NEW DELHI — India's top court ordered the government on Thursday to cancel 122 licenses granted to companies during an irregular sale of cellphone spectrum that has been branded one of the largest scandals in the country's history.
The verdict will likely disrupt the country's massive cellphone market and is a further embarrassment for the scandal-riddled government of Prime Minister Manmohan Singh.
The 2008 sale of second generation, or 2G, cellphone spectrum at cut-rate prices in a bewildering "first-come, first-served" process netted the government only 124 billion rupees ($2.7 billion). Government auditors said the sale might have cost the treasury as much as $36 billion in potential revenue.
The court ruled that the 122 licenses granted in that deal be scrapped and that a fresh auction for licenses be held in the next four months.
Analysts expect the new auction to raise an estimated 1 trillion rupees ($20 billion). That might be less than the spectrum would have garnered at the time because of the subsequent introduction of 3G technology here and the consolidation of the main market players.
Such a windfall would be welcome in New Delhi, which has been struggling with a growing fiscal deficit.
Telecoms Minister Kapil Sibal said the ruling at least would bring clarity to an industry that had been frozen because of investor wariness over the government's policy.
But the verdict is also likely to serve as a chilling reminder to foreign companies about the complexities of doing business in India. Policy flip-flops and corruption scandals have made foreign investors increasingly skeptical about investing here.
Among the companies that will lose their licenses under Thursday's ruling are Unitech Wireless, which is in collaboration with Norway's Telenor, and Swan Telecom, which is 45 percent-owned by Abu Dhabi-based Etisalat.
The Telenor Group, which has invested over 61 billion rupees ($1.2 billion) in equity and offered more than 80 billion rupees ($1.6 billion) in corporate guarantees for its India venture, said it was being punished for actions that took place before it entered the Indian market.
"We urge the government to ensure that a foreign investor that had nothing to do with these processes is not harmed," Telenor said in an emailed statement.
Etisalat said the license was granted nearly a year before its investment in Swan.
"Etisalat has no knowledge of what occurred in the license application process for Swan, far less did it have any involvement," the company said. "The license applications were entirely conducted by the promoters and their associates who subsequently marketed the Swan investment opportunity to Etisalat."
The license cancellation affects 11 companies, mainly newer and smaller firms that were late entrants into the market. Larger companies, such as Bharti Airtel and Reliance Communications, received nearly all their licenses in earlier agreements with the government and are largely unaffected. IDEA Cellular and Tata Teleservices, both major players, will lose a handful of licenses giving them the right to operate in several cities.
Still, tens of millions of subscribers will be affected.
India's telecommunications regulator, J.S. Sarma, told CNN-IBN TV that many of the affected subscribers will be expected to move their accounts to other operators over the coming months.
Ankita Somani, a telecoms analyst, said the decision would likely spell the end of some of the smaller, struggling cellphone companies and give an opening to those remaining to raise prices for the country's nearly 900 million cellphone accounts.
"It'll create consolidation in the industry ... and a price rise," she said.
During the 2008 sale, some licenses were awarded to ineligible participants who in turn sold their stakes at much higher prices than they bought them from the government.
While the 2G sale raised concerns at the time, criticism exploded when the transparent auction of 3G spectrum two years later raised more than six times as much money.
India's former telecommunications minister Andimuthu Raja, who was forced to resign because of the scandal, is facing charges of abusing his position. He denies any wrongdoing.
In its judgment Thursday, the court declined to order a high-level probe of one of the country's most powerful politicians, Home Minister Palaniappan Chidambaram.
Chidambaram was finance minister at the time the licenses were granted and opposition officials say he was partially responsible as well. The court instead directed a trial court to examine the accusations against Chidambaram and make a decision on what to do within two weeks.
Sibal, the telecoms minister, defended his Congress party-led coalition and blamed the opposition government that lost power in 2004 for putting in place the "faulty" policy for allocating the spectrum.
"The prime minister was in no way responsible, nor was the finance minister," he said.
Opposition leaders called for Chidambaram to step down from the Cabinet immediately while the trial court decides what to do.
"This is a matter of probity in public office. If Chidambaram is cleared by the trial court, he can always return to the Cabinet," said Balbir Punj, of the opposition BJP.
The government has been battered by a series of recent corruption scandals, including graft allegations stemming from the 2010 Commonwealth Games, while other parties have been implicated in mining and vote-buying scandals.
Fed up with the country's pervasive corruption, tens of thousands of Indians joined protests in August in support of a social activist's hunger strike demanding the creation of a government ombudsman to punish corruption. However, that legislation stalled in December and a new round of protests fizzled for lack of support.
AP Business Writer Erika Kinetz in Mumbai and reporter Adam Schreck in Dubai, United Arab Emirates, contributed to this report.