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Alarming sounds

twitter-logoManu Kaushik | Print Edition: May 27, 2012

The Telecom Regulatory Authority's suggestions on spectrum allocation have shocked the industry.

What's proposed:
The Telecom Regulatory Authority of India (TRAI) has proposed a new base price for the auction of 2G spectrum across different bands. It has recommended a price of Rs 7,442 crore per megahertz (MHZ) for the 800 and 900 MHZ bands, and Rs 3,622 crore per MHZ for the 1,800 MHZ band.

It has also said the entire spectrum available should not be auctioned at one go. Only 5 MHZ should be given in each circle, followed by more auctions over the next three years.

The auction will be held before August 31 this year, as directed by the Supreme Court. TRAI has also suggested reducing the spectrum usage charge to one per cent of the adjusted gross revenue, down from three to eight per cent at present.

Again, it wants spectrum in the 800 and 900 MHZ bands currently held by telecom operators replaced with spectrum in the 1,800 and 1,900 MHZ bands respectively. The former are technically superior bands and are currently being used to provide GSM services.

TRAI wants these bands freed up for 3G and 4G services.

What will change:
If the government accepts these proposals, buying spectrum will become much costlier. For spectrum in the 1,800 MHZ band, an operator will have to shell out Rs 18,110 crore for 5 MHZ, the minimum bandwidth TRAI has prescribed for those seeking to start mobile services. Those who bought spectrum in 2008 paid barely a tenth of this amount, getting 4.4 MHZ of spectrum for Rs 1,658 crore.

"The auction may receive a tepid response," says Karan Mittal, analyst at ICICI Securities. "Some of the new operators may find it difficult to operate in the sector."

Already foreign players like Sistema, which lost $700 million, Telenor, which forfeited $680 million, and Etisalat, which has written off $820 million of its investment following the cancellation of 2G licences by the Supreme Court in February, have decided to cut their losses and may exit India.

The proposals will not have any immediate impact on existing telecom operators who choose not to participate in the coming auction. However, all licences are due to expire in 2014 and they will have to pay the revised spectrum price thereafter.

"For the older players, the degree of impact will be directly proportional to the quantity of spectrum they hold," says Naval Seth, equity analyst at Emkay Global Financial Services.

Implications:
Market experts believe that by allowing just 5 MHZ to be auctioned in the first phase, TRAI may be creating an artificial shortage of spectrum.

On average, there are 28 MHZ of spectrum available in each of the 22 telecom circles across the country.

"The recommendations make no sense. This is a free market in which companies from around the world are involved. Instead of TRAI fixing unrealistic prices, let market forces determine price," says Rajat Rajgarhia, Head of Research, Motilal Oswal Securities.

Already, some operators have said high spectrum costs will jack up call rates by about 30 per cent.

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