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Developments in the telecom sector,

award of 2G licenses in 2007-08 and


subsequent observations of audit

Policy Perspectives
Status Report

January 07, 2011

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Scheme of Presentation

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Scheme of Presentation

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Initial developments and National
Telecom Policy (NTP), 1999
 NTP 1994 (approved on May 13, 1994) opened the telecom
sector for private participation :
 2 cellular mobile telecom service (CMTS) licenses each granted
in the 4 metros in 1994. Fixed license fee prescribed (over 10
years) with spectrum usage charges payable separately.
 34 CMTS licenses issued in 18 telecom circles in 1995 based on
bidding for license fee (over 10 years) with spectrum usage
charges payable separately.
 6 basic (wireline) licenses issued in 1997-98 based on bidding
for licence fee over 15 year license period.
 Inadequate revenue generation and inability of telecom
operators to honor revenue commitments :
 Constitution of Group on Telecom [GoT] under Shri Jaswant Singh
(then Minister of External Affairs and Minister of Electronics).
 NTP, 1999 formulated to take a ‘fresh look at the policy
framework for the sector’ and, ‘to resolve the problems of the
4 existing operators’.
Initial developments and National
Telecom Policy (NTP), 1999…..<II>
II
 Salient features of NTP, 1999 :
 Objectives: (revenue maximization not an objective)
o To introduce greater competition in the
telecommunications sector.
o To provide equal opportunities and level playing field for
all players.
oTo make available affordable and effective
communications for the citizens.
 Importance assigned to Telecom Regulatory Authority of
India (TRAI).
NTP, 1999 continues to be the policy matrix guiding telecom
sector to date.
‘Migration package’ offered to existing licensees (42 CMTS, 6
Basic):
Revenue sharing arrangement (15% of Adjusted gross revenue
[AGR]) instead of fixed license fee, with effect from August 01,
5 1999.
Scheme of Presentation

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Development policies followed in the
period 1999 to 2004
 First come first serve (FCFS) principle used for the first time, in
2001, in allotting spectrum for basic services with wireless in local
loop (WLL).
 Licenses for the 4th cellular operator were issued on the basis of a
bidding process, for entry fee in 2001, in 4 metros and 13 telecom
circles.
 The ‘pan India’ entry fee aggregated to ` 1,658 crore.
 This was half of what had been charged to the 1st and 2nd CMTS
operators in 1999, while offering them the ‘migration package’.
 The annual license fee was progressively reduced:
 From 15% to 12/10/8 % [Category ‘A’, ‘B’ and ‘C’ circles] in
January, 2001, with significant financial implication.
 By additional 2% to 10/8/6 % (8/6/5% for 1st and 2nd CMTS
operators for 4 years, except in Metros) in April, 2004, with
significant financial implication.
 Spectrum entitlements were progressively enhanced.
7  Additional spectrum beyond 6.2 MHz upto 15 MHz, on
Development policies followed in the
period 1999 to 2004…..<II>
II
 Policy underpinnings of telecom sector outlined in detail in the X
Plan document:
 The telecom sector needs to be treated as an infrastructure
sector for the next decade.
 Government’s broad policy of taxes and regulation for the
telecom sector has to be promotional in nature.
 Revenue generation should not be a major determinant of
macro policy governing the sector.
 License fee needs to be aligned to the cost of regulation and
administration of Universal Service Obligation (USO).
 Specific planning would be required to prepare the grounds
for a multi-operator system to develop and the subscriber
base to expand without impediments.
 Spectrum policy needs to be promotional in nature; with
revenue considerations playing a secondary role.
 The X Plan document was formally released on December 21,
8 2002 covering the period April 01, 2002 to March 31, 2007.
Development policies followed in the
period 1999 to 2004…..<III>
III
 Decision of the Union Cabinet, dated October 31, 2003, on
introduction of unified access service (UAS) licensing regime
(based on TRAI recommendations of October 27, 2003 and
recommendations of a GoM dated October 30, 2003):
 The recommendations of TRAI with regard to implementation
of the UAS Licensing Regime for basic and cellular services
was accepted.
 Minister of Communications & IT was authorised to finalise
the details of implementation including the calculation of the
entry fee based on the principle given by TRAI in its
recommendations.
 Decisions taken by the then Minister-in-charge of
Telecommunications: (in regard to migration to UAS licensing
regime)
 Entry fee of 4th CMTS licensee (discovered in 2001) adopted
as the entry fee for new operators into the UAS licensing
9 regime.
Scheme of Presentation

