Telcos remain mum, jio makes noise in spectrum sale

Seven telecom operators have deposited over 14 cr rupees as earnest money for the spectrum auction which is scheduled to commence from 1st October. The telcos have to deposit 10-12% of the reserve price of the spectrum they are to bid for. The EMD – earnest money deposit by telcos points out to a muted response to the spectrum auction since at this rate airwaves worth about Rs.1.40 lac crore could be bid for, as compared to airwaves worth Rs.5.66 lac cr put up for auction by the Indian government. In the auction which took place in March 2015, 8 telcos had deposited Rs.20,435 cr as earnest money and the government had earned highest proceeds of Rs.1.10 lac cr.

There is news in the industrial air that spectrum worth about Rs.80,000 cr would be sold out in the upcoming round. If it happens in actuality, the Indian government will fulfill its revenue target of Rs.64,000 cr from spectrum auction in the present financial year. This was announced by our Finance Minister Arun Jaitley in the budget. To sum up, the government expects to earn Rs.98,995 cr from communication services in 2016-17, which envelopes proceeds from spectrum auction along with other fees levied by the DoT – Department of Telecommunications.

Reliance Jio alone showed interest in 700-MHz band:The top 3 operators and Reliance Jio might spend at least Rs.35,500 cr at reserve prices, to begin with, in the 2,100-MHz and 1,800-MHz band, and nil in the 700-MHz band, a Credit Suisse report said. The report also stated that there could be a positive aspect to this number provided the bidding goes above the reserve price or for that matter if operators purchase additional carriers.The Indian government has put up 2,354.55 MHz spectrum for auction at reserve price of Rs.5.66 lac cr. No telecom operator except Jio, has deposited earnest money worth 5 MHz of 700-MHz band for which the government has placed a reserve price of Rs.11,485 cr per MHz.

What exactly is EMD or earnest money deposit?An earnest money deposit (EMD) shows the seller that a buyer is serious about buying a property. When the deal is locked, the funds are put toward the purchaser’s down payment. If it falls through, the buyer might be unable to reclaim the deposit. Senior officials stated that while earnest money deposit depicts the width of what telcos can bid for, it also has correlation to some extent to the outcome of the auction where prices are driven by competition. To that extent, EMD is merely a parameter to measure a participant’s interest in an auction.

Reliance Jio submitted highest EMD:Mukesh Ambani-led Reliance Jio has submitted EMD of Rs.6,500 cr, which is the highest among the seven operators. Vodafone secured the second position with an EMD of Rs.2,750 cr, followed by Idea Cellular’s Rs.2,100 cr, Bharti Airtel’s Rs.1,980 cr, Tata Teleservices’ Rs.1,100 cr, RCom’s Rs.313 cr and last and the least Aircel’s Rs.120 cr. The pie chart below will give you a clearer picture:

Why has there been a poor response to spectrum auction?According to the industry, the major reason for poor response to spectrum auction is the high reserve price for the 700-MHz band. This alone accounts for reserve price of Rs.4 lac cr. With no ecosystem in place for 700-MHz, telcos are unlikely to bid for it and would rather focus on 1,800-MHz, 2,100-MHz, 2,300-MHz and 2,500-MHz.To add to this, there is cutthroat competition in the market, especially after the entry of Jio, so telcos are likely to bid very selectively and try and fill in the gaps in their networks. The operators have been under huge debt thus, buying airwaves is not a very good idea.

The table below throws light upon the potential bidding strategy of the telecom operators:

OperatorPotential Bidding StrategyReliance JioCould bid for 5 MHz in 700 MHz band. Likely to concentrate on 800-MHz and 1,800-MHz bandVodafoneMay bid for 1800 MHz, 2100 MHz, 2300 MHz and 2500 MHz band to improve 4G footprintIdea CellularCould go for 1,800-MHz, 2,100-MHz, 2,300-MHz and 2,500-MHz bandBharti AirtelWill try and fill gaps in circles where it doesn’t have 4G airwaves. May bid for 1,800-MHz, 2,100 MHz, 2,300 MHz and 2,500 MHzTata CommunicationsCould bid for 800-MHz band in Delhi, Mumbai and Maharashtra circlesReliance CommunicationsCould bid for 800-MHz band in select circlesAircelMay bid selectively

Conclusion:The upcoming spectrum auction is significant as the Indian government is putting up huge chunks of spectrum for sale for the very first time, which should aid in eliminating fragmentation and improving quality of services. The rules of the auction are made bidder-friendly.

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