India's biggest corruption scandal badly affected the Government's reputation. Majmudar & Co's Akil Hirani sizes up the impact for foreign investors of February's Supreme Court ruling in the 2G case

On 2 February 2012, India's Supreme Court delivered a much awaited judgment in the 2G spectrum allocation case of Centre for Public Interest Litigation v Union of India.

In 2008, the Indian Government awarded 122 telecommunication licences on a first come, first serve basis to new entrants and Code Division Multiple Access (CDMA) operators migrating to Global System for Mobile (GSM) technology. The licence fees charged were the same as those paid for by operators at the auction held in 2001.

India's comptroller and auditor general estimated the loss to the exchequer as a result to the tune of billions of dollars. The choice of the policy, the irregularities in its implementation and the alleged criminal behaviour of the parties involved in the grant formed the core subject matter of the case, and the main issue before the supreme court was whether the 122 licences issued by the Department of Telecommunications (DoT) were legal or whether the grant was made in an arbitrary, unfair and unconstitutional manner.

After considering the facts and circumstances, the Supreme Court concluded that the grant of the 122 licences was unconstitutional. The Supreme Court opined that while distributing natural resources (2G spectrum) the state was duty bound to act in consonance with the principles of equality and public trust, and ensure that no action was taken that would be detrimental to public interest.

It held that the actions of the DoT, between September 2007 and March 2008, under the leadership of Andimuthu Raja (pictured), the then Minister of Communications & Information Technology, was wholly arbitrary, capricious and contrary to public interest, apart from being violative of the doctrine of equality.

The Supreme Court directed the Telecom Regulatory Authority of India (TRAI) to make fresh recommendations on the grant of 2G licences within two months. The Supreme Court also directed the Indian Government to consider the recommendations of the TRAI and decide on the auction process for grant of fresh licences (in which the entities whose licences were cancelled could also bid). The Supreme Court has prescribed a four-month period within which this must be done. In addition, the Supreme Court levied a penalty of $1m (£630,000) on telecommunication companies Unitech Wireless, Swan Telecom and Tata Telecom, and a penalty of $100,000 (£63,000) on Loop, S-Tel, Allianz and Sistema Shyam, as they were benefited by a wholly arbitrary and unconstitutional action of the DoT.

The Supreme Court ruling is noteworthy in its approach and punishment meted out; however, the decision of the Supreme Court to cancel 122 licences granted in 2008 has some serious repercussions.

After the licences were sanctioned, the licensees spent significant amounts of money over a three-year period rolling out their telecommunication infrastructure and providing services. This included making investments in equipment, creating networks and investing in marketing activities to acquire customers.

It does not appear that the judgment has given adequate attribution to the investments made by the licensees. While there is no question that the Supreme Court needed to intervene to prevent an abuse of the system, cancellation of the licences penalises foreign investors very harshly. This can adversely impact foreign direct investment into India as investors can perceive India to have an unstable policy regime without any certainty. However, on the flipside, the judgment can also be viewed as sending a message to the world that India is serious about dealing with corruption in its system.

On the question of the Supreme Court's authority of judicial review, the judgment recognises that a court should not interfere with the fiscal policies of the state. However, the judgment adds that when it is demonstrated that the policy framed by the state and its implementation is contrary to public interest or is violative of constitutional principles, it is the duty of the Supreme Court to exercise its jurisdiction in larger public interest and reject the plea that the scope of judicial review should not exceed beyond recognised parameters.

The judgment states that it was the duty of the Supreme Court to ensure that the institutional integrity was not compromised by those in whom public trust was reposed and who were under oath to discharge duties in accordance with the constitution and the law.

While the judgment seeks to protect public interest and safeguard scarce natural resources, it has failed to adequately address the concerns of customers. The judgment does not provide for any plan of action for the customers of these cancelled licences. Although some of the solutions being floated include mobile number portability by switching the customers to another company, this is going to be a tedious process.

From a foreign investor's standpoint, it is important to ensure that adequate due diligence is conducted on the manner in which government contracts have been procured by incumbent joint venture partners in India. This becomes even more critical after the enactment of the Bribery Act in the UK, which has very onerous provisions dealing with bribery and corruption, and merely relying on representations and warranties to this effect in a joint venture agreement may not be sufficient.

Akil Hirani is managing partner at Majmudar & Co in India.