Etisalat's ambition to acquire another mobile operator in India faced a new challenge after the country's auditor general declared the auction for second-generation phone licences lacking in transparency.
Last week, a report released by the Comptroller and Auditor General of India claimed the prices paid for licences were "unbelievably low". Andimuthu Raja, the country's telecommunications minister, resigned from his post.
The Indian government is now deciding whether to rescind some or all of the 122 spectrum licences it awarded in 2008 to nine companies for 123.9 billion rupees (Dh9.99bn).
The auditor general claimed the treasury missed out on as much as US$40bn (Dh146.92bn) of revenue from the auctions.
Etisalat's Indian subsidiary was among companies mentioned in a government report. But Etisalat acquired the company, Swan Telecom, only after Swan had purchased the spectrum.
Etisalat acquired a 45 per cent stake in Swan for $900 million in March last year in a deal that included management control. The remaining 55 per cent is held by two Indian companies, Dynamix Balwas Group and Genex Exim.
As the government decides what its next move will be, financial analysts say interest in takeover deals will be thin in the short term.
"Nobody would like to acquire in an uncertain environment," said KK Mital, a fund manager at Globe Capital Market in New Delhi. "There would be some consolidation only after there is some clarity."
So far this year, there have been 27 transactions in India's telecoms industry worth a total of $7.83bn, a notable decrease from last year, when 33 deals valued at $10.45bn were made.
"Deals in the domestic wireless sector are likely to slow down in the short term," Prahlad Shantigram, the global head for mergers and acquisitions at Standard Chartered, told Bloomberg. "Investors are following the 'wait and watch' approach for now, given the regulatory overhang."
An executive at Etisalat DB who declined to be identified said cancelling any of its Indian licences appeared to be off the table, but the company might have to pay an undetermined penalty next year.
The executive did not rule out the possibility of Etisalat acquiring another company in India in the future.
"Companies will still try to push each other [for an acquisition]," the executive said. "Either the acquirer makes a push or the company looking to be acquired makes a push, but it could still happen. I don't think there will be much impact, but we'll see."
Etisalat's Indian business operates under the Cheers Mobile brand and had about 43,000 subscribers as of August, the most recent month for which data are available, according to the country's telecoms regulator.
Over the past year, Mohammed Omran, the chairman of Etisalat, has stated the company's intention to aggressively expand in India. The operator has been linked with Reliance Communications and Idea Cellular, but so far no deals have been announced.
Mr Omran has repeatedly said the country's telecoms industry will enter a period of consolidation and Etisalat will be one of the main acquirers. India has 15 mobile operators across the country with phone rates as low as 0.3 rupees a minute.
Etisalat has to wait until the start of next year before it is allowed to acquire another Indian mobile operator, according to the foreign investment rules set by the country's telecoms regulator.
Waiting until the dust settles in India may turn out to be a blessing for Etisalat. The operator is trying to raise $8bn in bonds to help fund its purchase of a 51 per cent stake of Kuwait's Zain.
Etisalat has begun the due diligence process to acquire the company in a deal worth about $11bn at 1.7 dinars a share.
The operator also has Dh5.3bn of existing debt with its international subsidiaries in Egypt, Zambia and western Africa.
* with Bloomberg
