Shut out of India's latest airwaves auction, the country's smaller operators now risk falling even further behind their bigger rivals.

Both Aircel Ltd. and Tata DoCoMo were barred from participating in the auction because they could not meet the telecom regulator's strict financial requirement that bidders each have a "net worth" of at least 1 billion Indian rupees ($15.9 million).

Indeed, each operator was way off the mark when judged on this basis. Tata's net worth was a negative INR71.9 billion ($1.15 billion), while Aircel's was a negative INR66.7 billion ($1.06 billion).

Yet neither player is insignificant. With 78.7 million subscribers at the end of December 2014, Aircel controlled about 8.3% of India's mobile market. Tata's share stood at approximately 7% on the same date.

In the meantime, Sistema Shyam TeleServices Ltd. , the country's only pure-play CDMA operator, has decided not to bid for 800MHz spectrum after complaining the regulator's minimum prices were too high. Last year, it had been the only player to bid for spectrum in this particular band.

For all the latest news from the wireless networking and services sector, check out our dedicated mobile content channel here on Light Reading.

There's no doubt that India's smaller operators have lost relevance in the past few years. Formerly a pan-India service provider, Aircel was three years ago forced to shut down operations in the circles (service areas) of Madhya Pradesh, Chattisgarh, Gujarat, Haryana, Rajasthan and Punjab in order to cut costs and free up resources for more profitable circles. Similarly, Tata has shut down CDMA operations in many circles and GSM activities in three.

Their exclusion from the auction will further strengthen the big players. A form of passive consolidation is already underway in the telecom market, with Bharti Airtel Ltd. (Mumbai: BHARTIARTL), Idea Cellular Ltd. and Vodafone India all continuing to bulk up. Last year, this trio controlled as much as 70% of the market, according to data released by the regulator, and their market share is growing at the expense of smaller rivals.

Balance sheet weakness will make it hard for smaller operators to invest in upgrading their networks or buying spectrum in future. That, in turn, will make it even harder for them to compete in the mobile data era and render them less attractive to potential buyers once true consolidation begins.

Ideally, that process should provide an exit route for the likes of Aircel and Tata. Recent media reports have suggested that Uninor , an Indian operator backed by Norway's Telenor Group (Nasdaq: TELN), is interested in buying the stake in Tata DoCoMo held by Tata Teleservices Ltd. . Similarly, Aircel has reportedly attracted the interest of Reliance Jio, a new entrant rolling out 4G services.

Ultimately, though, regulatory and market uncertainty could rule out any such moves. "The telecom market should either be policy driven or market driven. Right now it is neither fully policy driven nor fully market driven in India," says Deepak Kumar, the founder of analyst firm BusinessandMarket.net. "Even if they want to exit, the policy is not clear. In the present circumstances, a shake-out of smaller players is happening but a sell-out seems distant."

– Gagandeep Kaur, contributing editor, special to Light Reading.