Investors wary of India telecom

Foreign investors have become wary of entering the world's second-largest telecommunications market in India after a major corruption scandal.

It relates to the undervaluation of electromagnetic spectrum, resulting in top government officials being jailed for corruption.

Even as Delhi seeks to recast its telecoms policies, multinational corporations are distancing themselves from their local partners whose licences may get cancelled on orders from the Supreme Court of India.

"We are scared as hell and can do nothing but wait and watch," a representative of a major international telecoms group told the BBC on condition of anonymity.

On Monday, exactly a hundred days after taking over from his predecessor Andimuthu Raja, India's new federal communications minister Kapil Sibal announced the contours of a new policy.

Industry shake-up

In December 2004 the United Progressive Alliance coalition government led by the Congress party and headed by Prime Minister Manmohan Singh, allowed foreign investors to hold up to 74% in Indian telecom firms (up from 26%).

Total cumulative inflows of foreign direct investment (FDI) into India's telecom sector have come close to $10bn (£6bn) over the last decade.

According to India's Department of Telecommunications, two-thirds of that came from the tax haven of Mauritius, followed by Singapore (14%), Russia (4%), Japan (3%) and the US (2.4%).

In early April, in an unprecedented development, leading corporate captains were summoned before a parliamentary committee investigating the telecoms spectrum graft scandal that has shaken the country's political and business establishment.

The scandal may have resulted in notional losses to the exchequer as much as $39bn in terms of unearned revenue, according to a November report prepared by an official watchdog of public finances, the Comptroller and Auditor General (CAG) of India.

This makes it the biggest scandal of its kind not just in India, but perhaps anywhere in the world.

The corruption scandal has lead to widespread protests and anger against the government

On 2 April, the country Central Bureau of Investigation (CBI) charged Mr Raja and his associates with conspiring to defraud the government.

The scandal is among a number of cases of corruption that have dented second-term Prime Minister Singh's public image and seriously damaged the credibility of the government.

It has also contributed to a lowering of stock-market indices with Mumbai's benchmark sensitive index being among the worst performers in the world in the first quarter of 2011.

Besides Mr Raja and his associates, police have charged executives of private telecom firms that have Telenor of Norway and Etisalat of the United Arab Emirates as joint venture partners.

The accused have denied the charges, and representatives of the foreign corporations have argued that the alleged events occurred before they entered India.

Norwegian Prime Minister Jens Stoltenberg recently wrote to Mr Singh seeking "fair treatment" for Telenor.

The Supreme Court now has to consider a plea to cancel licences that were issued to firms who were not eligible to receive them.

Such a move has the potential to jeopardise investments worth billions of dollars.

Spectrum shortage

At present, there are more than 700 million mobile phone users - more than double the number five years ago - and user charges are among the lowest in the world.

In fact, in large metropolitan areas like Delhi and Madras (Chennai), the capital of Tamil Nadu, there are more phones (land-lines and cellular mobile phones) than people.

The sharp rise in the number of mobile phone users in India led to an acute shortage of spectrum - airwaves which are allotted by public authorities the world over.

As demand for spectrum went up the real price of spectrum shot up dramatically.

The public auction of third-generation spectrum in the middle of 2010 clearly indicated that the prices at which second-generation spectrum had earlier been allotted in 2008 were at least one-tenth the prevailing market price.

Future investment

Allegations were levelled against the former minister that he favoured a particular group of companies who had no prior experience in telecoms (including real estate firms).

Some of these firms, in turn, then expanded their equity share capital by roping in new partners, including the multinational corporations from Norway and the UAE, besides Japan's DoCoMo, who paid large sums of money to acquire shares in their Indian associates.

While the growth of the telecom sector in India is often attributed to the positive impact of deregulation and the government giving up its monopoly in 1994, the other side of the coin is the crony capitalism.

This is shown in the way in which the government has applied guidelines in an arbitrary and opaque manner to favour a few players.

The rules of the telecom industry have been framed so that foreign firms have to work with Indian partners.

A senior representative of a telecom multinational said that unlike the challenges his organisation had to face in other countries that were related to technology, consumer preferences and market saturation, the problem in India was absence of regulatory stability and corruption.