India - Merger control

Govt announces M&A norms for telecom licences

The Department of Telecommunications (DoT) has significantly tightened the rules on mergers amongst telecom operators within a circle by imposing a three-year lock-in period and making it mandatory for them to take prior permission from the ministry. It has also made the rules on retention of spectrum after the merger much more stringent.

According to the existing policy, operators do not need prior DoT permission or have a lock-in period for merging.

Experts, however, say the new policy will not benefit anyone and will only block consolidation in the industry, which will already have too many players in the market. Says telecom analyst Mahesh Uppal: “It is bit of a mess for everyone — existing players will be hit as they cannot buy now for three years; new players would not be able to sell; and it will not help the consolidation of the industry, either”.

A similar view is echoed amongst operators too. A senior member of the Cellular Operators Association of India — the GSM lobby— said: “The policy does not benefit anyone. New players cannot cash out; consolidation of the industry, which has been the new cry, has to wait; and the existing operators, who were looking for mergers as a way to get extra spectrum, will be confronted with stringent rules on its utilisation.”

However telcos also say that in many areas the policy lacks clarity. “It says that there is a three-year lock-in on mergers for new licencees but it is quiet on the possibility of an operator acquiring a company, taking a majority stake and waiting for three years. What stops them from doing so? The word acquisition is conspicuous by its absence” asks an existing operator.

The government has recently awarded licences to over six new players, including Datacom Solutions (promoted by Videocon group), Loop Telecom part of the BPL group controlled by the Ruias and their associates, Swan Telecom, S-tel, the Unitech group, among others. Even Reliance Communications and Tata Teleservices (which are in CDMA) have been given permission to operate GSM services under the new policy.

The new merger rules are based on the recommendations made by the Telecom Regulatory Authority of India (Trai). In line with the regulators recommendations, DoT’s merger rule also limits the market share of the merged entity — both in terms of subscribers and revenue to 40 per cent. Under the prevailing rules it is 67 per cent. That is understandable as the number of operators in each circle is expected to go up from 5 to 6 now to over 10 to 12. For a similar reason, the new policy states that merger and acquisition activity cannot be undertaken if there are less than 4 players in the circle. Under the current policy, the rule is of 3 operators.

However the new policy deviates in two key areas from the regulator’s recommendations — the existing rule under which a telecom operator cannot take more than 10 per cent equity stake in rival operators in the same circle will continue. Trai had suggested that this limit be raised to 20 per cent.

Also DoT has removed the regulator’s suggestion that mergers can only be allowed if operators have met their rollout obligations.

The new policy, of course, has made retention of spectrum tougher. While it allows the merged entity to be entitled for the total amount of spectrum held by the merging companies, it puts in a stiff rider — the new entity has to meet the subscriber criterion within 3 months or surrender the licence. And in case some spectrum is still held by the merged entity after the expiry of 3 months the charge for it will be doubled every 3 months