How the auction was designed to ensure high bids

The auction design was engineered to ensure that the Central government gets maximum revenue. But that has led to some irrational bidding.

For example, price per MHz for spectrum in Uttar Pradesh has turned out to be higher than airwaves in Delhi and Mumbai, which is considered to be high revenue earning areas for telecom companies.

There are primarily two reasons why the pricing went skyrocketing. Firstly, many of the incumbent operators were left with no choice but to bid for spectrum if they wanted to remain in business. Airtel, Vodafone and Idea Cellular had taken 20-year licences in 1994-95 which expires this year. The Centre had declined to extend the licence period which essentially meant that they had to buy back the spectrum to continue operations. That’s the reason why price of 900 MHz band has crossed three or four times the reserve price in some circles.

The Centre also squeezed the supply of spectrum in 900 MHz and the 2100 MHz bands. While the telecom regulator had urged the Centre to put all spectrum available on the block, the Department of Telecom kept back at least 15 MHz spectrum in the 2100 MHz. It also could have reorganised the existing usage by BSNL in 900 MHz band and freed up one block of 5 MHz. This would have eased up the pressure on these two spectrum bands.

The other reason is that the Centre allowed operators to bid for disproportionate amount of airwaves. For example, if the bidder was a new player in a circle in a particular frequency band, it had to bid for a minimum of 5 MHz band while an existing player was allowed to buy even 1.25 MHz slots. As a result the operator who could bid for lower amount of spectrum was in a position to keep raising the stakes with lower amounts but the player who wanted at least 5 MHz or above had to bid a proportionately higher amount to stay in the race.