The government will let cellular carriers share airwaves and allow for consolidation in a crowded industry that has been battered by ferocious competition as well as a licensing scandal that may have cost New Delhi up to $39 billion in lost revenue.

Under a draft telecoms policy unveiled on Monday, second-generation mobile spectrum that now comes bundled with a telecoms licence will be separated and priced on a market basis, which means operators will have to pay for additional network capacity, driving up costs.

With more than 850 million users, India's mobile market trails only China's. The difference is that 15 players slug it out in India; in China there are only three. Operators have long said the Indian industry is ripe for a shakeout.

The new policy will facilitate consolidation in the converged telecom service sector while ensuring sufficient competition, Telecoms Minister Kapil Sibal told a briefing, where he announced several initiatives but gave few details.

He had previously said the government will not let the number of players in any telecoms zone fall below six. India allocates mobile phone licences by zone, of which there are 22.

India decided to overhaul its decade-old rules for the industry after alleged rigging in the grant of licences in 2007/08 came to light late last year, forcing the then-telecoms minister to resign. Police have charged 14 people in an ongoing investigation into the case, including the former minister.

The probe widened on Monday, when federal police said they were formally investigating another former telecoms minister, Dayanidhi Maran, his media mogul brother, and Malaysian tycoon Ananda Krishnan over the 2006 sale of Indian phone company Aircel to Malaysian telecoms firm Maxis.

Even before the scandal, investors had been scared off from an industry whose rock-bottom tariffs have been a boon to customers but have squeezed margins for operators.

MIXED BLESSING

Carriers, however, continue to invest to capture what they hope to be vast potential, stumping up $22 billion -- far more than expected -- in government auctions last year for third-and fourth-generation airwaves.

The new draft policy, which is focused on boosting the availability of broadband and improving rural telecoms access, is expected to be a mixed blessing for operators, who will be required to provide free roaming across the vast country.

Top Indian mobile operators generate 5 to 7 percent of revenue from roaming charges, according to Jaideep Ghosh, a partner at KPMG.

The draft policy talks about exit option, which could be the entry point for some new players, he said. Whether consolidation will happen or not will be more of a business decision depending on valuations and other things.

Shares in Bharti Airtel, Reliance Communications and Idea Cellular gained between 1.7 and 2.5 percent in a market that rose 2 percent.

Sibal's briefing was in progress when the market closed.

A spokesman for Norway's Telenor declined specific comment on the policy but said: For Telenor it is important that the new telecom policy establishes a clear and investment-friendly framework that promotes a level playing field and allows young operators to compete.

Telenor's Indian joint venture Unitech Wireless is racking up losses as it struggles to cut costs, but aims to break even by 2013.

The Indian telecoms market has been completely paralysed in anticipation of this law, so it is hard to interpret this in any other way than (as) positive for the telecoms market in India, not least for Telenor, said Carnegie analyst Espen Torgersen.

SPECTRUM SHARING

India will release 300 megahertz of additional spectrum by 2017 and another 200 megahertz by 2020, cheering larger mobile firms who have been cramming million s of new subscribers each month onto increasingly congested radio airwaves.

In the first seven months of 2011 India added an average 15 million cellular users each month.

The proposal to provide more spectrum, allow sharing of spectrum and allocation of spectrum through transparent market based processes are progressive policy decisions, which will provide much needed capacity augmentation to this vital sector, market leader Bharti said in a statement.

The telecoms ministry is still consulting the sector regulator on issues including pricing of spectrum, licensing issues and mergers, and will set rules later, Sibal said.

The new policy should be finalised by December, he said.

Analysts said more details on the policy are still needed.

What seems to be the idea is they want to promote more of data and broadband, for which they are willing to provide more spectrum, said Naveen Kulkarni, an analyst with MF Global.

Vodafone, the world's biggest mobile carrier by revenue, has faced a host of problems since entering the Indian market in 2007, including a 2.3 billion pound ($3.6 billion) charge last year due to stiff competition and spectrum costs.

Vodafone's experience is often cited as a cautionary tale for foreign companies in India and Chief Executive Vittorio Colao has criticised Indian telecom rules.