India Telecom:: 2G: TRAIed but failed again : BNP Paribas

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• ƒ TRAI recommendation on 2G spectrum pricing disappoints again 
• ƒ Excess spectrum charge negative for incumbents such as Bharti and Idea 
• ƒ New entrants unscathed; but to pay for spectrum beyond 4.4MHz 
• ƒ We expect incumbents to contest methodology and legality of charge 

2G: TRAIed but failed again 
TRAI revisions to pricing 2G spectrum disappoint
On 9 February 2011, the telecom regulator, Telecom Regulatory Authority of India
(TRAI), submitted a report on the pricing of 2G spectrum to the Department of
Telecommunication (DoT) as a follow up to the May 2010 recommendations. The
report outlines charges for spectrum above 6.2Mhz and for future spectrum
allocation between 4.4MHz and 6.2MHz until a value is discovered via a future
round of 2G spectrum auction. The charge for a pan-India 1800Mhz spectrum
above 6.2MHz is INR45.71b/MHz (1.36x the charge for 3G spectrum) and for
future spectrum allotments for the 4.4MHz-6.2MHz range is INR17.69b/MHz. The
900Mhz spectrum will be charged at 1.5x the price of 1800Mhz spectrum. In
addition, the price for spectrum above 8MHz will be 1.3x the spectrum price. The
spectrum charge will be prorated, based on the remaining validity of the license
starting 1 April 2010, subject to a minimum of seven years.
Spectrum charge to hurt incumbents, new entrants unscathed
Based on our estimates, the excess spectrum charge liability for Bharti is INR43b
(INR11/share or 3% of current market price) and for Idea is INR16.5b (INR5/share
or 8%). RCOM, Tata and the new entrants would have negligible or no liability for
excess spectrum. However, they may have to pay INR32b (INR15/share or 15%
of the current market price of RCOM) to increase their spectrum holding up to
6.2Mhz. We estimate the impact on our fair value at 3% for Bharti, 8% for Idea
and 0% for RCOM if these recommendations are accepted by the DoT.
Discovery of fair value of 2G spectrum could be delayed
The TRAI expects some 2G spectrum to be returned to the government due to the
cancellation of licenses, which could subsequently be auctioned to discover the
market price for 2G spectrum. However, the cancellation of licenses and the
return of spectrum by the defaulters is likely to be mired in a legal tangle, delaying
the discovery of fair price for 2G spectrum. Until a price is discovered for 2G
spectrum via an auction, the telecom operators whose licenses are coming up for
renewal starting 2014 through 2025 would have to pay the proposed prices.
Telcos may contest on the basis of legality and methodology
As per the recommendations, the cashflow method to compute spectrum price
uses blended ARPU of operators, which may not be reflective of the financials of
a new entrant in a circle. The methodology compares the capacities of 3G
WCDMA with 2G GSM spectrum to justify pricing of 2G spectrum in relation to 3G
spectrum. The 3G spectrum price discovered via the auction does not reflect the
fair price due to the scarcity premium paid by operators given the DoT’s decision
to restrict 3G auction to only three slots. In addition, the comparison of capacities
is based on WCDMA technology instead of HSDPA, the technology of choice for
deploying current 3G services. The new entrants and dual-tech operators could
argue for free spectrum up to 6.2Mhz similar to the incumbents.