Vodafone India and Idea Cellular’s merger, which was formally announced on Monday and will create India’s largest telecom company, may well run up against a number of regulatory hurdles.
According to a Moneycontrol report, here are the main issues that the companies will need to look at:
According to brokerage firm CLSA, the combined entity would hit revenue, subscriber and spectrum caps in at least five of India’s 22 circles. The combined entity will get a year to align with revenue and subscriber market share caps, but it would have to sell or surrender part of its spectrum to stay below the cap, CLSA said.
With 43 percent revenue market share and 40 percent share of the active subscriber base the combined entity will account for more than 25 percent of allocated spectrum across all bands and may have to sell at least 1 percent to comply to meet spectrum cap regulations.Spectrum share
As per Rajan Mathews, Director General of Cellular Operations Association of India said the main issue will revolve around spectrum holding.
The rules state that spectrum holding should not be higher than 50 percent in each band individually. According to experts, the combine will breach the spectrum cap in at least five circles in the 900 MHz band.
As per government guidelines, there will be no refund of money for excess spectrum. This means that the merged entity would have to sell the excess spectrum to competitors such as Airtel. To make matters worse, it cannot command spectrum sale prices.
Also Read: Merger Creates India’s Biggest Telecom Company with 395 mn Customers
In a note issued on January 30, Credit Suisse pegged the revenue loss owing to these guidelines at Rs 6,000 crore or more in the 900 Mhz band alone.Revenue market share
There also obstacles that await on the mergers and acquisitions front, as norms require that revenue market share of the combine should not be higher than 50 percent in any circle.
Together, they will lead in 12 of the 22 circles across India. Experts see the combine crossing the 50 percent revenue share limit in six circles and it will have to address this imbalance within a year in keeping with the regulations. According to Edelweiss Securities, the reduced share will bring it down to 39.6 percent.Subscriber base
Vodafone India has 205 million users and 23 percent market share, while Idea Cellular has 190 million users with 19 percent revenue market share. At 43 percent, the combine will have a 10 percentage point higher market share than its nearest competitor Bharti Airtel. In addition, their base share will exceed the limit of 50 percent in at least nine circles.
And, then there is the matter of Vodafone’s unresolved taxation issues with the government. The merged entity will likely inherit the liability, which amounts to $2.5 billion and has been in arbitration since 2012 when the Indian government amended tax laws retrospectively.
There is also the possibility that the Idea-Vodafone combine may be asked to pay the one-time fee for spectrum liberalisation. This fee, amounting to about Rs 5,000 crore, is currently under litigation. The Department of Telecom could insist on recovering this money before it allows the merger to proceed.(Disclosure: Reliance Industries Ltd, which owns Reliance Jio, also owns Network18, moneycontrol.com and News18.com)
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