The Supreme Court on Thursday ordered the cancellation of all the 122 unified access service licences issued in January 2008 by former telecom minister A Raja. It also directed the Telecom Regulatory Authority of India (Trai) to make fresh recommendations for the telecom spectrum auction route in future, within four months.

The eight companies holding the licences together invested Rs 35,000-40,000 crore, of which two-thirds was put in by two telcos, Uninor and Sistema. However, with their pan-India market share of about 7.9 per cent (71 million subscribers), their customers are not expected to face any trouble in shifting to competing players, thanks to the option of mobile number portability. Even here, the bulk of the subscribers (over 51 million) are with the two new players. Total subscribers in the market stand at 894 million.

The companies whose licences have been scrapped, apart from Uninor (a joint venture between Norways Telenor and Unitech Group), and Sistema Shyam (it offers services under the MTS brand name through a JV between Russias Sistema and Shyam Telecom) include S Tel, Videocon, Idea Cellular, Tata Teleservices, Loop Telecom, Etisalat DB (a JV between the UAEs Etisalat and Swan Telecom).(Click here for table)
Detailing the future process, the Supreme Court said, Within two months, Trai shall make fresh recommendations for grant of licence and allocation of spectrum in 2G band in 22 service areas by auction, as was done for allocation of spectrum in 3G band. The Central government shall consider the recommendations of Trai and take an appropriate decision within the next one month and fresh licences be granted by auction.

The court also ordered Tata Teleservices, Unitech Wireless Group and Etisalat DB Telecom to pay Rs 5 crore as fine as they benefited by a wholly arbitrary and unconstitutional action taken by the DoT for the grant of UAS (unified access service) licences and allocation of spectrum in 2G band and who off-loaded their stakes for many thousand crore in the name of fresh infusion of equity or transfer of equity.

Loop Telecom Ltd, S Tel Ltd, Allianz Infratech Ltd and Sistema Shyam Teleservices Ltd shall pay Rs 50 lakh each. The orders were passed by a bench of Justice G S Singhvi and Justice A K Ganguly in public interest petitions moved by the Centre for PIL and Janata Party leader Subramanian Swamy. A special court was set up during the hearing of these petitions last year.

Raja, during whose term these licenses were issued, is already under judicial custody for a year now for his alleged role in 2G spectrum allocation irregularities. Responding to the order, communications and IT minister Kapil Sibal said the government accepted the verdict, and it would await Trai recommendations and proceed in accordance with the court directions. He said the order had provided clarity and the future road map became known. "Henceforth, spectrum will be auctioned the investors will also be clear now on what they will get. Companies can seek reprieve from the court if they wish," he said.

Trai Chairman J S Sarma said, The Supreme Court judgment will be implemented. Customers will not be impacted from the cancellation of licences, as around 95 per cent market share is of those who got licences before January 2008. Subscribers have the option to port out through MNP. We will instruct operators to inform their subscribers and come out with an advertisement."

The stock market reacted, with shares of incumbent Bharti Airtel going up 6.88 per cent to close at Rs 385.95. The company did not face any cancellations. However, the shares of Videocon Industries were down 0.92 per cent at Rs 171.95 while Unitech Ltd fell by 7.04 per cent to Rs 25.10. But, despite many of its licences getting cancelled, Idea Cellular went up 2.68 per cent and closed at Rs 95.85. That, market experts said, was because only four per cent of its revenues came from the seven cancelled service areas that were operational.

While publicly most of the operators whose licences have been cancelled have raised serious concerns, privately many of them say the judgment will remove the cloud over their operations once they bid and win spectrum through the auction process.

The cancellation of licences will release 470 MHz of 2G spectrum across the country more than half of what has already been given to the operators.

Operators say demand for 2G spectrum, unlike the mad rush for 3G spectrum, will be muted. That is because the telecom business is going through a serious financial crunch and telcos dont have that kind of money to splurge. Also, not more than two-three of the eight new players are still serious about their business in India. The rest, like Loop Telecom for instance, have already expressed intent to surrender licence. The auction price will crucially be determined by the way Trai formulates the rules will the entire spectrum being released be auctioned in one go, or only a part of it, what the base price will be and of course the number of players who would want to bid.

For incumbent players, the decision is a bonanza. For one, it substantially reduces the number of competitors and makes raising tariffs easier. Two, if the auction of 2G spectrum is muted, the price would be what they would have had to fork out as market value of their spectrum when their licences would come up for renewal in 2012.

Telenor in a statement said, "This pertains to actions that happened much before we entered India. When we have not caused any of the faults found by the courts, it is obvious to everyone that our investment must not be jeopardised. We are reviewing the order and will consider necessary actions 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. Sistema Shyam also said that being a law-abiding organisation, it reserved the right to protect its interests by using all available judicial remedies.

Idea Cellular said it had unnecessarily been caught in the situation just because the licences were granted in January 2008, 18 months from the date of application. It is unfortunate that a serious incumbent operator like Idea Cellular is being made to suffer we will study in detail the above Supreme Court judgment and explore all possibilities to protect our investment, Idea said.

Etisalat also said it would work closely with EDBs management and legal counsel to understand the judgment, its ramifications on the operations of the company in India, particularly its customers and employees as well as its right to a review of the decision.

Experts say the judgment could adversely impact FDI flows. Ernst and Young analyst Prashant Singhal said, Cancellation of the 2G license could cost India Inc over $8-10 billion annually, which is currently in circulation by 122 such licences. Auctions may not see much excitement. It will generate negative market sentiment, waning investors confidence. That will have a significant impact on the FDI inflow across sectors." Others say it is a positive move. Gartner analyst Kamlesh Bhatia said, This will have short-term repercussions for the sector. But, in the longer run, it will bring more transparency and accountability. There was a dire need for policy formulation, which will help the sector grow.

For telecom equipment operators, Chinese companies have been the favourites for new operators because of their aggressive pricing. A Chinese equipment manufacturer said, The new operators are about 15-20 per cent of our business. Even here, there are only one or two players who have made big orders. So, the impact on us will not be big. About 15 per cent of the business of Huawei comes from new players such as Uninor, Etisalat, Loop and Videocon. Tower companies are, however, divided on this. Most older tower companies, which have incumbent telcos as their key tenants, have not had an impact. But newer players depend for more than 50 per cent business on companies such as Uninor and Sistema Shyam, which are bound to have an impact. Uninor was the main client of tower firm, Viom Networks.