Thursday, Nov 18, 2010

(Adds audit report details, comments from analysts, share price) 


 
  By Romit Guha 
  Of DOW JONES NEWSWIRES

MUMBAI (Dow Jones)--Reliance Communications Ltd. (532712.BY) shares plunged Thursday despite the company strongly denying that it broke rules during an allotment of telecom licenses and 2G spectrum in 2008.

Investors, worried about the issue which has already cost the federal communications minister his job, shunned the stock, causing it to lose 10.1% in morning trade.

At 0724 GMT, the shares were trading 8% lower at INR148.90--in a Bombay Stock Exchange market up 0.2%--on concerns over what action the government will take on the allegations by India's top government auditor.

In a report tabled in Parliament Tuesday, the Comptroller and Auditor General of India said that Reliance Communications--through wholly owned unit Reliance Telecom Ltd.--held a 10.71% stake in Swan Telecom Pvt. Ltd. when Swan applied for a license in March 2007.

The CAG said the application violated Indian regulations, which don't allow telecom operators to hold 10% or more in any rival in the same service areas.

Swan Telecom, now called Etisalat DB Telecom Pvt. Ltd., received a license in January 2008.

The auditor's report deals mainly with the Indian telecom department's 2008 allotment of licenses and bandwidth, which it said caused a potential revenue loss of $38.9 billion to the government as the radio waves were given at rates fixed way back in 2001.

The audit report said that Swan Telecom appeared to be a "front company" for Reliance Telecom while applying for the license and that its application was "against the intent and spirit" of the licensing guidelines.

It added that, since Reliance Telecom was operating in all the service areas which Swan Telecom had applied for, the application didn't conform to licensing guidelines and so Swan wasn't eligible.

Reliance Telecom operates GSM services in eight of the country's 22 service areas.

Reliance Communications said Wednesday that "our group had no shareholding in Swan Telecom at the time of grant of license to them or any time thereafter, and that issue is accordingly not relevant to our company."

But it didn't say whether it had any stake in Swan Telecom at the time of submitting the license application.

Reliance Communications, India's second-largest mobile phone operator by users, added that the company "has always been in full compliance with all applicable laws, rules and regulations, and there has been no violation of our license conditions at any stage on account of cross-holdings in excess of 10%."

Officials at Etisalat DB Telecom couldn't be reached for comment.

The allegations over the mishandling of the bandwidth allocation forced federal Telecommunications Minister Andimuthu Raja to resign on Nov. 14.

Swan Telecom was among 13 companies which applied for and received licenses--which came bundled with radio bandwidth--to offer services under the global system for mobile, or GSM, communications in January 2008 in 15 service areas.

The company, in September 2008, sold a substantial stake to Emirates Telecommunications Corp. (ETISALAT.AD), and its name was changed to Etisalat DB Telecom.

Etisalat Telecommunications owns about 45% of Etisalat DB Telecom, with Mumbai-based Dynamix Balwas Group holding the rest.

The audit agency also said the introduction of dual technology--through which an operator could offer services using both the GSM and code division multiple access platforms--in October 2007 was done in a "hasty and arbitrary manner," which gave the "perception" of favoring some companies, including Reliance Communications.

"There is no certainty over what will happen from here because it is a tricky issue for the government," said a Mumbai-based analyst, who didn't wish to be identified.

Another analyst at a Mumbai-based brokerage, who asked not to be named, said investors are exiting because of uncertainty about what will happen to Reliance Communications' licenses.

Both analysts said that the stock will continue to see selling pressure until the matter is resolved.

-By Romit Guha, Dow Jones Newswires; +91-9967586928; romit.guha@dowjones.com

(END) Dow Jones Newswires

18-11-10 0809GMT