Tel-Hounds on Your Trail: Analysing Potential Objections to Resolution Plans in the Telecom Sector
[Pooja Shankar is an Associate at Trilegal.]
The telecom sector in India has been wrought with financial difficulty. This has been attributable to several issues ranging from sustaining the capital-intensive requirements of a telecom company, including periodical payments of various fees and charges to the government, to competing with fresh market entrants employing predatory strategies.
Aircel Limited (Aircel) and its associate companies were admitted into corporate insolvency resolution process (CIRP) on 12 March 2018, and the resolution plans submitted by UV Asset Reconstruction Company Limited (UVARC) were approved by the committee of creditors on 13 May 2019. The resolution plans were submitted before the National Company Law Tribunal (NCLT) on 19 May 2019 and are currently pending NCLT approval. Reliance Communications Limited (RCom) and its associate companies were admitted into CIRP on 15 May 2018. UVARC emerged as the successful bidder for the resolution plan in respect of RCom (as well as Reliance Telecom Limited), while Reliance Digital Platform & Projects Services Limited, an affiliate of Reliance Jio Infocomm Limited, emerged as the successful bidder for Reliance Infratel Limited. The resolution plans have been approved by the committee of creditors as on 4 March 2020 and were submitted before NCLT on 6 March 2020 and are currently pending NCLT approval.
While Aircel and RCom are separately undergoing CIRP, there are commonalities in the insolvency process trends, particularly, in light of sectoral considerations. This article seeks to specifically highlight one example of these commonalities, specifically, the requirement of government approval for transactions contemplated in the resolution plan. I will analyse potential objections that may be raised by the government against a resolution plan and the interplay with ongoing CIRPs in the telecom sector.
The Insolvency and Bankruptcy Code 2016 (IBC) provides that a resolution plan is required to provide measures for obtaining necessary approvals from the government and other statutory authorities. This has often resulted in complications due to stalemates with the government over sanctioning certain transactions which have commonly been subject to a position of intransigence exhibited by the government. To specify, this challenge can be seen particularly in the case of sale of spectrum. Spectrum (essentially, a range of electromagnetic waves/ frequencies) is a natural resource owned by the government. The Government of India (through the Department of Telecommunications (DoT), Ministry of Communications and Information Technology) is entitled to grant licenses for the usage of spectrum to eligible entities, which provide licensees the exclusive right to use and manage the frequency band in a pre-determined geographic area. The DoT has granted spectrum licenses to entities including Aircel and RCom.
The DoT has issued guidelines to regulate the trading of spectrum (Guidelines for Trading of Access Spectrum by Access Service Providers issued in 2015) (Spectrum Guidelines), which provides certain conditions for transfer of spectrum. However, the DoT has also displayed a predisposition against consenting to sale of spectrum. In 2018, the DoT rejected the proposed sale of spectrum by RCom to Reliance Jio Infocomm Limited. It also rejected UVARC’s resolution plan submitted in respect of Aircel for insufficiency of amounts earmarked for operational creditors (including the DoT), while stating that it did not approve of resolution professionals being allowed to sell spectrum under CIRP.
As highlighted above, UVARC has also bid for RCom and its assets, including spectrum, which, it is seeking to sell for generation of distributable funds. DoT approval does not yet seem to have been categorically obtained for the resolution plans submitted in respect of RCom or the proposed sale of spectrum. Until and unless this approval is obtained, the resolution plans are at risk of being subject to objections by the DoT, which could prevent implementation of the resolution plan and ultimately augment potential for liquidation. Some of these potential arguments are set out below:
Clearing of past dues: RCom has not yet cleared the dues relating to the spectrum licenses which were charges payable prior to initiation of CIRP. The Spectrum Guidelines permit sale of spectrum by licensees, subject to inter alia the following conditions: (a) the seller is required to clear its spectrum usage charges and its instalments of payment due till the effective date of trade; and (b) the liabilities related to spectrum like network rollout and dues (inclusive of spectrum usage charges) will be transferred to the purchaser. The DoT may raise arguments against the sale of spectrum unless these conditions are satisfied. Till date, the resolution professional of RCom has admitted claims of the DoT amounting to approximately INR 22,500 crores (as well as INR 2,074 crores in respect of Reliance Telecom Limited). It remains to be seen whether the prescribed pay-out under the resolution plan will satisfy the DoT of adequately covering past dues, and whether the transferee will be able to effectively cover future spectrum obligations.
