Bloomberg News

Indian Court Adds to Singh Flip-Flop, Telenor’s Insecurity

February 05, 2012

(Updates share prices in eighth paragraph.)

Feb. 3 (Bloomberg) -- The Indian Supreme Court’s decision yesterday to scrap tainted phone licenses is spurring concern frequent policy flip-flops will deter foreign investment when the economy needs about $1 trillion over the next five years.

The top court yesterday decided that mobile permits won by 11 companies in a 2008 sale, the subject of a probe by federal auditors and investigators, would be canceled and will be auctioned at a later date. The court issued the ruling 14 months after the auditor said the state may have lost as much as $31 billion from the sale at “unbelievably low” prices.

“The fact that the court has voided these contracts as a consequence of the government’s failure in the court’s eyes to achieve best price could have a chilling effect on foreign investment,” said Thomas Britt, head of the India practice of Debevoise & Plimpton LLP in Hong Kong. “Foreign investors want predictability and certainty about enforceability for their contracts.”

Policy U-turns, including Prime Minister Manmohan Singh’s decision under coalition duress in December to halt the entry of Wal-Mart Stores Inc. and Carrefour SA, have sapped investor confidence in the $1.7 trillion economy. The rupee slumped 16 percent last year in its worst performance of the region, touching a record low, while the benchmark stock index slid 25 percent, even as the corruption allegations sparked protests and hunger strikes for a powerful anti-graft bill.

Personal Benefit

The Comptroller and Auditor General said in a report submitted on Nov. 16, 2010, that the cut-price, first-come, first-served sale four years ago to ineligible bidders was “arbitrary and lacked transparency.” Jailed former telecommunications minister Andimuthu Raja and bureaucrats and company officials on bail are facing charges they conspired to grant permits for personal benefit. All deny any wrongdoing.

The ruling puts at risk, among others, Telenor ASA’s $1.2 billion investment in India through a venture with real-estate developer Unitech Ltd. “When we have not caused any of the faults found by the courts, it is obvious to everyone that our investment must not be jeopardized,” the Fornebu, Norway-based operator, said in an e-mailed statement yesterday.

The Supreme Court canceled permits held by companies including Idea Cellular Ltd., Unitech Wireless Pvt., Etisalat DB Telecom Pvt., Loop Telecom Ltd., Videocon Telecommunications, Sistema Shyam Teleservices Ltd. and S Tel Ltd.

Unitech rose 3.6 percent to 26 rupees at close in Mumbai after falling as much as 6.4 percent earlier today. Telenor declined 1.6 percent to 92.2 kroner as of 1:21 p.m. in Oslo.

‘Get Out’

Telenor “really needs to get out because shareholders worry that capital discipline will be broken in India,” said Saeed Baradar, a telecommunications sales specialist at Societe Generale in London. He estimates that the operator may have to pay an additional $2.1 billion to rebid for the permits rescinded by the court.

“We look at this as an attack on the process and the execution of the process and not as an attack directly on Telenor,” Chief Executive Officer Jon Fredrik Baksaas said in a phone interview yesterday. “But it creates an enormously high level of insecurity for investments in this sector and also into other industry sectors in India. Particularly for foreigners who are in need of a certain level of protection when you move into a new country.”

Tata Teleservices Ltd., Unitech Wireless, and DB Realty Ltd. have each been ordered to pay 50 million rupees in penalties, while Loop Telecom and Sistema Shyam Teleservices have been ordered to pay 20 million rupees each.

‘Money Power’

The court yesterday asked the Telecom Regulatory Authority of India to recommend the next course of action, after saying those who earlier obtained the licenses had “money power” and the “ability to manipulate the system.” The decision to repeal the licenses was fair because the sale was rigged, said Pavan Duggal, a Supreme Court lawyer specializing in telecommunications law.

“Never before in the history of independent India has something so valuable been sold at such low prices,” New Delhi- based Duggal said. “This is a huge rebuke to the government and an indictment of the ad hoc manner in which governmental procedures were deliberately tampered with.”

The Federation of Indian Chambers of Commerce and Industry said in a statement yesterday that the court’s decision ends the uncertainty over policy and will pave the way for investment into the country, though “it may take some time.”

The main opposition Bharatiya Janata Party criticized Singh’s administration yesterday after the verdict.

Global Doubts

“The verdict has not only put a question mark on the government’s morality, but has also created doubts worldwide of the country’s economy and its functioning,” said Arun Jaitley, leader of the opposition in parliament’s upper house.

The government needs foreign investment to double planned spending on infrastructure to $1 trillion in the five years to accelerate growth 10 percent and lift living standards in the nation. India is currently ranked 89th among 142 nations by the World Economic Forum for infrastructure quality.

P. Phani Sekhar, a fund manager at Angel Broking Ltd. based in Mumbai., said the Supreme Court’s decision presents “a very bad image” to the international investment community and will make foreign companies think twice about investing in the country’s telecommunications industry.

“It’s going to lead to lots of questions from investors,” said Sekhar. “Investors are going to be disturbed by the fact that you can follow the government’s policies and then tomorrow a court may scrap that.”

--With assistance from Douglas Wong in Hong Kong, Bibhudatta Pradhan in New Delhi and Diana ben-Aaron in Helsinki. Editors: Sam Nagarajan, Abhay Singh

To contact the reporters on this story: Andrew Macaskill in New Delhi at amacaskill@bloomberg.net; Ketaki Gokhale in Mumbai at kgokhale@bloomberg.net

To contact the editors responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net; Michael Tighe at mtighe4@bloomberg.net


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