An article in WSJ outlines the issues that foreign telcos are facing while trying to enter the Indian market: the article says that AT&T (NYSE: T) is frustrated with the red tape in India, and recent M&A guidelines don’t make things easier. The problems: valuations of larger Indian telecom operators are through the roof, so smaller regional players like Spice Communications and Aircel, or new entrants like Videocon (which has yet to launch services) are less expensive. But M&A guidelines prevent mergers that bring number of operators in a region to less than four, so consolidation is unlikely. Foreign operators aren’t being allowed to bid for 3G spectrum, or even build a network from scratch.

Well, the reason why consolidation is not allowed if number of operators in an area drop below four is to ensure adequate competition, and perhaps prevent the formation of a cartel or a monopoly. There have been instances of spectrum being hoarded by licensees, just so someone may acquire them for the spectrum (which is at a premium). That’s why, with every license now being given out, there are certain rollout obligations. Also bear in mind that teledensity in India is less than 30 percent, and the primary goal of the government is to push for an uptake in rural India; how many of the new operators are interested in the high cost, low ARPU (average revenue per user) rural sector?

M&A is not permitted in the initial years primarily to prevent such speculation. Sure, that’s helped existing operators get a high valuation, and even helped the new operators get high valuations. Meanwhile, there’s not much info available on Videocon’s acquisition of Datacom, which eventually got a license...we’d written about that earlier, here.