In a bid to spur mergers and acquisitions (M&A) in the crowded telecom

sector, the government has eased rules by allowing mergers between firms
with up to 50 per cent combined market share.

At present, telecom firms are allowed to merge if their combined market

shares in terms of subscriber base does not exceed 40 per cent in any of the
nation's 22 circles or zones.

The government will determine market share based on both subscriber

number and adjusted gross revenue which is earned through telecom services.

The long-awaited guidelines pave the way for fresh investments through
consolidation activity in the industry which has 12 telecom service providers.

The Mergers and Acquisition (M&A) guidelines issued on Thursday, however,

stated that a market determined fee will have to be paid if the merged entity
was to hold low-priced 4.4 MHz spectrum.

The guidelines issued by government largely focus around spectrum held

by companies as there are two set of companies at present - one which hold
spectrum allocated at old rate of Rs 1,658 crore and other set which hold
spectrum purchased through recent auctions at over 5 times this price.

The rules have allowed only those companies to participate in M&A activity
who have either purchased spectrum through auction or paid one-time
spectrum fee to bring old spectrum rates at par with latest market determined
price.

The M&A guidelines say that acquirers of companies holding 4.4 Mhz
spectrum, allocated at old rate, will have to pay to the government the
difference between the initial amount (Rs 1,658 crore for pan-India as per
2001 auction) and the market rate determined through the latest auction.

The market rate determined through auction will remain valid for a period of
one year. Thereafter, additional price calculated based on prime lending rate
of State Bank of India will be added on to determine the market rate.
If companies holding spectrum at the old rate opt for buying another company
they will have to submit one-time spectrum fee as bank guarantee to the
Department of Telecom.

The guidelines further said that the merged entity will be allowed to hold a
maximum of 25 per cent spectrum allocated in a service area and 50 per cent
in a particular band for telecom services under the rule.

In case of CDMA spectrum (800 Mhz band), held by firms like TTSL, Sistema
Shyam and Reliance Communications, the government has fixed the upper
limit of the total spectrum holding at 10 Mhz.

A merged entity will be allowed to hold a maximum of 2 blocks of 3G spectrum

in a service area. This rule will check amalgamation of more than two 3G
spectrum holding companies.

GSM industry body COAI's Director General Rajan S Mathews said: "We
welcome clarity in M&A policy. We now expect 4-5 operators in each circle.
However, step up cost on spectrum that was not acquired through auction and
lock-in period are matter of concern."

The new rules also allow telecom firms to enter into M&As within the lock-in
period that bars new entities from selling equity for three year. The lock-in
period will, however, apply to the company resulting from the M&A.

On this, Mathews said that when a company is already paying a market

determined rate for spectrum, while acquiring another firm, there should be
no lock-in period.

As for one time spectrum fee, DoT has already raised a demand for over Rs
26,000 crore. It includes Rs 23,177 crore from GSM companies and Rs 3,000
crore from CDMA operators.

However, telecom operators have challenged this order and the matter is still
sub-judice.

DoT is working on fresh one-time spectrum fee after the recent auction which
concluded on February 13.
"Consolidation is the need of the hour. M&A guidelines may not provide full
benefits of the consolidation in terms of costs especially of spectrum," Deloitte
Haskins & Sells' Partner Hemant Joshi said.

The guidelines free companies from various equity holding norms for one year
to complete the process of acquisition and make the new entity compliant with
rules.

The licence period of the resultant company will be valid for the longer period
held by any of the merging company. However, there will be no change in the
validity period of spectrum allocated to each of the entities.