Tangled reasoning

| Updated on April 21, 2021

The NCLAT ruling on clearing spectrum dues is full of contradictions

The National Company Law Appellate Tribunal’s (NCLAT’s) ruling on ownership of spectrum is a rather confused one. The tribunal has rightly said that the final ownership of spectrum lies with the Government. But it has muddled the issue when it comes to dealing with the waterfall mechanism for stressed assets. On the one hand, the NCLAT has stated that the Department of Telecom (DoT), the spectrum owner, will be treated as an operational creditor; on the other, it has said that operators have to first clear pending dues to DoT before filing for bankruptcy. This is not just contradictory but illogical. A company is unlikely to be insolvent if it clears DoT’s dues. The Ministry of Corporate Affairs has also stated previously that the DoT will be treated as an operational creditor. But the NCLAT order in effect puts DoT ahead of the financial creditors when it comes to telecom assets. This sends confused signals to banks and will derail the IBC process in the sector.

Take the case of Aircel, which owes about ₹10,000 crore to DoT and ₹20,000 crore to various banks. As per NCLAT, Aircel should have first paid the dues to the DoT before filing for debt resolution under IBC. If Aircel had had the wherewithal to give ₹10,000 crore to DoT it may not have even filed for bankruptcy. NCLAT has also said that the spectrum cannot be treated as a security interest by the lenders. A bank enters into a tripartite agreement with the telecom operator and the DoT at the time of lending money. The quantum of spectrum held by the operators is one of the key considerations. While operators do not have ownership of spectrum in perpetuity, they have rights over it for the period of 20 years during which they can use it themselves or sell it to another entity. DoT has the right to decide whether the buyer of the spectrum is qualified to run a telecom operation. The tribunal itself acknowledged that spectrum, being an intangible asset, can be subjected to insolvency proceedings. But by making IBC proceedings conditional to payment of dues to DoT ahead of all other creditors, NCLAT’s ruling could scuttle the entire debt resolution process of not just Aircel but also RCom. This would lead to zero recovery for ₹60,000 crore owed by the two operators to the banks. DoT will get back the spectrum but not the licence fee dues.

The Centre should reconcile the provisions of the telecom licence that makes DoT the final authority on spectrum ownership, and the IBC rules that give banks the top priority. In sectors such as mining or telecom, where the value of an entity is dependent on the natural resource, it is worth considering whether the government as the owner of the resource should be treated as just another operational creditor.

Published on April 21, 2021

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