OREANDA-NEWS. The Indian government's newly announced approval for spectrum trading and sharing is likely to push industry consolidation further, reduce regulatory uncertainty and ease network congestion, says Fitch Ratings. Specifically, these new rules are credit positive for the fourth-largest telco - Reliance Communications Limited (Rcom, BB-/Stable) - which can now reduce leverage through monetising its under-utilised pan-India 800MHz spectrum.

The top-three telcos, including market leader Bharti Airtel Limited (BBB-/Stable), have increased their combined revenue market share to 73%. These companies may further consolidate market share by acquiring additional spectrum from smaller telcos, de-congest their network, and support their fast-growing 3G/4G services. Furthermore, their ability to trade spectrum may curtail excessive bidding in future spectrum auctions.

Spectrum trading coupled with sharing will spur consolidation as it provides an exit route to smaller loss-making telcos which have struggled to generate positive operating cash flows. Smaller telcos - including Tata Telecom, Videocon Telecom and Aircel Limited - make operating losses, are struggling to gain market share, and are saddled with high debt. These businesses could trade their under-utilised spectrum assets with larger telcos in the loss-making Indian circles to focus only on profitable circles. The regulator has divided India into 22 telecom circles depending on demography.

The state-owned telcos - including Bharat Sanchar Nigam Limited and Mahanagar Telephone Nigam Limited - will benefit as they own a large chunk of the most-efficient - but under-utilised - 900MHz spectrum which can be traded to boost cash. These companies also make operating losses as employee costs are 50% of revenue. Furthermore, they have high debt, which was taken on to fund the acquisition of spectrum reserved for them by government.

However, aggressive spectrum trading could be deterred in the short term by new taxes and fees, and by restrictive rules. First, the rules prevent a telco from owning over 25% of available spectrum in any one circle. Second, a telco may have to pay additional taxes on the revenue derived from traded spectrum over and above the existing spectrum charges. Third, a seller will have to pay an additional 1% fee on the traded spectrum's market value. Finally, the inability of telcos to trade cheaper spectrum acquired before 2010 - unless paid-for equal to an auction-determined market value - is also a dampener.

Reliance Industries Ltd's (RIL, BBB-/Stable) telecom subsidiary, Jio, which is rumoured to launch its 4G services in December 2015, could acquire 800MHz spectrum to provide better indoor coverage, as it owns spectrum in 800MHz only in 10 circles and higher-bandwidth spectrum of 2300MHz/1800MHz in the rest of the Indian circles. Rcom could be a source of this spectrum, as it has continuous spectrum bandwidth in 800MHz and already has a reciprocal infrastructure agreement with Jio to share Rcom's 43,000 towers, 120,000km of inter-city fibre, and 70,000km of intra-city fibre network over the next 17-20 years.

Indian telcos are some of most spectrum-starved operators in Asia Pacific, and consumers frequently experience call drops and poor data quality. To date, active consolidation in the sector has been prevented by inefficient utilisation of spectrum assets by smaller telcos, and regulatory uncertainty regarding M&A rules.