CIOIN

While the Supreme Court ruling is being hailed as great initiative in terms of decision-making and regulation, it also raises concerns about the foreign investment climate and the billions of dollars that companies like NTT DoCoMo and Telenor ASA have invested in the Asia's third-largest economy.

“The decision is certainly going to renew some trust in the judiciary’s and the nation’s belief in a corruption-free country and more visibility and transparency in the market,” says Rajan S Mathews, director general, Cellular Operators Association of India.

The decision however, could impact foreign investor’s psyche about investments in India, which is already knee deep in an environment of political and economic uncertainty at present.

“The move could have a detrimental side effect on FDI because innocent investors are at the verge of losing giant stakes,” says Mathews.

Investors who like a certain degree of stability in these matters might step gingerly till the government and regulatory authorities come up with set guidelines and policies regarding their future course of action.

“Given the hyper-competitive telecom environment today, and with regulatory uncertainties adding to the situation, holding companies or foreign partners wouldn't be as bullish on the sector as until a few years ago,” says Deepak Kumar, research director - Telecommunication, IDC India. “In fact, some of them would rather be exploring any decent exit possibilities,” he feels.

Japan's NTT DoCoMo, Norwegian company Telenor as well as Russia's Sistema JFC and Emirates Telecommunications Corp. of the United Arab Emirates had bought major stakes in companies like Tata, Uninor and Sistema Shyam Teleservices.

Along with heavy penalties (Uninor, Swan Telecom and Tata Telecom were asked to pay Rs 5 crore each) and revoked licenses, companies whose licenses have revoked also have no clear idea how the government will compensate them for the money they have already invested.

It could also hurt domestic investment in the sector. Indian banks have huge risk exposure in these companies. According to PwC, as of June 2011, Indian banks have a total exposure of Rs 94,319 crore to the telecom sector. If they pull the plug on any further loans, it could trigger consolidation.

“The verdict will bring a shakeout in the industry. This will have an impact on the newer operators. This shakeout, by which I mean consolidation, was expected. Consolidations could follow the regular M&A route, with the larger operators acquiring the smaller ones,” says Kamlesh Bhatia, Research Director, Gartner.

Gartner predicts that it will be five or six large players in the end who will survive in the market.

So what do these companies do now? That depends a lot on TRAI. “The Supreme Court has juggled the ball back in the government’s court,” he says.  “Any M&A or exit of players from the market will only be visible after TRAI and the government come up with clear guidelines.”

However, IDC’s Kumar, also has another theory. “If valuations stoop too low and companies don’t find exit options attractive enough, then consolidations could actually be delayed.”

The Supreme Court has granted a grace period of four months before licenses are cancelled and has asked the TRAI to make fresh recommendations for how 2G licenses should be allotted next.

Meanwhile affected companies can use this time to find their feet. “An appeal through a review petition is understood to be an option,” says Kumar.

Mathews suggests that companies use this time to work in close unison with the government and regulatory authorities to chalk out an action plan that works best in interest for them and their consumers.