Wednesday, August 22, 2012

Merger and Acquisition Policy

The Finance Ministry has requested the Department of Telecom to provide maximum security to lenders in the event of termination of licence and incorporate suitable clause in the draft tripartite agreement. Communications have been received from Finance Ministry which, among others states the following:
  • It would be necessary to expedite assignment of the spectrum allotted to operators in favour of lenders;
  •  Permit a suitable stand still period for consultation with secured lenders before cancellation of telecom license assigned in favour of lenders in the event of default/breach of terms of allotment by the operator;
  • Incorporate a suitable clause in the Tripartite Agreement (for assignment of License) to provide for termination payment to lenders of an amount equivalent to lower of the license fee mobilized or secured loan outstanding in the event of termination of license allotted to an operator;
  •  There should be tripartite agreement between the Government of India, the lender and the borrower to ensure that the lender’s interests are duly taken care of even in the case of force majeure.
  •  In case of default by the borrower, the bank should have unfettered right to sell, transfer, assign, exchange or otherwise dispose of the spectrum free of any restraining conditions.
  •  In case of cancellation/revocation/voluntary surrender of telecom licence before full satisfaction of dues to the lender, whatsoever may be the reason, the title/right to spectrum should be with the lenders.
  • There shall be credible valuation methodology for valuing spectrum, to reflect the true realisable value of the spectrum for the purpose of treating it as security.
  • There shall be a robust formula/ methodology for finding the market price of spectrum together with a margin which has to be prescribed/ laid down to take care of the downward fluctuations in prices before spectrum can be treated as a tangible security.
 Government has decided that the existing Tripartie agreements in Unified Access Service (UAS) licenses be modified appropriately to include ‘spectrum’ in order to achieve the desired objective in

consultation with the Department of Legal Affairs and the Department of Financial Services. Further, in the event of default by a licensee entailing auction of spectrum, financial institutions/agents be allowed
to conduct auction in consultation with the Department of Telecommunications and in accordance with such guidelines as may be laid down for the purpose by the Department of Telecommunications. It would be open to financial institutions to request the licensor to conduct the auction without prejudice to their rights. 
Broad guidelines announced through Press release dated 15.02.2012 in respect of intra-service area merger of CMTS/UAS licences are given here.

The broad guidelines in respect of intra-service area merger of CMTS/UAS licences will, inter-alia, include:
  • For determination of market power, market share of both subscriber base and Adjusted Gross Revenue of licensee in the relevant market shall be considered. The entire access market will be the relevant market for determining the market share, and  will no longer be classified separately as ‘Wire line’ and ‘Wireless’.
  • Merger up to 35% market share of the resultant entity will be allowed through a simple, quick procedure. However, there may be a need to consider cases of merger beyond 35% market share in certain circumstances without breaching the 25% cap on GSM spectrum/ 10 MHz for CDMA spectrum holding in any service area. Recommendation of TRAI that such cases will be considered up to a market share of 60% has been taken note of.  In order to ensure clarity on the circumstances and extent to which merger above 35% limit would be permissible, detailed transparent criteria will be prescribed/ adopted after receipt of TRAI’s recommendations and after due consultation with the appropriate authorities.
  • Consequent upon the merger of licences in a service area, the total spectrum held by the Resultant entity shall not exceed 25% of the spectrum assigned, by way of auction or otherwise, in the concerned service area in case of 900 and 1800 MHz bands. In respect of 800 MHz band, the ceiling will be 10 MHz. In respect of spectrum in other bands, relevant conditions pertaining to auction of that spectrum shall apply.
  • If, as a result of the merger, the total spectrum held by the resultant entity is beyond the limits prescribed, the excess spectrum must be surrendered within one year of the permission being granted. Government may prescribe the band which will be required to be surrendered in accordance with spectrum refarming policy to be announced separately.
  • The substantial equity and cross holding of the Resultant entity shall be in conformity with the provisions of the UAS licence.
  • The duration of licence of the resultant entity in the respective service area will be equal to the higher of the two periods on the date of merger. This does not however entitle the resultant entity to retain the entire spectrum till the expiry of licence period.
  • In case of renewed validity beyond the original validity of any of the merged entity, holding of spectrum in 800/900 MHz band shall be subject to the applicable spectrum refarming guidelines to be announced in future w.e.fthe deemed date of extension of merging entity having lesser validity of licence at the time of merger or the date of spectrum refarming guidelines whichever is later.
  • Issues related to spectrum price, to be paid by the resultant entity, would be decided separately. The same shall also apply in case of renewal of wireless operating licence, post merger.
  • On the merger of the two licenses, the AGR of the two entities will also be merged and the license fee will be therefore levied at the specified rate for that service area on the resultant total AGR. Similarly, for the purpose of payment of the spectrum charge, the spectrum held by the two licensees will be added /merged and the annual spectrum charge will be at the prescribed rate applicable on this total spectrum. However, in case of holding of spectrum for various technologies by the entity subsequent to Merger, spectrum charges & license fee etc. or any other criterion being followed by the licensor shall be applicable as in case of any other UAS/CMTS licensee.
  • Existing provisions in the UAS licence relating to Lock-in period for sale of equity/merger shall continue.
This was stated by Shri Milind Deora, the Minister of State in the Ministry of Communication and Information Technology in response to a written question in Lok Sabha today.

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