Going by the media,the government proposes to ease or even scrap FDI sector limits to attract stable foreign investment. One sector where the FDI limit (74% now) is likely to be scrapped is telecommunications.
However,raising or scrapping the FDI limit alone will not compel foreign companies to invest in India. Investor confidence in the sector has to be restored first. Global players such as Telenor,Systema and Etisalat have been affected by the Supreme Court judgement of February 2012 which cancelled the 122 licences granted by the department of telecommunications (DoT) in 2008. Such mass cancellation dented investor confidence.
The last financial year saw a steep drop in FDI in telecom. Many players quit the market. Now only a few international players are left in the market,in joint ventures with Indian players. Even they are looking out. It will be instructive to review the telecom policies of the last two decades to know the reasons for such a sorry state of affairs and draw a lesson for the future.
One most lucrative sector for attracting foreign investment in the early 1990s was mobile telephony. Bids were invited in early 1992 for two licences in each of the four metro cities i.e. Mumbai,Kolkata,Delhi and Chennai. The bids were ranked based on the licensees capability to provide affordable service.
The decision was soon challenged by two of the losing consortia,after allegations of corruption. A court battle followed. The dispute could be resolved only after two years. Although mired in legal controversy,the metro bids saw the participation of a large number of foreign players such as Hutchinson Whampoa,France Telecom,Telecom Malaysia,Telstra,Bell South,and Vodafone. Having lost two years by adopting a non-transparent bidding process,which can be called a beauty contest,the DoT decided on transparent bidding (auction) for granting two licences in each of the 18 telecom circles in 1994.
By then auction had emerged as the method of choice internationally for grant of mobile licences. Since demand exceeds supply of spectrumwhich came bundled with the licencethe only objective criterion was auction. Beauty contest and first-come-first-served (FCFS) being ruled out because of their poor transparency. In this bidding process also,global players such as AT&T,US West,Nynex,Telia and Finnish PTT took part in partnership with Indian players. The third slot in each of the 22 circles was reserved for PSUs (MTNL/BSNL). The Telecom Regulatory Authority of India (Trai) in 2000 recommended induction of a fourth player,through bidding. The bids were invited in 2001 and a fourth licence was granted for an entry fee of R1,658 crore,which was actually the price of spectrum that came bundled with it.
A major departure from the established practice of the first decade i.e. transparent bidding,came with the introduction of the FCFS method by the NDA government in November 2003. According to Trai recommendation,relating to the new licensing regime called Unified Access Service Licence (UASL),FCFS was applicable only to basic service operators (BSOs),who were already providing limited mobility,for their migration to the new regime to provide full mobility services.
But FCFS was extended to new cellular operators,in violation of Trais October 2003 recommendationwhich wanted DoT to induct more cellular players through a multistage bidding process similar to what was adopted for the fourth cellular licence.
Trai had,in a presentation to a Group of Ministers on Unified Licensing in 2003,sought separation of licensing from ‘spectrum allocation’,in line with the EU directive of March 2002; with licence as a ‘general authorisation’ at a nominal fee and spectrum allocation through competitive bidding. Ignoring these recommendations,hundreds of new operators were given the UASL licence during 2004-2008. The GSM frequency was allotted to applicants numbering hundreds by the so-called FCFS method. The scarce national resource was allocated at 2001 prices. Even the FCFS policy was not followed scrupulously. Some operators had prior information of the last minute change in the rules of the game.
Another major irregularity relates to the allocation,in 2002,of additional frequency spectrum beyond 4.5MHz,which was the cumulative maximum as per the licences granted in the 1990s and applicable then. Even the USAL licence stipulates 4.4 MHz as the cumulative maximum and mentions 6.2 MHz to explain the obligation to pay additional revenue share in case this limit (4.4) is exceeded.
The incumbents were given additional spectrum up to 12 MHz on the basis of their subscriber numbers,thereby increasing their market power vis-a-vis new entrants. there is no international precedent to allocate frequency to an incumbent operator on the basis of subscriber numbers exceeding an arbitrarily laid down threshold. In the UK,all such changes in the licence condition are referred to the Competition Authority. Globally regulators and policymakers practice what is called ‘asymmetric regulation’,which places certain obligations and restraints on the dominant operators. However,in India,instead of allotting additional spectrum to incumbents practically free,this limited resource should have been reserved for the new entrants,to ensure greater competition.
All these irregularities have been brought out at length in the Justice Patil committee report. The committee was set up by the DoT to examine procedural lapses in allocation of spectrum & licenses to operators during 2001-2009. The report also brings to public domain,how the bureaucratic leadership completely sidelined the technocrats of the department,such as the wireless adviser & the Telecomm Commission,while allocating additional spectrum to operators. Even the Trais recommendation was not sought.
The latest judgement of the Supreme Court,delivered on February 10,asking the government to auction the entire frequency band released by the cancellation of 122 licences is also a landmark decision. It lays to rest the DoTs plan to implement the so-called refarming of spectrum,again in violation of best international practices.
The telecom assets have a life of 40 years. The DoTs decision to allocate an alternative frequency band to the incumbents on their licence expiry,in the 1800 MHz band,would have meant a complete reengineering of their radio access network,as the propagation characteristics of radio waves in 1800 MHz and 900 MHz are quite different. The former will require three to four times the number of cells to cover the same area. This would be an unacceptable burden on the telecom operators,whose margins have gone down because of the saturation of the cellular market.
The licence agreement provides for extension of the licence after expiry by mutual agreement. Refarming of analogue TV broadcast frequencies in the UHF band (526-820MHz)to free about 125 MHz of spectrumcalled digital dividend has been completed in many countries,like in Australia and the UK. The digital dividend band has become available in India also,following the conversion of analogue TV transmission to digital. The DoT should coordinate with the ministry of information and broadcasting to get this spectrum released for advanced telecom services like 4G. This will avoid disruptive changes in the network engineering of incumbent mobile operators. There may not be a need for them to vacate 900 MHz and move to 1800 Mhz band; 700 Mhz band,which is part of the digital dividend,is suitable for 4G services.
It is unfortunate that the Supreme Court has to intervene so often in policy matters,which should normally be the domain of the government. Hopefully,the new telecom policy document NTP 2012,which delinks licensing from spectrum allocation and mandates auction as the method to allocate spectrum,will send right signals to the global investors.
The author is former member,Trai/Telecom Commission