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Award of 2G licenses in 2007-08 and
subsequent developments
 25 new UAS licenses were awarded between June, 2004 and
March, 2007 on FCFS basis and as per the existing license
conditions.
 Reference was made to TRAI in April, 2007 to furnish
recommendations on limiting the number of access providers in
each service area and other license conditions. Salient
recommendations of TRAI dated August 28, 2007 are:
 No cap be placed on the number of access service providers
in any area.
 Spectrum in 2G bands (800, 900 and 1800 MHz) should
continue to be priced as before for new entrants.
 In future, all spectrum, excluding the spectrum in the 2G
bands should be auctioned.
 “Dual” spectrum may be allocated to existing licensees on
same entry fee charged from existing/ new licenses.
 TRAI recommendations accepted in the Internal Telecom
11Commission (ITC) meeting held on October 10, 2007.
Award of 2G licenses in 2007-08 and
subsequent developments ….<II>
II
 Process followed for award of 2G licenses:
 Press release issued by DoT on September 24, 2007 (appeared
in news papers on September 25, 2007) specifying October 01,
2007 as the ‘cut off’ date for accepting new applications. 343
new applications were received in this period.
 Reference made to Ministry of Law and Justice (ML&J) on the
options to deal with the large number of applications. Advice of
ML&J to refer the matter to a Empowered GoM (EGoM) not
accepted.
 Applications received upto September 25, 2007 taken up for
processing under an FCFS methodology notified via a press
release issued on January 10, 2008, wherein, fulfillment of the
Letter of Intent (LoI) conditions was stipulated for earmarking
seniority for allotment of UAS license.
 Applicants were asked to collect DoT’s response on the
applications on January 10, 2008 at 3:30 PM and submit
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compliance of LoI within 15 days.
 121 LoIs were issued on January 10, 2008; 78 complied with on
Award of 2G licenses in 2007-08 and
subsequent developments ….<III>
III
 Salient recommendations of TRAI report dated May 11, 2010:
 Auction should not be resorted to for spectrum in 2G bands
(800, 900 and 1,800 MHz bands).

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Scheme of Presentation

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“Presumptive loss” on award of
licenses
` Crore

* ‘Presumptive loss’ to be estimated against 4.4 MHz (instead of 6.2


MHz) allotted to new licensees.
** ‘Presumptive loss’ to be estimated against 4.4 MHz (instead of 5
MHz) allotted to dual technology licensees.
# ‘Presumptive loss’ against Spectrum beyond 6.2 MHz not to be
considered as the allotment of additional spectrum (post January 17,
2008) is subject to pricing as determined in future for spectrum
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beyond 6.2 MHz. Decision to be taken after TRAI’s recommendations
“Presumptive loss” on award of
licenses ….<II>
II
Observations on “Presumptive loss” based on 3G prices:
 UAS licenses issued in January 2008 and 3G payments made in
May, 2010., therefore, 3G prices have to be discounted to reflect
time value of money.
 Economic value of spectrum a function of subscriber base and
ARPU. While subscriber base increased 3 times, ARPU reduced
by 66%.
 2G spectrum was subject to availability. On average, allottees of
2008 (and even earlier) have received spectrum after a gap of a
year, therefore 2G spectrum is available on an average for 19
years instead of 20 years..
 There is difference in spectral efficiency of 2G and 3G spectrum:
• 5 MHz of 2G and 3G spectrum have spectral efficiencies of 40.61
Erlangs and 149.1 Erlangs respectively, i.e., in the ratio of 1:3/4.
 While computing the pro-rata value for 4.4 MHz spectrum vis-à-
vis 6.2 MHz, the non-linear advantage due to consolidation of
16 holding 6.2 MHz over 4.4 MHz needs consideration.
“Presumptive loss” on award of
licenses ….<III>
III
Observations on “Presumptive loss” based on 3G prices -----<II>:
 Telecom sector policy has evolved continuously since 1999 and
is predicated on the following pillars: increase in teledensity and
affordability to the consumer; creation of a competitive
environment, with level playing field between existing and new
incumbents; and, revenue accrual to Government both through
one time fee and annual recurring charges.
 The policy evolved through NTP, 1999; 1999 migration
package for existing operators; development policies
followed between 1999 and 2004; and, the overarching
vision articulated through the X FYP.
 The policy created a historical legacy, once it was decided to
allow induction of new operators in the UAS regime on the
basis of 2001 entry fee.
 TRAI, the sector regulator, has recommended for induction of
more players at low entry charges, in its successive
17 recommendations of October/November, 2003; January/May,
“Presumptive loss” on award of
licenses ….<IV>
IV
Observations on “Presumptive loss” based on 3G prices -----<III>:
 The policy has met with spectacular success, in terms of
increase in teledensity and subscriber base; reduction in call
rates; and, boosting economic growth.
 Development policies pursued between 1999 and 2004 had
significany financial implications.
o However duopoly regime was ended and additional operators
were introduced.
o This resulted in direct benefit to the consumers over `
1,00,000 crore per annum, as a result of ARPU drop between
September, 2007 and May, 2010).

