In the initial years of wireless telephony in India, radio spectrum was administratively allotted to licensees. However, following the recommendations of the National Telecom Policy, 2012, and the decision of the Apex Court in the case of Centre for Public Interest Litigation v. Union of India,^[1] the Department of Telecommunications (DoT) de-bundled spectrum allotment from the grant of licenses, and adopted an auction-based price-discovery mechanism for spectrum allotment.

Scarce radio spectrum resources have typically been considered as bottleneck assets, and therefore auctions provide an effective means of price discovery, help maximise revenue for the Government, and ensure optimal allocation of spectrum resources. However, excessive reliance on bid markets risks overlooking potential market failures attributable to enterprises attempting to monopolise bottleneck assets such as spectrum.

Recognising the need to ensure that no one operator should be able to monopolise scarce spectrum resources to the detriment of its competitors and consumers, the DoT, in successive Notice Inviting Applications (NIAs) has prescribed ceilings for the amount of spectrum that can be held by any telecommunications operator in a given band within a Licensed Service Area (LSA), as well as a ceiling on the total amount of spectrum that can be held by an operator across all bands in an LSA. Presently, these stand at 50% of any given spectrum band in an LSA, and 25% of the overall spectrum available in such LSA across all bands. These restrictions have also been incorporated into the Mergers and Acquisitions Guidelines of 2014 (M&A Guidelines) as prescribed by the DoT.

Consolidation in the Telecommunications Sector and TRAI’s Recommendations on Spectrum Caps

The past year witnessed significant churn in the telecommunications industry. Faced with stressed balance sheets, the industry turned to consolidating assets, to reduce operational and business losses. An Inter-Ministerial Group (IMG) was therefore set up to examine issues affecting viability and repayment capacity in the telecom sector, and recommend policy and strategic interventions to address the financial burdens facing the industry.

By way of its reference dated 29 October, 2017, the DoT acting upon the IMG’s enquiries, requested the Telecom Regulatory Authority of India (TRAI) to study and furnish its recommendations on any potential revisions to the spectrum caps prescribed by the DoT.

The TRAI in its recommendations, dated 21 November, 2017, recommended that the inter-band spectrum cap (i.e., the total spectrum across all bands in an LSA) be revised to 35%, and that intra-band spectrum caps (i.e., spectrum in any given band in an LSA) be done away with. However, the TRAI carved-out the sub-1 GHz spectrum bands, viz. 700 MHz, 800 MHz and 900 MHz, and recommended the imposition of a combined inter-band spectrum cap of 50% for all sub-1 GHz spectrum bands.

In arriving at its recommendations, the TRAI noted that:

1. The M&A Guidelines permit a revenue and subscriber based market share of 50%, accordingly to restrain an operator to a mere 25% of the spectrum available across all bands, is likely to put a constraint on consolidation, and deter the sale of unsold spectrum in the future.
2. Technological developments have rendered spectrum technology neutral, since the entire spectrum can efficiently host Long Term Evolution (LTE) ecosystems. Imposing intra-spectrum bands would deprive operators from enjoying spectral efficiencies derived from contiguous blocks of spectrum, and increase operators’ costs of network.
3. Spectrum bands in the sub-1 GHz range (such as 700 MHz and 800 MHz), due to their superior propagation characteristics, have greater intrinsic techno-economic value, making them suitable for in-building coverage, and coverage over large areas with low population densities. Therefore, any operator with the entire, or significant contiguous potions of such spectrum bands, would have a significant competitive advantage.
4. Individual intra-band spectrum caps for spectrum bands in the sub-1 GHz range could render the unsold portion of the bands unattractive for buyers. Therefore, a combined inter-band spectrum cap for all sub-1 GHz frequency bands is preferable.

Earlier this week, the Telecom Commission accepted the TRAI’s recommendations, and the revision in spectrum caps would be carried out upon receipt of cabinet approval.

Restriction on Market Shares: Irrelevant?

Apart from incorporating the restrictions pertaining to spectrum caps, the M&A Guidelines also provide for a limit of 50% on the market share of any operator (calculated on the basis of revenue share, and number of subscribers). The underlying rationale for both restrictions appears to be the promotion of a competitive marketplace.

However, the stated rationale for maintaining a restriction on market shares is to align them with the spectrum caps prescribed by the DoT. The reasoning appears to be circuitous.

Following the notification of Sections 5 and 6 of the Competition Act, 2002 (Act) in the year 2011, the Competition Commission of India (CCI), is tasked with scrutinising combinations amongst enterprises that satisfy certain prescribed asset and turnover thresholds. In its evaluation, the CCI is required to assess whether any proposed combination could give rise to any appreciable adverse effects on competition (AAEC) in the relevant market in India, in line with the factors enlisted under Section 20(4) of the Act. To this end, the CCI has been vested with powers to direct remedial measures, including the divestment of assets held by the combining enterprises, prior to consummation of the transaction. In fact, in its recent decisions pertaining to M&A activity in the telecommunications sector, the CCI has been cognisant of the DoT’s M&A Guidelines. However, the CCI recognised that it needed to carry out an independent and standalone assessment of all proposed combinations under the factors listed in Section 20(4) of the Act.

Therefore, should the CCI in its ex-ante review of transactions, believe a certain level of market share to be problematic with the potential to give rise to AAEC, it has been vested with powers to appropriately address the same.

Similarly, the TRAI retains the power to provide differential regulations for Significant Market Players (SMP) on matters of interconnection and tariffs, which are targeted solely at preventing competitive harm perpetuated by dominant market players.

It is one thing to ensure that access to bottleneck assets such as spectrum is regulated, so as to reduce entry barriers and ensure competitiveness in the market. However, imposing form-based restrictions on market share run contrary to the wider competition policy adopted by the Government, which, following the recommendations of the Raghavan Committee, witnessed a shift from form-based analysis (as adopted under the Monopolies and Restrictive Trade Practices Act) to an effects-based framework of analysis for competitive harms.

Conclusion

The revised spectrum caps would certainly provide some relief to the industry. Apart from enabling operators to hold contiguous segments of spectrum in largely technology neutral bands (especially with the advent of LTE technologies), the revised spectrum caps ensure that access to spectrum resources in high value bands such as 700 MHz, are not stifled by the removal of intra-band spectrum caps. Further, by raising the inter-band spectrum cap to 35%, the TRAI has struck a fine balance between the needs of the industry, and an appropriate level of ex-ante regulatory cautiousness required to ensure competitiveness in the market.

However, there might be some merit in re-evaluating the need to retain a form-based market share cap of 50% under the M&A Guidelines. Effect based rules of evaluating competitive harm as captured in the Act, together with regulations made applicable to SMPs, adequately serve to preserve and protect consumer interests, and the process of competition. In such a scenario, additional restrictions, such as those under the M&A Guidelines, not only appear to be unnecessary, but might actually prove to be a disincentive for operators to engage in rigorous competition on merits.

* The author was assisted by by Indrajeet Sircar, Consultant.

[1]      See, Centre for Public Interest Litigation v. Union of India, (2012) 3 SCC 1; The Supreme Court held that administrative allotment on a “First-Come-First-Serve” basis was arbitrary.