The department of telecommunications has raised questions about the merger between Idea Cellular [Get Quote] and Spice Telecom violating key clauses on intra-circle merger and mobile licence conditions.

On June 25, Idea Cellular, in which the A V Birla Group has a majority stake, had announced that it would acquire industrialist B K Modi's 40.8 per cent stake in rival mobile operator Spice Communications for over Rs 2,700 crore (Rs 27 billion).

DoT sources cited revised merger and acquisition guidelines of April 22, 2008, that disallow intra-circle mergers (merger between two operators in the same service area) for three years from the date a licence is granted.

Spice Communications, which provides GSM-technology mobile services, holds licences for Karnataka and Punjab.

But Idea also has licences for these two circles effective January 25, 2008. Similarly, Idea Cellular has licences for the Delhi, Andhra Pradesh, Haryana and Maharashtra circles. Spice also holds licences in these circles effective January 25, 2008.

DoT officials added that the share purchase agreement between Idea Cellular and Spice could also violate a "substantial equity" clause of a telecom licence under which one service provider cannot have more than 10 per cent in another in the same circle.

DoT officials added that Spice has stated if the merger does not take place within a year, it would be willing to surrender its new licences for the Maharashtra, Andhra Pradesh, Delhi and Haryana circles, as required by policy.

But officials scrutinising the proposal said there is no provision in the agreement by which an operator can surrender the licence to DoT. In simple terms, DoT will not return the money Spice has already deposited to acquire the licence.

A senior Idea Cellular executive said the company has not received any query from DoT. He, however, added that the company would comply with all the regulations to complete the merger.

Idea will also make an open offer, along with Telekom Malaysia, the other major shareholder in Spice, to acquire a further 20 per cent in the company for over Rs 1,000 crore (Rs 10 billion).

This is to be followed by a preferential issue by Idea to Telekom Malaysia followed by a merger of Spice with Idea.

On the DoT

• Revised M&A guidelines of April 22, 2008, disallow intra- circle mergers for three years from the date a licence is granted
• Spice has a licence for Karnataka and Punjab. So does Idea, whose licence is effective January 25, 2008
• Idea Cellular has licences for Delhi, Andhra Pradesh, Haryana and Maharashtra. So does Spice, whose licences are effective  January 25, 2008
• The agreement may also violate a "substantial equity" clause under which one service provider cannot have more than 10% in another in the same circle