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Dropped call: India's 2G verdict and its impact on foreign investment

Dropped call: India's 2G verdict and its impact on foreign investment
The revelations of high-level corruption in late 2010 had already spooked businesses considering expanding into India. Then, a month ago, the country’s Supreme Court decided to cancel 122 of the 2G spectrum licences that the government had allocated in 2008, which appears to have only rattled investors further. But why did the apex court feel compelled to make this seemingly investor-unfriendly decision, and how will it affect investor perceptions of India going forward? The cause Of the corruption scandals to come to light in recent years, one involved such eye-popping sums and featured such high-profile actors that it grabbed most of the headlines. Claims of a $39 billion loss to the exchequer caused by the undervaluation of 2G spectrum licences, coupled with accusations that they were allocated to ‘favoured’ companies by the then telecommunications minister, Andimuthu Raja, dominated public discourse. The government denied there was any wrongdoing; investigative bodies disagreed. New precedents were set when several of the government’s top officials and leading business executives were finally arrested.  While political leaders dithered over how to respond, the judiciary stepped in to take charge of the investigation. On 2 February, the Supreme Court cancelled 122 of the licences that had been granted, claiming that their award was ‘arbitrary, capricious and contrary to public interest’. In doing so, the Court reinforced the findings of the Central Bureau of Intelligence, which stated that the Department of Telecoms had awarded the licences to ‘those with money and power’. More embarrassing for the Government was its inability to defend its telecom policy or explain why the spectrum allocated to the companies had not been auctioned in keeping with licensing regulations. Bad reception The Supreme Court’s decisive action is clearly humiliating for the administration of Prime Minister Manmohan Singh. However, it is the foreign companies that had formed joint ventures with Indian partners post licence-acquisition that would seem to be the biggest losers. Telecoms analysts suggest that around $5 billion was invested into these ventures, and that companies such as Norway’s Telenor ASA, the UAE’s Etisalat, and Russia’s Sistema, among others – all of which appear to have entered these relationships in good faith – will lose heavily on their investments. Indeed, some of these companies have already initiated legal action against their local partners, and are in the process of winding up their Indian operations. Another casualty of the 2G fiasco is India’s image as an attractive destination for foreign investment. Already positioned mid-table in Transparency International’s annual Corruption Perception Index, the Court’s decision raises further questions about how business is conducted there and reinforces the impression that decisions made by Indian authorities can be reversed with little warning. A clear signal There is little doubt that the 2G scandal and the Supreme Court’s subsequent decision to cancel licences have cast a dark cloud over India’s international image. Like all proverbial clouds, however, this one too has a silver lining. Indeed, the message underpinning the Court’s decision is a strong and positive statement that India has the will and the means to tackle corruption. Executives who might not have otherwise thought twice about colluding with corrupt officials may now have second thoughts. After all, few things sharpen the mind like the prospect of losing money or liberty - or both. Moreover, if flawed government decisions can be retroactively reversed, it might make those partnering with Indian companies pay closer attention to the potential risks they may face. Indeed, one India-based businessman we spoke to confirmed that ‘no real due diligence was undertaken’ ahead of the 2G spectrum allocation, but that now, ‘people will think twice about who they are going into business with and assess risks more carefully in the first place’. Others believe that not enough attention is being devoted to the positives to come out of this fiasco. For example, a telecoms analyst we spoke to said that all of the foreign companies that lost their rights to spectrum have been given the opportunity to submit new bids, under a more transparent and fair bidding process. In the hysteria of the 2G outcome and the deep frustration of a few, these promising developments should not be overlooked. The judiciary has done something rather rare in demonstrating that it is willing to defy India’s political and business elite, even if the government of the day proves unwilling or unable to do so. The decision may initially be perceived as an unfavourable outcome, but it should be viewed as paving the way for more market-friendly policies in the future. It is also a strong signal that India is, at last, sending the right message to corrupt officials and executives. By Romila Chowdhury Associate, South & South East Asia
Published: 15th March 2012