BRIEF FOR FINANCE MINISTER Meeting with Minister of Telecommunications and IT May 28, 2008

1.

DEA position on various issues relating to allocation and

pricing of spectrum 2G and 3G has been summarized in the updated position paper submitted to Finance Minister on April 29, 2008. The main features of the recommendations are summarized below:

Issues relating to 2G spectrum 2. It is legally and administratively tenable to impose a two part

tariff for spectrum: a fixed, one-time upfront spectrum price for allowing the allottees of spectrum to use a public resource for private profit; and a recurring usage charge, whereby Government shares the profits accruing to the operator. 3. Spectrum allocation upto 6.2 MHz for GSM (5 MHz for

CDMA) may not be charged both for existing and new allottees. 4. Spectrum allocation beyond 6.2 MHz for GSM (5 MHz for

CDMA) ought to be charged, in terms of an upfront price, both for existing and new allocations. The principle employed for charging should draw from the initial entry fee of Rs 1,650 crore (for 4.4. MHz (GSM)/2.5 MHz (CDMA)) fixed in 2003-04 suitably inflated for the growth in AGR/MHz between 2003-04 and 200708. Spectrum allottees not willing to pay this price can relinquish their allotments. 5. The current practice of linking spectrum usage charges to

bandwidth may be replaced by making spectrum usage charges circle or category specific. The formulation recommended by DEA in this regard, while yielding maximum revenue (as compared to the other formulations advanced by DoT, TRAI and CDMA operators) also represents a break from the current practice and strengthens the arrangement for a two part tariff. This manner of levying spectrum usage charges has also been recommended by

the Cellular Operators Association of India (CoAI) in their representation to Finance Minister dated May 08, 2008.

Issues relating to 3G/WiMax Spectrum 6. Allotment of 3G spectrum may be made on the basis of an

International Competitive Bidding (ICB) process, with reiteration of the existing mandatory roll out clause and preconditions relating to prior experience in the sector, net worth criteria etc being specified for pre-qualification of bidders. 7. Both TRAI and CoAI (representation dated May 26, 2008)

have argued in favour of auction among UAS (including ISP licenses, for WiMax) license holders. The main arguments in support of this recommendation are as follows: (i) The new entity bidding for 3G spectrum will need a UAS License. There is a queue for this license and the practice is to allot the license on a first come first serve basis. If the new entrants are allocated spectrum through auction and then granted the license subsequently, it would amount to effecting a backdoor entry into UASL. On the other hand, if the entity is not granted a UAS License, it would amount to creating a new class of licenses, which would need reference to TRAI. (ii) The existing licensees, who have huge investments in infrastructure and systems, will be in a better position to roll out 3G services faster and at lower incremental cost. Presence of 13-14 UAS Licenses per circle will ensure enough competition to have a meaningful price discovery.

8.

These arguments are not found to be tenable on account of following reasons:

(i)

Spectrum allocation for 3G services should be treated sui generis and not an extension of the 2G allocation process. It is for this reason alone that with respect to allocation of 3G spectrum, a spectrum acquisition price and a different

process for price discovery have been prescribed by TRAI; different rates for spectrum usage charges than being used currently have been laid down; and, more stringent roll out obligations have been defined. (ii) The modifications required in the terms of license for 3G services can be effected using the power conferred on Government vide Clause 43.5(iv) of the UAS License, which states, the Licensor has the right to modify and/or amend the procedure of allocation of spectrum including quantum of spectrum at any point in time without assigning any reason This clause may be used to amend the allotment procedure of 3G spectrum and no reference to TRAI for creation of a new license is warranted. (iii) While the number of operators per circle has gone up after award of 120 UASL Licenses in January, 2008 and averages around 13-14 per circle, it would not be correct to argue that mere presence of numbers would lead to sufficient competition. A preliminary analysis suggests that nearly 70-75 of the total Licensees at present (279) have none or insignificant prior experience of the Telecom sector; moreover, the actual holders of spectrum are not more than 7-8 per circle. The competition, thus, in actual fact, is restricted to these established players and there is every possibility of collusion/ cartelization taking place amongst these operators while bidding for 3G spectrum. The other licensees have been granted licenses but do not have any spectrum allocation. Most in this category also do not have any prior telecom experience and have not invested in telecom infrastructure as yet. Therefore, the argument of TRAI that existing operators have invested heavily in infrastructure and will be at a disadvantage if ICB is done is not correct in the context of such licensees. (iv) While presence of basic infrastructure, e.g. transmission towers, will lead to synergies in extension of telecom

services by existing operators to 3G operations there is no case for presuming that new entrants will not be in a position to make requisite investments in similar infrastructure. In fact, with the presence of telecom infrastructure companies in the market, the roll out of 3G services by new players can also be equally swift in a market driven, competitive situation, there is no cause for denying fresh entrants the right to enter the fray on grounds that they do not have the same advantages as the existing players.

9.

The initial position of DEA in this regard may continue to be maintained.

Issues relating to Mergers and Acquisitions: 10. DoT have issued a notification on April 22, 2007 on Guidelines for intra service merger of Cellular Mobile Telephone Services (CMTS)/ Unified Access Services (UAS) Licenses (copy attached). The guidelines mandate

a spectrum transfer charge to be payable as specified by Government.

11.

DoT may be advised that fixation of spectrum transfer charges shall be in consultation with DEA.

Infrastructure Division, DEA.