The Supreme Court ordered telecoms licences issued under a scandal-tainted 2008 sale be revoked, striking a decisive blow against corruption that plagues the country and roiling the world's number two cellular market.
The ruling applies to 122 licences held by eight operators but potentially affects fewer than 5 percent of users in a fiercely competitive market crowded with more than a dozen players.
Market leaders such as Bharti Airtel and Vodafone , which last month scored a big win when the Supreme Court ruled it is not liable for $2.2 billion in tax, are poised to benefit from the ruling.
The licences affected include those held by Unitech Wireless, a joint venture of Norway's state-backed Telenor and Indian real estate firm Unitech, which has been the most aggressive of the newer operators and had more than 36 million subscribers in the country as of December.
"We have been unfairly treated as we simply followed the government process we were asked to," the Telenor joint venture, which operates under the Uninor brand, said in a statement.
"We are shocked to see that Uninor is being penalised for faults the court has found in the government process," it said. Shares in Telenor fell 3 percent in early trade.
Affected licence holders can operate for four months, during which regulators will come up with new market rules.
The ruling is an embarrassment for Prime Minister Manmohan Singh's government, which oversaw the sale of the licences at below-market prices, costing the exchequer as much as $36 billion in lost revenues and leading to political gridlock.
The telecoms scandal is the biggest of several that have emerged during Singh's second term and triggered massive street protests last year.
"This country is no longer willing to allow these corrupt corporations and these corrupt public officials to retain the benefits of their illegal and corrupt actions," said Prashant Bhushan, a lawyer and petitioner in the case.
Two ministers, including former telecoms minister Andimuthu Raja who presided over the 2008 grant process, have resigned. Raja is in jail awaiting trial.
While the ruling may revive investor worries about the uncertainty of doing business in Asia's third-biggest economy, it could also build confidence in the role of the judiciary and broader efforts to crack down on corruption.
"It is a historic judgment. It is trying to break a corrupt nexus between business and politics," said political analyst Paranjoy Guha Thakurta, who was one of petitioners in the case.
"It is a stinging judgment against the government. It seriously dents its credibility," he said.
BIG PLAYERS BENEFIT
India is the second-largest cellular market in the world by subscribers, with 894 million at the end of December, although fierce competition means call rates are among the lowest.
Investors and operators have long called for consolidation in the crowded industry, and Thursday's ruling stands to benefit the country's biggest operators.
"Players like Bharti Airtel and Idea Cellular, with popular brands and strong balance sheets, will be clear beneficiaries because they can take advantage of this situation and increase market share," said Jagannadham Thunuguntla, head of research at SMC Investments and Advisors in Mumbai.
Shares in Bharti, the world's fifth-largest carrier by subscribers, were up 8 percent while Idea shares were up 4 percent on the day. Shares in Unitech fell about 6 percent.
Carriers whose licences were ordered revoked include those of the local joint ventures of Abu Dhabi's Etisalat and Russia's Sistema, as well as Telenor.
"For foreign investors, it is very bad news. What mistake did they do? They partnered with Indian companies, invested lots of money and followed the process of that time," said Rishi Sahai, director at consultancy Cogence Advisors in New Delhi.
India's image as an investment destination was dented over the past year as the economy slowed, government reforms stalled and the telecoms scandals along with high profile graft cases heightened concerns about government policies.
"This is a collective failure of the government of India," Subramanian Swamy, an opposition politician and also a petitioner in the case, said following the ruling.
Police have charged six companies and 19 people, among them a billionaire owner of the Essar Group; top executives of Telenor's and Etisalat's India ventures and three from billionaire Anil Ambani's Reliance Group.
Executives arrested in the telecoms case have been released on bail. Telenor and Etisalat say the case should not involve them because the licences were issued before they bought into the Indian market.
Other owners of licences ordered cancelled include Loop Telecom Pvt Ltd; Videcon Telecommunications, part of India's Videocon group ; and S-Tel, part-owned by Batelco.
Thirteen licences held by Idea Cellular, of which it is using seven, and three by Tata Teleservices are also affected.