2G: How do telecom companies see their future after SC's verdict

The Supreme Court's 2G verdict to cancel all the 122 licences issued to nine operators in 2008 is a godsend for some telecom licensees, but for the serious ones and their bankers it is a punch in the stomach.

On February 2, the air in Room No. 5 of the Supreme Court was thick with speculation. By 10 a.m., the 400 sq ft courtroom was crowded with some 80 people, with even more spilling out into the corridor to hear what was to become a historic verdict in the '2G scam'.

It was the first matter of the day for Justices Asok Kumar Ganguly and G.S. Singhvi, who entered the courtroom at 10.30 a.m. Within five minutes Singhvi, who was reading out parts of the judgment, called the telecom licence process "arbitrary, capricious and contrary to public interest". The licences allotted were "declared illegal" and "quashed". The courtroom erupted as the import of the judgment sank in. An executive with one of the affected companies even started weeping.

The chaos in the courtroom was almost akin to what had played out about four years ago at the 13-storey headquarters of the Department of Telecommunications (DoT). On a wintry evening back in January 2008, Sanchar Bhavan's ground floor witnessed a melee when applications for 2G licences - 2G is short for second generation telecom technologies - and spectrum were being accepted. What started as pushing and shoving to get ahead in the queue turned into fisticuffs and even bloodied faces. All to get what was a very valuable commodity - spectrum, which DoT in its wisdom was allocating on a first-come-first-serve basis.

The sale of licences - at just Rs 1,651 crore for a pan-India licence - caused a notional loss to the exchequer estimated by the Comptroller and Auditor General at Rs 1.76 trillion (one trillion equals 100,000 crore).

Former telecom minister Andimuthu Raja is in jail for a year in an ongoing case related to this scam. Justices Ganguly and Singhvi ensured all that drama of January 2008 came to naught. They ordered cancellation of all the 122 licences issued to nine operators on or after January 10, 2008, and the subsequent allocation of spectrum. The order will become operational within four months, and the Telecom Regulatory Authority of India (TRAI) will make recommendations on how to issue licences through auctions. The judgment has a direct impact on 63 million mobile phone users, who have the option to port their number to an older player.

Will Fight, May Stay
Within hours of the verdict, the press releases from most of the nine affected companies showed their willingness to continue to operate in India, the world's second largest mobile phone market after China and the fastest growing.

Vsevolod Rozanov, CEO, Shyam Sistema Teleservices
We are talking with all possible working groups and in consultation with TRAI: Vsevolod Rozanov
Idea Cellular, India's fourth ranked mobile phone services company by customers, has lost licences to operate in nine circles. That will have an impact of about four per cent on its revenues (Rs 15,638 crore in 2010/11). The Aditya Birla Group company will participate in new spectrum auctions. "We have to protect our interest, our investors' interest and that of our customers and trade," says a senior executive, who does not want to be identified.

Norway's Telenor, which runs its Uninor brand in a joint venture with realty firm Unitech, wants to stay the course, too, despite skirmishes with its partner and a write-off of Rs 3,450 crore on its Indian operations. The UAE's Etisalat has written off more (Rs 4,135 crore) and is unlikely to be the last one to do so. Telenor and Moscow-based Sistema, which controls Shyam Sistema Teleservices (SSTL), are leaving no stone unturned.

Norwegian Information Technology Minister Rigmor Asarud travelled to New Delhi to meet her counterpart Kapil Sibal. SSTL is taking a broader approach. "We are talking with all possible working groups and in consultation with TRAI," says CEO Vsevolod Rozanov. He is on the phone several times with his bosses in Moscow every day. For good reason: SSTL has invested $3.1 billion (Rs 15,500 crore) in its 21 circles in India.

STel's partner Bahrain Telecom
is pulling out of India. It will sell its 42.7 per cent to its Indian partner, the Siva Group, for $175 million (Rs 875 crore). STel was not available for comment but a former senior executive of the company, requesting anonymity, says: "Few of the serious players will continue in the market."

STel is in a particularly tough spot in that it has 3G, or third generation, licences in three states but cannot run such data-rich services. "Even if they have the 3G spectrum they cannot operate without the UASL," says Aseem Abbas, Partner at law firm Khaitan & Co. UASL is short for unified access services licence, which is an umbrella licence for all telecom services that companies apply for.

The government expects to get Rs 1 trillion from a re-auction (see Strong Vibrations). Analysts such as Harit Shah of Mumbai brokerage Nirmal Bang expect the amount to be around Rs 78,000 crore - still higher than the Rs 10,000 crore the cancelled licences generated in licence fees. Overall the nine affected companies had made an estimated investment of Rs 35,000 crore in rolling out networks and setting up their business, a substantial portion funded by banks.

Experts estimate banks are staring at an exposure of close to Rs 15,000 crore, about a quarter of which is fund-based, or actual loans that have been disbursed to the companies with cancelled licences. State Bank of India (SBI) has the largest exposure at Rs 4,500 crore, of which Rs 1,100 crore is fund-based loans. The remaining was non-fund exposure like bank guarantees and was withdrawn when the licences got cancelled.

Santosh Balachandran Nayar, Deputy Managing Director and Group Executive of the corporate banking group at SBI, says it has the first right on licence fee refunds and also has guarantees from group companies of the borrower.

But the licence cancellation comes at a time when the long-term viability of the telecom sector is under a cloud with too many players, low tariffs, and spending on 3G licences. Market-linked pricing of spectrum will put further pressure on cash flows, believes M.V. Nair, Chairman and Managing Director of Union Bank of India. Also, older operators such as Bharti Airtel and Vodafone have the first bunch of their licences expiring in 2014, after which they will have to apply afresh for spectrum rights. Nair's counterpart at Bank of Baroda, M.D. Mallya sounds cautious when he says: "The bank will go by the merits of the projects in future."

Some like SSTL and Uninor argue that fresh spectrum auctions, if held, should be limited among the new players whose licences have been cancelled. "Incumbents should be kept out as the whole idea of the auction was to bring in more competition to the Indian mobile sector," Sigve Brekke, Managing Director, Uninor, told reporters in New Delhi. Bharti Airtel does not buy this. "Bharti is a believer in a market mechanism where everybody should get equal opportunity to participate (in an auction)," says Sanjay Kapoor, its CEO for South Asia. Already some analysts say newcomers like Reliance Industries could be knocking at DoT's doors to take part in the auctions.

After the initial shock over the February 2 judgment died down, the general feeling in the mobile phone services industry as well as among experts was that a transparent framework had been ushered in, even if there were short-term hiccups. Says Frank Hancock, head of corporate finance with Barclays Capital India: "Over the medium term, the sentiment towards telecom should improve once it is clear that the sector is going to be regulated in a transparent manner." The real proof of that transparency will be how much policy makers distance the sector from the crony capitalism it has been marked by in the last two decades.