Looking ahead to the new telecom M&A policy

By Nikhil Narayanan and Rohit Ambast, Amarchand Mangaldas

Pressure on average revenue per user and the fragmentation of spectrum allocation is driving consolidation in the Indian telecom industry. In this article, we review recent regulatory developments and certain key issues expected to feature in the eagerly awaited telecom M&A policy.

Recent developments

There have been two recent key regulatory developments of note.

Nikhil Narayanan
Nikhil Narayanan

The first is the liberalization of the foreign direct investment limit for telecom services companies from 74% to 100% under the “approval route”. This will offer international telecom companies operating in India the ability to buy out their Indian minority shareholders with government approval.

The second development is the introduction of the “unified licence” regime in August. This enables provision of multiple telecommunication services under a single licence. It also de-links the allocation of spectrum from the grant of licence for providing telecom services and prohibits direct or indirect cross-holdings by a licensee or its promoter (holder of 10% of the equity in the licensee).

New M&A policy

The new M&A policy is being considered by the government as a follow-up to the National Telecom Policy of 2012. The national telecom policy’s objectives include attracting investment, domestic and foreign, and facilitating M&A transactions, both of which are welcome objectives. The Telecom Regulatory Authority of India (TRAI) had submitted its recommendations to the Department of Telecommunications (DoT) for this purpose in 2011 in which it has also recognized the positive aspects of consolidation in the sector (subject to the preservation of competition).

Some of the key issues expected to be addressed in the new M&A policy are considered below.

Key highlights

Prior approval of the DoT/TRAI has been recommended to be mandatory for a merger. In this regard, TRAI has recommended three thresholds based on market share of the surviving entity or transferee, calculated by reference to the subscriber base or the adjusted gross revenue in the licensed service area: (i) up to a 35% market share, where TRAI is likely to grant approval; (ii) 35-60% market share, to be decided on a case-by-case basis; and (iii) 60% or above market share, where mergers will not be permitted. However, recent reports suggest that these proposals will be amended in the final M&A policy so as to allow mergers resulting in a 50% market share without approval, which will assist consolidation.

For the calculation of these market shares, in contrast to the current norms, TRAI’s recommendations consider the entire access market, i.e. both wireline and wireless.

Note that the approval of the Competition Commission of India, which regulates merger control in India, may also be required in addition to the DoT/TRAI approval and it is unclear as to how this “overlap” will be addressed.

The recommendations would permit mergers either between service area licences or national level licences. This may affect the suitability of certain target entities which hold only service area licences.

The recommendations provide that total spectrum held by a resultant entity should not exceed 25% in case of the 900 MHz and 1800 MHz bands. However, recent reports suggest that this ceiling is likely to be increased to 50% in the final draft of the M&A policy. Further, the ceiling prescribed for the 800 MHz band is 10 MHz.

Rohit Ambast
Rohit Ambast

The M&A policy envisages the payment of a charge for the acquisition of spectrum where the original spectrum was acquired outside of an auction process. Details of this proposal are awaited, but this charge is likely to be based on a differential between the auction price (as pro-rated for time and also adjusted in accordance with State Bank of India’s prime lending rate) and the actual price paid (outside an auction process) by the seller. These rules may favour incumbents and new entrants will need to factor this cost into deal values.

Any spectrum held by a resultant entity in excess of the prescribed limits must be surrendered to the government within one year. This recommendation allows the government to choose the spectrum bands that are to be surrendered.


Some aspects of TRAI’s recommendations would, if implemented, represent positive measures. However, the M&A policy should also address the issue of “double approvals” from a competition perspective as this could pose a practical challenge to deal execution. From a commercial perspective, new entrants will need to factor the spectrum transfer fee and related costs into deal pricing, which may also affect the economics of acquisitions.

Nikhil Narayanan is a partner and Rohit Ambast is an associate at Amarchand & Mangaldas & Suresh A Shroff and Co, New Delhi. The views expressed in this article are those of the authors and do not reflect the position of the firm.


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