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What is 2G scam all about?

In 2007-08, when the government issued 122 new telecom licences, several rules were violated and bribes were paid to favour certain firms. Several licences were issued to firms with no prior experience in the telecom sector or were ineligible or had suppressed relevant facts, CAG report said.

delhi Updated: May 06, 2011 10:26 IST

In 2007-08, when the government issued 122 new telecom licences, several rules were violated and bribes were paid to favour certain firms. Several licences were issued to firms with no prior experience in the telecom sector or were ineligible or had suppressed relevant facts, CAG report said.

The violations cost the exchequer $39 billion in lost revenue, the auditor said, equivalent to India's defence budget.

The telecom ministry's process of issuing licences "lacked transparency and was undertaken in an arbitrary, unfair and inequitable manner," the auditor said.

Police have accused Andimuthu Raja, the then-telecom minister, of having taken bribes from two firms which are now the local joint venture partners of Telenor and Etisalat .

What was the fallout?
The report sparked political outrage and the main opposition Bharatiya Janata Party all-but-shut an entire session of parliament demanding a special parliamentary probe.

Raja was forced to resign and was arrested over the report. The telecom ministry is considering whether to cancel some 85 licences which the audit report says were issued to firms which were ineligible for them.

Many of India's biggest business names have been questioned, including billionaires Anil Ambani, chairman of Reliance ADA group, and Prashant Ruia, chief executive of Essar Group.

A parliamentary panel probing the scandal questioned Ratan Tata as well as Anil Ambani.

What does it mean for politics?
Singh and the ruling coalition have been weakened by the events, and the BJP is seen as having regained political momentum it had lost after defeat in the 2009 federal elections.

The Supreme Court criticised Singh for not acting quickly enough against Raja, a rare censure that was picked up by the BJP to accuse the government of shielding corrupt officials.

The attacks have nearly paralysed the government but it is not in danger of collapsing as its slim majority is not expected to see defections by coalition partners and no one, including the BJP, wants a federal election now.

The scandal has also touched Raja's regional DMK party, a leading ally of the ruling Congress party. Police say some of the bribes were routed through the DMK's television channel, controlled by the wife and daughter of the DMK party chief.

DMK rules the large southern Tamil Nadu state, which goes to polls in April. The corruption cases could affect the electoral performance of the DMK-Congress coalition there.

What does this mean for investment in India?
While corruption itself has been largely shrugged off by investors, the regulatory uncertainty from the review of past government decisions is a source of concern to investors.

The benchmark Mumbai stock index ended the March quarter as the world's worst performer, weighed down in part by worries over fallout from a spate of scandals.

If the telecom ministry does decide to cancel some or all of the 85 licences it is scrutinising, questions will be raised on whether foreign investors can trust Indian government contracts.

The licences under review include those now held by Telenor and Etisalat's local ventures.

It is too early to know whether licences will be cancelled, but pressure will be on the government not to do so because operators have invested millions of dollars in rolling out networks and cancelling them will inconvenience subscribers.

The telecom ministry is also mulling imposing charges for spectrum it granted to telecom firms in the past and has levied fines on newer firms for not rolling out networks quickly enough.

For years, India gave operators spectrum beyond contracted levels free of cost as they added subscribers.

If the spectrum charges are imposed, market leaders Bharti Airtel and Vodafone would have to pay hundreds of millions of dollars in back-charges. For newer entrants, hefty fines could strain their finances and force them to exit.