India's booming but crowded telecoms sector has been roiled by controversy over a set of licenses given mostly in 2008 that a government audit said were issued too cheaply, depriving New Delhi of $31 billion and resulting in the sacking at the weekend of the telecoms minister.

Late on Thursday, a source with direct knowledge of the matter said the Telecom Regulatory Authority of India recommended to the government that it cancel 38 telecoms licenses because the operators did not meet rollout requirements.

While shares in Reliance Communications, Unitech and Videocon extended losses on Friday, market leader Bharti Airtel clocked gains in a market that fell.

"The regulatory uncertainty is a negative for the sector, but Bharti Airtel is well positioned for the 3G opportunity and should benefit from any sector consolidation," brokerage CLSA wrote.

CLSA rates Bharti outperform and the rest of the Indian sector underperform.

Bharti shares rose 7.4 percent this week, while No.2 player Reliance Communications fell 12.7, Unitech was down 16.6 percent, and Videocon lost 14.2 percent. India's market of nearly 700 million subscribers, the second largest, is served by 15 operators offering some of the cheapest service in the world. Competition intensified when new operators were granted licenses in 2008.

Licenses recommended for cancellation include eight held by the joint venture between Norway's Telenor and Unitech, two held by the India unit of Abu Dhabi's Etisalat, and 10 held by the India arm of Russia's Sistema, the source said.

The regulator recommended that another 31 licenses be examined for just meeting rollout minimums, the source said. India has 22 telecoms zones. Licenses are allocated by zone.

"We will consider it,” India's newly-appointed Telecoms Minister Kapil Sibal told reporters, referring to the regulator's recommendations. He did not elaborate.

Recommendations by the regulator are not binding, and the telecoms ministry has final say on licenses.

Telenor said on Friday that the company had not received official communication on the mobile license row, and that the operator was in India "to compete and do business." It said it had no other comment on the row.

On Friday, shares in Videocon dropped as much as 10.4 percent, extending the previous session's loss of as much as 5.4 percent. Videocon Telecommunications, a unit of Videocon, had licenses on the list for examination.

Unitech, a property company that is Telenor's joint venture partner in India for telecoms, ended down 4.6 percent at 67.95 rupees in a broader market that fell 1.7 percent.

The government audit found Unitech, which had no prior experience in the sector at the time, was allocated spectrum at "a throw away price" by the Department of Telecommunications, which is the telecoms ministry.

Shares in Reliance Communications, one of the firms named by the auditor, fell 3.6 percent, although it has denied the findings in the audit report.

Shares in Bharti ended 1.2 percent higher on Friday, while mid-tier operator IDEA gained 4.75 percent.