NEW DELHI (Reuters) - Investors gave a thumbs down to Telecom Regulatory Authority of India's (TRAI) proposals for a near tenfold increase in the price of 2G mobile phone spectrum, viewing the move as yet another blow to companies in the cutthroat sector whose shares tumbled.
India's telecoms sector, the world's second-biggest by subscribers, has been battered by ferocious competition and a scandal over the below-market price sale of lucrative mobile phone permits in a 2008 state sale process.
The TRAI late on Monday recommended an auction starting price of 36.22 billion rupees for every megahertz (MHz) of nationwide spectrum in the 1800 MHz band, compared with a price of 3.8 billion rupees in the 2008 sale.
The proposed steep increase in spectrum pricing will make it very expensive for new entrants and is a blow to foreign carriers such as Telenor and Sistema, who will have to repurchase licenses bought in 2008 for a much higher price if they wish to keep a foothold in India.
"It creates further uncertainty for the sector," said Kunal Bajaj, partner and director of the Indian operations of London-based consultants Analysys Mason.
"The new entrants will have to fight hard to justify a business case at this price," he said, referring to companies whose permits are being revoked after the court order.
Norway's Telenor would have to spend at least $3.6 billion for 5 MHz spectrum in all of India's 22 zones, while for Russia's Sistema it could be even higher as the base price of the 800 MHz spectrum band it operates in was proposed at 72.44 billion rupees per MHz.
The revised spectrum pricing proposal came after the Supreme Court ordered the cancellation of 122 permits granted four years ago to eight operators including Telenor and Sistema's Indian units and asked the government to redistribute radio airwaves through an open bidding process.
Telenor is likely to quit India rather than pay a much higher price, analysts said, while sources close to Sistema said it would take a writedown of nearly $1 billion because of the suspension of the licenses.
The court, which had earlier ordered the licences to be cancelled in early June, on Tuesday allowed the affected companies to operate until September 7 and asked the government to complete the auction process by August 31.
The government had sought directions from the court saying it would take more than a year to complete such an auction.
The regulator's proposals are not binding on the government and a panel of ministers will decide on the spectrum auction base price and rules.
Big payouts also loom for leading Indian mobile carriers Bharti Airtel, Vodafone's local unit and Idea Cellular if the regulator's proposals including reallocation of spectrum bands are accepted.
Bharti and Vodafone India, which are not affected by the court order, are interested in buying more spectrum in the auction to feed their overstretched networks, and the steep base price and a restriction on operators holding spectrum beyond a limit does not augur well for them.
More bad news for them is a proposal for refarming, or reallocating, their existing bandwidth "at an early date" before their licences come up for renewal starting in 2014.
Most of their existing bandwidth is in the superior 900 MHz band and that would be replaced with spectrum in the 1800 MHz band in the so-called refarming, a move that would increase their capital expenditure. And they have to buy 1800 Mhz spectrum from state auctions to keep their networks running.
Shares in Bharti Airtel fell as much as 7.5 percent on Tuesday to their lowest level since July 2010, while fourth-ranked Idea Cellular slumped as much as 9.8 percent, before cutting some losses. Bharti closed 1.7 percent down at 307.35 rupees, while Idea ended 4.2 percent down at 79.90 rupees.
At 1247 GMT Telenor shares were up 1.1 percent and Sistema's London-listed shares were almost 4 percent lower.
The reallocation of spectrum may have a potential adverse impact of 32 rupees a share on Bharti's market value, while Idea's may be hit by 23 rupees a share, estimated Anand Shanbhag, executive director at Avendus Securities.
The regulator's proposal to defer the auction of 4G spectrum in the 700 MHz band is, however, seen as a positive for Reliance Industries(RELI.NS), controlled by India's richest man Mukesh Ambani, which is the only company with nationwide 4G spectrum.
The government had plans to auction 4G spectrum in the 700 MHz band this year, which would have given a chance to Reliance's competitors to build all-India coverage and may have even forced Reliance to buy spectrum in the 700 MHz band, which is considered far superior than the company's current holding.
"We believe these recommendations are negative for incumbents/new entrants as it will stretch their weak balance sheets and positive for new 4G entrants like Reliance Industries," Goldman Sachs analysts wrote in note.
Editing by Aradhana Aravindan and Ranjit Gangadharan; Editing by Jon Loades-Carter