|India, the world's fastest growing mobile phone market, has attracted many investors in recent years [GALLO/GETTY]
India's attorney general appeared before the supreme court Tuesday to defend Manmohan Singh, the prime minister, against allegations he failed to act over an alleged multi-billion dollar telecoms scam.
The court asked for an explanation why Singh took 16 months to examine a request for his now-sacked telecoms minister to face prosecution over alleged corruption.
Andimuthu Raja, the telecoms minister, was forced to resign last week after his ministry was accused of selling licences too cheaply in 2007-2008, possibly costing the state $39bn in revenue, according to an official watchdog audit. He denies any wrongdoing.
G.E. Vahanvati, the attorney general, told the judges on Tuesday that Singh "had made all efforts to deal with the complaint".
He told the court that a complaint lodged by Subramanian Swamy, a senior opposition politician, against Raja was "misconceived in law".
Swamy wrote to the prime minister in 2008 demanding that Raja was investigated and prosecuted, but Swamy said he received a reply only in March this year saying no inquiry would be launched.
Singh has not been accused of benefitting from any alleged corruption, but under Indian law the prime minister must approve criminal proceedings against any cabinet member.
Any significant criticism of Singh by the judges could make it hard for the prime minister to remain in office.
In 2008, India issued 122 new telecoms licences at a price set in 2001.
The state auditor said that the flawed allocation process benefitted selected companies as the telecoms ministry did not carry out the required due diligence and granted 85 out of the 122 licences to ineligible applicants.
He further said that several Indian companies deliberately witheld information, submitted fake documents and used fraudulent measures to get licences.
It is still too early to know if any of the licences would be cancelled or not. There is likely to be pressure not to cancel any licences as operators have invested in networks and these networks have subscribers.
But the government could ask operators to compensate for the potential revenue loss by imposing fines.
Any penalty or adverse regulatory action could affect companies such as Telenor and Etisalat, which were not part of their respective Indian ventures when the licences were distributed.
India's mobile phone market is the world's fastest-growing with nearly 700 million users, making it a must-invest market for any major global operator.
But regulatory uncertainties have been a concern to operators and and this latest controversy would force future investors to be more careful before they decide to invest in the market.
Vodafone, the single-biggest foreign investor in India, is fighting a $2.5bn tax bill over its acquisition of a mobile firm in the country and has signalled frustration with Indian regulations.
Opposition parties have demanded a thorough parliamentary investigation and have blocked proceedings until the government relents.
The running of government is not affected by the closure of parliament.
Mumbai's financial markets have not been affected by the scandal. But analysts say telecoms stocks would remain vulnerable until there is clarity on whether licences will be revoked or not.