Last year, I blogged on how India’s 3G spectrum auctions would be the catalyst to a much-needed wave of consolidation in the country’s mobile sector. And so it proved. The long-awaited auctions may have led to a lucrative payday for the government – over US$20 billion according to the latest reports – but the outcome was unsatisfactory in many ways. Many of the country’s largest operators – Bharti and Vodafone among them – criticised the auction process within hours of it closing, claiming the high prices of bandwidth had prevented them from securing a nationwide footprint. The fact that even the largest operators couldn’t afford the spectrum they wanted reflects the Indian mobile market’s cut-throat economics – and has led to renewed calls that the government should relax rules around industry consolidation to ease the pressure.

The patchy allocation of 3G spectrum across the country could mean that this consolidation could come sooner rather than later, at least in the form of roaming agreements. Bharti, for example, spent the most in the auctions (US$2.7 billion), but still has gaps in key A Circle service areas such as  Maharashtra and Gujarat, where it lost out (in both cases) to Vodafone, Idea and Tata Teleservices. Some form of deal will be required if the market-leader is to provide nationwide 3G coverage.

But roaming and network-sharing is only a short term fix to the problem, and real consolidation still needs to occur. In a set of recommendations made to the government on the eve of the auctions, the Telecom Regulatory Authority of India (TRAI) backed both spectrum sharing and merger and acquisitions, but suggested a cap on the share of merged entities at 25 percent for spectrum and 40 percent for market share in order to prevent large operator groups dominating the market (it also recommended scrapping the distinction between fixed and mobile when calculating market shares). 

I wrote last year that tier-two operators such as Aircel, Tata Teleservices and Idea are the most likely candidates for a takeover, and all three of these now hold valuable 3G spectrum, making them even more attractive to potential suitors. But which of the larger players is now in a position to make such a deal? Bharti has just spent over US$10 billion on its move into Africa, while second-placed Vodafone was forced to write down the value of its Indian business by more than 25 percent last month due to competitive pressures. Moreover, as well as spending billions on licenses, the country’s new 3G operators are now under obligation to build-out the new networks into vast swathes of India over the next few years. Money is tight, to say the least. 

However, with the stocks of the Indian telcos wobbling in recent months, the market is beginning to look more attractive to foreign investors which had previously been put off by sky-high valuations. Indeed, it now looks more likely it will be a major international operator that could consolidate the market.

The number of foreign operators currently rumoured to be studying Reliance Communications’ books demonstrates this new appetite for foreign investment in India. Since the auctions closed only a few weeks ago, Reliance – which has over 100 million subscribers in India – has been linked with South Africa’s MTN, Etisalat of the UAE, and even US giant AT&T. According to analysts, Reliance has an enterprise value of around US$15 billion – not cheap, but its shares are down by almost 50 percent from a year ago and the firm is thought to need a cash injection to pay down large debts. It also announced this week that it is looking to spin-off its tower arm – Reliance Infratel – in a further effort to generate cash. 

Indian consolidation, therefore, is likely to come from beyond its borders rather than within. And not only will international operators provide local players with much-needed investment they may also bring a wealth of experience in building out and marketing 3G services. How quickly, and to what extent, this happens depends on how keen regulators are to encourage outside investment. Under current law, foreign ownership of local firms is capped at 74 percent, and at 10 percent if a foreign investor has stakes in two or more firms. Such regulations effectively barred foreign investors from bidding for 3G spectrum directly, ensuring spectrum was only available to incumbents in order to limit the number of players in the country.
 
If the government is serious about attracting investment from international operators it must move to provide a more favourable regulatory framework. It has already enjoyed a bumper payday from the 3G auctions – now it must provide a platform for its new 3G operators to get a return on their hefty investments.

Matt Ablott, Senior Editorial Analyst

The editorial views expressed in this article are solely those of the author(s) and will not necessarily reflect the views of the GSMA, its Members or Associate Members