UPDATE: India Court Scraps 2G Telecom Licenses Given Post Jan 2008

NEW DELHI (Dow Jones)--India's Supreme Court Thursday cancelled all mobile-telecom-service licenses issued without auction after January 2008, raising uncertainty over billions of dollars that companies like NTT DoCoMo Inc. (9437.TO) and Telenor ASA (TEL.OS) have invested in the South Asian nation.

The ruling, which comes on complaints of corruption in the license allotment, raises concerns about the foreign investment climate in Asia's third-largest economy.

Japan's NTT DoCoMo, Norwegian company Telenor as well as Russia's Sistema JFC (AFKS.RS) and Emirates Telecommunications Corp. (ETISALAT.AD) of the United Arab Emirates had bought major stakes in companies that got licenses in 2008 as India presented a major growth market to global telecom operators.

The ruling could also affect the investments of local groups like the Tatas and Unitech Ltd. (507878.BY).

The Supreme Court scrapped 122 licenses issued to nine companies across India's 22 telecom services areas--each service area requires a separate license--but said the affected companies can continue operations until the government finalizes new rules for allotting licenses and bandwidth.

The cancelled licenses include 15 of Etisalat DB Telecom Pvt. Ltd., majority owned by Emirates Telecommunications; 22 of Telenor's unit Unitech Wireless Ltd.; 21 of Sistema's unit Sistema Shyam Teleservices Ltd. and three given to Tata Teleservices Ltd., in which NTT DoCoMo holds 26%.

It also cancelled licenses in 13 services areas for Idea Cellular Ltd. (532822.BY), 21 each for Loop Telecom Pvt. Ltd. and Videocon Telecommunications Pvt. Ltd. and all the six licenses given to S Tel Pvt. Ltd.

The court fined Tata Teleservices, Etisalat DB, Unitech Wireless, Sistema Shyam and S Tel INR50 million (about $1 million) per service area, and Loop INR5 million for each of its licenses.

In separate statements, Telenor and Sistema Shyam said they will consider all necessary actions to protect their investments, while NTT DoCoMo said it couldn't comment on a business decision that Tata Teleservices will take post the court order. Other companies couldn't be reached for comment.

Under law, the companies can file for a review of the order.

"The cancellation of the telecom licenses issued in 2008 will impact FDI [foreign direct investment] because foreign investors seek certainty in these types of matters," said Akil Hirani, managing partner of Majmudar & Co, which advises international companies on investments in India and cross-border mergers. "However, on the flip side, the message that the Supreme Court has sent out is that corruption will be dealt with strictly."

The order comes even as a special court set up by the Supreme Court is trying a former minister and several others including former government officials and corporate executives over charges of corruption in the allotment of the licenses that a federal probe agency says led to a potential $7 billion revenue loss to the government.

The agency had charged Etisalat DB, Unitech Wireless and Loop Telecom and their top executives in the case. They have denied any wrongdoing.

Thursday's order by a Supreme Court bench comprising Justices G.S. Singhvi and Asok Kumar Ganguly came on a bunch of 27 petitions, including some filed by advocate Prashant Bhushan and opposition politician Subramanian Swamy.

The telecom case has been a major embarrassment for Prime Minister Manmohan Singh's administration, which is facing flak over large-scale corruption and, of late, indecision on policy issues--in late December, the government had to go back on its plan to open up the multi-brand retail segment to foreign investment due to political opposition.

But the court ruling, which also directed auctioning of all telecom licenses and bandwidth in future, could bring a financial windfall for the government as it could auction the bandwidth currently with the cancelled licenses.

India had raised $22 billion through an auction of bandwidth for third-generation and broadband internet services in 2010.

However, it isn't immediately clear if the government would have to refund the fees of companies whose licenses have been cancelled.

While the ruling is a body blow for the new telecom players, it could benefit existing players such as Bharti Airtel Ltd. and Vodafone India Ltd. A lower number of operators could ease the competitive intensity in India's telecom industry, and see some call tariffs being raised.

The court said the telecom regulator has to frame new recommendations for license and bandwidth allocation in a month's time, and that the government needs to decide on the proposals in four months.

-By R Jai Krishna and Romit Guha, Dow Jones Newswires; +91-9967586928; romit.guha@dowjones.com

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