Skip to main content

Legal Corner by Trilegal: India’s New M&A Guidelines Dampen Hopes of Market Consolidation

The guidelines for telecom mergers and acquisitions are being touted as a harbinger of market consolidation in India. But a closer reading suggests they leave a lot to be desired. 

In the weeks preceding its official release in February 2014, the mergers and acquisitions guidelines for telecommunications services (M&AGuidelines) were projected as beingvital totheprocess of consolidation in India’ssaturated telecom market, which featuresthirteen operators across twenty-two telecom circles. But shoddy drafting,insufficient incentives and latent ambiguities in the guidelines maydeter telecom companies from exploring any immediate partnerships. 

In particular, telecom operators have been put off by the requirement to pay, at the time of a merger or acquisition,the market-determined rates for any spectrum obtainedthrough the erstwhile 'first-come-first- served' system. Under this system, a fixed 'entry fee'was collected by the government from each operator for a given amount of spectrum (4.4 Mhzfor GSM and 2.5 Mhzfor CDMA)which was bundled with the relevant telecom license. Post-2008, operators were forced to bid for spectrum in a highly competitive open auction. In light of this policy change, the Guidelines state that any spectrum that a target company(i.e. the company being acquired)has obtained by paying only the entry fee, will have to be revalued on the basis of the latest auction-derived price. The differential fee (i.e. the difference between the entry fee paid and the auction-derived price for that spectrum) must be paid to the government upon merging. 

With respect to the payment of the differential fee, the M&A Guidelines impose this obligation only on the spectrum held by the target entity. This would seem to imply that if the acquiring entity has not paid for spectrum at market rates, there would be no requirement to rectify therevenue shortfallfor spectrumthat it holds. That apart, there is some confusion on the lock-in period applicable to shares of the resultantentity, pursuant to a merger or acquisition. It is not clear from the language of the M&A Guidelines whether the lock-in timer will restart from the date of the mergeror if it is a continuation of the three year period, starting from the date of the auction. 

Besides the differential fee, the government has also prescribed payment of a one-time feefor any spectrumheld by an operator over and above the spectrum that was administratively allocated along with the license. Given the disputes over the payment of this fee, the Guidelines state that the merged entity will need to submit a bank guarantee for the amount claimed by the government,pending a final decision by the courts on whether the fee is payable by operators. 

The M&A Guidelines have also made it tougher for bigger incumbent operators, such as Bharti Airtel and Vodafone, to merge amongst themselves. The cap on market share for the resultant entity, in terms of revenue and subscriber base, has been fixed at 50 percent in any given band.If the merged entity breaches this limit, it will have to remediate it within a year’s time. However, there is sufficient leeway for the bigger operators to merge their operations with smaller operators, while remaining within the market cap. 

While the M&A guidelines are a welcome addition to the Indian telecom regulatory framework, it falls short of being the catalyst for consolidation that industry stakeholders had anticipated. But the future is not entirely bleak. The Telecom Regulatory Authority of India recently recommended that spectrum trading should be permitted, which would allow operators to buy and sell airwaves according to their needs. In the context of mergers and acquisitions, liberal spectrum trading norms may allow investors to value an operator’s business separately from its spectrum, paving the way for bigger operators to acquire smaller operators and new entrants to exit the industry based on such assessments. 

Authors: This article has been authored by Kosturi Ghosh, who is a partner and Amlan Mohanty, who is an associate at the Bangalore office of Trilegal. Kosturi heads the corporate practice group in Bangalore and her area of expertise is private equity and venture capital investments. 

Disclaimer: The contents of this article are intended for informational purposes only and do not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein. 

Popular posts from this blog

VC Interview: Shailendra Singh of Sequoia Capital India

In a recent interview to Venture Intelligence, Shailendra Singh discussed some of the firm’s newer investments in the early stage segment including in the online payments space, the progress at a few existing portfolio companies and the active role the firm is playing in helping its portfolio companies scale and succeed in India and globally. Prior to joining the firm in 2006, Singh was a strategy consultant at Bain & Company in New York and before that, an entrepreneur in the digital media industry.

Venture Intelligence: How does Sequoia go about identifying potential early stage investments in India? Is there anything different you are doing today than, say, a couple of years back?

Shailendra Singh: There is a lot more focus on technology investing and early stage investing. In general, as you might remember a few years ago, we were doing primarily growth investing but in the past 18-odd months, we have had a very strong focus on early stage and that’s continuing. In terms of how…

PE investments in 2018 crosses $33-B to set new all-time high

Big Ticket investments in consumer apps Swiggy & Byju’s dominates year-end activity, even as investments in Core Sectors slow down
Private Equity (PE) investments in India rose to their highest ever figure of $33.1 billion in 2018 (across 720 transactions), according to data from Venture Intelligence (, a research service focused on private company financials, transactions and their valuations. While PE investments have already surpassed the previous high - $24.3 Billion across 734 deals in 2017 - in the first nine months of 2018, the mega investments in Consumer Internet & Mobile startups such as Swiggy and Byjus towards the year-end, helped the 2018 total vault by 36% year-on-year. (Note: These figures include Venture Capital investments, but exclude PE investments in Real Estate.) The year witnessed 81 PE investments worth $100 million or more (accounting for 77% of the total investment value during the period), compared to 47 such transac…

ChrysCapital and Sequoia Capital India grab two awards at APEX’19 PE-VC Awards

Mumbai, India, Feb 27, 2019: ChrysCapital and Sequoia Capital bagged two awards each as part of the “Awards for Private Equity Excellence” (APEX)event organized by Venture Intelligence. 

ChrysCapital bagged the Private Equity Fund Raise of 2018 Award (Closed $850 M Fund VIII within 4 months of launch) and the Private Equity Investor of 2018 Award (for its Exits from LiquidHub with 4x in dollar terms (within 4 years of its $53-M investment), AU Small Finance Bank with 11.5x return,  Torrent Pharma with 2.95x, City Union Bank with 2.83x, L&T Infotech with 2.56x)

Sequoia Capital India won the Early Stage VCInvestor(the firm registered 10x+ exits in Byjus Classes and SCIOInspire) and VC Fund Raise of 2018 (the firm closed an almost $700-M Fund VI).

Award Winners at APEX'19 PE-VC Awards

The event opened with a Fireside Chat with Kiran Reddy, CEO of SPI Group interviewed by his long time friend and colleague Vineeth Vijayraghavan.

Snapshots of the Awards Ceremony: (L-R) Gopal Srinivasan, …