New Delhi, Feb. 20: The government today cleared the path for consolidation within the deeply fragmented telecom industry by permitting mergers and acquisitions but set a rider that the market share of the resulting entity should not exceed 50 per cent.
If the market share exceeds 50 per cent, the entity must reduce its share to the desired threshold within a year from the date of approval of merger of acquisition or amalgamation. If it fails to do so, suitable action shall be initiated.
In a long-awaited note that spelt out the guidelines for telecom mergers, the department of telecom (DoT) said the market share would be determined on the basis of adjusted gross revenues paid by the licensees involved in the merger and their subscriber bases determined by visitor location register (VLR) data.
VLR is the system that recognises how many mobile subscribers of an operator are switched on and ready to receive or transmit calls at any given point of time.
The guidelines said the telecom company planning to buy out another would have to pay the difference between the entry fee and the market price for spectrum when the acquisition actually happened as charges to the government, if the merger involved low-priced government allocated airwaves.
The guideline issued by the department today said: “The transferee (acquiring) company at the time of merger, shall pay the government the differential between the entry fee and market determined price of spectrum. No separate charge shall be levied for spectrum acquired through auctions from 2010 onwards.”
The guidelines also say that buyouts or mergers can be effected only after permission from the government. This rule will head off the possibility of a re-run of the controversial offshore deal that Hong Kong-based Hutchison Whampoa struck with Vodafone Plc — and the subsequent court battle between the British telecom giant and the government over the latter’s attempts to gouge out a withholding tax from Vodafone for failing to dock the levy while making the $11.2-billion payout to Hutchison in May 2007.
The rules also say that all demands raised by the government will have to be cleared by either of the two licensees before the government grants permission for the merger.
“This shall be, according to demand, raised by the government/licensor based on the returns filed by the company notwithstanding any pending legal cases or disputes. However, the demands shall be subject to the outcome of the decision of such litigation.”
Analysts said these rules could make deals costlier and might dampen industry enthusiasm for takeovers.
Vodafone has been rumoured to be interested in acquiring a stake in Tata Teleservices. But it wasn’t immediately clear whether Vodafone — should it acquire the stake in Tata Tele — would end up paying the difference between the Rs 1,650 crore that Tata Tele paid for the spectrum it currently holds and the current market price, which would run to over Rs 13,000 crore. However, the burden will be partly offset by the number of years that the 20-year spectrum licence still has before it runs out.
Hemant Joshi, partner, Deloitte Haskins & Sells, said, “The larger question is whether the so-called “market discovered price” of the auction is a fair price for determining the differential to be paid at the time of the merger considering that auctions were held when the companies were under compulsion to bid aggressively to remain in business.”
The guidelines also said that a lock-in period, if imposed by the spectrum licence conditions, shall carry over to the merged entity. “If a licensee (telecom company) participates in an auction and is consequently subject to a lock-in condition, then if such a licensee proposes to merge/compromise/amalgamate into another licensee…, the lock-in period will apply in respect of new shares which will be issued in respect of the resultant company.”
Officials said telecom companies should also not breach the 25 per cent cap for individual entities in any circle for those holding GSM airwaves or of 10MHz for those holding CDMA airwaves.