How the 2G controversy shaped telecom policy, impacted industry 

How the 2G controversy shaped telecom policy, impacted industry 

Context

Earlier this year, the Reserve Bank of India red-flagged the telecom industry and asked banks to review their exposure to the sector.

Revamp of Telecom Sector: Changes

• The cancellation of telecom licences by the Supreme Court in 2012 in the 2G case prompted the key stakeholders — the government and telecom operators — to revamp the way the telecom sector functioned in India, especially how airwaves were offered to operators
• While on the policy front, spectrum allocation started happening through auctions, for corporates, especially foreign players, the verdict forced many to cut back on their India exposure
• Consequently, the verdict impacted the bank books, loans to telecom companies and infrastructure providers, comprising nearly 3% of the portfolios for lenders at that time.
• While initially the industry expressed concern over the impact on foreign investment in India’s telecom market, analysts suggest that allocating spectrum at lower prices in fact opened the door to players who may not have been serious about rolling out networks at that point in time.

A Developed Telecom market

In 2012, from the pool of operators, 18 had their licences cancelled. As of date, 11 companies offer mobile services in the country, and if the proposed mergers and acquisitions go through, only five operators will remain — Bharti Airtel, Vodafone-Idea, Reliance Jio, BSNL and MTNL. This is in line with developed telecom markets where four or five companies dominate the sector

Artificial Demand

• Mr Raja’s approach created an artificial demand for spectrum by keeping it under-priced. If the spectrum was priced closer to its real value, it would not attract so many players
• Non-serious players would not have sought it

Allocation of airwaves at much lower prices

Bundling the spectrum with the licences and selling this on a first-come-first-served basis resulted in the allocation of airwaves at a much lower price than the market would have dictated — Rs 1,76,000 crore — as estimated by the Comptroller and Auditor General (CAG) of India.

The Problem is not the auction itself but the design

If demand exceeds supply, auctions are your best bet. The process of auction itself is not the issue, it is the design

Different ways of conducting the auction

There are many different ways of conducting the auction. For example, if the government said auction winners would have to make the payment within a week instead of 10 years, many companies would exercise caution. Similarly, if there was a penalty if the services aren’t rolled out within, say, two months of allocation, some players would have opted out

“The government also designed the auction with the primary focus of maximising revenues and not to speed up rollout of broadband or improve the quality of services. If you do that, then you increase the harm an auction can do. If instead, for example, the government had sought bids of how much revenues companies would share with it, there would have been less harm to service growth or consumers

Governments’ pursuit of higher revenues

The government’s pursuit of higher revenues through auctions, which is seen to be a direct result of the CAG’s observations on the loss of revenue through administrative allocation, has also resulted in spectrum becoming costlier, one of the factors cited by telecom players analysing the financial condition of these companies.

RBI red flagged the telecom industry earlier this year

Earlier this year, the Reserve Bank of India red-flagged the telecom industry and asked banks to review their exposure to the sector. An inter-ministerial group was formed, headed by DoT Secretary Aruna Sundararajan, to suggest measures for reducing financial stress in the sector