India's Supreme Court scrapped 122 telecom licences awarded in a 2008 sale at the centre of a corruption scandal, further embarrassing the government and causing upheaval for the flagship sector.
"Licences after January 2008 are quashed," Justice G.S. Singhvi told the court in New Delhi, on Thursday. "The Telecom Regulatory Authority of India will make fresh allocations by auction."
Mis-selling of the second-generation (2G) mobile licences was estimated by the country's public auditor to have cost the treasury up to $40 billion in lost revenue.
The minister in charge of the sale, A. Raja, is currently on trial accused of fraud and cheating, one of several corruption cases to have buffeted the government of Prime Minister Manmohan Singh.
While the cancellation order re-opens a damaging episode for the government, there was a reprieve for Home Minister P. Chidambaram who activists had wanted investigated by a special court trying suspects in the case.
The Supreme Court declined to rule on the issue, saying it was up to a special court to decide if there was evidence against Chidambaram, who was finance minister at the time of the 2008 sales.
Raja, a member of the DMK, a regional party in the Congress party-led national coalition, is suspected of rigging rules over the sale of the licences to favour some firms in return for kickbacks.
Lawyer Prashant Bhushan, who brought the case to the Supreme Court, welcomed the cancellations and also the fines announced by judges for companies who were awarded the licences.
"This is a historic judgement for the reason that now these companies which were the beneficiaries of these illegal licences... will have to effectively refund the benefit," he told reporters.
"The public exchequer will be able to recover the losses, he added, saying it would send a "strong signal" to dissuade corrupt corporations and public officials from conspiring together.
Among the companies affected are Uninor, a joint venture between Norway's Telenor and India's Unitech, Tata Telecom and Swan Telecom.
Graft has become a hot political issue in India due to high-level scandals such the so-called "2G scam" and contracts awarded for the 2010 Commonwealth Games in Delhi, as well as a street-level campaign by activist Anna Hazare.
Hazare galvanised millions of people in August last year when he held a 12-day hunger strike in New Delhi that triggered huge rallies of supporters across the country.
Many Indians complain that corruption is part of daily life for every transaction ranging from getting a driving licence to property sales. Graft is also seen as a major deterrent to international investment in India.
"This decision has multiple ramifications for the telecom sector, India's image as a destination for foreign investment and a political impact for the ruling Congress," said Jigar Shah, analyst with Kim Eng Securities.
Singh, who previously enjoyed a blemish-free reputation, has vowed to tackle the problem but his efforts to pass an anti-corruption law failed in December due to political wrangling.
The failure of the bill in the upper house was a further blow to Singh, whose administration also had to withdraw major reforms late last year to allow foreign supermarkets to operate in India.
The latest set-back for the government comes amid a flurry of local elections, including one starting next week in political heavyweight Uttar Pradesh, India's biggest state where Singh's party was hoping to make gains.
India's top federal police force, the Central Bureau of Investigation (CBI), has raided several politicians' houses as well as the nation's biggest telecom firms, Bharti Airtel and Vodafone Essar, during its probe.