Spectrum being a DoT asset and priority of payments: In the past, the DoT has argued that spectrum is a natural resource, owned by the Government of India, and it cannot be further sold by licensees. The Supreme Court held, in the case of Centre for Public Interest Litigation and Others v. Union of India and Others, that spectrum is a natural resource, belongs to the people of India and must be auctioned and not allotted. In the case of Vijaykumar V. Iyer v. Union of India, the DoT had issued a demand notice to Aircel for payment of spectrum license fees. In apprehension of a potential cancellation of the license by the DoT, the resolution professional of Aircel had filed an application before the NCLT, Mumbai seeking an injunction against the DoT from termination of the spectrum licenses. The NCLT, in its order dated 27 November 2019, held that spectrum is an asset owned by the Union of India. However, it characterized spectrum as comprising a sizeable portion of the assets of a licensee telecom operator. Accordingly, it held that the DoT should not terminate the licenses, as spectrum is a principal asset and essential good/service of the telecom business and is required to run the company on a going concern basis. While this may appear favourable to the corporate debtor, it creates an alternate branch of potential objections to a resolution plan, as under the IBC, payments for ‘essential goods or services’ are required to paid out as insolvency resolution process costs, and therefore, must be paid in priority to all other creditors. The NCLT has not yet commented on the existing priority of payments under the resolution plans for Aircel and RCom, which currently do not appear to prioritise spectrum license fees over other creditors. Therefore, it remains to be seen whether the resolution plans will witness further objections on the grounds of being in contravention of law.
Pendency of disputes: There are several pending disputes in respect of DoT dues, including those pertaining to: (a) payable spectrum license fees and other spectrum charges on the basis of expected revenue, when actual revenue is below such expected revenue; (b) payment of spectrum contiguity charges; (c) non-compliance with roll-out obligations in respect of 3G spectrum in Delhi and Kolkata; (d) seeking directions to the DoT to refrain from cancellation/termination of spectrum licenses; and (e) return of excess bank guarantees which were encashed. There are certain points of law that are sought to be argued, and the same may affect all telecom operators and the current engagement of all telecom operators with the DoT. Therefore, it is currently unclear whether the prescribed pay-out under the resolution plans will effectively discharge RCom from its liabilities to the DoT. The DoT may also raise concerns pertaining to uncertainty of dues and assert revisions to the verified claims and distribution mechanism, subject to the outcomes of these pending disputes.
Objections to the transferee: The spectrum licenses granted to RCom are secured in favour of certain lenders by way of tripartite agreements between the DoT, RCom and the lenders. The format for tripartite agreements, as available on the DoT website, provides that in the event the borrower defaults on repayment, the lenders may initiate sale of the spectrum to an identified transferee. The format also prescribes a certain set of eligibility criteria, which should be fulfilled by a transferee to the satisfaction of the DoT. Therefore, in the event the spectrum is allotted by UVARC directly to a particular transferee, and if such transferee does not satisfy the eligibility criteria prescribed in the tripartite agreements to the DoT’s satisfaction, it is possible that the DoT may raise objections against such sale in light of contractual obligations.
Implementation of resolution plans in respect of any telecom operator is likely to be met with complications, not only in terms of persuading the DoT to approve transactions contemplated in the resolution plan, but also in terms of accounting for subsisting contractual arrangements and interdependencies. Aircel and RCom are awaiting developments in this regard. It will be useful for the resolution professionals and resolution applicants to keep in mind potential objections that may be raised in relation to transactions contemplated under the resolution plans and to strategically build into their resolution plans pre-emptive measures, which are transparent as well as appealing to the interests of the relevant stakeholders.