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3G spectrum auction rules unfair to foreigners

The radio spectrum is finite. Most jurisdictions therefore treat it as a scarce and strictly regulated resource. Asim Abbas examines how India has not succeeded in doing this fairly so far.

In Secretary, Ministry of Information and Broadcasting vs. Cricket Association of Bengal AIR 1995 SC 1236, the Supreme Court held that "radio frequencies and spectrum are public property".

The earlier spectrum was embedded in the license itself and used to come automatically with the Unified Access Service License (UASL). Initial spectrum commitments were attached to the licence from the licensor and additional spectrums were assigned on the basis of the licensor meeting subscriber base criteria.

However, 3G services spectrum allocation now is separated from licensing of services and for the first time spectrum is being auctioned through a bidding process.

Squabbling delays
The roll out of 3G telecom services in India was badly delayed compared to other countries because of disagreements between various wings of the Government. The Government hopes to get Rs 35,000 crore ($7.2bn) from 3G and Wi-Max auctions but the Department of Telecommunication (DoT), the Ministry of Finance and the Telecom Regulatory Authority of India (TRAI) could not agree on crucial issues.

Bones of contention were areas such as the reserve price (the upfront acquisition fee in addition to spectrum usage charges), whether the 800MHz band be subject to auction or automatic allocation linked to subscriber base and how to permit the entry of new players.

The DoT finally issued guidelines relating to the auction and allotment of spectrum for 3G and Wi-Max telecom services on 1 August 2008. The 3G spectrum will be e-auctioned by service areas in the block of 2x5MHz in the 2.1 Ghz band.

To participate in a 3G e-auction bidders have to hold a Unified Access Service Licence (UASL) or be eligible to obtain a UASL.

Foreign operators can bid as 100 per cent foreign entities, however spectrum will be allotted only to its Indian subsidiary after it acquires a UASL.

The DoT initially fixed a reserve price of Rs 2,020 crores for 3G, which was double than the amount recommended by TRAI. The Empowered Group of Minsters enhanced this to Rs 3,500 crore ($720m) for the pan-India 3G spectrum.

It is important that the reserve prices are set at a level that ensures the spectrum cannot be won cheaply and that successful bidders pay near the expected market price.

However, the methodology for fixing the reserve price is not known and the process has not been transparent.

Costly for foreigners
Although the DoT has permitted foreign operators to participate in the 3G auction process without obtaining UASL, the existing policy puts foreign operators at a disadvantage if they win a 3G spectrum bid, as the foreign operator's Indian entity has to still acquire a UASL to provide the 3G service.

The foreign operator's Indian entity has to apply for that UASL after winning the 3G bid, paying the DoT an additional Rs 1,651 crores ($340m) as an entry fee, without getting any 2G spectrum allocation.

The total entry price of foreign operators or new entrants is therefore at least Rs 5,151 crores ($1bn), which consists of the reserve price plus the UASL entry fee.

This violates the principle of a level playing field.

Unfilfilled needs
Further, the 3G spectrum allocated to an Indian entity of a foreign operator may not be enough to provide a standalone 3G service. Hence foreign operators have to either merge with their existing UASL or acquire an existing UASL holder.

The DoT has drawn up guidelines for such mergers on 22 April 2008. This policy is applicable for the merger between two UAS licensees but does not apply between existing UAS licensees and holders of a 3G spectrum licence in one service area.

In other words, before merging with the existing UAS licensee, a foreign operator's Indian entity again has to acquire a UASL by paying Rs 1,651 crores to the DoT as an entry fee. Also, the merger is subject to spectrum transfer charges and a spectrum enhancement charge, as determined by the DoT.

The route to acquire an existing UAS license by an Indian entity of a foreign operator may also not be available due to following reasons.

Recently, new UAS licensees have issued equity to some foreign operators at a price far above the entry fee of Rs. 1,651 crores, such as Etisalat picking up a stake in Swan Telecom and Telenor buying a stake in Unitech Wireless.

In view of this, the DoT restricted the sale of promoters' equity for three years in new UASLs. That lock-in period governs the sale of equity but not issuance of fresh equity.

But even in the case of a subscription of shares in new UAS licensees, that licensee is not allowed to transfer any 3G spectrum to the new UAS licensee.

Also, the DoT may not allot 3G spectrum to an Indian entity of a foreign operator unless it acquires a UASL by paying Rs 1,651 crores.

Whichever way you twist it, the process disadvantages foreign bidders. If the aim is to have a competitive bidding process for the 3G spectrum that can not be in anyone's interest.

Asim Abbas is the founder and managing partner of niche telecoms law firm Legal Spectrums.

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