Telecom Sector Update – TRAI responds to DoT: Incrementally positive - Prabhudas Lilladher

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Telecom

Sector Update – TRAI responds to DoT: Incrementally positive

TRAI has responded on some of the issues referred back to it by DoT on the recommendation on ‘Spectrum Management and Licensing Framework’. Key highlights are as below:

Uniform license fee

TRAI reiterates its earlier recommendation of progressively moving towards a uniform license fee of 6% of Adjusted Gross Revenues (AGR) over four years from FY13 to FY16.

Progression towards uniform license fee

Service providers	Current	2012-13	2013-14	2014-15	2015-16
Metro	10%	10%	9%	8%	6%
Category ‘A’	10%	9%	8%	7%	6%
Category ‘B’	8%	7%	6%	6%	6%
Category ‘C’	6%	6%	6%	6%	6%

Source: TRAI, PL Research

IMPACT: POSITIVE

Currently, Bharti/Idea pay blended license fees of 8.7%/8.9% on AGR, resulting in a ~250bps benefit on wireless margins in FY16. DoT has asked for 8.5% license fee which had a NEUTRAL impact.

Spectrum Pricing

TRAI has reiterated its view that the contracted spectrum is 6.2MHz/5MHz for GSM/CDMA and recommended that the ‘current price’ (determined by an expert panel) recommended earlier by TRAI be used for determining the price of excess spectrum beyond the contracted spectrum. TRAI had earlier recommended that excess spectrum up to 8MHz be charged at this ‘current price’ and beyond 8MHZ be charged at the rate of 1.3x the ‘current price’. TRAI has now stated that this additional charge would not be appropriate since the experts recommended only one price for all excess spectrum.

IMPACT: INCREMENTALLY POSITIVE

While the one-time charge on excess spectrum is a negative for incumbents, if the DoT opts for a uniform charge beyond 6.2MHz, it reduces the potential charge on excess spectrum on Bharti by ~8% to ~Rs40bn and on Idea by ~7% to ~Rs19bn.

M&A

Resultant entity can have a maximum revenue/subscriber market share of 60% (currently 40%). Up to 35% will be automatically approved, while between 35-60% will have to be referred to TRAI for approval. The limit on spectrum holding by the combined entity will be 25% of the total spectrum held in that service area. Spectrum sharing will also be permitted within this 25% limit.

TRAI has clarified that the “prescribed limit” of 2X10MHz for Metros and 2X8MHz for other circles pertains only to the assignment of spectrum by the Govt. It does not preclude a licensee from acquiring additional spectrum by way of auction or through mergers

IMPACT: POSITIVE

Will encourage consolidation in the wireless space and allow optimum use of allotted spectrum.

Re-farming

Reiterates need for spectrum re-farming in the 800/900 MHz bands and is separately initiating a consultation process and will give its final recommendations after that. It has recommended that the Govt. should at least bring out the need for re-farming in the New Telecom Policy 2011 and the details can be worked out in the consultation process.

In the process, TRAI also will consider limiting the auction of spectrum in the 700 MHz band initially to those not holding spectrum in the 800/900 MHz bands, subject to the condition that holders of 800/900 MHz spectrum would pay the market price. This is to establish a level playing field.

TRAI recommends that a specific fund for spectrum refarming be created and that 50% of the realization from all proceeds from spectrum, including from the auction proceeds as well as from the Spectrum usage charges, should be transferred to this fund.

IMPACT: NEGATIVE

The uncertainty over re-farming of spectrum in the 900MHz band remains a major concern owing to increased capex requirements in the less efficient 1800MHz.

Other Highlights

Incentive in the form of a progressive reduction in the USOF component (5% of AGR) of the license fee, starting with 0.5% for the achievement of two years’ obligation, extending up to 4% in the event of 90%+ coverage of all villages with a population of 500 to 2,000.

Renewal of licenses for a period of ten years v/s current term of twenty years.