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Silver Linings Phonebook

After an age, telecom firms look to the future with hope and to Rahul Khullar with gratitude.
Suveen Sinhaand Sunny Sen | Print Edition: Dec 8, 2013
TRAI Chairman Rahul Khullar at Nehru Park, New Delhi
The indomitable regulator: TRAI Chairman Rahul Khullar at Nehru Park, New Delhi. PHOTO: Vivan Mehra

"Rules of the game...." That is how Rahul Khullar likes to open many of his meetings. That is how he started one just about the time the rains arrived in Delhi last year. Inside the Telecom Regulatory Authority of India (TRAI) office in the MTNL building, which is a surprisingly expansive premise in the noisy patch between the New Delhi Railway Station and Zakir Hussain College, the top executives of Bharti Airtel, Vodafone, Idea Cellular and other mobile service operators were seated around a table.

"Rules of the game," began Khullar, who had taken charge as the TRAI chairman in May that year after retiring as the commerce secretary, "if you play ball with me, I will play ball with you." The authority was engaged in a maze of prosecution against the top managers of mobile service operators. Khullar thought it was a stupid way of doing things. The right way, in case of a violation, was to impose a penalty, then increase the penalty if the violation continued, and then look at prosecution as the last resort.

The honchos came away with hope, like the characters in the Oscar-winning Silver Linings Playbook, who find cheer amid emotional chaos. But Khullar was only doing what he had outlined in his first meeting with the Cellular Operators Association of India (COAI), the industry lobby. TRAI's objective, he had said, was to protect the interests of the service providers and consumers, and to promote orderly growth of the sector.

A veteran industry executive, who attended that meeting, recalls that Khullar had walked in full of purpose. "He said, 'I know you guys have a problem. I do not promise to solve them all, but I will try.'"

Try he had to, for "orderly growth" cannot occur unless the interests of the industry are protected as much as the consumer's. And Khullar lived up to his promise in standing up to Communications Minister Kapil Sibal.

NO SUCH THING AS FREE ROAMING

Sibal, in his enthusiasm, had gone ahead and announced free incoming calls on national roaming from October this year. Its appeal is infectious. Consumers do not understand why both the caller and the receiver have to pay for a call on roaming when incoming in their own circle became free a dozen years ago.

But it would also have an impact on the service provider. Which Khullar thought of and refused to allow.  He said this would amount to the non-roaming population, 88 per cent of users, subsidising the 12 per cent that does roam and is typically better off.

Wasn't that an unusually firm stand against the minister? "The authority always takes a firm stand," says Khullar. "The NTP (National Telecom Policy) never said roaming will be free, only that we will move towards free roaming." He did cut roaming charges, though, but with a caveat. He said the order was being made in good faith. If this was not repaid in good trust, he would review his order a year later.

Roaming charges is an issue to which no one has a solution. The European telecom zone, with 27 countries, compared with 22 circles in India, is grappling with it just as much. "How do you expect to suddenly announce free roaming? When the industry is going through so much trouble, if you impose cost on them, an industry which is in the toilet… it will be like pulling the flush on them," says Khullar.

Sibal has had to swallow it. The thing is, TRAI's decision is final in tariff issues. "We do not need to go to the government. TRAI's decision is the law. Yes, I am answerable to Parliament, as a collective authority," says Khullar.

He has in fact stepped beyond just tariff and into the contentious issue of roaming pacts for third-generation, or 3G, services. The Department of Telecommunications (DoT) frowns on these pacts, which companies like Bharti Airtel, Idea and Vodafone formed so they could offer 3G services throughout the country despite winning only 13, 11 and nine areas in the spectrum auctions of 2010.

KHULLAR SPEAK
Most of 2012 was spent in shock. The [telecom] industry was in tatters. Very slowly but surely the government and the regulator have come to deal with the problems at hand

The DoT asked them to stop and imposed fines on them, on the ground that the pacts violated the terms of the licence. The companies have appealed against the strictures in the Supreme Court and the Telecom Disputes Settlement & Appellate Tribunal.

