2G CONTROVERSY - CANCELLATION OF LICENSES AND PRESENT STATUS WITH REFERENCE TO ARBITRATION

INTRODUCTION

The Supreme Court of India (“SC”) in Writ Petition (Civil) bearing number: 423/2010 and 10/2011 dealt with important question of law and after finding irregularities in the process of awarding of licenses by the Government of India (“GoI”) declared all licenses issued on or after January 10, 2008 to be illegal as the same were awarded in a wholly arbitrary and unconstitutional exercise of power. Thus the SC cancelled One hundred and twenty two (122) 2G telecom licenses derailing the business plans of both national and international companies with stakes in the Indian telecom sector.

As an aftermath of the decision, affected companies were seen mulling over remedial options, to safeguard and protect their investment in the once fancied telecom sector. The companies which picked up stake in Indian companies at a premium and thereafter made significant monetary contribution to roll out telecom services have put up a strong front and exercised several legal remedies available to fix accountability and claim damages for the losses suffered by them.

Telecom majors that were at the receiving end of the fiasco included the likes of – Unitech Group, Loop Telecom, Videocon Telecommunications, Swan Telecom, Idea Cellular, Spice Communications, S – Tel, Tata Teleservices and Shayam Telelink.

Foreign telecom majors that bought substantial stake in some of the Indian companies that were arbitrarily awarded the licenses are Sistema, Etisalat, Bahrain Telecommunications, Telenor, Khaitan Holdings Mauritius Limited.

BACKGROUND

The Department of Telecommunications (Ministry of Telecommunications and Information Technology), under the then telecoms Minister, Andimuthu Raja, allotted 122 2G mobile spectrum licences in 22 circles in the year 2008. The allocation was based on controversial "first come first served" criteria which led to allocation of the licenses at lower prices than would have been the case via an auction.

The Comptroller and Auditor General of India (“CAG”) highlighted various irregularities in the allotment process and estimated that the cost to the GoI in terms of loss of revenue realized from the spectrum sale / award was approximately 1.76 lakh crore.

THE JUDGMENT

The SC found the licensing process to be arbitrary and unconstitutional and thus cancelled all the 122 2G spectrum licenses in 22 circles allotted in the year 2008. The SC also took serious note of the grave irregularities like ineligibility of some of the winning bidders and collusion between officials and various industry executives. Further the SC was instrumental in asking TRAI to formulate fresh proposals on new licensing and spectrum allocation and asked the GoI to take a decision on the proposals, and auction the licenses within four months from the date of passage of the order.

IMPACT

1. Sistema, a Russian conglomerate which owns fifty six point eighty eight (56.88) percent stake in Sistema Shyam TeleServices (“SSTL”) issued a notice to the GoI under the India – Russia Bilateral Investment Treaty (“BIT”). The BIT binds signatories to provide investments with full protection and security and bars any expropriation of investment.

Sistema invoked Clause 9.1 of the BIT signed between the government of the Russian Federation and the Republic of India for the promotion and mutual protection of investments on December 23, 1994 which came into effect on August 4, 1996. This clause allows Sistema to initiate proceedings against GoI before an international arbitration tribunal set up in accordance with the arbitration rules of the United Nations Commission on International Trade Law, or any other forum, in case the dispute is not resolved within six months.

2. Telenor, an indirect majority shareholder in Unitech Wireless through its Singapore based subsidiary is in a legal dispute with its domestic JV partner, Unitech where Telenor has served a notice for indemnity and compensation upon the promoters of Unitech. In addition, Telenor is threatening to seek damages and compensation from the Government of India by invoking the provisions of the 2005 Comprehensive Economic Cooperation Agreement between India and Singapore.

Telenor, which held a sixty seven point six (67.60) percent stake in Uninor, a joint venture (JV) with Unitech Limited, is keen to protect its investments in the country. On behalf of Telenor, the Norwegian government had intensified its diplomatic efforts to discuss various issues related to the 2G controversy and the possible way forward.

3. Etisalat which had a forty five (45) percent stake in Etisalat DB (earlier known as Swan Telecom), an Abu Dhabi based telecommunications company, has shut down its India network and has initiated proceedings against its Indian joint venture partners Swan Telecom and DB Group and its promoters Shahid Balwa and Vinod Goenka on grounds of fraud and misrepresentation.

Etisalat took a hit of USD 829 million in its Indian earnings after cancellation of the licences.

4. Bahrain Telecommunications (Batelco) which had bought forty two point seven (42.70) percent stake in S Tel Private Limited, in 2009, was the first to announce its exit plan from India.

Batelco reportedly sold the stake that it brought to its Indian partner (Siva Group), for Rupees Eight hundred and sixty crore (INR. 860,00,00,000.00/-) the very price it paid for purchasing the same.

5. Khaitan Holdings Mauritius Limited (“KHML”) that holds twenty six point ninety five (26.95) percent stake in Loop Telecom has slapped a USD 1.4 billion notice on the Indian government, seeking international arbitration while arguing that the South Asian nation was not able to protect investments made in the mobile phone operator since 2008.

According to the arbitration notice Mauritius registered Khaitan Holdings Mauritius Ltd (KHML) has invoked the India Mauritius Bilateral Investment Promotion and Protection Agreements (BIPA) treaty and has intimated the ministries of communications, finance and external affairs of treaty violations.

KHML has demanded that the government appoints an arbitrator within two months and has offered to keep London or Dubai International Finance Centre as the seat of arbitration.

6. Japan's DoCoMo, which holds twenty six (26) percent stake in Tata Teleservices has filed a review petition, since their license application was filed in 2006 and the government was supposed to process it within thirty (30) days instead of clubbing it with applications processed in January 2008.

7. Malaysia's Axiata which holds around twenty (20) percent stake in Idea Cellular has filed a similar review petition in the SC as Idea Cellular had also filed its license applications in 2006.

CURRENT POSITION

There can be no predicting the outcome of these court cases. So far, SSTL and Telenor are the only two companies that plan to continue operations in India post the cancellation of their licences. Meanwhile, TRAI has done a commendable job to outline a future course of action to bring in transparency in the sector to promote investments in the once booed sector.

Sistema has secured CDMA spectrum in eight circles including Delhi, Kolkata, Gujarat, Karnataka, Tamil Nadu, Kerala, Uttar Pradesh (West) and West Bengal telecom for Rupees Three thousand six hundred thirty nine and forty eight crore (INR. 3,639.48 crore) in the auctions held in March 2013. It also has a license in the Rajasthan circle which was not affected by the Supreme Court judgment last year.

Further mobile operator Telewings have got unified license in the six circles of UP East, UP West, Bihar and Jharkhand, Maharashtra and Goa, Andhra Pradesh and Gujarat, after its promoter Telenor successfully transferred assets of old venture Unitech Wireless to the new entity.

WAY FORWARD

Learning from the past, India has introduced provisions in the just concluded bilateral investment protection and promotion agreement (“BIPPA”) with the United Arab Emirates to ensure that only executive decisions can be challenged and that too within a stipulated period.

This comes in the wake of Vodafone threatening to use India's BIPPA with the Netherlands to challenge the tax levied on the acquisition of an Indian business through a retrospectively applied change in the law, besides other disputes raised by overseas investors seeking recompense through the respective country treaties.

The inclusions in the UAE treaty will protect the Indian government from international arbitration challenges in the event of Parliament changing the law or judicial pronouncements having to be implemented.