(MENAFN- Live Mint)

The government argued in the Supreme Court that telecom spectrum belongs to the citizens and cannot be traded in insolvency cases. But there were differences between the two ministries involved on whether the critical national resource can be traded in such instances.

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) were at odds over how spectrum should be treated in insolvency cases of Aircel and Reliance Communications (RCom), according to two people in the know, who spoke on the condition of anonymity about internal discussions.

The DoT held that the spectrum is a natural resource and cannot be sold during liquidation, while the corporate affairs ministry was of the view that airwaves should be tradable so that creditors such as banks can recover their dues, the first of the two people quoted earlier said.

RCom, Aircel and Videocon went bankrupt over 2018 and 2019, leaving unpaid statutory dues of over ₹40,000 crore.

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The Attorney General of India held meetings with the two ministries to understand the disagreements before presenting the final arguments in the court. The government's stance was that the spectrum belongs to the state, held in trust for the public, and is not subject to the Insolvency and Bankruptcy Code (IBC).

Queries emailed to DoT, the ministry of corporate affairs (MCA) and the Attorney General did not elicit any response until press time.

The telecom spectrum is a natural resource and constitutionally recognized as belonging to citizens of India, with the government acting as a trustee. The top court's decision will determine whether airwaves can be liquidated under the IBC for lenders to recover dues.

Airwaves blocked

Banks used to lend to telecom operators against assets, including spectrum, as collateral. However, given the legal disputes over the treatment of airwaves in the event of insolvency, investors and lenders now consider a company's financial health before advancing funds, an industry executive said.

“The government is clear on its stance. Multiple meetings have happened between DoT and MCA on the issue of spectrum under insolvency," the second person said, adding that one of the reasons why MCA wanted to bring the spectrum under insolvency was out of concern that the sector does not lose its attractiveness for investors and lenders.

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Currently, the right to use spectrum is classified and accounted for as an intangible asset on the balance sheets of telecom operators. However, under insolvency proceedings, there has been a long-pending legal battle over whether this "right to use" can be sold by a bankrupt company to recover dues for lenders. The government maintains that the spectrum ultimately belongs to the state and all its prior dues must be cleared first. This left a large volume of spectrum unused for years.

In the 2021 order, the National Company Law Appellate Tribunal (NCLAT) held that the spectrum can be included in the Corporate Insolvency Resolution Process (CIRP) and transferred to a successful bidder under IBC. However, it also ruled that this transfer could only occur if all dues owed to the DoT, which it classified as an operational creditor, were cleared in full.

“The NCLAT in the order said that the government is a trustee and the spectrum must serve public interest. DoT is not a secured lender. There is a large spectrum unused for years and this has violated the logic of government acting as a trustee as public resources is wasted instead of utilized," said Parag Kar, an independent telecom analyst, said in a recent video analysis. According to Kar, 21% of the total gross revenue of operators from FY10 to FY24 has gone into the spectrum auction outflow, pointing to high spectrum reserve prices and pushed certain operators to bankruptcy as well.

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Creditor hierarchy

Usually, under the insolvency process, as part of the waterfall mechanism, the operational creditors are paid after the financial creditors such as banks are paid their dues.“MCA too was in favour of the waterfall mechanism to be followed in the insolvency case," the second person cited above said.

Satya N. Gupta, a former principal advisor at the Telecom Regulatory Authority of India (Trai), said India has lagged in resolving the critical issue of spectrum treatment if a telecom operator goes bankrupt.“Globally, in most countries, the resolution process is faster if a telecom operator goes under insolvency. Government dues are not absolute blockers, though regulatory compliance is mandatory there as well."

In its recent comments to Trai on the spectrum auction, Bharti Airtel Ltd has said the spectrum currently locked in insolvency proceedings remains an unproductive national asset.“Its prompt inclusion in upcoming auctions will prevent further value erosion, ensure transparent access for all service providers, and enable efficient, demand-driven utilization."

Last week, the apex court was hearing a batch of petitions filed by State Bank of India and the two insolvent operators–Aircel and RCom–that challenged the NCLAT's 2021 order, which held that spectrum could be transferred or sold under an insolvency resolution plan only after all government dues were cleared. On 13 November, the court reserved its verdict.

During the hearing, SBI backed its arguments on the grounds that the tripartite agreement entered into between the lender, the corporate debtor (Aircel in this case) and the government at the time of sanctioning loans is underpinned by the fact that spectrum acts as a security interest for lenders.

“...the important aspect of this loan agreement is that it stipulates I (lender) should have the first charge over this asset (spectrum) otherwise I have no security. And this project will never take off (in the absence of financing)," the lawyer representing SBI told the Supreme Court.

The government, however, has maintained that the state holds the spectrum as a trustee and the licence granted to operators is only a permission to operate the airwaves.“The interim resolution professional (IRP) in the course of any proceedings in IBC cannot reach out to this asset (spectrum)," R. Venkataramani, the Attorney General of India, the government's top lawyer, informed the Supreme Court.

The Supreme Court observed that the government should have cancelled the licences of telecom operators under insolvency instead of filing claims under the IBC as an operational creditor. The court noted the government's conflicting stance: arguing that spectrum cannot fall within the insolvency process, while simultaneously filing claims as an operational creditor under the IBC.

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