NEW DELHI (Reuters) - The Supreme Court ordered on Thursday telecoms licences issued under a scandal-tainted 2008 sale be revoked, striking a decisive blow against corruption that plagues the country and roiling the world's second biggest cellular market.
The ruling applies to 122 licences held by eight operators but potentially affects fewer than 5 percent of users in a fiercely competitive market crowded with more than a dozen players.
Market leaders such as Bharti Airtel (BRTI.NS) and British-based Vodafone, which last month scored a big win when the Supreme Court ruled it was not liable for $2.2 billion in tax, are poised to benefit from the ruling.
The licences affected include those held by Unitech Wireless, a joint venture of Norway's state-backed Telenor and Indian real estate firm Unitech (UNTE.NS), which has been the most aggressive of the newer operators and had more than 36 million subscribers in the country as of December.
"We have been unfairly treated as we simply followed the government process we were asked to," the Telenor joint venture, which operates as Uninor, said in a statement.
"We are shocked to see that Uninor is being penalised for faults the court has found in the government process," it said.
Telenor shares fell 3.67 percent in Oslo.
Affected licence holders can operate for four months, during which regulators will come up with new market rules.
Freed-up spectrum will be auctioned, which could bring a multi-billion dollar windfall to a deficit-strapped government.
The ruling is an embarrassment for Prime Minister Manmohan Singh's government, which oversaw the sale of the licences at below-market prices, costing the exchequer as much as $36 billion in lost revenues and leading to political gridlock.
The telecoms scandal is the biggest of several that have emerged during Singh's second term and triggered street protests last year.
"It is a historic judgment. It is trying to break a corrupt nexus between business and politics," said political analyst Paranjoy Guha Thakurta, who was one of petitioners in the case.
Two ministers, including former telecoms minister Andimuthu Raja who presided over the 2008 grant process, have resigned. Raja is in jail awaiting trial.
While the ruling may revive investor worries about the uncertainty of doing business in Asia's third-biggest economy, it could also build confidence in the role of the judiciary and broader efforts to crack down on corruption.
"This is one step closer to transparency in policy-making," said Kamlesh Bhatia, research director at Gartner in Mumbai.
India is the world's second-largest cellular market by subscribers, with 894 million at the end of December, although fierce competition means call rates are among the lowest.
Investors and operators have long called for consolidation in the crowded industry, and Thursday's ruling stands to benefit the country's biggest operators.
"This verdict is good news for established incumbent operators and in the short term, we are likely to see some increase in tariffs," said Benoy C.S., a director at consulting firm Frost & Sullivan.
Shares in Bharti, the world's fifth-largest carrier by subscribers, ended 6.8 percent higher while Idea gained 3 percent, reversing earlier losses. Unitech fell 7 percent.
Carriers whose licences were ordered revoked include those of the local joint ventures of Abu Dhabi's Etisalat and Russia's Sistema, as well as Telenor.
"For foreign investors, it is very bad news. What mistake did they do? They partnered with Indian companies, invested lots of money and followed the process of that time," said Rishi Sahai, director at consultancy Cogence Advisors.
Affected companies are expected to fight the verdict.
Sistema's India unit said it "reserves the right to protect its interests by using all available judicial remedies".
India's big operators crave more bandwidth to accommodate surging usage in the country of 1.2 billion, so if the spectrum is auctioned it could command a premium.
The CAG has said the spectrum bundled with the 122 licences would be worth $22.7 billion at the price paid in the 3G auction in 2010, although 2G spectrum is likely to command a lower price.
"Whether this auction will be opened for all operators or will be open only for the people whose licences are being cancelled -- that will determine the demand-supply equation," said Ashish Basil, a partner in Ernst & Young's telecom group.
India's image as an investment destination was dented over the past year as the economy slowed, government reforms stalled and the telecoms scandals along with high profile graft cases heightened concerns about government policies.
"This is a collective failure of the government of India," Subramanian Swamy, an opposition politician and also a petitioner in the case, said following the ruling.
In declaring the licences "illegal and quashed," the court said in its ruling that the process of awarding them "was wholly arbitrary, capricious and contrary to public interest apart from being violative of the doctrine of equality".
The Central Bureau Of Investigation has charged six companies and 19 people, among them a billionaire owner of the Essar Group; top executives of Telenor's and Etisalat's India ventures and three from billionaire Anil Ambani's Reliance Group.
Executives arrested in the telecoms case have been released on bail. Telenor and Etisalat say the case should not involve them because the licences were issued before they bought into the Indian market.
Other owners of licences ordered cancelled include Loop Telecom Pvt Ltd; Videocon Telecommunications, part of Videocon group (VEDI.NS); and S-Tel, part-owned by Batelco. Thirteen licences held by Idea, of which it is using seven, and three by Tata Teleservices are also affected.
Additional reporting by Rajesh Kumar Singh and Mumbai newsroom; Writing by Tony Munroe and Frank Jack Daniel; Editing by Robert Birsel