The Supreme Court last week reserved its verdict on the treatment of spectrum in bankruptcy cases. But The Department of Telecommunications (DoT) and the Ministry of Corporate Affairs (MCA) have differed on how spectrum should be handled in the insolvency cases of Aircel and Reliance Communications (RCom), according to two people familiar with the matter, who spoke on condition of anonymity about internal discussions.
The DoT was of the view that spectrum is a natural resource and cannot be sold during liquidation, while the corporate affairs ministry was of the view that broadcasting should be tradable so that creditors such as banks can recover their debts, the first of the two people cited above said.
RCom, Aircel and Videocon went bankrupt in 2018 and 2019, leaving unpaid statutory dues ₹40,000 million crowns.
The Attorney General of India held meetings with the two ministries to understand the differences before making final arguments to the court. The government’s position was that the spectrum belongs to the state, has public trust and is not subject to it Insolvency and Bankruptcy Code (IBC).
Email queries to the DoT, the Ministry of Corporate Affairs (MCA) and the Attorney General did not elicit any response till press time.
Telecom spectrum is a natural resource and constitutionally recognized by the citizens of India, with the government acting as the custodian. The Supreme Court’s decision will determine whether the broadcast can be liquidated under the IBC for creditors to recover fees.
Air waves are blocked
Banks used to lend to telecom operators against assets, including spectrum, as collateral. However, due to legal disputes over the treatment of airwaves in the event of insolvency, investors and creditors are now considering a company’s financial health before backing up funds, an industry executive said.
“The government is clear about its position. There have been several meetings between DoT and MCA on the issue of spectrum in insolvency,” said the second person, adding that one of the reasons why MCA wanted spectrum to go into insolvency was the concern that the sector would lose its attractiveness to investors and lenders.
Currently, the right to use the spectrum is classified and accounted for as an intangible asset on the balance sheets of telecommunications operators. However, there has been a long-running legal battle in the insolvency proceedings over whether this “usufructuary” can be sold by the bankrupt company to recover fees for creditors. The government says the spectrum ultimately belongs to the state and all its previous dues must first be cleared. This left a large amount of spectrum unused for years.
In a 2021 order, the National Company Law Appellate Tribunal (NCLAT) ruled that spectrum can be included in the corporate insolvency resolution process (CIRP) and transferred to the successful bidder under the IBC. However, it also ruled that this transfer could only happen if all debts owed to the Department of Transport, which it classified as an operating creditor, were paid in full.
“The NCLAT said in the order that the government is a custodian and the spectrum must serve public interest. DoT is not a secured creditor. There is a lot of unused spectrum and it violates the logic of the government acting as a custodian because public resources are being wasted instead of being used,” said Parag Kar, an independent telecom analyst, in a recent video analysis. According to Kar, 21% of operators’ total gross receipts from FY10 to FY24 went to spectrum auction outflows, indicating high spectrum reserve prices and forcing some operators into bankruptcy.
Creditor hierarchy
Typically, in an insolvency process, as part of a waterfall mechanism, operative creditors are paid after financial creditors such as banks have paid their fees. “The MCA was also in favor of a waterfall mechanism to be applied in case of insolvency,” said the second person quoted above.
Satya N. Gupta, a former senior adviser at the Telecom Regulatory Authority of India (Trai), said India is lagging behind in addressing the critical issue of how to deal with spectrum should a telecom operator go bankrupt. “Globally, in most countries the resolution process is faster if a telecom operator becomes insolvent. Government charges are not absolute blockers, although even there compliance is mandatory.”
In its recent comments to Trai on the spectrum auction, Bharti Airtel Ltd said spectrum, which is currently locked in insolvency proceedings, remains a non-productive national asset. “Its prompt inclusion in upcoming auctions will prevent further erosion of value, ensure transparent access for all service providers and enable efficient demand-driven use.”
Last week, the apex court was hearing a series of petitions filed by the State Bank of India and two insolvent operators — Aircel and RCom — challenging the NCLAT’s 2021 order, which stipulated that spectrum can be transferred or sold under an insolvency resolution plan only after all government dues are cleared. On November 13, the court reserved its verdict.
During the hearing, SBI supported its arguments on the basis that the tripartite agreement entered into between the lender, the corporate borrower (in this case, Aircel) and the government at the time of sanctioning the loans is supported by the fact that the spectrum acts as collateral for the lender.
“…an important aspect of this loan agreement is that it stipulates that I (lender) should have first lien on this asset (spectrum), otherwise I have no security. And this project will never come up (without funding),” a lawyer representing SBI told the Supreme Court.
However, the government insists that the state holds the spectrum as the administrator and the license granted to the operators is only permission to operate the radio waves. “The Interim Resolution Provider (IRP) during any proceedings in the IBC cannot reach this asset (spectrum),” R. Venkataramani, Attorney General of India, the government’s top lawyer, informed the Supreme Court.
The Supreme Court observed that the government should have canceled the licenses of insolvent telecom operators instead of filing claims under the IBC as an operating creditor. The court took note of the government’s contradictory position: it argued that Spectrum could not fall under the insolvency process, while at the same time filing claims as an operating creditor under the IBC.
