India's Supreme Court deals blow to corruption - and foreign investors (+video)

India's Supreme Court today issued a landmark decision against government corruption. The move will ultimately raise international confidence in India, but in the short term investors may stay away while the country cleans house.

The court revoked a set of telecom licenses granted in 2008 through a rigged government bid. The “2G scam” – which became India’s largest public corruption scandal – robbed government coffers of about $40 billion. Today’s ruling will strip companies of the underpriced licenses and allow the government to resell them at more competitive rates.

This sudden upheaval in the cellphone market is the sort of volatility caused by a corruption crackdown that has made investors nervous during the past year.

Foreign investors fled India last year for a number of reasons, including uncertainty about what business-as-usual corruption might suddenly be uncovered and punished. In the short-term, the decision spells out more economic woes for the world's fourth-largest economy – which was, until recently, a beacon of hope during the darkest hours of the global recession.

“This will have a hugely negative impact on future foreign investment because it sends a signal that a license issued by the government of India has no meaning and could be considered null and void because of a judgment two or three years down the line,” said Rishi Sahai, director of the consulting firm Cogence Advicor, according to a roundup of reactions by The New York Times.

As of press time, share prices in one of the license losers, Norway’s Telenor, have fallen nearly 5 percent today.

Foreign institutional investors (FIIs) placed only $8.4 billion in India in 2011, roughly a fifth of the $39.5 billion they invested the previous year. The investor pullout began at the start of 2011 and the trend was flagged early by Espirito Santo Investment Bank. 

1 | 2

Next