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Indian Supreme Court’s Telecom Verdict Damages National Interests

Decision goes beyond court’s purpose, punishes wrong people, hurts international image, and will raise prices for Indian consumers

Op/Ed Commentary: Chris Devonshire-Ellis

Feb. 6 – One day they’ll make a film about this case – corrupt bidding, jailed ministers, a vindictive judge and a cast of 80 million telecom subscribers. India’s Supreme Court on Thursday axed all 122 2G telecom licenses and forced a new bidding process on a government-approved tender that saw both domestic and international telecom investors spend billions on rolling out 2G telecom networks on a national scale serving some 60 million users. Those networks are now to be dismantled within four months.

As anyone familiar with conducting business in emerging markets knows, often it’s a case of two steps forward and one step back. It’s a frustrating process, but one gets there in the end. Yet in this case, the Supreme Court has taken upon itself to not just challenge the government, but to also mete out punishments in the form of fines to operators who thought they were acting in good faith; placing itself in the position of authority as determining market prices and effectively ending India’s benefit of having the lowest mobile phone user costs in the world.

That the bidding process for obtaining the 2G licenses was flawed is beyond doubt. A weak and poorly thought-out bid process saw licenses snapped up on a first-come first-serve basis for relatively small amounts, then upon issuance immediately traded as a commodity to other buyers. The minister responsible for that is now in jail on charges of corruption, and ongoing probes continue into further wrongdoing. I don’t think anyone has any problem with this.

However, a politically motivated challenge to the validity of the licenses as issued by the government has been misplaced and remains a vindictive piece of Indian realpolitik at its worst.

With nine operators taking on the 122 regional licenses, including joint venture partners from Norway, Russia, Dubai and Bahrain, billions have been raised and spent on equipment and the roll out of services. Some 60 million users are engaged in these licenses, whose infrastructure is still under development to cover India nationally. The Supreme Court has given a three month window for operators to resubmit bids, and an additional month to take down their existing network (assuming they do not re-bid). All this has done is push the existing license holders to re-apply for licenses they thought they already had – yet at what will be a significantly increased tender price. In doing so, the Supreme Court has ended a major incentive for bringing millions of Indians into global and national connectivity – mobile fees will rise exponentially and many who would have been able to afford a mobile phone will now not be able to do so. At a stroke, this ruling perpetuates poverty.

It’s not just the Indian consumer who will feel the brunt of this decision. The telecom operators themselves are of course up in arms. Having obtained what appeared to be legally-issued telecom licenses from the Indian government, they have instead found their capital and development investments ruined. The court has effectively suggested that Indian government contracts and licenses are subject to judicial review and can be overturned. This is no way to attract or retain foreign investment. That appeals are likely is almost a given – and diplomatic rows are almost certain. Of each of the foreign-invested operators, all have some government stake of their own involved. Appeals are expected to be made in a number of ways, including the filing of a review petition to the Supreme Court, but also to the heavy duty United Nations Commission of International Trade Law, or the World Bank offshoot, the International Center for Settlement of International Disputes. The ruling itself calls into question India’s own bilateral investment promotion and protection agreements, which it holds with some 72 nations including each of those affected.

Also affected are suppliers – many of them Chinese, such as Huawei and ZTE who may now face defaults on payments from the 2G operators caught in this mess, whose bankers must surely now be reflecting on their support. Both companies have provided over US$1 billion in equipment sales to the operators concerned; negotiations over contract terms and payments will almost certainly be underway as you read this.

And the Supreme Court judge who made the ruling? Justice Ganguly retired the same day, effectively dumping a pile of do-do on the Indian government’s desk while conveniently stepping away from the fray hours later. If that doesn’t smack of political vindictiveness towards the government, and cowardice in dealing with the aftermath, I don’t know what does.

