Proposed regulations hit India’s telecom giants

Things just got tougher in the world’s fastest-growing cell phone market. A government proposal to hike existing mobile spectrum fees for India’s largest players sent stocks swooning Wednesday, with shares in market leader Bharti Airtel plunging 8.3 percent.

If accepted, the proposal would help the government reduce its fiscal deficit, but it’s unwelcome news for leading operators caught in a brutal price war and burdened by a pricey auction for third-generation licenses.

It’s also a reminder that you can’t do business without the government in India.

The Telecom Regulatory Authority of India said Tuesday that its proposals were meant to encourage consolidation and maximize efficiency. They still have to be approved by the Department of Telecommunications.

The most controversial change calls for a one-time fee for existing operators with large allocations of spectrum. The price would be based on the cost of 3G spectrum, which has spiraled past $3 billion for an all-India license in the ongoing bidding process.

The chairman of the regulatory authority, J.S. Sarma, told India’s CNBC-TV 18 that the government could make 350 billion rupees ($7.8 billion) from the fees. Add that to an anticipated 550 billion rupee ($12.2 billion) windfall from 3G auctions and the telecom department could rake in an amount equal to 1.6 percent of India’s estimated gross domestic product for the year that ended March 31.

The uncertainty couldn’t have come at a worse time for India’s once-golden telecom industry. New players such as Norway’s Telenor and Japan’s NTT DoCoMo have piled in, driving call costs to less than one cent a minute in some cases. Even as their margins erode, companies are scrambling to amass war chests to bid for 3G spectrum, which analysts say is crucial for future growth.

Critics say the regulator’s proposal is an about-face by the government which could cost market leaders like Bharti, Vodafone and Idea Cellular billions of dollars and drive away investors wary of government interference.

“The government one fine day cannot stand up and say you have to pay up for that spectrum at a price not anticipated by anyone in the telecom market. It’s not sticking to your own promises,” said PricewaterhouseCoopers executive director Sandeep Ladda. “This is not going to be looked at by overseas new entrants in a very favorable manner.”

Concerns about resurgent government assertiveness have been running high since the Supreme Court’s ruling last week that the government’s right to price natural gas trumps a private contract — even if it happens to be between two of the richest and most powerful brothers in India, Mukesh and Anil Ambani.

Bharti bit back Wednesday, issuing a withering statement that called the telecom regulator’s recommendations “shocking, arbitrary and retrograde.” It said they overturn 15 years of policy in India and are at odds with global norms.

“It seems that the recommendations are designed to punish efficient and performing operators like us for contributing to the growth of the Indian telecom sector and are instead tailor made to benefit select operators whose contribution to telecom growth and government revenues have been negligible,” the statement said.

Bharti, which has a 21.8 percent market share in India, is in an especially tough situation. It has massive financing demands, both for 3G spectrum and its $10.7 billion offer for the Africa assets of Kuwait’s Zain Telecom.

A company spokesman declined to comment on how much the proposed changes might cost the company, but analysts estimated $1.4 billion to $2 billion.

Advocates of the proposals say making spectrum allocation more efficient would be good for consumers, who deal with the daily frustration of dropped calls. Some say they would also foster competition by helping some smaller players, like Reliance Communications, get more spectrum.

Existing players with less spectrum also wouldn’t feel the pinch of added fees and would benefit, like all others, from a proposal to cut licensing fees by as much as 40 percent.

Reliance Communications executives called the recommendations “forward-looking, pro-consumer and pro-competition.”

Reliance Communications shares closed up 0.03 percent in Mumbai trading Wednesday.

Angel Broking analyst Rahul Jain said the government, which nurtured the industry with infrastructure and tax breaks, is now looking to get its share.

“The government is trying to extract more revenues from an industry earning good profits,” he said.

Associated Press