Revoked Licenses Are the Latest Fallout from India’s 2G Telecom Scam

In the wake of India’s $40 billion 2G telecom scam, the country’s Supreme Court issued an order on February 2 revoking 122 licenses granted to eight telecom operators. The licenses were issued by former telecom minister A. Raja on a controversial first-come-first-served basis. According to the Comptroller and Auditor General (CAG), this had led to the gargantuan multi-billion-dollar loss to the exchequer. The court said that the licenses were awarded in a “wholly arbitrary and unconstitutional” manner.

The companies in affected include Uninor (22 licenses), Videocon (21), Loop Telecom (21), Sistema (21), Etisalat DB (15), Idea Cellular (13), S Tel (6), and Tata Teleservices (3). Uninor is a joint venture between realty firm Unitech and Telenor of Norway, Sistema Shyam TeleServices (SSTL) is a joint venture between Shyam Telecom and Sistema of Russia. Etisalat DB is a joint venture between DB Realty and Etisalat of the United Arab Emirates.

The Supreme Court noted in its decision that the original license holders have sold at very high prices. This implies the license fee was too low, leading to the loss to the exchequer. Swan Telecom (now Etisalat DB Telecom) paid a license fee around $350 million. It offloaded around 45% equity in favor of Etisalat for over $700 million, a move that values the company — which, at the time of the transaction, was nothing more than the license — at $1.55 billion. Unitech, which had paid a similar amount for its license, brought in Telenor of Norway as a 60% equity holder by issuing fresh shares of $1.2 billion. The valuation of the company jumped to $2 billion.

The affected companies are planning to fight the court’s decision. “We have been penalized for faults the court has found in the government process,” Uninor officials said in a statement. A statement from SSTL noted that “being a law-abiding organization, [Sistema] reserves the right to protect its interests by using all available judicial remedies.” Etisalat, too, has been talking about its “right to a review of the Supreme Court’s decision”.

The telecom trio is moving into top gear to lobby for its cause and influence public opinion. Some media outlets have noted that the decision could create significant implications for India as a whole. “[The Supreme Court ruling] is likely to impact around 10,000 jobs in the telecom sector,” The Times of India reported. Adds The Economic Times: “The Supreme Court ruling on the 2G scam [is] unfair and a setback to India’s image.”

According to newsmagazine India Today, the Norwegian government has stepped in to bail out Telenor, noting that the country “is likely to invoke clauses from the India-Norway Bilateral Investment Treaty (BIT) to protect Telenor’s investments in India.” Telenor officials said the firm has invested nearly $3 billion in equity and corporate guarantees for the telecom joint venture. Sistema-Shyam says its outlay so far has been $2.5 billion.

Media reports also claim that the ruling will impact foreign direct investment in India. But there are two sides to that coin: When the recent Supreme Court verdict in the Vodafone tax case went in favor of the U.K.-based telecom major, the decision was hailed by some in the West as a triumph for the rule of law in India. The same Supreme Court has now struck a blow against corruption, but that ruling is being held up as potentially unfriendly to foreign investors.

Following the Supreme Court’s decision, the government has asked the Telecom Regulatory Authority of India (TRAI) to make its recommendations on the license issue. Though it has four months to do this, TRAI has indicated that it prefers the auction route. Based on amounts received for the 3G auction, back-of-the-envelope calculations show that the license — essentially the spectrum — will have a base price of $2 billion. (There are some procedural complications here as the country may be moving to a regime in which the license is de-linked from the spectrum allocation. The license will have a fixed fee, while the spectrum will be auctioned.)

The companies that have been stripped off their licenses by the Supreme Court can participate in this action. But those firms will probably have to pay $2 billion-plus instead of the $350 million they spent the first time, a prospect that many will likely find unattractive.