The shine is off the Indian market

Tony Poulos

The shine is off the Indian market

February 13, 2012  |  2 comments

As featured on TM Forum’s the Insider Blog

Anyone seduced by those ‘Incredible India’ advertisements that ply the TV airwaves around the world may be lulled into a false sense of security, much the same as bidders for 122 2G spectrum licenses were.

The color, the vibrancy, the uniqueness of India that is used to attract tourists soon gives way to squalor, poverty, dirt and grime that is the real India. Those license holders that have now been stripped naked and left with no 2G licenses or compensation are the victims of an inept bureaucracy that appears to have condoned corruption – the real dirt and grime of India’s political and social system.

It all started when India's deposed telecom minister, Andimuthu Raja, now wallowing in jail, ignored top-level government advice his department's own criteria while issuing 2G licenses in 2008 at 2001 prices.

In a damning report into the allocation of that spectrum, India's Comptroller and Auditor General (CAG) said that more than 70% of the winning applicants were unqualified to participate.

It was reported at the time that the winning applicants for 85 of the 122 licenses did not satisfy the basic eligibility conditions for the auction. These companies allegedly suppressed facts - or even outright lied - in their applications. Some were thinly veiled fronts for existing operators flouting the rules.

Acting like a belligerent school master, the Supreme Court of India handed out its own form of punishment to all the license holders, not just the naughty ones, and simply took back all the spectrum to be resold in a new auction where it is anticipated they will return considerably more revenue than before.

In fact, the Telecom Regulatory Authority of India (TRAI) recently adopted a rather controversial pricing methodology for spectrum. It valued 2G spectrum (whether at 900 or 1800-MHz) at a price point potentially six times higher than operators paid in the controversial 2008 allocation.

To add insult to injury, Bloomberg reported that in addition to scrapping the licenses, the Supreme Court is ordering operators to pay a penalty of 50 million rupees ($1.02 billion). So, simple corruption by a government minister appears to have been surpassed by a grand case of highway robbery by the government itself.

It is questionable whether many, if any, of the international operators now being penalized had any idea that their initial investment would become such a painful and costly exercise. The lure of those many millions of phoneless souls was too good to resist, but after their brief gambit in such a low ARPU market, the gloss has well and truly worn off for some.

Bahraini operator group Batelco has announced the sale of its stake in STel, in the wake of the circumstances surrounding the country’s 2G scandal, and that Telenor is also believed to be considering selling out of its partnership with Uninor. Russia's Sistema, joint owner of Sistema Shyam has decided to stand and fight by protesting the verdict.

With Indian regulations restricting foreign ownership to less than 74% of a mobile operator, all international participants in the market have to seek out a domestic partner. After this latest debacle, the line-up of foreign ‘victims’ may shorten dramatically. The desire to enter a market, albeit massive in terms of subscriber numbers, that competes on calls down to 0.001 cent US per minute with ARPU hovering around $2, must be wavering. Even the most ambitious boards desperate for foreign expansion to combat saturation of their own home markets would probably think twice before approving a foray into India.

Unless the government can guarantee that a similar spectrum seizure won’t happen again, or that corruption will play no part in any foreign company’s dealings within India in future, foreigners may be well advised to spend their hard-earned money elsewhere. The Indian government’s attempts to placate corruption fears by jailing the one man, supposedly operating alone, can best be described as cursory. It will need to do a lot more to get investor confidence back.
 

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Tony Poulos


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