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Monday, 17 Feb 2014
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2G spectrum auction: Smiles for Government, worries for Telcos


The 2G spectrum auction, conducted in the first half of February 2014, bought in a total revenue of Rs 61,162.22 crore for the government -- much higher than the estimated Rs 41,000 crore. The spectrum auction ended after 68 rounds of bidding spread over 10 days. The present 2G spectrum auction is the largest in terms of radiowaves on sale and the third longest in terms of duration.


2G Spectrum_ProjectsToday


The Telecom department had put on the block about 385 MHz of spectrum in the 1,800 MHz band in 22 circles and 46 MHz in the 900 MHz band in 3 circles. Eight telecom companies participated in the 2G auction, namely — Bharti Airtel, Vodafone, Idea Cellular, Reliance Jio Infocomm, Aircel, Tata Teleservices, Telewings (Uninor) and Reliance Communications. Airtel, Vodafone, Reliance Jio and Idea dominated the auction in terms of investment. The licences won by the telcos in the 2G auction will be valid for a period of 20 years.


In the 900 MHz band, which is much more cost-efficient and can be used to deploy any future technology, the whole 46 MHz spectrum on offer was sold. Bharti Airtel and Vodafone got spectrum in all three circles of Delhi, Kolkata and Mumbai, while Idea Cellular got spectrum in Delhi.


Bharti Airtel was able to buy 900 MHz band spectrum in the Mumbai circle where it did not have any spectrum in this band. Overall, Airtel bagged 18 MHz of spectrum in the 900 MHz band for Rs 8,624 crore.


Vodafone retained its total 900 MHz spectrum holding spread over Delhi, Mumbai and Kolkata, getting 23 MHZ of spectrum for Rs 11,261 crore. Idea got five MHZ of spectrum for Rs 3,705 crore.


Bharti Airtel, Vodafone and Idea Cellular were the price setters in the 1,800 MHz auction as well. In the 1,800 MHz band, Airtel topped in 15 circles, Idea in 11 and Vodafone in 10. Of the 385 MHz on offer in the 1,800 MHz band, 79.75 per cent was sold.


Bharti Airtel bagged 97 MHz in 15 circles Mumbai, Andhra Pradesh and Tamil Nadu for Rs 9,906 crore. Vodafone got 46.6 MHz of 1,800 MHz spectrum in 10 circles including Mumbai, Gujarat and Kerala for Rs 8,319 crore. Idea Cellular bagged 59.8 MHz in 11 circles including Kerala, Madhya Pradesh and North East for Rs 6,969 crore.


Of the total revenue, Rs 38,000 crore or 63 per cent was contributed by Bharti Airtel and Vodafone India. Vodafone paid Rs 19,600 crore, while Bharti paid a total of Rs 18,530 crore.


New entrant, Reliance Jio Infocomm, bagged 1,800 MHz band in 14 circles, including Gujarat, Maharashtra and Assam, for around Rs 11,000 crore. It has bought five or more MHz in each of the circles, which is a necessity for 4G. Reliance Jio had earlier won the rights to offer 4G broadband services across the country.


Government garners more than expected


For the current fiscal, the government’s earnings from the auction will be around Rs 18,296.36 crore if all winning operators opt for the deferred payment plan which entails an upfront payment of 33 per cent of the total price in 1,800 MHz and 25 per cent in 900 MHz, and the rest payable in 10 equal installments after a moratorium of two years. If some companies make one-shot payments then the government’s revenue for the fiscal will be even higher.


The Rs 18,200 crore revenue which the government is expected to get at a minimum is much higher than the budget estimate of Rs 11,300 crore. This has come as a breather, when the government is struggling to maintain the targeted fiscal deficit. The country's fiscal deficit at Rs 5.16 lakh crore has already crossed 95 per cent of the budget target in the first nine months of 2013-14.


Telcos to suffer from winner’s curse?


A lot of money put into the auction by telcos went simply into retaining their existing spectrum. The stakes were especially high for Vodafone and Bharti which use 900 Mhz. They had to join the auction after the Supreme Court refused to extend their licences, which expire in November 2014. Thus, they had to pay high prices just to retain their spectrum, especially in the Delhi circle where the winning price was Rs 740.96 crore which was more than double the base price.


Taking into account that most of the payment will be staggered, operators will have to pay 33 per cent of their 1,800 MHz and 25 per cent of their 900 MHz winning bid amounts upfront, which would mostly deplete their cash flows. The overall cost will also need to be amortised over the 20 year duration of the licence, thus weighing on the net profit.


Much of what the government will gain as revenue will end up as debt on the balance sheets of mobile operators. High indebtedness will in turn hurt the operator’s ability to invest in new technologies.


Though the high price paid by the telcos means tariff hike, in reality it may not happen. High competition among the existing players to retain their existing consumers and gain some more, and the entry of cash-rich Reliance Jio Infocomm is expected to force the telcos not to hike the prices, at least in the near future.


Overall, the current 2G auction was a success as compared to the last two auctions held in November 2012 and March 2013, which flopped as most bidders stayed away due to high floor bid prices. Keeping reserve prices low allowed a successful auction to take place.


Manufacturing Sector Developments


  • CCEA accorded approval for setting up two semiconductor wafer fabrication manufacturing facilities
  • Toshiba to invest Rs 3,000 crore in India over the next five years
  • ACC has established a cement blending unit in Udupi district of Karnataka
  • Tata Steel to set up a ferro-alloy plant at Ganjam district of Odisha
  • Eicher Motors to invest Rs 600 crore in two years for capacity expansion


Infrastructure Sector Developments


  • 16 international firms have qualified in a pre-qualification bid process for Bhaupur-Mughalsarai section of the eastern dedicated freight corridor project
  • The government has given approval to the 'Civil Aviation Authority Bill 2013'
  • Power Grid Corporation has received approval from the board of directors to invest Rs 1,915.51 crore in expansion and upgradation works
  • Adani Ports and SEZ is likely to acquire Dhamra Port from Tata Steel and Larsen & Toubro
  • Interim Railway Budget for 2014-15 unveiled


Power Sector Developments


  • State Level Single Window Clearance Authority (SLSWCA) in Orissa has given approval to Tata Power to relocate its Cuttack power plant
  • Borg India to invest Rs 280 crore in solar EPC Projects
  • NTPC has received 96 acre land for its Katwa coal-based power project in Bardhaman district in West Bengal
  • MoEF has shelved the grant of environmental clearance to the Bhedabahal UMPP in Odisha
  • UJVN has invited bids for upgradation of the Chilla power station in Uttarakhand


FDI Developments


  • The government, on the recommendation of the FIPB has approved nine FDI proposals worth Rs 798.73 crore


Quote of the week:


Sanjay Kapoor_Bharti Airtel_ProjectsToday  
"Now you will see that in these auctions when you protect 900 MHz and also when you get some 1800 MHz to replace some of the 900 MHz that you surrender, you are basically protecting existing revenues and that is not an economically very wise investment. But it happens because you have to protect a very large customer base. So from that perspective a lot of money in this auction is going into protecting existing revenues and that becomes absolutely essential for large operators who have millions of customers who they are able to offer good customer experience because of the 900 MHz spectrum."
Sanjay Kapoor, former CEO, Bharti Airtel
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