Nine affected firms to seek Rs. 9,000 to 20,000 crore for surrendering spectrum

Adding financial injury to insult, the nine firms whose 2G licences were cancelled by the Supreme Court last week are now preparing to seek compensation from the government, particularly on the total entry fee of Rs. 9,013.94 crore, though their claims threaten to balloon to Rs. 20,000 crore or more on several accounts.

According to industry sources, several licencees are holding day-long meetings with legal advisors to understand their rights to such claims, the various heads under which damages can be sought and finally, the judicial forums where they are most likely to succeed.

The claims may extend from entry fee to investments upwards of Rs. 20,000 crore in capex, advertising, employee costs and other related expenses.

It is learnt that the Finance Ministry has also swung into action to determine its legal and contractual options in the event of a demand for such large refunds.

The heavier burden the Finance Ministry now carries is the huge debt exposure of banks towards these licenses on account of the entry fee and subsequent operating costs. For obvious reasons, the Ministry would want “Indian scheduled banks and Indian public financial institutions”, whose viability and general well-being is its responsibility, to be amongst the first debtors to get paid back, if and when such claims are settled.

However, the possibility of any claims being settled in FY 2012 appears bleak, sources confirm.

Repayment of bank loans by these companies will require unravelling of Annexure 7 of the Unified Access Service License (UASL) Agreement which relates to a tripartite agreement between the DoT, banks and telecom firms.

Significantly, the back-up guarantee for the loans through the tripartite agreement for the banks was the license agreement itself, with linked start-up 2G spectrum. Now, with the Supreme Court declaring the agreement illegal, operations have to be wound up and spectrum returned within a four-month timeframe. This 12-page agreement specifies “transfer or assignment of licence as a security for financial assistance” along with the “modalities of transfer”. Article 5 specifically relates to “termination of licence by the licensor”. Under this section, in the event of cancellation, the DoT will need to intimate the bank/FI prior to the exercising of its decision to terminate the licence.

It is also possible, given the complexities involved, the Supreme Court 's 120-day deadline and the possibility of domestic and international litigation, that the Finance Ministry will take the lead to seek clear guidance not only from the Law Ministry, but also from Cabinet.

Claims of two categories of firms face a stronger possibility of rejection: those facing corruption and fraud charges in the CBI court and those where the Supreme Court found that “the beneficiaries offloaded equity to others in the name of transfer of equity or infusion of fresh capital by foreign companies, and thereby made huge profits”.

While it is uncertain whether the government will eventually entertain any claims, companies are unlikely to temper their demands, setting the stage for more litigation. Some of this litigation could even be in international forums, with arbitration being another option. Unless claims are settled, these nine firms are further likely to resist returning the roughly 500 MHz of GSM spectrum that they cumulatively hold, despite the June 1, 2012 deadline.