Speaking at a conference in early August, Khullar wondered how banning intra-circle roaming pacts for 3G could be a solution. The government had to either make more spectrum available or allow the pacts.

If that was music to the industry's ears, the next month saw a symphony orchestra emanating from the MTNL building as Khullar recommended steep cuts of 37 to 60 per cent in the reserve price of spectrum for the auctions coming up in January. The auctions are for the spectrum freed by the licences for 122 circles that the Supreme Court cancelled in February 2012 and also for frequency due for renewal next year.

"The price cut is an outcome of the valuation and the reserve price. I didn't set out to do a price cut, and nowhere in our document there is a mention of price cut," he says. What the document does mention, indeed elaborate on, is the method to calculate the value of the spectrum. Khullar did not one, not two, but six valuations based on the latest economic literature and took the average.

DIFFERENT STROKES

The feeling had been building up, but, with the September recommendations, TRAI under Khullar looks a very different animal from the time of J.S. Sarma, his predecessor. Sarma's recommendations, made in April 2012, had pegged the spectrum price at 10 times what was paid in 2008. And that was just the reserve price, the starting point for bids in an auction.

Sarma's views achieved the improbable by uniting a highly competitive industry - they spoke as one in protest against TRAI's recommendations. They saw as the final crippling blow Sarma's idea of spectrum re-farming, which he wanted introduced when the oldest licences come up for renewal from 2014 onwards. At that time the efficient 900 MHz spectrum, mostly with the oldest licence holders, would be taken away and redistributed.

At the time Sarma made his recommendations, Sunil Bharti Mittal, who heads the group that bears his middle name, said in public: "This has been the most destructive period of regulatory environment in 16 years." Himanshu Kapania, Managing Director of Idea Cellular, told Business Today in May last year: "This is a dark period... We will move from wealth to death knell." Vittorio Colao, Vodafone's worldwide head, Kapania's boss Kumar Mangalam Birla, and Mittal wrote a joint letter to Prime Minister Manmohan Singh saying their industry faced ruin.

Given these sentiments, nobody was surprised when the spectrum auctions that followed - in November of last year and March this year - turned out to be resounding flops. Some circles found no bidders, some others were sold only partially. Those that did find bidders had to be given away at the reserve price due to a paucity of bids. Only Bihar got more than the reserve price. By March this year, according to the Reserve Bank of India's figures, the share of stressed assets in banks' loans to telecom companies had increased to 15.64 per cent, from just 1.3 per cent two years earlier.

SOMETHING TO CHEER ABOUT

The voices today strike a tenor much different from that of Mittal, Kapania and others last year. Vodafone India, which has been at the receiving end of more regulatory caprice than others because of an energy-sapping tax battle, has announced plans to raise its holding in its Indian subsidiary to 100 per cent by buying the 15.5 per cent equity held by minority shareholders for $1.65 billion.

Marten Pieters, MD and CEO, Vodafone India says - 'There is a lot of recognition of things we have been saying for years but earlier nobody listened to us.' PHOTO: Rachit Goswami
Wallowing in thoughts of cash from the parent company's sale of its United States division to Verizon Communications for $130 billion in September, the Indian offspring wants to spend Rs 7,000 crore (about $1.1 billion) on upgrading its networks. That will be in addition to its normal annual capital expenditure of Rs 4,000 crore to Rs 5,000 crore.

"It would have taken a lot of courage to do this two or three years ago," said Vodafone's India head Marten Pieters in response to a question from BT at a press conference in New Delhi. "There is a lot of recognition of things we have been saying for years but earlier nobody listened to us."

Two of the things the company had been saying are that there should be more spectrum, allocated in a transparent way, and a more level-playing field, with less opportunity for arbitrage created by ambiguous regulation.

Rajat Mukarji, who liaises with the government and regulator for Idea Cellular, says: "There is a silver lining in the cloud now, which was not visible earlier."


