Indian police will file charges against a former telecoms minister and other government and corporate officials this week, a government lawyer said on Tuesday, in a multi-billion dollar telecoms corruption case that has shaken government and business.

Alleged corruption in a 2007-08 telecoms license and spectrum allocation has damaged confidence in the ruling Congress government, has led to calls for the resignation of Prime Minister Manmohan Singh and has worried investors in Asia's third-largest economy.

The announcement of the first formal charges in the investigation into a scandal that a government auditor estimates cost the exchequer up to $39 billion came hours after two more arrests of company executives.

The charges may put further pressure on the embattled prime minister, criticized by the Supreme Court for failing to act quickly enough against his minister. While his government will likely survive, the scandals have almost paralyzed policymaking.

Police will file charges against former telecoms minister A. Raja, government officials and two companies, on April 2, government lawyer K.K. Venugopal told the Supreme Court on Tuesday.

Investigations will be completed by end-May, and more charges are expected to be filed, Venugopal said.

Venugopal also said Etisalat, the Gulf's largest telecoms firm, violated foreign investment and forex rules when it entered India. He accused Etisalat of using front companies to control more shares of its Indian operations than the 45 percent as publicly revealed and approved by authorities.

Earlier, in court, police lawyers accused Raja of having taken bribes from firms which are now the Indian arms of Telenor and Etisalat to grant them lucrative mobile phone licenses.

A federal report into the allocation highlighted irregularities and said kickbacks had been paid when licenses were granted in 2007-08 at rock bottom prices. The report forced the resignation and arrest of Raja.

Executives Asif Balwa and Rajiv Agarwal were arrested Tuesday in connection with the telecoms probe, a spokeswoman for India's federal investigative agency said.

The two arrested Tuesday are executives with real estate firm DB Realty, according to the company's latest annual report as well two people with direct knowledge of the matter.

Balwa is the brother of former DB Realty Managing Director Shahid Balwa, who was arrested in February in connection with the telecoms investigation. DB Realty's parent DB Group is Etisalat's India mobile joint venture partner.

All of the accused have denied any wrongdoing. Etisalat and Telenor have in the past said they bought into the Indian firms long after licenses were granted and therefore are not involved.

Etisalat was not immediately available to comment on the latest allegations. DB Realty said the officials arrested on Tuesday were innocent and the company fully backed them.

ECONOMIC REFORMS STALLED

The opposition has called for Singh's resignation and halted parliament, effectively blocking economic reforms such as freeing up diesel prices and allowing foreign investors into the supermarket sector.

The scandal has touched the very top of Indian society, including some of the stars of India's economic boom once seen as untouchable. Police have questioned businessmen including Anil Ambani, the billionaire chairman of the Reliance ADA Group.

Notices have gone out to telecoms firms asking why their licenses should not be canceled, sparking questions about regulatory stability.

Monday, a parliamentary panel probing the scandal called top Indian tycoons Ratan Tata and Anil Ambani to depose before it.

The scandal has weighed on the benchmark Mumbai stock market, which is down 6.8 percent since the start of the year, underperforming the MSCI's broader emerging markets equities index, which is down about 1 percent.

The corruption scandals, which include charges of graft at the 2010 Commonwealth Games and of officials at state-run banks taking bribes for corporate loans, have tarnished Singh's image as a clean and effective leader.

They could also affect the performance of the ruling Congress party in five state elections that begin in mid-April, in which the Congress must perform well or risk the coalition unraveling.

(Additional reporting by Stanley Carvalo in Abu Dhabi; Editing by Alistair Scrutton and Jeremy Laurence)

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