India’s Telecom Rules Could Derail Potential Deals; Telecom Commission Recommends Fee on Mergers and Acquisitions

India’s Telecom Rules Could Derail Potential Deals

Telecom Commission Recommends Fee on Mergers and Acquisitions

R. JAI KRISHNA and KENAN MACHADO

Updated Nov. 6, 2013 8:52 a.m. ET

NEW DELHI—India approved new rules on acquisitions of cellular companies Wednesday, in a move analysts say could increase the cost of buying phone companies in the world’s second largest telecommunications market. India’s Telecom Commission—the government’s top telecommunications policy-making body—recommended that any company acquiring an Indian cellular company be asked to pay a fee to the government on top of what it pays for the company. The fee will be connected to the current value of the bandwidth which the target company holds.The new rule could raise the cost of acquisitions by billions of dollars, analysts and industry executives said, as bandwidth values have skyrocketed in India over the past five years. The fees could discourage consolidation and encourage more cellular companies to grow organically rather than through acquisition.

“This will impact consolidation,” by making mergers more expensive and harder to price, said Prashant Singhal, telecommunications analyst at EY Pvt. Ltd. in New Delhi. “Certainly it is an impediment for transactions.”

The commission’s recommendations, which are likely to become policy after final approval from a panel of ministers, included a suggestion that India increase the minimum price for bandwidth by 15% to 25% for an airwave auction scheduled for January.

It also recommended that merged telecommunications companies be allowed to control up to 50% of the market zones in which they operate. That cap, set to encourage competition, had earlier been 36%.

India’s telecom sector, the beacon of New Delhi’s liberalization policies since the 1990s, has lost its shine in recent years as regulatory hurdles, profit-crushing competition and corruption allegations have weighed on optimism about the industry which had brought hundreds of millions of Indians their first phone connections in the last decade.

While India has been trying to encourage more foreign investment in the sector by allowing 100% international ownership in its cellular companies, the country’s insistence on charging high fees on acquisitions could hurt interest in the market, analysts said.

Acquiring companies will now have to pay the difference between the market price of the target company’s airwaves and the price that company originally paid to acquire the bandwidth from the government, said a Telecom Commission official who declined to be named.

Many Indian companies had paid the government as little as 16.58 billion rupees ($266 million) for bandwidth used to carry cellphone calls and data. Today, the going rate for the same amount of bandwidth is about $1 billion.

With a total of nearly $13 billion in foreign funds invested between April 2000 and August 2013, India’s telecom sector had ranked third-highest in attracting foreign investment after the services and construction sectors, but now seems to be losing popularity. But foreign investment has fallen sharply this year amid uncertainty about the future of the sector and the rules surrounding it.

In the 12 months ended March 31, foreign firms invested just $304 million in the industry in India, compared with nearly $2 billion in the same period a year earlier, government data showed.