Nripendra Misra: An auction that did not flop

Last Updated: Sun, Nov 25, 2012 05:10 hrs

The media has unanimously declared the recent auction of 2G spectrum held on November 12, 2012 a flop. Unfortunately, the auction results are also being flagged to flog the Comptroller & Auditor General's report on the 2G licence allocation of January 2008. It is relevant to analyse the auction results and revisit the CAG report to explore if there is any valid nexus between its assumptions and the actual price determined by the auction of 2G spectrum.

We need to keep in mind that the CAG, while evaluating the price of licences, had given three presumptive loss figures. It was Rs 57,000 crore based on the sale of equity by the new licensee Swan, Rs 67,000 crore based on another offer and Rs 176,000 crore based on the extrapolation of the proceeds from the 3G auction. Perhaps the exercise was done with the domain knowledge in existence at that time. It does not appear that the CAG took inputs to determine the market situation, the financial health of telecom companies and regulatory uncertainties while doing this exercise. It is certainly possible to argue that the market discovery of the price even in 2008 and beyond could have been based on various objective criteria prevailing in the telecom sector.

One needs to identify the positives of the auction results before putting any qualitative tag on them. In 2001, the government had auctioned licences for telecom services. One of the conditions was that the licensee would be given 4.4 MHz start-up spectrum for operations. On fulfilment of certain conditions, the licensee was eligible for higher slabs of spectrum. The total bid price then received was Rs 1658.57 core for 22 circles - read as states. It ranged from Rs 1 crore in West Bengal to Rs 233 crore for Tamil Nadu and Chennai. In the 2001 auction, there were no bids for states like Jammu & Kashmir, the North-east and a few others. The price of licences for states where there was no bidding was determined in consultation with the telecom regulator, Trai.

During the 2012 auction, the reserve price was fixed for 5 MHz spectrum. Thus, the auction in 2012 was for 2G spectrum in the 1800 MHz band with a licence to follow in case it was required by the winning bidders. For the sake of comparison, the price of spectrum at the 2001 price for 5 MHz is approximately Rs 1,884 crore, estimated on the basis of the auction price of licences which promised allocation of 4.4 MHz. Thus, the comparable figures are Rs 1,884 crore based on the 2001 auction, and the reserve price of Rs 14,000 crore fixed for the 2012 auction. There were no bids for Mumbai, Delhi, Karnataka and Rajasthan in the recent auction. The comparative results for 5 MHz spectrum in the circles for 2001 and 2012 are given in the table. It should be evident from the discovered prices that there have been significant increases in bids in spite of regulatory uncertainties and disturbing features in the telecom business. The overall increase over the 2001 bid amount is 368 per cent.

Circle name Total price of
spectrum at
2001 prices for
4.4 MHz
Total price of
spectrum at
2001 prices
for 5 MHz
Reserve price
at 2012
auction for
5 MHz
Final auction
price at 2012
auction for
5 MHz for
circles where
there were
valid bids
Increase over
2001 bid
Delhi  170.7 193.98 2,772.24 -  -
Kolkata  78.01 88.65 454.88 454.88 513.11
Andhra Pradesh  103.01 117.06 1,147.64 1,147.64 980.38
Himachal Pradesh 1.1 1.25 31.12 31.12 2489.6
Northeast 2 2.27 35.36 35.36 1557.7
Punjab  151.75 172.44 269.12 269.12 156.06
Karnataka  206.83 235.03 1,320.48 -  -
Rajasthan  32.25 36.65 268.32  - -
Gujarat  109.01 123.88 899.36 899.36 725.99
Haryana  21.46 24.39 186.08 186.08 762.93
Kerala  40.54 46.07 261.2 261.2 566.96
MP  17.45 19.83 215.96 215.96 1089.05
Maharashtra  189 214.77 1,051.24 1,051.24 489.47
Mumbai  203.66 231.43 2,713.80                        -  -
TN & Chennai  233 264.77 1,224.36 1,224.36 462.42
Uttar Pradesh (West) 30.55 34.72 429.64 429.64 1237.44
Assam  5 5.68 34.68 34.68 610.56
Bihar  10 11.36 170.04 189.4 1667.25
Jammu and Kashmir 2 2.27 25.32 25.32 1115.41
Orissa  5 5.68 81.08 81.08 1427.46
Uttar Pradesh (East)  45.25 51.42 304.68 304.68 592.53
West Bengal 1 1.14 103.36 103.36 9066.66
Total  1,658.57 1,884.74 13,999.96 6,944.48 368.45
All figures in Rs crore

The way forward is to make a fresh reference to Trai, which would ensure legal compliance. Trai must take measures to restore confidence in the sector. The key incumbents have reported growing debt to equity, decline in minutes of usage and significant fall in average revenue per user. The telecom companies are jittery in terms of the financial burden if the Department of Telecommunications' policy is enforced on refarming, one-time payment beyond 6.4 MHz and payment for spectrum usage at the time of licence renewal. There is a strong case that these issues are best settled in consultation with the stakeholders. We also need to review the reserve price and the total number of slots available for auction.

It appears that the "flop" claims for the auction are in the context of revenue contributions to the national exchequer. Those who are terming the auction a flop are also in the front row of those claiming that the telecom sector should not be seen as a revenue multiplier. This view has been also confirmed by the apex court. We must recognise that the telecom sector is the most potent conveyor belt for taking growth to the aam aadmi. The lasting achievement of the November 12, 2012 auction is the recognition that spectrum allocation should be based on market determination of price and the licence and spectrum should not be coupled, as was the case with the Unified Access Service Licence of 2001. The New Telecom Policy of 2012 has already confirmed the separation of licences from spectrum. This auction laid the foundations for the implementation of NTP-2012. Once we resolve the regulatory uncertainties through a consultative mechanism, the telecom sector will be put back on the rails to feed growth and meet the expectations of 100 per cent density for both voice and data.

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