Indian telecom scam: how, why and what not

India's government has been jolted by controversy over licences and radio airwaves that a state auditor says were given out too cheaply, depriving the government of up to $39 billion in revenues.

The telecoms minister was forced to resign and the prime minister has been asked to explain himself to the Supreme Court.

Opposition parties want a full parliamentary probe and have blocked proceedings until the government relents.   

WHERE WAS THE ALLEGED SCAM?

In 2008, India issued 122 new telecoms licences and the  second-generation radio spectrum bundled with it to several  Indian companies that had little or no experience in the  telecoms sector, and at a price set in 2001.

The state auditor said the allocation process did not  reflect the correct value of radio spectrum as there was no  auction and the entire process was flawed, benefiting selected  companies. 

The auditor said the telecoms ministry did not do the requisite due diligence, granting 85 out of the 122 licences to ineligible applicants.

The auditor also said the ministry did not follow its own  guidelines, changed the cut-off date for applications, which  gave "unfair advantage" to some companies over others. It said  the entire process "lacked transparency and was undertaken in  an arbitrary, unfair and inequitable manner".

The auditor said several Indian companies deliberately  suppressed facts, disclosed incomplete information, submitted  fictitious documents and used fraudulent means to get licences  and thereby access to spectrum.  

WILL COMPANIES LOSE LICENCES?    

The auditor said units of Unitech Ltd , which  received licences in 2008 and now operates services in a joint  venture with Norway's Telenor , had not fulfilled  eligibility conditions including required share capital.

Other firms which were ineligible according to the auditor  include Loop Telecom, Videocon Telecommunications and S Tel Ltd.

The auditor said Swan Telecom, which has since been partly  acquired by the UAE's Etisalat , was given licences  even though a unit of No. 2 telecoms firm Reliance  Communications held over 10 percent of equity, a  violation of rules.

It is still to early to know whether any licences would be  cancelled, but the pressure would be strong not to do so  because operators have invested in networks and have  subscribers.

Any big crackdown could send a wrong signal to investors.

But the government could ask operators to compensate for  the potential revenue loss as highlighted by the auditor and  may impose fines for not meeting separate rollout obligations.

The auditor also named nine other operators, including  market leaders Bharti Airtel , Reliance Comm and  Vodafone , who were allotted spectrum beyond the  contracted limit without paying any upfront charges, costing  the government a potential $8 billion.

WHAT DOES IT MEAN FOR TELECOMS MARKET?

If the government imposes heavy fines on new licensees singled out in the auditor's report, it would weaken them further. The newer operators are yet to make profit as they offer heavy discounts to grab subscribers, and any financial penalty would be a blow for them, forcing some to leave the market. 

Some operators may also freeze network expansion until clarity emerges on the regulatory front, meaning slower growth for network equipment vendors and other service providers.

In case licences are cancelled, it would lead to natural consolidation in the crowded 15-player market.  

WILL THIS AFFECT FDI INTO INDIA?

India's mobile phone market is the world's fastest-growing  and its nearly 700 million users trail only China, making it a  must-invest market for any major global operator. But regulatory uncertainties have been a concern for some and could make foreign companies start to look more carefully where to invest.

Any penalty or adverse regulatory action could also weigh on companies such as Telenor and etisalat, which were not part of their respective Indian ventures when the licences were distributed. Also, the controversy would make future investors  more careful before they decide to invest in the market.

Vodafone, the single-biggest foreign investor in India, is fighting a $2.5 billion tax bill over its acquisition of a mobile firm in the country and has signalled frustration with Indian regulations.

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