Kolkata: The Department of Telecommunications (DoT) has scrapped the 3% spectrum use charge (SUC) limit, a move that brings great relief to Reliance Jio Infocomm, Bharti Airtel and Vodafone Idea (Vi) as it will greatly reduce their futures outflow to these statutory fees.
Analysts expect the move will spur stronger telco participation in upcoming 5G spectrum sales, as operators would enjoy significant annual savings on SUC, especially if they bid strongly on low-cost 26GHz mmWave airwaves.
“The weighted average (of SUC) should be derived by the sum of the product of spectrum ownership and applicable SUC rate, divided by (a telecom operator’s) total spectrum ownership,” DoT said in a June 21 order on SUC calculations.
A senior telco executive told ET that, unlike previous SUC calculation orders, “there is no mention of the 3% floor rate this time, implying it has been removed”.
SP Kochhar, director-general of Cellular Operators Association of India (COAI), said: “The highly anticipated DoT order regarding the levy of SUC for ether will provide clarity to telecom service providers for the upcoming auctions.”
The COAI represents Reliance Jio, Bharti Airtel and Vi.
Operators recently told the DoT that just scrapping SUC for ether purchased in future spectrum auctions, starting with next month’s 5G sales, would be meaningless if the SUC floor rate, equal to 3% of adjusted gross revenues ( AGR) of a telco, would remain.
They said the abolition of SUC on ether bought in the July sale would not effectively reduce the telco payouts of these regulatory fees as they would still have to pay a minimum of 3% of AGR regardless of buying new spectrum. that attracts zero SUC on future sales.
The 3% limit was set by DoT in 2016 to protect government revenue, as the SUC was lowered at the time to encourage telcos to participate strongly in that auction. But with the scraping of the SUC floor, a telco’s total outflow to spectrum loads could dip well below 3% of AGR, especially if they buy large chunks of 5G airwaves.
Analysts expect operators to buy 400-500 units of the low-cost 26GHz mmWave spectrum given the wide range and as it will not attract SUC as 26GHz is suitable for high-speed, low-latency applications, especially in congested areas where large volumes of traffic to be transported.
IIFL Securities said it saw “significant SUC savings on the horizon for Jio, Airtel and Vi, estimating they could see $3.7 billion, $3.4 billion and $1.2 billion EV (enterprise value) upwards, respectively.” by extracting large amounts of the 26 GHz band spectrum”.
Under the auction rules, telcos pay SUC on a weighted average basis, depending on the timing and amount of ether being held. The government has reduced the SUC over the years. So if an airline buys a large amount of ether in the next auction, which attracts zero SUC, their total payouts on this score could drop to 1-2% of AGR, especially now with the removal of the 3% floor rate.
Reliance Jio is expected to spend Rs 37,500 crore, while Airtel is expected to spend Rs 25,000 crore and Vodafone-Idea is expected to spend Rs 850 crore in the upcoming spectrum auctions, according to an IIFL securities report.
Reliance Jio, Bharti Airtel and Vi could spend about Rs 37,500 crore, Rs 25,000 crore and Rs 8,500 crore respectively in 5G spectrum sales in July, according to IIFL Securities. It expects Jio and Bharti Airtel to bolster their sub-1GHz stock, but only offer small amounts of the main 3.3-67GHz 5G band given the high reserve price.
But analysts expect general bids to remain subdued as minimum prices are higher than what telcos wanted, spectrum stocks are sufficient coupled with the prospect of annual auctions.
They also don’t expect bidding wars, given the presence of only two serious bidders, Jio and Bharti Airtel, as Vi’s financial battle is far from over.
Another downer is business uncertainty over future 5G enterprise revenue streams for telcos following the DoT’s decision to allow direct enterprise spectrum allocation for captive 5G networks.