India’s New Telecom M&A Rules Could Deter Deals

India’s New Telecom M&A Rules Could Deter Deals

R. JAI KRISHNA

Feb. 21, 2014 6:48 a.m. ET

NEW DELHI–India’s new rules that require that the buyer of an Indian mobile phone company pay a fee to the government, in addition to what it pays for the target company, could deter deals in the world’s second largest telecommunications market, after China.

The new rules, issued late Thursday, will govern mergers-and-acquisitions of cellular operators in India. They formally adopt recommendations made in the fall by India’s Telecom Commission, the country’s telecommunications-policy body.

Analysts say the new fee would increase the cost of acquiring large Indian telecom companies by billions of dollars. The fee will be calculated based on the value of the telecom bandwidth of the target company–the higher the amount of bandwidth a company holds, the higher will be the fee to buy it.

“Payouts to the government could be a serious dampener” to deal-making, said Mohammad Chowdhury, Mumbai-based head of telecom practice at consulting firm PricewaterhouseCoopers India.

Till some years ago, India’s telecom sector was one of the country’s biggest success stories, given the widespread reach of mobile phones. India has nearly 900 million cellphone subscribers, the second-largest of any country in the world after China.

However, the industry has lost its shine in recent years as regulatory hurdles, profit-crushing competition and corruption allegations have weighed on profits and optimism about the industry’s future.

Meanwhile, the Indian government has been looking for ways to earn more revenues from the telecom companies.

Last week, the government said it had raised 611 billion rupees ($9.8 billion) by auctioning airwaves or bandwidth used to carry cellphone calls and data signals.

The new fee on acquisitions is a way for the government to get more money for the airwaves it had allocated in the past.

Until 2008, Indian companies had paid the government as little as 16 billion rupees ($266 million) to buy bandwidth of minimum 4.4 MHz. Today, the same amount of bandwidth is valued at around 100 billion rupees ($1.6 billion).

The new rules say that anyone who buys an Indian telecom company would have to pay the government the difference between the market price of the target company’s bandwidth and what the target company had originally paid to get the bandwidth from the government.

Analysts say that companies could look to trade or share bandwidth with large telecom firms, rather than making an outright acquisition. There is a fee for sharing or trading bandwidth also, but it is far lower than the fee for a merger.

Meanwhile, analysts say there could be a spurt of acquisitions of smaller telecom companies in the coming months, as firms compete to increase their users and services.

Earlier this week, Bharti Airtel Ltd., India’s largest cellphone company by number of subscribers, said it was buying Mumbai-based Loop Mobile India Pvt. The deal would help boost Bharti’s presence in the financial hub of Mumbai.

Among the new telecom M&A rules, the industry has welcomed a rule that will allow a company formed by the merger of two or more telecom firms, to own a greater market share in the 22 telecom service areas of the country.

Earlier, to avoid monopoly, a merged entity wasn’t allowed to hold more than 40% of the revenue or users in any particular Indian telecom. Now, a merged entity can have a market share of up to 50% of the revenue in a specific telecom circle.