Supreme Court Ruling on 2G Scam — Initial Chaos Will Lead to Order

On February 2, 2012, the Supreme Court delivered a judgment that shook India's telecom sector to its foundations: all 122 licenses granted in 2008 for 2G mobile services were cancelled, with a bench of Justices G. S. Singhvi and A. K. Ganguly holding that they had been issued in a manner that was "wholly arbitrary and unconstitutional."

The licenses had been handed out by then-telecom minister A. Raja on a first-come-first-served basis at 2001 prices — an allocation method the Comptroller and Auditor General had already estimated cost the exchequer tens of billions of dollars. The court found that 85 of the 122 licensees didn't even meet the eligibility criteria. It ordered that the spectrum be re-auctioned within four months, imposed penalties of ₹5 crore each on Unitech Wireless, Swan Telecom, and Tata Teleservices (₹50 lakh on Loop, S-Tel, Allianz Infratech, and Sistema Shyam), and asked the trial court to rule within two weeks on whether Home Minister P. Chidambaram, the finance minister in 2008, should also face charges.

The immediate fallout was chaos. Foreign investors — Norway's Telenor (partner in Uninor), Russia's Sistema, the UAE's Etisalat — suddenly faced the prospect of losing everything. Billions of dollars in market value evaporated overnight. Industry lobbyists warned that the auctions would drive up spectrum prices and, ultimately, call rates for consumers.

But look at it from the other end. Swan Telecom had paid roughly $350 million for a license and then offloaded 45% equity to Etisalat for over $700 million — valuing the company, which was essentially nothing more than the license, at $1.55 billion. Unitech did the same with Telenor: a $1.2 billion investment that valued the company at $2 billion. When a public asset flips in value like that in months, the price charged for it was plainly wrong.

The ruling forced a principle into India's regulatory bloodstream: natural resources must be allocated by auction, transparently, to the highest bidder. It was painful for the operators who lost their licenses, and uncomfortable for a government whose minister's allocations were declared unconstitutional. But the chaos was the price of replacing a system where spectrum went to the well-connected with one where it goes to the public purse.

Sources

• Revoked Licenses Are the Latest Fallout from India's 2G Telecom Scam — Knowledge at Wharton
• 2G spectrum scam: A timeline of events — Mint