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India's Third Giant Leap

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Who will benefit from spectrum sale?
Tue, 11 Feb Pre-Open

The ongoing spectrum auction has become competitive. Telecom firms have offered bids totaling Rs 565 bn for 900 Mhz and 1800 Mhz bands after 42 rounds at the end of sixth day of spectrum auction on Saturday. Soaring spectrum bid price may be good news for the Government but not for the mobile user.

The present auction is being conducted online. Bidders have a choice of paying the full amount upfront or defer it by paying 33% of bid amount in 1,800 MHz and 25% of bid amount in case of 900 MHz within 10 days of auction close. There is a moratorium of 2 years of payment of balance amount which shall be recovered in 10 equal annual installments which will attract an interest of 10%. Each applicant has to apply along with Earnest Money -- in the form of a bank guarantee, which changes as per circles as prescribed by the government.

India's telecoms industry has only recently begun to recover from a period of intense price competition and erratic government regulation. Earlier both these factors dented the promise of the world's second-largest telecoms market by subscribers and left many operators saddled with significant debts. The ongoing spectrum auction is further likely to add to the debt woes of the telecom operators. We believe players face a combination of high regulatory costs, likely increase in capex spends and higher competition from the impending entry of a new player (Reliance Jio).

So how will they recover these costs? There are two ways a telecom company can recover their investment in getting the spectrum license. First is by increasing their consumer base and second is by increasing their tariffs. For an existing player, increasing customer base is difficult in the current scenario, thus the only option left is to increase tariffs. Thus, telecom companies and analysts reckon that the days of cheap mobile telephony are over and tariffs could rise by up to 20% in the coming months as spectrum price rises.

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