For many telecommunication firms with global aspirations, India was hailed as the promised land for expansion. With its vast population and stellar growth trajectory, it was a market that telecom companies actively pursued – in some cases, violating laws and ethics – to achieve a foothold in the market. But the February ruling by the Indian Supreme Court to revoke 122 licences, citing corruption and bribery, has changed the game in India and has raised the very real regulatory risks telecom companies face while expanding in emerging markets.

It is a realisation that has particularly hit Abu Dhabi-based Etisalat, which acquired a 45 percent stake in an Indian joint venture in 2008 for $900 million. The company, originally named Swan Telecom, had already acquired 2G licences prior to Etisalat’s investment. Just four years later, Etisalat lost all 15 licences under the ruling, was forced to write off $827 million due to the cancellation and is now embroiled in litigation against its Indian jointventure partners, with both sides claiming mismanagement and fraud.

“The magnitude of the Indian 2G scandal is an anomaly for the telecoms industry and its circumstances are relatively unique, although we commonly deal with similar issues for companies entering new markets and always seek to add deal protection mechanics in the legal documentation to protect our clients to the extent possible,” said Dino Wilkinson, partner in the sourcing and technology team of Norton Rose in Dubai. “The case illustrates the very real regulatory risk that telecoms operators face when seeking to expand into some of the more difficult markets in this region, particularly India.”

In an interview with The Brief last month, Etisalat’s group general counsel Isam Akrat said the company had followed a strict M&A process in acquiring a stake in the Indian joint venture, which it renamed as Etisalat DB. But no amount of due diligence could have predicted the irregular conduct undertaken by telecom firms in India, he said. Etisalat launched legal proceedings against Vinod Goenka and Shahid Balwa, top executives at its India partner DB Group, and against Majestic Infracon Private Limited, a DB Group company, for fraud and misrepresentation.

Majestic Infracon had filed a lawsuit against Etisalat last year alleging mismanagement of their joint venture.

Determining the outcome of either litigation in Indian courts will be difficult, said one attorney based in India, who asked not to be named. “This corruption scandal has had such widespread implications and given such a black eye to India, that there are definitely those out for blood,” he said. “There is a lot of scepticism over who knew what here,  and the courts are not in a particularly forgiving state of mind.”

In April, India’s Supreme Court rejected appeals to overturn an order cancelling the telecom licences awarded in 2008, dealing a blow to the companies affected. The decision came just a week after India’s telecoms regulator said it plans to recommend that carriers be denied a refund of their licence fees if they lose or surrender permits.

Norton Rose’s Wilkinson said the implications of the telecom scandal could be similar to the impact of the 2009 Satyam outsourcing case, in which the IT services company became embroiled in a $1 billion false-accounting scandal. The effect was felt not only by Satyam, but also by thousands of companies worldwide that relied on outsourced services from India.

“After that case, we witnessed an increased focus on supplier due diligence by prospective buyers of outsourced services. Whether or not the 2G scandal will result in less investment in Indian telecoms is an open question, but it will certainly mean that companies will wish to satisfy their boards that the risks are justified and manageable in light of the potential rewards,” Wilkinson said.

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