Nevertheless, some good will come out of the matter. India’s government bid processes and auction procedures will now be far more transparent, and its national assets better assessed. In terms of the fallout for India’s reputation as a safe haven for foreign investment, in the communications and bidding process this will take a battering, but it will recover.

I am reminded of China’s GITIC scandal in the mid-1990s, in which the Guangdong International Trust & Investment Corporation, a state-owned entity, obtained billions of corporate and institutional foreign investment dollars, only to become bankrupt. Upon appealing to Beijing for redress, those investors were rebuffed on an administrative technicality. The hue and cry that resulted changed China’s policies towards the protection of foreign investors and acted as a wake-up call to many to properly assess risk. But after a while, the furor died down and China became a safer destination for foreign investment as a result. I suspect the same will happen in India, and that this dreadfully executed and senseless decision will spur both the Indian government and foreign investors to place the predictability of investment onto a better platform. If that is the result, then this unfortunate judgment may just have done India a favor in the longer term.

Chris Devonshire-Ellis is the principal and founding partner of Dezan Shira & Associates. The practice has 12 China offices and 5 in India. He can be contacted at chris@dezshira.com, while the firm’s web site is located at www.dezshira.com.

Related Reading

India’s Supreme Court Sets Corruption Bill Deadline

How Corruption Hurts Investors in China and India

India and China Top ‘Regulatory Overkill’ List

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6 Responses to Indian Supreme Court’s Telecom Verdict Damages National Interests

  1. Raj says:

    The rule of law cannot be subservient to anyone, including the investors. What has caused the problem to investors is the crony capitalism that had been followed in India. The investors knew this but followed it as they thought that it was the norm in India. This ruling has dealt the first blow to that.

  2. Chris Devonshire-Ellis says:

    How can you be so sure? The ruling seemed to take exception to the low price of the teniders – but then this was reflected in the consumer call charges – also low. The Supreme Court’s responsibility is not to fix market rates. They should not have interfered with that.

    As for the first come first served system, and permitting the selling on of franchises, obviously that is a result of extremely poor tender systems. But apart from levy fines what did the Supreme Court actually do about that single aspect? I’m not saying that system is good, obviously its open to abuse but I think the Court went about its responsibilities in entirely the wrong way – for example what about the billions invested in good faith in those networks that now have to be dismantled? – Chris

  3. Varma says:

    Chris, Both the govt and TRAI were just doing nothing about this situation. We can argue about the details and process, but the supreme court actually did something. This will help clean up the mess. I don’t think any national interests are damaged. What alternative would you suggest given the paralysis in the current govt?

  4. Chris Devonshire-Ellis says:

    Yes thanks, however the main point I’m making seems to be getting lost – that in ordering a rebid for the 2G licenses with a minimum cap; the Supreme Court is effectively getting itself involved in a consumer pricing / strategy issue which should not be its function. – Chris

  5. Subodh Saxena says:

    Chris, on the contrary Supreme Court verdict strengthens India’s national interests. Your presumtion that low spectrum prices resulted in low consumer prices is flawed. The ‘licence + spectrum’ which was awarded to Indian companies was sold at very high premium to foreign partners like Telenor, Etisalat etc. DOT awarded pan India license was for $ 400 million. The market price for this license was about $ 2 billion. Telenor or Etisalat paid accordingly to their Indian partners. Consumer did not benefit by low $ 400 million price and Government lost $ 1.6 billion $ for each pan India license. Foreign partners had full knowledge of this while buying stakes. Supreme Court verdict has proved that India is not a banana republic.

  6. satya says:

    “ordering a rebid for the 2G licenses” must not be a problem but court setting a min cap is not right TRAI or Govt must do that. I totally see your point, but do you see that the capital is lost in sub-licensing of the spectrum from corrupt buyers to actual providers. This capital must have been gained by govt and used in public interest. But Govt representatives have put their interests before public interest. I do agree its a blow to invested providers but Fixing/changing system must start at some point and it would hurt some one or the other.

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