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The Lowdown: India’s Telecom M&A Rules

Following the 2G auctions, which concluded last week, Department of Telecommunications (DoT) has finally released the much-awaited merger and acquisition guidelines for the telecom sector.

These guidelines are expected to pave the way for consolidation in the sector with major telcos acquiring struggling telcos for more spectrum in the country while providing an exit route to these telcos. The process seems to have begun with India’s largest mobile operator Bharti Airtel inking a strategic agreement to acquire the operations of Mumbai-based Loop Mobile earlier this week.

DoT also mentions that it has decided, in-principle, to allow trading of spectrum. Remember that TRAI had released its final spectrum trading recommendations last month, wherein it had recommended outright spectrum transfer and a two years lock-in period. Livemint says these guidelines will now be placed before the cabinet for approval by February 27. You can download the guidelines here.

Telco M&A Rules

50% Marketshare Limit: The marketshare limit for transfer and merger of licenses has now been increased to 50% from 35% i.e. merger will be allowed where the marketshare of the combined entity in the respective service area is up to 50%.

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In case, the marketshare of the combined entity exceeds 50%, the entity should reduce it to 50% within one year of the merger, failing which suitable action shall be initiated by the licensor.. The market share of both subscriber base and Adjusted Gross Revenue of licensee in the relevant market shall be considered for determining market power, taking access into consideration, not wireline and wireless separately.

After merger, spectrum held by the entity should not exceed 25% of the total spectrum for access services and 50% of the spectrum assigned in a given band, by way of auction or otherwise, in any service area.

– For 800 MHz band, the ceiling will be 10 MHz. Moreover, the relevant conditions pertaining to auction of that spectrum shall apply.
– In case any of the companies involved have been allocated a block of 3G spectrum through the auction conducted for 3G/BWA spectrum in 2010, the resultant entity shall also be allowed to retain two blocks of 3G spectrum in respective service areas and transfer/merger of various categories of telecommunication service licenses/authorizations under unified License, within the 50% of spectrum band cap limit.

Surrender excess spectrum

DoT has said in these guidelines that excess spectrum must be surrendered within one year of the permission being granted for the merger or acquisition. Applicable Spectrum Usage Charges (SUC) on the total spectrum holding of the resultant entity shall be levied for such period. If excess spectrum is not surrendered within one year, action maybe be taken by the government, but most importantly there will be no refund or set off of money paid and /or payable for excess spectrum.

On spectrum fee 

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– If the acquired company holds a part of spectrum, which (4.4Mhz or 2.5Mhz) has been assigned against the entry fee paid, the acquiring company or the resultant merged entity will pay the government the differential between the entry fee and the market determined price of spectrum from the date of approval of such arrangements by the National Company Law Tribunal/Company Judge, on a pro-rata basis for the remaining period of validity of the licenses.
– No separate charge shall be levied for spectrum acquired through auctions conducted from the year 2010 onwards.
– Since auction determined price of the spectrum is valid for a period of one year, PLR at the State Bank of India rates shall be added to the last auction determined price to arrive at market determined price after a period of one year.
– In the event of judicial intervention, in respect of the spectrum holding beyond 4.4 MHz in GSM band/2.5MHz in CDMA band before merger in respect transferee company, a bank guarantee for an amount equal to the demand raised by the department for one time spectrum charge shall be submitted pending final outcome of the court case.
– SUC as prescribed by the govt from time to time, on the total spectrum holding of the resultant entity shall also be payable.

How is marketshare calculated

– Marker share of both subscriber base and Adjusted Gross Revenue (AGR) of the licensee in the relevant market shall be considered for calculating market share.
– Both wireline as well as wireless subscriber numbers will be used while determining the market share.
– Exchange Data Records (EDR) shall be used in the calculation of wireline subscribers and Visitor Location Register (VLR) data or equivalent, in the calculation of wireless subscribers for the purpose of computing market share based on subscriber base.
– EDR/VLR data on Dec 31 or Jun 30 of each year depending on the date of application will be used.
– The duly audited AGR shall be the basis of computing revenue-based market share for operators in the relevant market. The date for duly audited AGR would be Mar 31 of the preceding year.

Lock-in period
If a licensee participated in an auction and is consequently subject to a lock-in condition, then if such a licensee merges or is acquired by another licensee, the lock-in period would apply in respect of new shares which would be issued in respect of the resultant company (transferee company). The substantial equity/cross holding clause shall not be applicable during this period of one year unless extended otherwise.

On licenses

– Companies will need to clear all demands related to the licenses they hold before merging entities, as per demand raised by the government/licensor on the returns filed by the company, notwithstanding any pending legal cases or disputes.

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Download the guidelines here.

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