An Indian government representative denied that his country has banned Chinese telecom network suppliers from working on infrastructure projects, but a recent report suggests otherwise.

"We are in the process of putting in place a new system, which will apply to everybody. It is not a China-related issue," said Shivshankar Menon, a special envoy of India's prime minister, while in Beijing earlier this week.

A key part of Menon's trip involved damage control caused in part by a report in India's Economic Times that said the country had temporarily blacklisted 25 Chinese and one Israeli network equipment supplier from taking part in infrastructure projects.

The Indian government fears malicious software in foreign equipment could put national security at risk. It is particularly wary of China because the two rising nations share a long border and a rocky history.

Losing the Indian market would be a major hit to the Chinese companies, especially because of the current market in India. Nine telecom companies shelled out $11 billion in May to buy 3G licenses, and six spent $5.49 billion last month for broadband licenses. After such heavy outlay, the companies will now need to invest big on infrastructure.

Two of the largest companies on the list were ZTE and Huawei. In 2009, 10.1% of ZTE's business was in India, and India is Huawei's top foreign market in Asia. Now both companies are trying to shore up their positions on the subcontinent so they can retain the Indian market.

"We will follow the rules," said ZTE senior VP Jane Chen. "If a special request comes up, we will follow up."

Meanwhile, both companies are trying to expand their India operations to elicit government support and trust. Huawei plans to spend $300 million to $500 million to build a telecom equipment manufacturing plant near Chennai, and ZTE has said it will continue to ramp up its investments in India.

Apart from Huawei and ZTE, Lenovo, Sunsea, UTStarcom, Tongyu Communication Equipment, GrenTech, Maipu, and Israeli company Comverse were included on the list. Each hopes to continue doing business in India, but the situation could be outside their control.

"This already isn't a problem between enterprises," an insider said. "It has gone higher than that, to become a problem between countries."

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