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India seeks to atone for Spectrumgate

14 AUG 2012

Spectrum auctions tend to be prosaic affairs. Not many warrant their own Wikipedia page. But then not many have had the seismic impact of the Indian 2G spectrum auctions of 2008. This scandalous episode is calculated to have cost the country as much as US$39 billion in lost income, led to the impeachment of a government minister and several high-profile execs, and dealt a severe blow to India’s reputation among foreign investors as a place to do business. In 2011, Time magazine ranked the scandal as number two in its list of ‘The Top 10 Abuses of Power,’ behind only Watergate.

A quick recap on what happened. Under the auspices of the now-disgraced telecoms minister, A Raja, India sold over a hundred 2G licences in a hastily conducted ‘first come, first served’ auction that allowed a favoured few to pick up licences on the cheap; several of the ‘winners’ had little or no telecoms experience. These firms were then able to use their licences to broker highly lucrative deals with foreign firms looking to enter the world’s second-largest mobile market.  

Swan Telecom picked up 13 regional licences for US$270 million and then sold a 45 percent stake to the UAE’s Etisalat for US$750 million; Unitech Wireless paid about US$300 million and then received a US$1.2 billion windfall when it sold a 60 percent stake to Norway’s Telenor. These two are the most notorious examples, but there are several similar.

Such is the excruciatingly slow nature of the Indian judiciary, it took several years and a change in government before the scandal was exposed and the culprits brought to book (Raja was bailed in May after spending 15 months in prison).

India’s Supreme Court, when its verdict eventually came, came down heavy. Ruling Raja’s auction “totally arbitrary and unconstitutional,” it cancelled all 122 licences awarded in 2008, effectively serving notice on operators such as Telenor/Unitech’s Uninor that had launched services using the spectrum in the intervening period.

Subsequent developments ahead of the re-auction of the cancelled spectrum have continued the drama. In an effort to right the earlier wrong, regulators were determined to price the airwaves at a premium, setting the base price at an eye-watering INR36 billion per megahertz, a rate which would’ve required operators to shell out about US$3.2 billion for a nationwide (5MHz) licence.

Faced on one hand with a need to maximise income, and on the other by fierce lobbying by the operators complaining that the price was too high, the government appeared unable to make a decision. One minister drafted in to oversee the process lasted just three days in the job before quitting; further proof that something as seemingly straightforward as selling-off radio spectrum has become a seriously hot political potato. The decision on reserve prices, when it was eventually made, was one of those compromise solutions that left parties on both sides of the debate feeling aggrieved.

At the time of writing, the government is attempting to push back the 31 August deadline for the auctions to start to later in the year. It is highly likely it could slip into next year, more than enough time for many more twists and turns in the saga. It’s not even clear who will be bidding; Etisalat and Bahrain’s Balteco both exited the market after their licences were cancelled, though both could return. Telenor is determined to remain, but must first extract itself from its JV with Unitech Wireless, which is already turning into an ugly legal battle between the Norwegian operator and its local partner. 

The government has, sensibly, decided this time to allow foreign operators to bid for airwaves without the need to be affiliated to a domestic partner, effectively scrapping the long-standing 74 percent cap on foreign ownership. That may stimulate some interest among international operators, but they will be equally aware of the problems faced by major players such as Vodafone and Telenor operating under India’s frequently dysfunctional regulatory regime. Plans to relieve competitive pressure among existing players by lifting tight M&A restrictions are still making their way, snail-like, through India’s legislative system.

Plus, India is not the high growth market it once was. Partly due to the start-up networks that launched using the new 2G spectrum, the Indian mobile market was growing by 50 percent a year by 2009. But subscriber growth has slowed dramatically since with several operators reporting flat or declining customer numbers this year (efforts by regulators to remove inactive subscribers from totals has also been a factor). Those networks that had their licences cancelled in February are, as it stands, required to switch off their networks on 7 September, which will reduce the size of the market by almost a tenth, according to Wireless Intelligence. 3G services – only launched in India two years ago – have yet to compensate for slowing growth, forcing 3G operators to slash data prices to stimulate usage. 

If all this sounds like doom and gloom, then it shouldn’t. India is the largest mobile market in the world open to most international operators (assuming China to be a closed shop); and while subscriber growth is slowing, the market is still very much in its infancy in terms of smartphones and mobile data services. Moreover, the opportunity to acquire spectrum doesn’t come up very often in any country, let alone in the world’s second most populous nation.

Let’s just hope that, following the disastrous consequences of the 2008 licensing scandal, India has learnt some harsh lessons and gets it right second time round. Fingers crossed. 

Matt Ablott

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