Gurugram/Bengaluru: The September 3 decision of the Supreme Court in the so-called Adjusted Gross Revenue (AGR) case has left wide open the question of whether the Department of Telecommunications (DoT) in the Union Ministry of Communications must be paid past dues by telecommunications companies (telcos) that have undergone or are undergoing insolvency proceedings. At stake is Rs 38,959 crore that the DoT is owed by three companies – Aircel, Reliance Communications (RCom), and Videocon Telecommunications.
Whereas the AGR dues of Videocon are less contentious, the manner in which the dues of Aircel and RCom will be paid is likely to get embroiled in legal tussles. If some thought the more-than-a-decade-long saga of payment of back-dues and the definition of what constitutes revenue that must be shared with the government, had reached a resolution of sorts––even as it completely disrupted the working of the industry and tilted the balance decisively in favour of Reliance Jio––the story seems far from over.
While the DoT holds the position that it must be paid the pending dues of these companies for use of electro-magnetic spectrum, the question that remains unresolved is whether spectrum can be sold by these sick companies as a part of the resolution process under the Insolvency and Bankruptcy Code (IBC). Moreover, it has been argued that government approval would be required for any sale or transfer of spectrum.
According to a report by Bloomberg, banks are expecting just under Rs 42,000 crore from these three debt-ridden companies. This amount is unrelated to their AGR dues and calculated on the basis of resolution plans that have been submitted, after banks take a “hair-cut,” a euphemism for the value of an asset that is lower than its market price which is used as collateral for a loan, expressed as a proportion of the value. The same report added that the Ministry of Corporate Affairs is keen on expeditiously pushing through the sales of these bankrupt telcos.
While Videocon’s dues of Rs 1,376 crore will have to be paid by Airtel, which acquired the company in 2016, five industry experts and analysts (three of whom spoke on condition of anonymity) told NewsClick that Reliance Jio and Airtel, that have been using spectrum licenced for use to RCom (headed by Mukesh Ambani’s younger brother Anil Ambani, who claims he is broke) and Aircel through spectrum trading and sharing agreements may be able to escape payment of much larger dues of Rs 25,194 crore and Rs 12,389 crore, respectively. How this can possibly be achieved is the substance of this article.
A QUICK RECAP
The Supreme Court’s verdict, issued by a bench led by Justice Arun Kumar Mishra and comprising Justices S Abdul Nazeer and M R Shah, was one of Justice Mishra’s final rulings prior to his retirement on September 3. The judgement was on petitions by DoT and by the telcos to permit a staggered payment schedule for dues to DoT arising out of the Supreme Court judgment of October 24, 2019, by the same bench, which had expanded the definition of AGR to include non-telecom revenues. While the telcos had sought a 15-year schedule for payment of past dues and DoT had sought a 20-year schedule, the Supreme Court granted only a 10-year payment schedule.
Under revenue-sharing arrangements signed by the telcos with the government following competitive auctions for spectrum, they had agreed to pay a certain percentage of their AGR to DoT as licensing fees and spectrum usage charges. In the 2019 judgment, the Supreme Court had agreed with DoT’s arguments, and declared that AGR was to be calculated by including all revenues earned by a spectrum holder, including those not involving the direct use of spectrum. Until then, the AGR was calculated based on revenue directly earned through spectrum usage and excluded large portions of the revenues of telcos. The verdict resulted in demands for massive sums from the telcos by DoT in the form of back-payments of recalculated AGR dues.
WHO’LL PAY DUES OF INSOLVENT COMPANIES?
During the hearings, comments made by the judges had suggested their line of thinking. On August 22, the court had observed that if any telecom operator has acquired spectrum through trading from another operator, then past dues need to be cleared. If the spectrum seller does not clear the dues then the buyer has to clear them. Addressing Videocon’s counsel, the bench had said: “As per trading guidelines, past dues need to be paid before transfer of spectrum. If you don’t pay, Bharti Airtel, which acquired Videocon’s spectrum will have to pay.”
However, interestingly, in its final verdict, the court didn’t take a definitive stand, declining to rule on the question of whether spectrum held by companies that are under insolvency proceedings before the National Company Law Tribunal (NCLT) can be sold under those proceedings, and which parties would be liable for AGR dues payable by those companies. The apex court stated that the NCLT was the appropriate forum to decide on the issue. And crucially, the court ruled that no company that is using spectrum held by these insolvent companies under spectrum sharing and trading agreements would be liable for the latter’s AGR dues.
In an interim order issued on September 25, the Supreme Court ruled that the National Company Law Appellate Tribunal (NCLAT) would decide the issue, reducing one appellate layer from its earlier decision.
At the heart of the contention is a question of policy. Telecom spectrum is a limited natural resource, and India’s telecom policy is based on the implicit principle that the government is the ultimate owner of spectrum, which is used by service providers on issuance of a licence.
Brijendra K Syngal, former head of Videsh Sanchar Nigam Limited and an industry expert, explained to us that the policy imperative behind allowing spectrum trading and sharing between companies is to ensure that spectrum, a scarce resource, is optimally used and monetised by the government.
The rules governing spectrum trading and sharing issued by the government in 2015 require that both transacting entities must hold licences allowing the use of spectrum in the service area of which spectrum is being traded/shared, and that all dues to DoT are clear.
