Can Spectrum be Subjected to Proceedings under IBC?
[Sanjana is a fourth-year student at Symbiosis Law School, Hyderabad.]
In Union of India v. Association of Unified Telecom Service Providers of India (AGR-I), the Supreme Court of India determined the Adjusted Gross Revenue (AGR) dues arising out of the spectrum licensed to telecom service providers (telcos) by the government.
However, there were certain companies such as Reliance Communication, Aircel Group, Sistema Shyam Teleservices, among others, that were undergoing proceedings under the Insolvency and Bankruptcy Code 2016 (IBC), and there was considerable uncertainty as to how the massive dues from these entities would be recovered. Amid these questions, in July 2020, the Supreme Court further stated that the dues, at any cost, were to be paid, and no dispute in respect of the amounts and components of the determined dues would be entertained.
In light of this, the Supreme Court in Union of India v. Association of Unified Telecom Service Providers of India (AGR-II) raised several questions to be determined by the NCLT, one of them being whether spectrum is capable of being subjected to proceedings under the IBC. The present article examines some of the several considerations involved in answering this question.
Analysing Spectrum Management and Trading in India
‘Spectrum’ refers to the ability of space to transmit energy, and different bands of radio-based communications operate on different bands of spectrum. Naturally, this ability has been treated as a scarce resource. However, once commercial use began, it has been subject to strict government regulation. In the Cricket Association of Bengal case, the Supreme Court noted that airwaves, or frequency, is public property and is limited, and that it must be licensed by authorities for the best use in the interest of society. Further, in Centre for Public Interest Litigation, the Supreme Court laid down that spectrum is a finite, scarce natural resource, while affirming that although such natural resources belong to the people of India, they vest in the Government of India (GoI) as a “matter of trust”.
Spectrum allocation and licensing rights have remained with the Department of Telecommunications (DoT), and not the Telecom Regulatory Authority of India (TRAI). The Indian Telegraph Act 1885 gives the GoI the exclusive power to manage and grant licenses in respect of wired telegraphs, and wireless telegraphy through Section 5 of the Indian Wireless Telegraphy Act 1993. Spectrum licensing is similar to other regulatory licenses, such as the one under the New Exploration Licensing Policy, where the GoI allows for licenses of exploration to public and private companies, in exchange for a royalty.
Can the license provide the right of ownership?
It is understood that license does not confer ownership, and merely permits usage because a license does not grant interest or property in the thing licensed. In Associated Hotels of India Limited, the Supreme Court stated that a license does not create any interest or property in favour of the licensee, but only allows the right to use what is licensed for a particular purpose. Similarly, a spectrum license is a “right to use” in exchange for a fee, for a fixed duration. Therefore, an assertion that the spectrum licensed to telcos is “owned” by them is incorrect.
Spectrum Trading in India
Spectrum trading refers to the transfer of the right to use spectrum obtained through a license from the GoI. Trading was permitted in India through the Guidelines for Trading of Access Spectrum by Access Service Providers (2015 Guidelines) only in the form of a transfer of the right to use, and not a lease. More importantly, trading amongst licensees was only permitted on the premise that all prior dues of the seller-licensee are cleared; if an agreement is concluded with any dues still payable, the dues shall be the liability of the buyer-licensee. The licensor’s interest is to be secured throughout, and all conditions and caps attached to the initial license, including its validity, remain operative even after the transfer comes through. Thereby, spectrum trading does not involve a conveyance of the ‘spectrum’ itself, but of the right to use it.
Accounting Treatment of Spectrum Licenses
The Committee of Creditors in AGR-II brought forth the contention that both, spectrum and its license, are intangible assets. An intangible asset is a non-monetary asset without physical substance; such an asset may arise from contractual or other legal rights, including licensing agreements. Other criteria to classify an intangible asset are future economic benefit attributable to the asset flowing to the entity, and the cost of such an asset capable of being measured reliably; as regulatory licenses meet these criteria, they can qualify as intangible assets.
Additionally, spectrum licenses can be classified under this meaning as per the GAAP AS-26, the Guidelines for the Reporting System on Accounting Separation Regulations 2016, and the IAS-38. TRAI’s Consultation Paper on the Auction of Spectrum states that the right to use spectrum is to be treated as an intangible asset of a telecom operator, as it is an essential requirement for an operator to run its business.
Further, in Piem Hotels Limited, it was noted that approvals and licenses were intangible assets capable of being subjected to depreciation. A similar view, in the context of a spectrum license, was also taken in Vodafone India Limited, wherein it was stated that the right to use spectrum is an intangible asset for taxation considerations. Accordingly, it emerges that spectrum licenses are capable of being treated as intangible assets.
Spectrum and Proceedings under IBC
This section examines how spectrum licenses of corporate debtors can be dealt with under the IBC, firstly under resolution proceedings, and secondly, under liquidation proceedings.
a) Resolution under Chapter II of the IBC
Under the moratorium vide Section 14 of IBC, licenses and permits given by the Central Government cannot be terminated on the ground of insolvency of the corporate debtor; such moratorium operates until the completion of the CIRP. The idea behind it is to enable the corporate debtor to carry itself as a going concern during the CIRP by preserving its assets and legal rights in respect of any property in its possession or occupation.
Further, Section 18 states the assets of the corporate debtor that the interim resolution professional is to take control and custody of. Although intangible assets are included in this ambit, assets owned by a third party in possession of the corporate debtor under contractual arrangements are expressly excluded. This is also an exception to the moratorium period, to the effect that assets of a third-party can be transferred during the moratorium period.
As spectrum is a natural resource, not owned by the private entity making use of it, spectrum itself will not form a part of the assets of the corporate debtor (the spectrum licensee). However, the right to use spectrum (license) is protected under the moratorium imposed by Section 14. In Aircel Limited, the NCLT acknowledged that spectrum licenses cannot be terminated during the moratorium period, as the right to use spectrum was significant in running the company through the CIRP.
b) Liquidation under Chapter III of the IBC
The moratorium ceases to have effect once an order of liquidation has been passed by the NCLT, as per Section 14(4). Further, Section 35(1)(f) empowers the liquidator to make a sale of the assets of the corporate debtor once such an order is passed. Moreover, Section 36(3)(d) describes the components of the liquidation estate and includes contractual rights, with an immediate exclusion of assets held under contractual arrangements for the use of the asset without a transfer of title, under Section 36(4)(a)(iv). Going by this exclusion, it would be far-fetched to assert that spectrum itself licensed by the GoI can be treated as an asset of the corporate debtor, and form a part of the liquidation estate under the IBC. On the other hand, the license itself can form a part of the liquidation estate.
As an intangible asset, a spectrum license is protected by the moratorium under Section 14 of IBC, unless an order of liquidation is passed; once liquidation is ordered, the spectrum license can form a part of the liquidation estate and is capable of being transferred. A rider to spectrum trading in the 2015 Guidelines is that all prior dues of the transferor must be cleared before such a trade.
Under IBC, a transfer of the license to use spectrum would be different from spectrum trading as contemplated by the 2015 Guidelines, as its object is distinct and it is not between two access providers. While under the 2015 Guidelines the objective is to enhance competition and consumer benefit, under IBC, it would be a successful resolution or recovery of dues. Moreover, any transfers of spectrum licenses, if made, must be done with required approvals from the DoT, in line with Section 30(2) of IBC.
In light of this, while spectrum may not be subject to IBC proceedings, spectrum licenses may, and can, in fact, aid in the recovery of the massive AGR dues from the companies already undergoing insolvency.