Changes to M&A regulations could prevent new entrants cashing out

9 Oct 2008

India’s Economic Times is reporting that the government has created a new framework to govern mergers and acquisitions (M&A) that could effectively prevent newer 2G operators from selling majority stakes. Under the proposed changes, owners of cellcos including Datacom, Unitech and Loop Telecom will have to pay an acquisition fee equivalent to the market value of the entire company if they sell more than a 50.1% stake; the market value will be determined by the government on the basis of the market price of the radio frequencies held by the telco, although this would not be less than the price at which the deal has been struck. Operators that sell up to 50% stakes will not face any fees.

The move comes following the purchase of a 45% stake in Swan Telecom by UAE-based Etisalat in September 2008 for INR41 billion (USD900 million); Swan paid just INR16 billion for licences covering 13 circles in January 2008. Following the deal the finance ministry reportedly approached the Department of Telecommunications (DoT) proposing it be studied and M&A norms reviewed. The DoT has faced criticism for the low fees it charged for licences at the beginning of 2008, and the fact that Swan’s valuation rose so significantly without the commercial launch of services is believed to have forced the regulator to consider the new measures.