An Indian roadside vendor speaks on a cellphone in Mumbai, India, Thursday, Feb. 2, 2012. India's top court ordered the government on Thursday to cancel 122 cellphone licenses granted to companies during an irregular sale of spectrum that has been branded one of the largest scandals in India's history.
India's Supreme Court today canceled 122 cellphone licenses awarded to companies during an allegedly crooked 2008 sale at the center of one of the biggest scandals in the country's history. The decision rattled industry and investors, and comes as a major blow to a government already embattled by corruption allegations.
The government said that only five per cent of the country's 900 million mobile phone users would have their service affected. But the license auction had served as the basis for huge rounds of investment and share auctions in the country and the cancelation cast a pall over prospects for the foreign direct investment for which government is desperate.
"It's huge – this decision is going to have a hugely chilling effect just at the moment that you have sectors like aviation, insurance and pensions coming up for FDI," said Rishi Sahai, director of Cogence Advisers, a Delhi-based investment bank specializing in the telecom sector.
Telecom shares tumbled on the national index today.
Nearly four years ago India's disgraced former telecommunications minister Andimuthu Raja oversaw the sale of second generation, or 2G, cellphone spectrum allocations, using a "first-come, first-served" process to dole out licenses at prices set in 2001. That sale earned the government about $3-billion – some $33-billion less than what industry analysts say it should have brought in. Mr. Raja is now in jail on corruption charges, while a coterie of telecom executives arrested with him are on bail; investigators have charged that an elaborate kickback scheme for Mr. Raja and cronies was behind the unusual method of allocating licenses.
As part of its ongoing investigation into the 2G scam, as it has come to be known, an increasingly activist Supreme Court ruled yesterday that the 122 licenses granted under Mr. Raja were doled out in an "arbitrary" fashion and were now "null and void," and that a fresh auction for licenses must be held in the next four months.
"This judgment sends a strong signal to the entire country and in particular to the corporate world," said Prashant Bhushan, an anti-corruption activist and lawyer who was a petitioner in the case to have the government-issued licenses revoked. Revenues from a new license would be a huge boon the national treasury, he added.
The court decision is a blow to the already-embattled Indian National Congress-led government: the last two sessions of parliament have been hijacked by debate over how to handle corruption and the 2G scam is the touchstone scandal for an angry public. Mr. Bhushan and others insist the government has enriched itself at the cost of citizens; allegedly crooked deals are now back in the spotlight just as elections are underway or imminent in a handful of critical states.
The canceling of licenses affects 11 companies, most of them smaller players in the roaring Indian mobile phone market, but many are firms with foreign partnerships – the kind of overseas investment for which the government is desperate to woo as predictions from growth in the national economy have slid in recent months from over nine per cent for this year to six per cent.
Affected, for example, is Swan Telecom, which is 45 per cent owned by Dubai-based Etisalat, and Unitech Wireless, a company formed in partnership with Telenor Group of Norway. Telenor has invested more than $1.2-billion in equity and offered more than $1.6-billion in corporate guarantees for its India venture; the company reacted coldly to the court decision. "We urge the government to ensure that a foreign investor that had nothing to do with these processes is not harmed," Telenor said in a statement.
And it isn't just the telecom firms who could see big chunks of investment wiped out by the ruling; banks and private equity investors working with those companies also face potentially huge losses.
"You have $25-billion in debt and equity that has gone 'poof'," said Mr. Sahai. "This judgment puts many things into question, for example the tower companies that were rolling out the network, they are affected, and all the guys who supply them.
"It's going to cause policy indecision, and many [investors]will be afraid to move," wondering if licenses or permits issued by the government will simply be revoked by the courts a few years down the line, he added.
The major players in India's market, Reliance Communications and Bharti Airtel, received most of their licenses in earlier agreements with the government and are largely unaffected by this decision. Their shares, predictably, are up five or six per cent in trading today.
The millions of cellphone subscribers affected will need to move their service to new operators over the next four months. The current telecommunications minister, Kapil Sibal, insisted this decision would bring "clarity" to the industry.
Industry analysts say the new license auction should raise about $20-billion, much less than it would have originally because the next-generation 3G network is now in use here.
In its judgment Thursday, the court declined to order a high-level probe of one of the country's most powerful politicians, Home Minister Palaniappan Chidambaram, finance minister at the time the licenses were granted. Opposition party members, who have been openly targeting him for months, insisted yesterday that he is partially responsible for the crooked auction and must resign. The Supreme Court instead directed a trial court to examine the accusations against Mr. Chidambaram and make a decision on what to do within two weeks.