DoT plans new M&A norms for telcos
The Department of Telecom (DoT) has asked telecom regulator Trai for a fresh set of recommendations on M&As , following telecom minister Kapil Sibal’s recent statement that the telecom sector is too fragmented and requires consolidation.
The move is aimed at correcting the M&A guidelines of April 22, 2008 announced by former telecom minister A Raja, which still govern the telecom sector.
These norms allowed companies such as Swan, Unitech, Tatas and S Tel to issue fresh shares at a premium and diluting stake, one of the key areas of criticism of the policies followed in the Raja era.
Trai last made recommendations on M&As in May 2010. The DoT has re-referred these to the regulator for a review. The DoT’s key mandate for Trai is to harmonize M&A regulations with ‘relevant and legal regulatory provisions’ and ‘conformity with the provisions of the Competition Act, especially those relating to principles of market dominance’.
Trai has also been asked to revisit its recommendations prohibiting M&As if the number of service providers reduces to below six in a circle. Instead, the DoT wants M&As in each service area to be ‘based on its population’.
This implies that the competitive threshold level could be lower for states in the North-East but much higher for Metros or A category circles.
Trai had recommended that post M&A, the spectrum cap for each licensee should be fixed at 4.4 MHz for GSM and 10 MHz for CDMA spectrum. The DoT wants a review as the normal prescribed cap for a licensee is 8 MHz/10 MHz for GSM and 5 MHz/6.2 MHz for CDMA. The Telecom regulator has been asked to ‘indicate the rationale for the wide variation between the limit of spectrum that can be acquired through M&A and by regular procedure’.
Trai has been directed to justify its M&A-linked spectrum limits: ‘In case a variation is considered necessary for practical reasons, it may be indicated whether the higher limit for M&A (14.4 MHz versus 8 MHz/10 MHz) is for limited duration or for the entire licence period’.
Questioning the rationale behind Trai’s recommendation that the spectrum transfer levy should be 5% of the difference between transaction price and total current price, the DoT points out that transaction price may be a sum total of ‘equity/debt/preferential share/tangible or intangible assets/various other modes of tradeoff, etc, and also there is a possibility of negative transfer charge’.
Clarity is separately sought on how to define ‘acquisition’ with regard to spectrum charge separately from ‘merger’ . The DoT also seeks a suitable methodology to accomodate M&A activity between 2G, 3G, and BWA spectrum holders.
DoT wants terms like ‘associates’ and ‘stakes’ with respect to the substantial equity clause to be redefined. Trai been asked to resolve the contradiction in removing the three-year lock-in period , while restricting dilution of equity for up to five years (restricts M&A activity till March 2013).