New Delhi: The Supreme Court ordered the scrapping of 122 telecom licences issued to nine companies in 2008 in what’s become popularly known as the 2G scam—a major setback to a sunshine sector gone bad and a government just recovering from a year when it was pummelled by several controversies such as this.

The order, which came on the first anniversary of former telecom minister A. Raja’s arrest in connection with the same case, will affect nearly 66.6 million subscribers, roughly 5% of India’s mobile telephony subscribers, and banks that have a total exposure of around Rs 1 trillion to the telecom business, some of it in the form of loans to the affected telcos.

The order effectively sealed the fate of Raja, whose case is being heard in a special court, and criticized the Telecom Regulator Authority of India (Trai) for suggesting a policy that a minister was able to subvert, but provided a breather to home minister P. Chidambaram, who was finance minister at the time the licences were issued and whose inability to prevent the scam was one of the related issues before the court.

The worst affected was Unitech Wireless Ltd, which operates under the brand name Uninor, has around 36 million subscribers, and in which Norway’s Telenor Group holds the majority stake.

“We have been unfairly treated as we simply followed the government process we were asked to. We are shocked to see that Uninor is being penalized for faults the court has found in the government process,” the company said in a statement, pointing out that the issues before the court predate its entry into India and Unitech Wireless.

The bench comprising justices G.S. Singhvi and A.K. Ganguly (the latter in his final sitting) that had made scathing observations on the government and the companies throughout the 2G spectrum-related hearings from October 2010 to March 2011, brought public interest to the forefront of their jurisprudence regarding the allotment of natural resources. Their ruling regarding the use of auctions for allotment of such resources could have a bearing on other resource-intensive businesses too, including mining and metals.

The UPA’s main opposition, the Bharatiya Janata Party (BJP), had similar ideas.

“Is it not a fact that Singh wrote a letter on 2 November 2007, to Raja raising issues related to fairness and transparency in spectrum allocation criteria and asked him to convey his stand before any further action?” BJP spokesperson Ravi Shankar Prasad was cited as saying by PTI.

The denouement

Trai has been instructed by the court to come out with fresh recommendations on the issue of licences and spectrum. Trai will also have to work out what to do with on-ground assets of some of the telcos.

Denying that the credibility of Trai was being questioned by the court, chairman J.S. Sarma said that it was only the 2007 recommendations that had been found to be flawed. He added that a little over 500 megahertz (MHz) of spectrum could become available for auction after the existing licences are scrapped.

Each licence comes with so-called start-up spectrum of at least 4.4MHz (depending on availability and usage, telcos then apply for and are given more). The court recommended the delinking of spectrum from licences, something the new telecom policy, which has been in the works for some time, reflects.

The telcos themselves have another four months, till the government figures out how to implement Trai’s recommendations. It is likely some of them could take legal recourse and seek damages from the government, although only Sistema Shyam TeleServices Ltd, or SSTL, (MTS) is speaking this language at the moment. “SSTL is still awaiting the full text of the judgement, hence it would be a little premature to offer any detailed comments. However, the company would like to state that being a law-abiding organization, it reserves the right to protect its interests by using all available judicial remedies,” the company said in a statement.

“It is unlikely that the firms heavily affected by this judgement will want to have anything to do with the sector after this judgement. Companies like Idea and Tata are not that badly affected, but operators like Uninor and MTS have almost lost everything and they will have to now acquire a licence and costs will rise significantly for them,” said Rajat Kathuria, a consultant at Indian Council for Research on International Economic Relations.

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Expert Rajat Kathuria talks about the Supreme Court judgment canceling telecom licenses and what it will mean for the industry

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Another expert said the court’s ruling was the best thing that could have happened to the business

“It is a good thing that this happened as there were serious irregularities. It’s good for everybody. The government may have taken a beating in terms of reputation, but the best way to handle this was to cancel the licences and refund the money. Now with the spectrum back in the government’s kitty, a true value can be found for it,” said Mahesh Uppal, a telecom regulatory expert and director of Com First (India) Pvt. Ltd.

Still, the ruling will add to the uncertainty surrounding the telecom sector, said a third expert.

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The Supreme Court’s decision to cancel all licenses issued after January 2008 could be a big blow to the telecom sector. Mint’s Nikhil Kanekal lays down the implications of the decision

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“Foreign investors are likely to adopt a cautious approach while taking investment decisions. The issues which arise from the verdict will, unless resolved quickly, create a lot of uncertainty, which could again have negative impact on foreign investment in India. It could indirectly lead to consolidation in the market and healthy competition. But the auction process could lead to higher outflow from cash-strapped operators since the spectrum price could be higher now,” said Hemant Joshi, partner at Deloitte Haskins and Sells.

In 2011, R-Com shares fell 49.46%, while Bharti and Tata Teleservices lost 3.83% and 37.1%, respectively. Idea shares rose 20.32%. In comparison, the Sensex lost 24.2%.

While some analysts expect the re-auctioning and consolidation to result in higher tariffs, Kathuria isn’t convinced.

“As far as call charges go, I don’t see any immediate impact as there is still substantial competition,” he said. “Even if a Bharti, Vodafone and Idea form a cartel and raise prices, Tata and Reliance Communications (R-Com) bring enough to the table to balance out things. There shouldn’t be much change in tariffs as an immediate impact of this judgement.”

