Is it back to the future for India?

If the response to the The Insider's critique of the Indian telecom sector is any indication, there are a lot of people concerned about the direction India's government policy was heading. Almost on cue, but certainly not as a direct response to that article, India's Communications Minister Kapil Sibal, announced a broad range of measures that would be introduced in a new, far-reaching telecommunications policy aimed at addressing past misdirections and attempt to introduce transparency and regain investor confidence.

Dow Jones Newswire reports that this is the third time the government has formulated a policy for telecom, after 1994 and 1999. The new policy is part of efforts to clean up the sector following allegations of rigging in a sale of licenses and bandwidth in 2008 that led to the arrest of the relevant minister, lawmakers and company executives, put the government under pressure and prompted the Supreme Court to cancel 122 licenses allotted without auctions.

The new rules aim to clarify and simplify the licensing process, something missing from the previous policy that led to the rescinding of those licenses that were allocated without auctions. However, the most dramatic changes being proposed are the provision of a single license for an operator covering the entire country in the future, and the separation of licenses from bandwidth.

Currently, operators need separate licenses to operate in each of India’s 22 telecom service areas and to acquire the associated bandwidth to go along with those permits. The concept of a single license will certainly be welcomed by the major players in the market even though they could lose up to 10% of current revenues gleaned from domestic roaming charges.

Another provision of the new policy is that current rules that cap market share of any one operator at 40 percent may be increased to 60 percent, but analysts say rules don't clearly specify the parameters and the previous limit of 14.4 megahertz of bandwidth for any combined entity. Nevertheless, the policy also allows for 'quick' approval of mergers where the resultant entity won’t have a market share—comprising of revenue and user base—of more than 35 percent or bandwidth of over 25 percent in a service area.

This must put current players in the box seat with the potential of increased M&A activity on the cards. Maybe this what the government wants to achieve and, in such a fragmented market, it certainly is warranted. Entry by new or external players may have just become a little more difficult though, and competition will no doubt be enhanced for the 2G licenses recently rescinded.

One interesting outcome of the new policy is that operators would have to return any excess bandwidth they hold or acquire only when they renew their licenses, typically valid for 10 years. They can also collect spectrum beyond the limit by bidding at an auction. This seems to provide an amazing level of latitude that may be abused, but will surely be welcomed. The policy also allows for bandwidth sharing within a service area, but the mechanics of how that will be achieved or managed may be another matter.

The policy will be operative from now and the entire policy will be announced in April. On the surface, this looks like a unique and masterful solution for a telecom market that has had its fair share of drama and bad press. It will also go a long way in restoring investor faith, and that is essential for India's international reputation as a whole.