The Department of Telecommunications (DoT) has significantly tightened the noose on mergers among telecom operators within a circle by imposing a three-year lock-in period, besides making it mandatory for them to take prior permission from the ministry.

It has also made post-merger rules on retention of spectrum much more stringent.

According to the existing policy, operators do not need prior permission from DoT or have a lock-in period for mergers.

Experts, however, said the new policy will not benefit anyone and will only block consolidation in the industry, which will now have too many players in the market.

Said telecom analyst Mahesh Uppal: "It is bit of a mess for everyone; existing players will be hit as they can't buy for three years. New players won't be able to sell and it will not help the consolidation of the industry, either."

Operators held the same dim view of the DoT directive. A senior member of the Cellular Operators Association of India, the GSM lobby, said: "The policy does not benefit anyone. New players cannot cash out; consolidation of the industry, which has been the new cry has to wait. Existing operators who were looking for mergers as a way to get extra spectrum will be confronted with stringent rules".

Some telecom firms said the policy lacked clarity. "It says that there is a three-year lock-in on mergers for a new licensee but it is quiet on the possibility of an operator acquiring a company, taking a majority stake and waiting for three years. What stops them from doing so?" asked an existing operator.

The government has recently given licence to six new players, including Datacom Solutions (promoted by the Videocon group), BPL group subsidiary Loop Telecom, Swan Telecom, S-Tel and Unitech, among others.

Even CDMA operators like Reliance Communications and Tata Teleservices have been allowed to operate GSM services under the universal access service licence (UASL) policy.

The new merger rules are based on the recommendations made by the Telecom Regulatory Authority of India (Trai) that also limit the market share of the merged entity, both in terms of subscribers and revenue to 40 per cent, against the current 67 per cent.

It's understandable as the number of operators in each circle is expected to go up to over 10-12 from five to six now. For a similar reason, the new policy says that mergers and acquisitions cannot be undertaken if there are less than four players in the circle. The current policy puts the number of operators per circle at three.

However, the new policy deviates in two key areas from the regulator's recommendations. First, the existing rule under which a telecom operator cannot take more than a 10 per cent equity stake in rival operators in the same circle will continue. Trai had suggested this limit be upped to 20 per cent.

Also, DoT has removed the regulator's suggestion that mergers can be allowed only if operators have met their rollout obligations.

The new policy has, of course, made retention of spectrum tougher. While it allows the merged entity to be entitled for the total amount of spectrum held by the merging companies, it puts in a stiff rider, according to which the new entity has to meet the subscriber criterion within three months.

Failing this, it has to surrender the licence. In case some spectrum is still held by the merged entity after the expiry of three months, the charge for it will be doubled every three months.