As for Chidambaram, in a separate ruling, the Supreme Court gave the go-ahead to applications on the former finance minister pending before the special court hearing the 2G case. Judge O.P. Saini’s verdict on Subramanian Swamy’s deposition against Chidambaram is scheduled to be pronounced on Saturday. Saini is deciding whether or not to permit Swamy, a fellow petitioner in the case on which the Supreme Court ruled on Thursday, to continue to build his case against Chidambaram. While accepting the Central Bureau of Investigation (CBI) submission that the agency had investigated Chidambaram and not found anything, the court asked for a report card of sorts on the probe into the home minister’s alleged role in the scam. The Central Vigilance Commission, the government’s anti-corruption watchdog, was directed to submit a report to the apex court on CBI’s findings.

The Comptroller and Auditor General of India (CAG), the public auditor of the country, had estimated that the irregularities in issuing the 2G licences cost the treasury Rs 1.76 trillion. Prime Minister Singh, after initially maintaining that Raja had done no wrong, subsequently cited “coalition compulsions” for the delay in taking action against those responsible for the scam.

Thursday’s judgment, however, does not put a number on the potential loss caused to the government and citizenry.

What now?

Some of the companies that had their licences scrapped were also fined by the court. Unitech Wireless, Etisalat DB Telecom India Pvt. Ltd and Tata Teleservices Ltd were fined Rs 5 crore for selling equity in their companies to foreign entities, partly on the strength of the spectrum they acquired. Sistema Shyam, STel Ltd, Allianz Infratech (Pvt.) Ltd (subsequently acquired by Etisalat DB) and Loop Telecom Pvt. Ltd were fined Rs 50 lakh for benefiting from the “unconstitutional” and “arbitrary” exercise undertaken by the government.

Half the fine amount will go to the Prime Minister’s Relief Fund and the remainder to the Supreme Court Legal Services Committee for providing legal aid to indigent litigants, according to the court.

Interestingly, neither CAG nor CBI has clubbed Tata Teleservices—the promoters diluted their stake in the company in favour of NTT DoCoMo Inc.—along with Etisalat and Unitech Wireless, both of which sold fresh equity to foreign promoters.

Fresh equity flows into the company while the proceeds of a dilution in stake go to the promoters. A Tata Teleservices spokesperson said, responding to a query, that there was no question of the company coming under further scrutiny in light of the judgement. “All investigative agencies involved have looked for but not found anything,” he said.

Three other telcos claimed they were victims.

“When we have not caused any of the faults found by the courts, it is obvious to everyone that our investment must not be jeopardized. Telenor Group has already invested over Rs 6,100 crore in equity and over Rs 8,000 crore in corporate guarantees as a foreign investor that trusts a licence stamped by the government of India,” Telenor said in a statement. “We urge the government to ensure that a foreign investor that had nothing to do with these processes is not harmed.”

The UAE-based Emirates Telecommunications Corporation (Etisalat) said it “has no knowledge of what occurred in the licence application process for Swan” and wasn’t involved in it. “The licence applications were entirely conducted by the promoters and their associates, who subsequently marketed the Swan investment opportunity to Etisalat through a well-known international investment bank,” the company said in a statement.

“It was STel that highlighted the arbitrariness in allotting licences. We have followed all procedures and processes as laid out and we are also the only new operator to invest in 3G licences. Now, after today’s Supreme Court verdict, we feel like a victim caught in a riot,” said an STel spokesperson.

Loop, which has been seeking to exit the business, said in a statement that the court’s order “is broadly in line with its offer to the court on 9 March 2011”.

Idea Cellular Ltd said that it was unfair to club it with the other telcos because it had applied for the nine licences, now being scrapped, in 2006. “It is unfortunate that a serious incumbent operator like Idea Cellular is being made to suffer due to this cancellation of licences, despite being fully compliant at each stage of the licence allocation process,” the company added in a statement.

A spokesperson for Videocon declined to comment.

Raja’s case

The court’s ruling lists the ways in which Raja subverted the policy. He insisted on using the first-come-first-served principle to allot licences and also changed the cut-off date for applications at the eleventh hour.

The former minister’s conviction in the criminal trial seems inevitable in the wake of the apex court’s observations, despite justice Singhvi’s comment that the verdict should not prejudice any other parallel proceedings.

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With the Supreme Court scrapping more than 100 licenses issued during telecom minister A. Raja’s tenure, pressure is mounting on thegovernment to declare its stand on the issue

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The “arbitrary action of the minister, though it appears to be innocuous, was actually intended to benefit some of the real estate companies, who did not have any experience in dealing with telecom services,” said the ruling.

As if to pre-empt any criticism from the government on the judgement crossing into the realm of policy, the bench said it was a necessary intervention: “When it is clearly demonstrated before the court that the policy framed by the state or its agency/instrumentality and/or its implementation is contrary to public interest or is violative of the constitutional principles, it is the duty of the court to exercise its jurisdiction in larger public interest and reject the stock plea of the state that the scope of judicial review should not be exceeded beyond the recognized parameters.”

nikhil.k@livemint.com

PTI contributed to this story.

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