beyondbrics

In the latest twist in India’s epic, multibillion-dollar 2G telecom scandal, the Supreme Court on Thursday overturned the award of 122 mobile telephone licences granted in 2008 by Andimuthu Raja, the country’s jailed former telecoms minister.

While the move put into jeopardy major investments by 11 companies – including Uninor, Tata Teleservices, Idea, Loop Telecom and Etisalat DB – analysts told beyondbrics that the decision does more than just illustrate the often-fickle nature of doing business in India.

Instead, they said, it shows that at least one branch of the Indian government is attempting to curb corruption and, in doing so, is creating legal mechanisms that will make it easier for companies to do business in Asia’s third-largest economy, or at least offer them some assurance that a deal will not be reversed.

“It does [highlight some of the uncertainty], but with all these irregularities coming up, it’s actually better that India should come through all that fraud so that we have an actual legal mechanism,” said Ankita Somani, analyst at Angel Broking, “because before this foreign investors were suspicious of investing in India.”

Those suspicions were not unfounded, especially given the recent spate of corruption scandals that have rocked the subcontinent – from mining to sport and everything in between – not least of which was the 2G scandal.

The scam involved the illegal allocation of 2G spectrum licenses well below market value, costing the exchequer, by the central auditor’s estimate, $39bn. The collusion of politicians and industrialists to steal such a large sum from the country badly tarnished the image of prime minister Manmohan Singh’s Congress Party-led government, and launched a groundswell of middleclass support for a strong anti-corruption bill.

That bill, as beyondbrics has reported, has yet to be passed (along with dozens of other crucial reforms), so it was left to the highest court in the land to inject some certainty into the licensing process.

“I think what has happened is that the Supreme Court has taken a very fair stand in this matter because these licenses were issued under very [faulty] norms and as a result that placed a lot of complexity into the situation,” Deven Choksey, managing director of KR Choksey, told beyondbrics. “So I think Supreme Court has done a nice job; and probably what they may end up doing is that they will reissue the licenses under revised norms.”

Indeed, the court requested the Telecoms Regulatory Authority of India to prepare for a fresh auction of 2G mobile telephone licences within four months.

That could provide a huge boost for India’s biggest telecom players, Vodafone and Airtel, who may also be able to bid and consolidate even greater competitive advantage. On the other hand, Sohani said, the ruling is likely to drive some of the smaller players out of the business altogether, including Loop Mobile, S-Tel and Videocon.

“For them it’s very difficult for them to survive because the free cash flow generation from these companies is less,” he said. “[During the] 3G auction, companies had to take a lot of debt on their books, and to repay it will take a lot of free cash flow – which is difficult when you have low subscriber base.”

According to Reuters, Uninor (a joint venture between Telenor of Norway and Unitech) said in a statement that the company had been “unfairly treated as we simply followed the government process we were asked to.”

Related reading:
Essar chief steps down to face telecoms charges, FT
India cancels 2G licences, FT
Trial opens in Indian telecoms case, FT