In 2016, Airtel executed a spectrum trading deal with Aircel to use 20 MHz (megahertz) of the 2,300 MHz band 4G (fourth generation) of the latter’s spectrum in eight telecom circles, or regions, across the country. Reliance Jio (RJio) acquired 47.50 MHz spectrum in the 800 Mhz band from RCom through trading deals between January and March 2016. The spectrum was acquired across 13 circles and is currently being used by Reliance Jio to provide 4G (fourth-generation mobile telephony and internet data) services. In addition, RJio is sharing spectrum with RCom in 15 circles––thus making a total of 58.75 MHz spectrum of RCom in the 800 MHz band currently being used by RJio.
What NCLAT will have to decide is, who will have to pay the additional AGR dues arising out of the Supreme Court’s 2019 verdict––Rs 25,194 crore in the case of RCom and Rs 12,389 crore in the case of Aircel––and whether these dues must be paid before the spectrum of these companies are sold under resolution proceedings, as DoT sought, or through some other arrangement.
Crucially, the question will arise as to whether, as far as the portion of spectrum that is licenced to these bankrupt companies but are in use by others through spectrum sharing/trading deals is concerned, these companies––Airtel in Aircel’s case and RJio in RCom’s case––can be asked to pay the past dues that arise against the spectrum being used by them.
A LOOPHOLE IN THE LAW?
A financial analyst with a major consultancy firm, who has specialised on the telecom sector and who requested anonymity as he is not authorised to speak to the media, told NewsClick: “As per the Supreme Court, all assets and liabilities will be part of bankruptcy proceedings. This, to my understanding, means that DoT, which is the operational creditor in case of spectrum licenced, needs to be paid dues that remain after filing of bankruptcy by the companies concerned as per the process of the NCLAT.”
However, he added that “banks have argued against the claims of the DoT.” They told the Supreme Court that at the time of licencing of spectrum by DoT, “it was not written in the tripartite agreements (among the operator, the banks and DoT) that the Department will claim the spectrum back in case of a bankruptcy.”
Under the IBC, operational creditors are on a lower level of priority than secured creditors like banks, which places DoT at the back of the queue as far as payments through the resolution process are concerned. However, the banks also admitted before the Supreme Court that DoT’s approval would have to be taken for transacting (sharing, trading, or selling) spectrum since the government is the licencing authority.
In one instance, at least, the preference of an NCLT-appointed Insolvency Resolution Professional (IRP) came down on the side of the banks. The apex court’s order records that the IRP appointed by the NCLT to manage Videocon’s assets through the resolution process “applied before NCLT to restrain DoT from encashing certain bank guarantees submitted by Videocon.” “Banks have said that it is up to the IRP to decide as per the agreement with creditors and that DoT will be paid as per rules,” the analyst pointed out.
There remains a legal gap (call it a loophole, if you like), however, which will have to be filled up by the NCLAT, points out independent telecom industry analyst Mahesh Uppal.
“It is unclear from the spectrum sharing and trading rules under what circumstances can spectrum be shared/traded between one entity undergoing bankruptcy proceedings and another which is not,” he told NewsClick, adding that “there are clauses where dues are made the liability of both, buyer and seller,” and that while “rule 11 and 12 of the trading rules seem clear that known government dues must be cleared before trading and the trading agreements must explicitly allow for dues that emerge later, there is no clear provisions relating to bankrupt companies.”
The Supreme Court’s verdict says that it is for the NCLAT “to decide whether the licence/spectrum can be transferred and be a part of the resolution process initiated under the provisions of the Insolvency and Bankruptcy Code” and “whether spectrum/licence can be subjected to resolution process as an asset belonging to the telecom service providers, and whether the AGR dues are operational.”
The only clear case it seems, according to Syngal, is that of Airtel and Videocon. “Airtel acquired Videocon lock stock and barrel. In the case of an acquisition, the acquirer bears the brunt. The merger and acquisition guidelines are clear.”
Another analyst told NewsClick that as things stand, “if an entity shares/trades 100% of its spectrum (that is, if it is acquired), it is liable for all past and present AGR dues, but if 99% is shared/traded, then the entity has no past liability?”
This person wondered that if indeed this is the case, does it not seem “illogical and absurd.” Yet, this precisely appears to be the case for Airtel’s use of a part of Aircel’s spectrum through trading, and RJio’s use of a part of RCom’s spectrum through trading and sharing.
Whereas Uppal said this interpretation of the rules made no sense to him, Syngal agreed with the view of the analyst quoted, saying: “Clever and astute as the Ambanis are, they decided to use this loophole in the rules relating to spectrum trading and sharing––RJio has used this situation extremely cleverly.”
“That is why we say the law is an ass, absurdity is thy name,” he quipped.
A former CEO of a telco, who spoke on condition of anonymity, told NewsClick that at the heart of the matter is what principles the authorities eventually intend to follow.
“All good policies should start with a preamble expressing honestly what you are setting out to achieve. The Indian Constitution is the best example,” the former CEO said, adding that “the National Telecom Policy of 1999 also was more than half decent. But, when you follow no principle, or lack principle, then policy ends up as spaghetti.”
“Oh, what a tangled web we weave, when first we practice to deceive!” he concluded, quoting the 19th Century Scottish poet Sir Walter Scott.