India’s top two mobile phone carriers, Bharti Airtel and Reliance Communications, are expected to report lower quarterly profits, with investor focus firmly on a probe into a multi-billion dollar 2G spectrum licensing scandal.

Easing competition in the world’s fastest growing telecom market with about 800 million subscribers has been good news for companies after a vicious price war had led to sharp cuts in voice call prices.

Companies including Bharti and Reliance Comm have recently started rolling out third-generation (3G) networks and are betting on the pick up of data services to boost margins.

But regulatory uncertainty has clouded the sector’s outlook with the fate of dozens of licences -- including those now held by arms of Telenor and Etisalat -- hanging in balance after a state auditor CAG (comptroller auditor general) said they wrongly won those licences in a 2008 grant process.

“The sector is going through a sentimental breakdown, there’s a lot of uncertainty,” said K.K. Mital, head of portfolio management at Globe Capital.

Police have arrested a former telecom minister A. Raja, top officials of the Indian partners of Telenor and Etisalat, and three executives of billionaire Anil Ambani’s Reliance ADA Group that controls Reliance Comm, and have charged them with rigging the grant of lucrative licences and radio spectrum.

The state auditor said the flawed licence grant process may have cost the state coffers as much as $39 billion in lost revenue. All indicted have denied any wrongdoing.

“Bharti is relatively stronger, a positive candidate, because their name is not there in the scandal. And that’s why the stock is performing,” Mital said.

Shares in Bharti, the country’s top mobile phone carrier, have gained about 7% so far this year, outperforming a 7.4% slide in the BSE benchmark Sensex

Bharti’s close rival, Reliance Comm , a unit of which has been named in the telecom probe, has lost nearly a third of its value this year.

Africa key for Bharti

Last year, Bharti acquired telecom operations in 15 African countries in a $9 billion deal that made it the world’s fifth-biggest mobile carrier by customers, but the loss-making African businesses have been a drag on Bharti’s earnings in recent quarters.

Bharti’s March quarter net profit probably fell by about a fifth, a Reuters poll of 10 brokerages showed. The firm has cut prices in several African countries to boost usage and has said revenue growth is picking up.

“Still some distance needs to be covered for Africa,” Globe Capital’s Mital said, adding it may take Bharti one to two years to make the African operations profitable.

In India, Bharti’s 162 million mobile customers account for about a fifth of the market. The New Delhi-based firm said in early April it had added 2 million customers in just over two months of 3G services launch.

Possible steep increases in prices of second-generation (2G) mobile spectrum and a one-time fee proposed for spectrum holding beyond 6.2 megahertz are overhangs for Bharti, Vodafone’s and Idea Cellular. The telecom ministry is yet to take a final decision on 2G spectrum pricing.

Reliance Comm’s profit for the March quarter is seen plunging about 75%, marking the seventh straight quarter of falling profits for India’s No. 2 mobile carrier that had more than $7 billion in debt as of end 2010.

The company’s plans to cut debt by selling a stake in its tower business and getting a strategic investor to sell an up to 26% stake in itself have so far been unsuccessful.

Reliance Comm, which had about 136 million mobile customers at end-March, accelerated its subscriber additions in the last few months helped by its cheaper voice call prices and after India allowed mobile number portability.