A dark cloud of uncertainty hung over 15 telecom companies and their foreign partners after the Supreme Court on Thursday cancelled 122 telecom licences in the 2G space issued on or after January 10, 2008, that is, by the then minister A Raja, on a first-come-first-served basis.

As these licences get cancelled in four months from now and auctioned (as directed by the court), it is quite likely that the telecom industry will see a shakeout, at least among the smaller players.

It also certain that if some of them decide to participate in the auction, the bid prices would be much higher than what they had paid under the Raja dispensation. Higher bids, in turn, could lead to higher tariffs, which in any case have started to rise.

Both domestic and foreign investor confidence may hit a low; never mind that telecom minister Kapil Sibal believes otherwise.

Most beneficiaries of the Raja formula of doling out licences were stunned by the verdict. The fines slapped on them — heavy, for some companies — also hurt badly. A few of them that made it bold to come out with a public response said they felt victimised. They held that they did nothing wrong; yet their licences were cancelled.

Others licensees went into silent mode but a few of them privately said they might file a review petition for relief in payment of fine and also to save their licenses.

The court slapped a hefty fine of Rs 5 crore each on Unitech Wireless, Swan Telecom and Tata Telecom and Rs 50 lakh each on Loop, S-Tel, Allianz and Sistema Shyam.

In several cases, the ownership or substantial shareholding changed hands immediately after the licences were allotted. The original promoters made huge windfall gains, sparking the first murmurs about bribery in licence allotments.

The big question now is: what happens to the investments already made, the infrastructure already set up and the value of the business in case a operator fails to get licence for the same circle.

Operators, Indian and foreign, had paid nearly $2 billion as licence fees, bank guarantees and other requirements for the 2G spectrum. They spent another $4 billion to build infrastructure and roll out services. The court verdict now puts a question mark over this investment. No one knows how the money invested can be recovered, if at all.

Of the 122 licences that now stand cancelled, Uninor was alloted 22 (pan-India), Loop 21, Sistema-Shyam 21, Etisalat – DB 15, S- Tel six, Videocon 21, Idea nine and Tatas three.

Market watchers say the verdict will make foreign companies think twice before entering India. But it also gives several telecom companies a chance to exit the sector. (Minister Sibal said the verdict made the exit policy draft of the Telecom Regulatory Authority of India irrelevant.)

Some of the companies may take part in the auctions for the same circles they hold now. But they may have to put in huge bids. If they don’t put winning bids, they go out of the telecom business automatically, exit policy or no exit policy.

Most telecom firms Financial Chronicle contacted kept their own counsel, saying that they would want to first study the judgment and consult their lawyers. Only then would they decide on future action. But all asserted their right to guard their investments and make sure that they got back their investments

The Indian telecom market is not exactly in the pink of health now. It will be interesting to watch how many of the existing companies or would-be entrants will be ready to pay huge prices to capture vacated spectrum in the auctions.

“The auction process could lead to higher outflows from cash trapped operators since spectrum prices could be higher now and adversely impact consumers,” said Hemant Joshi, partner in the consultancy Deloitte Haskins and Sells.

Depending on what Trai and the government decide, “it could provide a good exit option for operators who have not rolled out and are not willing to roll out,” he said. It could indirectly lead to a consolidation in the market and lead to healthy competition among the remaining players, he added.

Benoy C S, director of ICT practice at Frost & Sullivan, agreed that the verdict would bring healthy competition and better services, “but at a cost to the consumer”. “In short term we may see some increase in tariffs. As in the case of 3G licenses, the auction route may jack up the initial capital investment that, in turn, may lead to increased costs of telecom services,” he added.

Kiran Karnik, chairman of CII’s national committee on telecom and broadband, did not see gloom and doom. “Less than 5 per cent of India’s 900 million subscribers of mobile services will be affected by the judgment. But even this is a significant number,” he said.

Idea Cellular, an Aditya Birla group company, said that it had unnecessarily been trapped into the controversy. “(It is) just because the licenses were granted in January 2008, which was as late as 18 months after the date of application,” Idea said.

Idea’s 13 licenses will be cancelled following the verdict. The company has rolled out services in only seven of its licensed areas. Two of its other licences and four of the erstwhile Spice Communications which merged with Idea are non-operational. These licenses, as per the government’s first- come- first- served’ policy, should have been granted to Idea much before January 2008. This seemed to have been recognised by the Supreme Court as they it did not fine the company, Idea said.

Uninor, a joint venture of real estate giant Unitech and Norway’s Telenor, said it was unfairly treated in the verdict. Telenor invested more than Rs 6,100 crore in equity and gave corporate guarantees for Rs 8,000 crore.

“We are reviewing the order and will consider necessary action to safeguard our investment. We urge the government to ensure that a foreign investor that had nothing to do with these processes is not harmed. We look to the government to arrive at a fair outcome,” the company said.

Naveen Mishra, telecom analyst at CyberMedia Research, did not share minister Sibal’s optimism that clarity now would dispel “negativism’ among foreign investors. Mishra in fact thought there would be greater policy confusion. “Clarity in the formulation of new guidelines, statesmanship in vision, character in execution are essential to regain trust,” he said.

The UAE Etisalat, which took over Swan Telecom, said the court decision related to events that occurred in January 2008, well before December 2008 when Etisalat invested in Swan. “Etisalat has no knowledge of what occurred in the licence application process for Swan, far less did it have any involvement. 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,” it said in a statement.

DB Realty, another real estate company, said it had no direct or indirect shareholding in Etisalat DB, which will now lose its licences. The promoters of DB Realty in their individual capacity invested in Etisalat DB. The two entities are separate and have nothing to do with each other. “This… cancellation of the 122 licences will have no bearing or impact on the financials of DB Realty,” the company said.

Loop Telecom said it would comment only after going through the judgment. Tata Teleservices kept mum. Loop has been fined Rs 50 lakh and Tata Teleservices Rs 5 crore.

RCom and Aircel said that their licences did not fall in the category outlawed by the court and, therefore, they were not impacted by the verdict.

There could be a fallout on some It companies. Wipro, for instance, has a outsourcing contract with Uninor. Just a week ago Telenor was on record that it wanted to expand this contract. Telecom gave 15.4 per of Wipro’s gross IT services revenue of $1.5 billion in the third quarter. A Wipro spokesperson said the company needed more time to study the judgment and assess the implication.

Tata Teleservices has employed TCS as the outsourcing contractor. TCS earned 10 per cent of its third quarter revenues of $ 2.6 billion from telecom.

Infosys, however, has little business with Indian telecom companies. All its telecom customers are in US. Infosys executive co-chairman S Gopalakrishnan said, “Indian IT companies would not be affected much as just about one per cent of their revenue comes from India. They are global players and are diversified.”

(with inputs from Shiv Kumar in Bangalore, Shyamala Seetharaman in Chennai, Vikas Srivastav in Mumbai)