 3G auction has a different context. There were no historical


legacy issues, hence no issues of level playing field arose.
Moreover, auction of 3G spectrum was a consistent
recommendation of TRAI, in its successive reports of September,
18 2006; August, 2007; and May, 2010.
“Presumptive loss” on award of
licenses ….<V>
Observations on “Presumptive loss” based on Offer of S Tel Ltd.:
 The offer was conditional and untenable, since it pertained
to 6.2 MHz spectrum in the 900 MHz band, in all 22 service
areas which was not available.
 The company also asked for permission for active
infrastructure sharing whereas sharing of spectrum is not
permitted under the current UAS regime.
 The offer was subsequently withdrawn by the company and
this was stated in its affidavit before the Supreme Court of
India.
 The amount offered (` 13,752 crore) was spread over 10
years, with the first year offer being only ` 250 crore. The
company could have reneged on its commitment after being
allotted spectrum at 1/5th of its extant price.
 There is no provision in the licensing regime to offer
spectrum on the basis of conditional offers.
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“Presumptive loss” on award of licenses
….<VI>
VI
Observations on “Presumptive loss” due to ‘Sale of Equity’ by
Swan and Unitech:

 Valuation of company is a function of many factors, and not


just the quantum of spectrum held.

 The cases are of dilution, not sale of equity.

 Government has been encouraging induction of Foreign


Direct Investment in all sectors, including telecom.

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Scheme of Presentation

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Conclusion…..
 The policy matrix which led to the issue of UAS licenses in 2008
evolved over a period of time, through NTP, 1999; decision of
the Union Cabinet, dated October 31, 2003; practice adopted by
successive Ministers for grant of UAS licenses; and, successive
TRAI recommendations of 2003, 2005 and 2007.
 The policy has met with unqualified success and has propelled
India into the fastest growth telecom market worldwide.
 The issue of deficiencies, if any, in translating policy into
procedure and procedure into actions, are being looked in to by
the One Man Committee set up by DoT and Investigating
Agencies. Appropriate action will be taken based on the
findings.

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OVERALL IMPACT…NATION TO DECIDE..
SUMMARY OF TRADEOFFS

REVENUE IMPLICATIONS BENEFITS REALISED


1. Revenue losses/ Amount foregone 1. DIRECT CONSUMER BENEFITS
over years, due to conscious policy  Indian customers have benefitted by World’s lowest
tariffs (Fallen from Rs 32 /min to Rs 0.30 /Min) due
changes, like: intense competition (Benefit to Aam Aadmi :
b) ‘Migration Package’ under NTP Over1,00,000 Cr/year)
1999 from fixed License fee to  Citizen connectivity and empowerment, which cannot
be estimated in value terms.
revenue sharing
c) Progressive reduction in License 2. RAPID GROWTH IN INDIAN TELECOM MARKET
fee charges, as % of AGR Due to the Policies, favoring ‘promotion’ of Telecom
Sector over revenue generation, Indian Telecom Market
d) ‘Low Entry Fee’ maintained has become World’s fastest growing market, with
(Assumptions regarding subscriber addition of 16-18 million/month, ahead of
‘Presumptive Losses’ are open to China’s 8Million/month) and World’s second largest
Telecom Market, after China. Since 2005, Indian
question) subscribers have thus grown from 9.83Cr to 74.21Cr
(Oct 2010) and similarly, Tele-density has grown from
e) Progressive enhancement of 8.95% to 62.51%), empowering masses.
Spectrum entitlement (Amount
foregone does not arise at this stage, 3. SPIN OFF BENEFITS TO ECONOMY:
since it is yet to be charged)  Huge indirect gain from impact on GDP Growth Rate
 High Service Tax accruals (30% of total Service
collections coming from Telecom sector alone)
2. Consistent Policies since 1999 aimed  Huge investments by Telecom Service providers and
at maximizing growth and Manufacturers.
competition rather than revenue,  Indian Telecom has turned out to be third biggest
and minimizing tariffs. recipient sector of FDI and has attracted more than US
10 Billion $ since 2000)
 Network externalities like facilitation and productivity
23 enhancements in Trade, industry and commerce
 Employment opportunities
Thank You

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Growth of the Telecom Sector since 2000

Source : TRAI
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