122 2G licenses issued to nine telecom operators by the UPA government in January 2008 have cancelled by India’s Supreme Court. These licenses were issued by former Telecom Minister A. Raja, under an unusual first-come-first-serve policy, with an arbitrary cut-off date set. In addition, penalties have been imposed on telecom operators. According to The Hindu, Swan Telecom, Unitech Wireless and Tatas have to deposit Rs five crore each as penalty, while Loop Telecom and Shyam Sistem have to deposit a penalty of Rs 50 lakh. Their licenses are valid for four more months, and the Telecom regulator TRAI will have to suggest a means by which these players will either be able to exit through mergers and/or acquisition, or pay an additional fee to retain licenses. More on the judgement at NDTV.

Given that there are third party rights involved, with many of these companies (especially Tata Docomo, Idea Celullar, Shyam Sistema and Uninor) already have a significant customer base.

Our Take On What Happens Next & What This Means For Telecom In India

– Impact on Incumbent Players: Incumbent players will benefit most, but those incumbents whose licenses have been cancelled will most likely pay more and retain their stake. Tata Teleservices (specifically Tata Docomo) and Idea Cellular are likely to participate in the auctions or repurchase to retain their licenses. Remember that Tata Teleservices put most of its eggs in the GSM basket (Tata Docomo) and scaled down their CDMA operations. The companies that benefit most from this judgement are Bharti Airtel and Vodafone India – the judgement doesn’t impact them, but will most likely lead to a reduction in competition.

– Impact on telecom tariffs: There has been talk of increasing rates, and it might be the case that given that Tata Docomo and Idea Cellular will have to buy 2G licenses, they might choose to increase rates on a preemptive basis. This also means that telecom operators will be under more pressure to increase revenues and profitability, given that some might have to raise debt.

– Which New Telcos Will Remain? Among the new telcos, Uninor and Sistema are likely to participate in the auctions too to retain their licenses, since they have made significant investments in the business, and have a substantive subscriber base. Telenor and Sistema will probably have to pump in more money into this business. We think that Loop & Videocon are likely to exit the telecom business and look to sell whatever assets they had, because they neither raised foreign investment, nor have they a substantive user base. Swan and S-Tel are the ones to watch out for – it doesn’t appear as if they invested much in the business, especially given lack of regulatory clarity, but now that the 2G mess looks as if it is clear, it is up to Etisalat (Swan) and S-Tel (Batelco) to make their move – exit or buy. Also note that there are new telecom operators who have not yet received spectrum that they had been allocated – with some players possibly exiting the market, you might find that they will be in a position to get spectrum

– Employees: Given that some telecom operators are likely to exit and costs will go up for many telecom operators, it is the employees in the telecom which will be impacted, especially those who are currently working with new telcos that are likely to exit.

– Impact on foreign investment: this is going to be tricky for foreign investors in India, because it suggests that government policy was not in line with law, and if government policy cannot be trusted and will eventually be revoked by the judiciary, would a foreign investor invest in the country? On the other hand, this judgement might lead to an enforcement of greater transparency in policy, because any auction that follows will be market driven and transparent. Once there is greater clarity on the governments reauction plans, this might be an opportune moment for global telecom operators, especially AT&T to re-enter the market.

Update: we had incorrectly mentioned that RCOM’s licenses have been cancelled. The error is regretted. RCOM did not receive any licenses among the 122 mentioned.

Over the next few months, there will be less uncertainty. We’ll update when we have more. If you would like to share your comments, please do leave a comment, or mail us at nikhil@medianama.com