* Graft scandal widens as PM to answer court criticism
* Indian telecoms shares hit by escalating investigation
* Parliament still stalled by protesting opposition
(Adds telecom industry details, background)
By Henry Foy
NEW DELHI, Nov 18 (Reuters) - Indian Prime Minister Manmohan Singh has been forced to explain to the Supreme Court his failure to probe a huge telecoms scam, in a widening scandal that prompted telecom investors to ditch their shares on Thursday.
Solicitor general Gopal Subramanium, representing Singh, will appear before the court by Saturday, the court said. Telecom shares fell as much as 10 percent as investors feared a full-scale investigation into the license allocations.
The court ruling has turned the spotlight on the scandal on to the highest political office in the country, underscoring the depth of the probe that could destabilise Singh's coalition and reduce government to policy limbo.
Telecoms Minister Andimuthu Raja was sacked at the weekend over accusations he sold telecoms licenses too cheaply, potentially losing the state up to $31 billion in revenues, according to a government audit.
On Tuesday, the Supreme Court took the rare step of publicly criticising Singh's slowness in deciding if Raja could be charged and investigated.
Raja is a member of the DMK, a regional party from Tamil Nadu that helps give the Congress party a majority in parliament. The opposition has stalled parliament as it claims Singh failed to act because he feared upsetting his coalition partner.
The court's criticisms have tarnished Singh's image as one of the country's most honest politicians and led to criticism he has failed to act on graft in a country mired by corruption.
While Singh and his coalition government are likely to survive the scandal, Congress is mindful that in 1989 it lost a general election partly due to a scandal over gun contracts involving close associates of then Prime Minister Rajiv Gandhi who were accused of taking bribes.
Senior Congress leaders met on Thursday to discuss the Supreme Court's remarks and opposition demands for a joint inquiry, with the ruling party anxious to end the parliamentary deadlock to allow the discussion of crucial pending reforms.
OPPOSITION ON OFFENSIVE
The opposition has stepped up its demand for a parliamentary probe after a report from the government auditor said the state may have lost up to $31 billion in revenues, roughly equivalent to the defence budget, in the granting of licences in 2007-2008.
Shares in mobile operator Reliance Communications and Unitech closed down 4.9 and 4.2 percent respectively on Thursday, as a wave of regulatory uncertainty swept through India's fiercely competitive mobile phone industry.
"There are concerns in the minds of investors that there could be an investigation in how companies like Unitech and Reliance Communications obtained spectrum," said Arun Kejriwal, a strategist with research firm KRIS.
Raja is accused of selling the licences at deliberately low prices to companies, some of which were ineligible, a charge he denies. The process also violated several rules, the report said.
Swan Telecom, since then bought into by UAE's Etisalat , was given a licence despite a unit of No 2 telecoms firm Reliance Communications holding over 10 percent of equity, a violation of rules, the report said.
Several firms, which now are part of Telenor's India operations, were also given licences despite not having adequate capital, the report said.
Indian real estate firm Unitech, which has a telecoms joint venture with Norway's Telenor, stated on Thursday that it had complied with guidelines prescribed by the Indian telecoms ministry in an attempt to quell investor fears.
Even by the standards of India, where corruption is pervasive, the scale of the 2G scandal has shocked India and galvanised the Hindu nationalist-led opposition.
India was ranked 87th in Transparency International's 2010 ranking of nations based on the perceived level of corruption. India lies behind rival China, which is in 78th place.
The Hindu-nationalist Bharatiya Janata Party (BJP) has threatened to block reform bills unless the government orders a parliamentary inquiry, though it is not thought likely to try to topple Singh's administration.
"The BJP is so embroiled in its own corruption allegations, such as in Karnataka, that it will not take the risk of attempting to pull down the government" said Amulya Ganguli, political commentator.
Both houses of parliament were again suspended on Thursday.
The government planned to push its reform agenda through the current session of parliament, including a bill to ease land acquisition for industry and mines. [ID:nSGE6A805B] (Writing by Alistair Scrutton; Editing by Sugita Katyal)
Our Standards: The Thomson Reuters Trust Principles.
