Ministry of Finance Department of Economic Affairs Allotment and Pricing of Spectrum 30 January 2008

1.

Minister for Communication met the Finance Minister today

on the subject of spectrum charges. Secretary, DoT, Advisor (Wireless) and I were present. The following is the gist of discussion. 2. FM suggested that keeping in view lessons of experience,

allotment of licenses and allocation of spectrum must be based on solid legal grounds. 3. It was agreed that the optimum numbers of operators per

circle would be about seven. The International norm is about six. If there are more licensees per circle, it is possible that consolidation will take place. Government should ensure that such consolidation happens in a healthy way without any rent-seeking. 4. It was noted that there is a mismatch in the demand and

supply of spectrum across circles. Redressing this mismatch will be another policy imperative. 5. FM said that for now we are not seeking to revisit the current

regimes for entry fee or for revenue share. 6. The issue under consideration now is the regime for

allocation of spectrum. The following aspects need to be studied further: (i) The rules governing the allocation of additional spectrum and the charges thereof, including the charges to be levied for existing operators who have more than their entitled spectrum. (ii) Rules governing trade in spectrum. In particular, how can Government get a share of the premium in the trade? (iii) The estimate of the additional spectrum that may be available for allocation after taking into account: (a) the entitlement of entry spectrum of fresh licenses: (b) the

spectrum that needs to be withdrawn from existing operators who do not have the subscriber base corresponding to the spectrum allotted to them; and (c) the spectrum that may be released by Defence. (iv)We also need to check the current rules and regulations governing withdrawal of spectrum in the event of: (a) not rolling over; (b) merger and acquisition; (c) trading away spectrum. 7. Secretary (DOT) will come for a meeting with us at 12 noon

on 31.01.2008 to discuss these issues. Please make it convenient to attend the meeting. Sd/(D. Subbarao) Finance Secretary 30.01.2008 AS(EA)

Discussion between Honble FM and Honble MOC&IT (30th January 2008)

Salient points:

DOT and MOC&IT best judge how to go about the issue; need to avoid legal issue

Initial spectrum linked with service licence. Growth of service should not get stifled. At the same time, spectrum hoarding and trading in spectrum should not be allowed.

Additional spectrum should be allotted at proper price; Need to discover right price for spectrum;

How to ensure availability of adequate spectrum for new operators as well as for growth of existing operators?

In case of Mergers and Acquisitions, Government should get appropriate part of company valuation as premium for spectrum.

2.

The main issues are discussed below:

2.1

How to discover the right/appropriate price for additional

spectrum. The best method to get the right/correct/appropriate market price for the spectrum is the Auction. All other methods provide only Administrative pricing of spectrum which can be reviewed periodically based on the experience gained. One method could be to index the bids of 2001 for different areas, with inflation since 2001 as well as the teledensity as prevailing 2001 and now. This amount can be taken as an equivalent of 4.4 MHz of GSM spectrum. Another method of valuation can be based on the population of the area concerned, which provides the potential for total teledensity.

2.2

How to ensure availability of adequate spectrum for new

operators? The total spectrum requirement for new operators would depend on the number of operators in a given service area. As was mentioned during discussion, a practical maximum number of national level operators can be 7-8 with one or two regional players. Of course, the general view of telecom experts is that eventually, only national level, integrated telecom players would stay in the field. Other operators are likely to merge in the main players or get acquired by them. For 7-8 total operators, spectrum can be made available in southern states, MP, Orissa and couple of other areas. In the remaining areas, adequate spectrum can be available for all these 7-8 operators, only after defence closes their tropo links and vacates the relevant spectrum. This also takes into account the needs of existing operators for additional spectrum.

2.3

Withdrawal of excess spectrum: Regarding withdrawal of excess spectrum, all the operators

have already been requested to provide the data of their active subscribers (VLR) and traffic. Some of them have provided the data. They can be informed that say after one year, they would be entitled to retain only that much spectrum which is their entitlement as per the criteria, taking into account their VLR and traffic data then, and the balance spectrum would stand withdrawn. For those who have not provided the data, a reminder had already been issued and a final notice can be issued that if the data is not provided within a week, spectrum beyond 6.2 MHz would stand withdrawn with immediate effect. In cases of Merger & Acquisitions, the merged entity can retain the spectrum as per their entitlement based on total VLR

and traffic, say three months after the merger. The remaining spectrum would stand withdrawn thereafter.

2.4

In case of M&A, getting part of the valuation for Government

as premium for spectrum, to avoid hoarding as well as spectrum trading. In view of very large number of new operators, it is expected that some of these companies might have obtained licences as speculative venture. Hence, some Mergers & Acquisitions (M&As) are likely to take place after some time, which de facto, would amount to spectrum trading, as a large part of such companys valuation may be on account of the spectrum held by them. This spectrum trading is not desirable and needs to be regulated. Besides the general conditions in service licence and other guidelines for M&As, clear and detailed Guidelines need to be evolved and announced regarding the M&As, especially the amount of spectrum which the merged entity would be allowed to retain along with criteria and other details in this regard, companys valuation by consultants/valuers appointed with Govt.s approval/concurrence; and then payment of a part of the valuation to Govt., as premium for spectrum, etc.