Revoked Indian Telecom Licenses Spur Legal Action

The Indian Supreme Court’s decision to revoke 122 licenses granted to eight telecommunications companies as part of a $40 billion scam allegedly perpetrated by the country’s former telecom minister is spurring a wave of legal and managerial reactions.

The cancellation of the licenses was a blow to the Indian government’s credibility. But the man who granted the licenses — former telecom minister Andimuthu Raja — is in jail facing charges of corruption. To challenge the court decision would be interpreted by the public as supporting the corrupt, which is politically unacceptable. A targeted reaction is more likely. Telecom secretary R. Chandrashekhar told journalists at an apex chamber meeting on February 29 that a decision would be taken in a couple of days. “We are not looking at challenging the cancellation of the licenses per se,” he said.

The companies affected by the license cancellations have already swung into action, however. On February 29, Tata Teleservices, which has had three of its licenses cancelled, moved the court. Idea Cellular, a Kumar Mangalam Birla company that had 13 of its licenses cancelled, had gone to court a few days earlier, seeking a clarification.

But the acrimonious action is really coming from the foreign companies that set up joint ventures with Indian firms that had obtained the licenses. Telenor of Norway, which had partnered with realty company Unitech for its telecom foray, has dumped its Indian partner. The Norwegian firm has approached the Company Law Board to prevent Unitech from obstructing its bid to form a new company. It has also sought unspecified damages from Unitech. The Norwegian company plans to bid for licenses through the new company. The Supreme Court has recommended that the 122 licenses revoked be auctioned off. This time, foreign companies may be allowed to bid on their own. The joint venture — Uninor — had 22 licenses.

Russian conglomerate Sistema, which had partnered with Shyam Teleservices to set up Shyam Sistema, has said that it will take the government of India to the arbitration table. The company says that the government failed to issue “proper licenses.” Sistema has evoked the provisions of the bilateral investment treaty between Russia and India.

Etisalat of the United Arab Emirates has started legal proceedings against the promoters of Swan Telecom, with whom it had joined hands to set up Etisalat DB. (The DB part of the name comes from DB Realty, a company belonging to the same owners as Swan.) The charges made by Etisalat are “fraud and misrepresentation.” According to an Etisalat statement: “Etisalat is facing very significant financial losses on its investment despite having no involvement in the 2G license application or award process…. As a leading international telecom company with a high reputation for integrity and ethical behavior, [Etisalat] has taken this action to protect its interests and those of its shareholders.”

Elsewhere, Anil Ambani’s Reliance Infratel has taken Etisalat DB and STel to the telecom regulator — the Telecom Disputes Settlement & Appellate Tribunal — for the recovery of dues. STel, which lost six licenses, has apparently decided to exit the Indian market. S. Sivasankaran, chairman of the Siva Group and a major investor in STel, has written to the Prime Minister asking that the $350 million paid as license fees be returned. Another investor in STel — Bahrain Telecom — has already sold its stake. Etisalat has meanwhile announced that it will pull out; it has written off most of its investment.

So could this telecom tangle provoke a more general pullout and a slowdown in foreign direct investment (FDI) in India? “There is likely to be a short-term ebb due to caution on the part of foreign investors, greater due diligence on local partners and more legal protection in contracts that will be time consuming,” says Bundeep Singh Rangar, CEO of IndusView, a cross-border M&A consultancy. “In the mid-to-long term, however, there will be an increase in FDI as the Supreme Court ruling signifies a cleaning up exercise that will lead to greater accountability and transparency for FDI and related processes such as auctions and applications for licenses and investments. That will give greater comfort to foreign investors about the soundness and protection of their investments in India.”

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