According to a senior telecom manager who is a veteran of policy battles, Khullar understands the economics of the industry. "His reading of the profit and loss account and balance sheet is certainly better, perhaps because as the commerce secretary he was involved in trade negotiations."

KHULLAR SPEAK
You come into my room with a problem, you will leave the room with absolute clarity. Either the problem can be solved or it can't be solved. I won't keep you dangling

A former DoT secretary echoes this view. "Khullar understands this game more than anyone else - both the hard and the soft factors."

The hard numbers coming out of the industry have begun to complement the softening of the voices. In the six months to September, Vodafone India's earnings before interest, tax, depreciation and amortisation (EBITDA) margin, a key indicator of profitability in capital-intensive industries, crossed 30 per cent for the first time to stand at 31.8 per cent, up 3.4 percentage points from April-September 2012.

Bharti Airtel, too, reported a higher EBITDA margin of 32 per cent for the second quarter ended September, compared with 30.6 per cent in the same quarter a year ago. That sent its shares up despite a 15th consecutive decline in profit.

For the same quarter, Idea Cellular, which has been the most consistent performer in the industry, reported an 86 per cent rise in net profit. The company, with its focus solely on mobile telephony and the domestic market, has seen its shares rise more than 65 per cent this year.

KHULLAR SPEAK
One shift I tried to create is that there should be no shock and knock, no surprises for the industry. They may not find the fine print, but they have a broad idea where they are going

All three have been helped by the improving regulatory environment, as also by factors not attributable to TRAI. The government's decision to allow 100 per cent foreign holding is a big thing for Vodafone. All three have benefited from the cleansing done through the cancellation of licences. The number of players in several circles has come down sharply - the most in Bihar, from 13 to eight.

That has given companies the courage to raise tariffs and do away with some discounts. It is not possible to give specific numbers on this, since a major operator would have as many as 550 tariff packages across the country. But in general the big ones have seen their realisations from voice traffic improve by 2.5 to three paise a minute in the last couple of quarters. The industry is pining for another rise of 10 to 12 paise. It need not happen in one shot, a rise of 2.5 to three paise a quarter would do.

That is admittedly small, but nevertheless critical, given that voice constitutes 85 per cent of mobile telephony and tariffs have generally moved only one way the last 18 years: downwards. "You cannot keep lowering tariffs in a high-inflation country," says Pieters.

KHULLAR SPEAK
Either you come with a better method, and if you can't, stop criticising us. Criticise me for all you want, but based on the methods. And then criticise the methods. But that they can't

Struggles remain, as do the vagaries of the government's functioning. The Telecom Commission, the highest policy-making body for telecom, has taken the middle path on spectrum pricing, suggesting a level 18 per cent above what Khullar recommended and 20 to 25 per cent lower than the DoT's wish. That is a clear reflection of the dilemma India has stared at all these years: whether to maximise government revenue or promote growth of a sector that boosts other areas of the economy as well.

The matter is now with an empowered group of ministers headed by Finance Minister P. Chidambaram. As if to compensate for its spectrum stand, the Commission came out in favour of mergers and acquisitions that would take the market share of the combined entity to 50 per cent. The cap was 35 per cent previously. The acquirer must pay the market price of spectrum if it was assigned administratively to the acquired company.

According to the industry, that's a step in the right direction but not quite there. However, if Khullar had his way, there could be a big leap.

In sharp contrast to Sarma's re-farming, the new concept Khullar wants to introduce is of spectrum trading. According to him, spectrum should not be treated as the Holy Cow. If everyone is buying spectrum in auctions, why not allow trading in it? On this issue, he has forced the DoT's hand by floating a consultation paper.

That would cheer the spectrum-starved industry and meet the objectives listed in the TRAI Act, a little maroon book Khullar likes to wave when speaking of his role. Those are the rules of his game.

(Follow the authors on Twitter: @suveensinha and @SunnySen)

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