India’s National Company Law Appellate Tribunal (NCLAT) has issued a ruling on the role of spectrum holdings within bankruptcy proceedings, as part of a decision on the dispute between defunct cellco Aircel and the Department of Telecommunications (DoT). The case centres on the bankruptcy resolution plan of Aircel, but is expected to have a negative impact on other bankrupt providers and will potentially leave lenders hundreds of billions of rupees out of pocket, the Economic Times reports.
Under Aircel’s plan, UV Asset Reconstruction Company Limited (UVARCL) would take majority control of Aircel and its assets, including its spectrum, in exchange for a total of INR66.3 billion (USD880.1 million), to be paid over a five-year period; Aircel’s debt pile when the deal was agreed in June 2020 totalled INR587.6 billion, with the repayment representing around 11% of the total. UVARCL would generate the funds by monetising Aircel’s assets, with the largest portion – between INR8.0 billion and INR13.0 billion – through the sale of Aircel’s 1800MHz and 2100MHz spectrum. The plan was challenged by the DoT with the justification that spectrum is a national asset and cannot be sold in such a manor by providers. In practice, though, the government’s main concern was that due to the way that insolvency resolution process is structured, the DoT would be considered an operational creditor and would be a lower priority for repayment than financial creditors.
In its resolution, the NCLAT addressed the government’s concern and closed a potential loophole that it argued would have allowed operators to avoid paying government dues for spectrum. Broadly, under the rules of India’s Insolvency and Bankruptcy Code (IBC), the initiation of insolvency proceedings leads to a moratorium on licence fees and deferred spectrum payments, enabling operators to avoid those dues, and leave the DoT as an operational creditor with a tiny fraction of the amount it is owed. To prevent this, the NCLAT’s decision states that the spectrum rights held by defunct companies may be used and traded, but only after statutory dues are cleared and the DoT grants approval. The ruling effectively grants the DoT the capability to recoup some of its dues outside of the insolvency process, either by reclaiming the spectrum rights from the operator or through payments to free-up the concession for sale by the defunct provider. The decision otherwise maintains the DoT’s status as a low-priority operational creditor, however, with the NCLAT noting that: ‘[the] DoT cannot now make a U-turn and raise an issue in regard to the nature of its dues, styling the same as a “financial debt”.’
The tribunal also sided with the DoT in recognising that ownership of the spectrum resources lies with the state, and not the licensee. In a significant blow to the industry and its creditors, the NCLAT clarified that, as the spectrum is owned by the state it ‘cannot be treated as a security interest by the lenders’. As spectrum licences are operator’s most expensive and valuable assets, it has been common practice for spectrum to be used as security against bank loans. The decision is expected to hinder other ongoing insolvency processes for defunct cellcos, most notably Reliance Communications (RCOM), from which creditors have submitted claims for approximately INR860 billion, according to the Economic Times.