International arbitration beckons over 2G scandal

Author: | Published: 1 Aug 2012
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On February 2 2012, the Supreme Court ordered the Government of India (GOI) to cancel all 122 mobile 2G cell-phone telecom licences that had been allocated since 2008. Norwegian telecom operator Telenor, in particular, has since experienced major losses and may have to leave the Indian telecom market. The scandal has triggered concern among foreign investors on the GOI's ability to protect their investments.

In 2010, India's Comptroller and Auditor General (CAG) submitted a report accusing the Communications and Information Technology (CIT) ministry of selling second generation (2G) frequency-spectrum licences "in an arbitrary, unfair and inequitable manner". The ministry sold the licences on a first-come-first-served basis, in some cases issuing licences to applicants who did not satisfy the requisite criteria. This is instead of engaging in a public, transparent auction process, a decision that the CAG has estimated to have cost the GOI US$40billion. This figure equates to six times the GOI's annual education budget.

The 2G spectrum scam is said to be the largest in the six-decade history of independent India. Supreme Court Justice AK Ganuly, a member of the Supreme Court bench that was involved in the case, said that considering the magnitude and volume as highlighted by the CAG, this scam would "put all other scams put together to shame".

The Supreme Court's February 2 order came as a surprise to the country's telecom industry, which had expected the Court to take less drastic action such as establishing an independent panel to look into the cancellation on a case-by-case basis.

Foreign investors invest in India's telecom market mainly through the purchase of licences from local companies, who have little knowledge on how these licences were obtained or the legal risks associated with them. These local companies stand to benefit hugely by selling the licences just a few days after purchasing them.

Telenor's India joint venture, Uninor, said in a statement that it was being "unfairly treated, as we simply followed the government process we were asked to". The statement added: "We are shocked to see that Uninor is being penalised for faults the court has found in the government process."

Infrastructure Development Finance Company legal director Raju Doti says: "It is simply unfair to request foreign investors to bear the costs of the government in failing to maintain the credibility of the licensing system. When these companies purchase licences from local private companies, they assume that these local companies have obtained these licenses following due process of law. They have no intention to participate in a fraud."

Khaitan & Co partner Rabindra Jhunjhunwala says that international parties, such as Sistema and Vodafone, have sent notice to the GOI under the bilateral investment treaty. "The amount of money involved is huge. Governments from other countries are also seeking to get involved in the matter."

In addition to Telenor, other major telecom companies affected were Russia's Sistema, Loop Telecom, NTT DoCoMo partner Tata Teleservices, and Idea.

Telenor has pressurised the GOI to come up with a solution within six months or it will bring the matter to international arbitration, suing the GOI for violating the provisions of India's Comprehensive Economic Cooperation Agreement (CECA) with Singapore to protect investor interest. Should arbitration be necessary, then Telenor will seek US$14 billion in compensation from the GOI.

Telenor has also expressed its intention to leave the Indian telecom market as the cost for participating in a re-auction, and put in further investment, would be huge. In the week following the Supreme Court's order, the stock price of Telenor dropped 4.4%.

While Telenor is suffering, large operators that have held licences issued prior to 2008, such as Vodafone and Bharti, are expected to benefit from the incident as the Court's order will likely remove smaller players from the market. For example, Bharti Airtel's share price has increased nearly 7% in the week following the Court order.

Ernst & Young partner Rajan Vora says the incident will certainly trigger concern among foreign investors: "The companies involved in the incident have already invested a huge amount of money, assuming that every procedure they have followed complies with the government's standards. Now, they could either exit the Indian market or reinvest to remain in the market. That means they would either waste the huge amount of money they have invested, or spend an additional huge sum of money to continue with their businesses. Either way is disastrous to the interest of investors."

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