The biggest merger being attempted in the history of Indian telecom could hit rough weather with a number of regulatory hurdles coming in the way.

There are three licensing conditions which Idea Cellular and Vodafone will have to be mindful of before they can move ahead.

Under the existing Mergers & Acquisition rules, any merged entity cannot have more than 50 per cent of the revenue market share. There are at least six markets in which the Idea-Vodafone combination would exceed 50 per cent revenue market share. This includes Maharashtra, Gujarat, Kerala, Haryana, Madhya Pradesh and West Bengal.

If the merger goes through, the merged entity will have one year to reduce its revenue market share in these areas within one year. The entry of Reliance Jio will partly help the two operators lose share but beyond that they will have to figure out how to shed revenues in a tough market. This could be done by giving up lower revenue users in these circles.

Spectrum holding

M&A rules also prohibit any entity from having more than 50 per cent of spectrum assigned in any single band. Analysis done by various research firms suggests the merged entity may have to surrender 12.8 MHz of 900 spectrum worth $1 billion. The merged entity could of course avoid this by trading the excess spectrum with other telecom operators. There is also the possibility that Idea-Vodafone combined may be asked to pay the one-time fee for spectrum liberalisation. This fee, amounting to about ₹5,000 crore, is currently under litigation. The Department of Telecom could insist on recovering this money before it allows the merger to proceed.

The merged entity could also breach the subscriber market share cap of 50 per cent in two circles – Kerala and Gujarat. Analysts at Philips Capital said, “The regulatory hurdles are significant and could potentially derail the merger. Vodafone and Idea are both very strong players and enjoy significant market share. They have the capability to sustain operations without consolidation.”

Valuation issue

Merger valuations could be another complication. As Vodafone India is not listed the benchmarking of valuations will pose further challenges for the merger. It also remains to be seen how the Vodafone tax dispute will come in the way.

“Our analysis reveals the Vodafone-Idea combined entity would hit revenue market share, subscriber market share and spectrum caps in five of the total 22 circles. The merged entity would get a year to align with revenue and subscriber market share caps, but it would have to part sell or surrender spectrum to be below the cap,” brokerage firm CLSA said.

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