Saturday, December 22, 2012

2G Auction/high reserve fee


Telecom giants complaint before auction started that the reserve fee too high

What is reserve fee??

The reserve fee is simply the starting point of bidding. No bidding can be made below this price. If bidding doesn’t push the price up then the item is sold at the reserve price. However if the bidding intensity is high then the final price could go much higher than the reserve price

Advantage of low reserve price:

Lower the reserve price --> more and more bidders participation in the auction --> more extensive participation --> more comprehensive price discovery of the resource --> more successful auction

Relation between Floor price and reserve price:

Reserve price should be kept as low as possible but it should not go below floor price.

What is floor price??

Price to recover all the cost associated with the resource

Issue with 2G reserve price??

Earlier (A. Raja time) 2G reserve price was kept 0

This should not be seen as scam because it will attract more competition and hence higher eventual prices.

Then what’s wrong with the issue?? Why it is called a scam??

A zero reserve fee would not be right thing to do because:-

It would violate one of the basic rules of any auctioning regime: "that reserve fees in subsequent round can not be lower than previous rounds"

2001 --> Rs 1658 crore

So zero reserve price after 2001 means a cheating with telcos who came early and invested in india

What happened in recent auction:

 Due to too much scam issue(after CAG report) pressure on TRAI --> so suggested too high reserve price for 2G (INR 18000 crore) which is even higher than the highes bid in 3G auction.(Lol)

This was 8.5 times higher than what telcos paid in 2008. Obviously spectrum was to attract less bidders.

As expected the auction failed to auction all available spectrum and collected meager one third of what was expected to collect. [ Delhi and Mumbai had no bidders ;) ]

Possible solutions as suggested by experts:

  1. Reserve Price could have been kept to same as 3G spectrum or lower 
  2. It could have been same as last auctioned price of 2001

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