Also, in a happy surprise for operators, the EGoM decided to increase the quantum of 1,800-MHz spectrum to be put up for auctions in January to 403 MHz, an addition of 118 MHz, or 41.4 per cent, to what it had proposed earlier. The addition also means that an average 18 MHz of spectrum will be up for sale in each circle - enough for three to four operators.
"An acquirer will have to pay the differential between the auction-determined market price and the administrative price for anything beyond 4.4 MHz in the GSM band and 2.5 MHz in CDMA, if an acquired company has got spectrum after paying administrative price," said a member of the EGoM. The M&A guidelines will now be sent to the Union Cabinet for its approval.
The ministers also agreed to increase the earlier-proposed 35 per cent cap on market share (in revenue, as well as user base) for merged entities in a circle to 50 per cent. However, if a merged entity breaches this 50 per cent ceiling in any circle, the companies will get a year to lower the share to below 50 per cent.
On the three-year lock-in period during which companies are not allowed to transfer equities, the ministerial panel decided to maintain the status quo for now. "This was in the Notice Inviting Applications (NIA) and the lock-in period will continue. The issue needs legal consultation," said the member. The matter is likely to be sent to the Attorney General of India for legal consultation.
The EGoM's decision, experts say, will benefit incumbent operators like Bharti Airtel and Vodafone.
If an incumbent telco acquires another incumbent operator, it will not have to pay for the 4.4 MHz GSM spectrum, or 2.5 MHz CDMA spectrum, the acquirer had got as part of its licence agreement. It will only have to pay market price for the spectrum being acquired. But, if a new operator - such as Telenor, which has already bought spectrum through auctions - decides to acquire an incumbent telco, it will have to pay market-determined price for the spectrum held by the company it is acquiring. On the other hand, if an incumbent operator buys a new operator, it will not have to pay anything for the spectrum it gets after acquisition.
"The price the acquirer will have to pay for spectrum might be a dampener. However, M&A activities are expected in the situations where an acquirer would not have to pay for spectrum," said Mohammad Chowdhury, partner & telecom industry leader, PricewaterhouseCoopers India.
The 50 per cent market share ceiling also gives incumbent operators more leeway to acquire other telcos; that would not have been possible under the 35 per cent rule.
Based on revenue market share, Bharti Airtel and Vodafone, the top two telcos in India as at the end of June 2013, together had more than 50 per cent share of the market in 15 of the 22 telecom circles. But, in terms of subscriber base, the two together exceeded 50 per cent market share in only three circles.
So, Bharti Airtel and Vodafone, if they were to merge, going by their revenues, a merger would not be possible in 15 circles (unless they are ready to bring the combined revenue market share down to less than 50 per cent within a year).
Going by market share in terms of both user base and revenues - where merged entities would not cross the 50 per cent threshold in any of the 22 circles - complete mergers are possible between Vodafone and Aircel, Idea Cellular and Aircel, Reliance Communications (RCom) and Aircel.
Had the government maintained the market share ceiling at 35 per cent for both revenue and user base, the possible merged entities would have exceeded the ceiling in most of these cases. For instance, the combined market share of Bharti Airtel and Vodafone exceeds 35 per cent in 21 circles by revenues and in 19 circles by subscriber base.
Cellular Operators Association of India (COAI) Director-General Rajan Mathews says: "With more spectrum being available in the 1,800-MHz band, operators are likely to shift their voice business in this band and use 900-MHz spectrum for LTE. I think we are happy. Also, the new M&A guidelines is likely to offer telcos the room to do some cherry picking."
According to a Department of Telecommunications (DoT) source, the value of the entire 403 MHz of spectrum at reserve price translate into Rs 36,000 crore. The additional spectrum the government auctions in January next year will come from the reserve that DoT has kept aside for refarming of 35 licences in the 21 circles that come for renewal between 2014 and 2016. As the government has decided to abolish reservation of spectrum for incumbent players, an additional 87.5 MHz of 1,800-MHz spectrum will be available for auction in January.
Besides, 27.8 MHz of 1,800-MHz spectrum is there in non-metro circles with the 15 telcos whose licences will be due for renewal between 2015 and 2016. These could also be auctioned. Earlier, DoT had said it would auction 285 MHz of spectrum in the 1,800-MHz band.
"The quantum available in an auction plays a very important role in determining fair price for spectrum, capacity of operators to pay for the quantum they acquire, quality of services, etc. The EGoM decision to increase the quantum will be very positive for the industry, as a lower availability of spectrum might have led to aggressive bidding by operators, who would have ended up paying very high price," said Hemant Joshi, partner, Deloitte Haskins & Sells.
Key EGoM decisions
* M&A policy for telecom cleared
* If an acquired firm has got spectrum at an administrative price, its acquirer will pay for its spectrum. Price to be the gap between market and administrative prices
* The 3-yr period for which transfer of equity is barred will continue; the issue needs legal opinion
* Market share of a merged entity should not exceed 50% in each circle. If it does, firms will have to bring it down below 50% in a year
* Govt to auction 403 MHz of spectrum in 1,800-MHz band
* Telcos to benefit: Incumbent ones like Bharti and Vodafone, which got spectrum bundled with licences at administrative prices