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The Indian government on Friday announced its guidelines for auction of 3G (third generation) spectrum in the country, allowing foreign bidders with experience in offering 3G mobile services to participate.

The government is allotting spectrum in the 2.1GHz band for 3G services, India's Minister for Communications, A. Raja, told reporters in Delhi on Friday.

The announcement of the policy was delayed because of disagreement within the government on whether to allow foreign investors to participate in the bid. The government was in favor of a global bid so that it could raise more money from auctioning the spectrum, and also to introduce competition in the market. The Telecom Regulatory Authority of India (TRAI) argued that existing players already had the infrastructure in place to be able to offer 3G services faster and at an incremental cost to customers.

The opening of the auction to foreign bidders will make the 3G market very competitive in India, which will help mobile users, said Madhusudan Gupta, senior research analyst at Gartner.

Operators are now expected to start offering commercial 3G services in the first half of next year, Gupta said. They will introduce applications like gaming, music, and navigation from the start, he added.

The government has thrown open the bid to current mobile service providers holding an Unified Access Service License (UASL), and to any bidder who qualifies for an UASL in India and has experience in 3G services, according to guidelines issued by India's Ministry of Communications on Friday. Foreign bidders fall under the second category, and will have to comply with current UASL rules limiting foreign investment in mobile services companies to 74 percent of total equity.

State owned telecommunications service providers Bharat Sanchar Nigam Ltd. (BSNL) and Mahanagar Telephone Nigam Ltd.(MTNL) have been allotted 3G slots in the service areas they operate in, without participating in the bid, though they will have to pay license fee for the spectrum at the highest bid in each service area.

The allotment of spectrum to these two service providers, without their participating in the auction, will at best give them a faster time to market, but they have to pay the same license fees as the highest bidder, and they will have to compete with private operators with strong brands, Gupta said.

Spectrum will be auctioned in blocks of 2x5 MHz, and the number of blocks to be auctioned will range from 5 to 10 depending on the availability of spectrum in each service area, the ministry said. Each bidder will be allocated only one block in each service area, and spectrum allotment will be for period of 20 years, it added.

As Indian mobile service providers try to expand their reach to rural markets, they are seeing ARPU (average revenue per user) declining. Value added services using 3G will help these companies boost their ARPU by addressing a new premium market segment, Gupta said.