI had proposed cap of 25 percent of the spectrum allocated in the circle. This cap will prevent hostile takeovers of small companies by large companies even if the combined market share is lower than the 35 percent cap.

On the uniform revenue-sharing model, DoT stuck to its earlier view of 8 percent of annual sales as licence fees compared with TRAI's reiteration of the 6 percent uniform license fees.Currently, telcos pay six to ten percent of their revenues as licence fees.

In another development, telecom players Bharti Airtel and Vodafone have sought the prime minister's intervention for a refund of their 3G license fees after TRAI changed the rules of the game on roaming charges.

The 3G roaming agreement among the players did not go down well with the Department of Telecom (DoT), which felt that these alliances were in violation of the terms and conditions of the third-generation (3G) spectrum agreements signed by operators in June last year following the auction. In their letter to the Prime Minister, the CEOs even demanded a refund of the investments made by the companies in the 3G auction, and later on for the infrastructure.

The Law Ministry too has supported the DoT's view that such spectrum-sharing agreements among service providers are in violation of licensing norms and conditions.

Updated Date: Dec 20, 2014 05:19 AM

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