Q+A - What is telcoms scam all about?

Two men speak on telephones at a roadside telephone booth in New Delhi May 18, 2010.

NEW DELHI (Reuters) - Government has been jolted by controversy over licences and radio airwaves that a state auditor says were given out too cheaply, depriving the government of up to $39 billion in revenues.

The telecoms minister was forced to resign and the prime minister has been asked to explain himself to the Supreme Court. Opposition parties want a full parliamentary probe and have blocked proceedings until the government relents.

So, what is the controversy all about and what does it mean for the telecoms sector and companies?

WHERE WAS THE ALLEGED SCAM?

In 2008, India issued 122 new telecoms licences and the second-generation radio spectrum bundled with it to several Indian companies that had little or no experience in the telecoms sector, and at a price set in 2001.

The state auditor said the allocation process did not reflect the correct value of radio spectrum as there was no auction and the entire process was flawed, benefiting selected companies.

The auditor said the telecoms ministry did not do the requisite due diligence, granting 85 out of the 122 licences to ineligible applicants.

The auditor also said the ministry did not follow its own guidelines, changed the cut-off date for applications, which gave "unfair advantage" to some companies over others. It said the entire process "lacked transparency and was undertaken in an arbitrary, unfair and inequitable manner".

The auditor said several Indian companies deliberately suppressed facts, disclosed incomplete information, submitted fictitious documents and used fraudulent means to get licences and thereby access to spectrum.

WILL COMPANIES LOSE LICENCES?

The auditor said units of Unitech Ltd , which received licences in 2008 and now operates services in a joint venture with Norway's Telenor, had not fulfilled eligibility conditions including required share capital.

Other firms which were ineligible according to the auditor include Loop Telecom, Videocon Telecommunications and S Tel Ltd.

The auditor said Swan Telecom, which has since been partly acquired by the UAE's Etisalat, was given licences even though a unit of No. 2 telecoms firm Reliance Communications held over 10 percent of equity, a violation of rules.

It is still to early to know whether any licences would be cancelled, but the pressure would be strong not to do so because operators have invested in networks and have subscribers.

Any big crackdown could send a wrong signal to investors.

But the government could ask operators to compensate for the potential revenue loss as highlighted by the auditor and may impose fines for not meeting separate rollout obligations.

The auditor also named nine other operators, including market leaders Bharti Airtel, Reliance Comm and Vodafone, who were allotted spectrum beyond the contracted limit without paying any upfront charges, costing the government a potential $8 billion.

WHAT DOES IT MEAN FOR TELECOMS MARKET?

If the government imposes heavy fines on new licensees singled out in the auditor's report, it would weaken them further. The newer operators are yet to make profit as they offer heavy discounts to grab subscribers, and any financial penalty would be a blow for them, forcing some to leave the market.

Some operators may also freeze network expansion until clarity emerges on the regulatory front, meaning slower growth for network equipment vendors and other service providers.

In case licences are cancelled, it would lead to natural consolidation in the crowded 15-player market.

WILL THIS AFFECT FDI INTO INDIA?

India's mobile phone market is the world's fastest-growing and its nearly 700 million users trail only China, making it a must-invest market for any major global operator. But regulatory uncertainties have been a concern for some and could make foreign companies start to look more carefully where to invest.

Any penalty or adverse regulatory action could also weigh on companies such as Telenor and Etisalat, which were not part of their respective Indian ventures when the licences were distributed. Also, the controversy would make future investors more careful before they decide to invest in the market.

Vodafone, the single-biggest foreign investor in India, is fighting a $2.5 billion tax bill over its acquisition of a mobile firm in the country and has signalled frustration with Indian regulations.