Apparently the Indian legal system is not the only one capable of throwing the occasional spanner in the telecommunications works. (See “Telenor, Etisalat, Sistema and India's License Debacle: A Harsh Reminder About Risk and Return.”)

In Indonesia, a long awaited auction of two additional channels of 2.1 GHz 3G spectrum was halted last week when state-controlled mobile operator Telkomsel was declared bankrupt and therefore ineligible to bid.

Telkomsel, which is by a considerable margin the market share leader in Indonesia, ended 2011 with assets of US$6.1 billion against liabilities of US$2.1 billion. It had a profit margin of 26% on revenues of US$5.1 billion.

We should all be so bankrupt.

Why is this apparently solvent and profitable behemoth bankrupt?  Because the Central Jakarta District Court says it is.

And this is not because the court has no basic accounting skills or because it is corrupt – it is actually one of the better regarded courts in Indonesia. It’s because Indonesian bankruptcy law says that a company can be declared bankrupt if it has at least two creditors and has an unsettled debt to at least one of them.

Needless to say, a company of Telkomsel’s size has a lot more than two creditors. In this case, the one with the unsettled debt is a distributor of prepaid cards, which says it is owed about US$ 557,000, a claim that Telkomsel disputes.

As a non-Indonesian and non-lawyer, I am not in good standing to say that this law seems odd, but I’m going to say it anyway: this law seems odd. Nevertheless, it is the law and the legal process must continue until things get sorted out, which could take months.

Meanwhile, a relatively minor commercial dispute is keeping the capacity-constrained 3G networks of Indonesia from getting a little bit of much-needed spectrum relief, frustrating consumers and depriving operators of revenue and the government of auction proceeds.

The impasse will be resolved, the spectrum will be auctioned, and life will go on. However, the lesson to be learned is that failing to reckon with all the possible sources of uncertainty in developing market telecommunications can be very costly. (See “Why Mongolia is a Better Bet than Algeria: Digital Investment Attractiveness Index Highlights Strengths and Weaknesses of Developing Countries”).

The Supreme Court of India today cancelled 122 2G licenses that were granted in 2008 mostly to new players but also to Idea Cellular and Tata Teleservices. The court has given four months to the government to auction these licenses and till then the existing operators would continue to operate, so nothing will happen to the existing subscriber base. However, it would be a major setback for the foreign operators like Etisalat and Telenor, which have made substantial investment in passive infrastructure and subscriber acquisition. For a discussion of Telenor’s entry into India, see “Telenor's India venture: Is it a misadventure?

It will be very difficult for all the operators whose licenses have been cancelled to participate in the fresh auction. Most of these companies don’t have the financial muscle to participate in the auction as any fresh auction would cost them around US$ 1-2 billion. (This is a conservative estimate as for 3G licenses in 14 circles Bharti paid around US$ 3 billion)  Even those who would participate and win after paying such a huge price would find it difficult to compete with big players like Bharti Airtel and Vodafone. So in a nutshell the court verdict would eventually result in a few operators in each of the circles; tariffs will no longer be low as there won’t be any player which can afford to play the game based on cheap tariffs after paying huge auction money.

The government and the regulator are working on an exit policy for the operators but this would not solve the problem of the foreign players. Foreign players entered Indian market with the intention to compete in the Indian market and were here to stay and expand their businesses. The court verdict has put them in a Catch 22 situation. If they decide to exit, they will lose out a lot in terms of subscriber base and investment made, but if they don’t , they will have to shell out huge amounts to get these licenses back again. Essentially this would mean going back to the drawing board and chalking out a new strategy to get returns on the investments. At present the focus of these players is using cheaper tariffs to add new subscribers in smaller towns and villages, but the ROI demands of new license fees mean they would have to focus on high ARPU customers even though they don’t have 3G licenses, which is definitely an uphill task. 

- Rahul Gupta

See also, “Low Income Indian Mobile User Survey Analysis: Basic Services”