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
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
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
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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