Indian Draft Telecom Bill 2022 — Changes and Implications (Part2)
In Part2 of this series, I plan to write about the Insolvency & Bankruptcy provisions. The current Act of 1885 has no such provisions. Hence, these provisions are new with an objective to serve a specific purpose. As stated in the Draft Bill of 2022, the whole purpose of including this clause is to achieve the larger public interest of enabling the availability of telecommunication services in India by ensuring efficient use of airwaves already assigned to the operator [Clause 20(1)].
Current Law
The current law related to insolvency and bankruptcy is covered under the Insolvency and Bankruptcy Code of 2016. The purpose of this code is to enable the restructuring of the insolvent company so that it can continue to function — provide services, manufacture, and sell products, or is liquidated. But why does a company gets insolvent in the first place? It does so if it has taken too much debt that it is unable to repay (both interest & principal). Under this law, once such a petition is filed by the impacted company before the designated authority then the process of liquidation or restructuring is undertaken. Both these processes require revaluing the company’s existing assets, and in the case of telecom, it also includes spectrum.
The Problem
The basic problem is that when a telecom company gets insolvent then it can’t be restructured or liquidated in the manner that is possible for a non-telecom company — i.e a company that does not hold airwaves. Why? Airwaves do not behave like normal assets which can be liquidated or restructured easily. In order to trade spectrum, the company has to first take permission from DoT and clear all its dues (spectrum trading & M&A guidelines). And such a condition makes liquidation and restructuring virtually impossible. And the very reason the company went bankrupt as it has no money to pay. Else there is no reason for it to file for bankruptcy (spectrum is a large % of a telecom company’s overall asset).
The other problem is that if a company does not pay its dues on time, then the DoT, as per the current license terms, can revoke its license. Once the license is revoked, then all operations have to stop — leading to the flight of customers. With no customers, and with no right to sell spectrum the company’s overall value gets driven down to virtually nothing. The least the company wants is for the DoT to allow its license to remain alive so that it can navigate through the bankruptcy proceedings. The real-life examples are RCOM and Aircel. Both were not allowed to sell spectrum due to the above-stated reasons and the proceedings are still pending before the competent authority. This is despite the fact huge protests were lodged by their lender (banks) on allowing the liquidation of airwaves — even though they disputed the matter in the courts but to no avail.
The Draft Telecom Bill
As stated in the beginning, the objective of the new provisions is to enable continuity of services, even in the face of insolvency — in the interest of consumers to preserve market competitiveness. Hence, the following provisions have been included in the draft [Clause 20(3)] reproduced under.
“In the event the licensee, or assignee that has become subject to an insolvency proceeding, fails to comply with the sub-section (2) [payment of dues], then the spectrum, if any, assigned to such entity shall revert to the control of the Central Government, and the Central Government may take such further actions as may be prescribed, which may include allowing such licensee or assignee to continue to use spectrum, subject to placing the revenue of such entity in a separate designated account with license fee and charges applicable being paid first in priority during such period”
The draft bill also empowers the central government to transfer control of the insolvent company to any person or entity, and for such period as may be notified in this regard — all in national interest and protect the interest of the consumers [Clause 20(5)].
The draft bill does not stop here, it even goes further. It empowers the Central Government with powers to take remedial measures to ensure continuity of telecom services even when the bankrupt company is unable to pay dues to the government (License and Auction dues). These provisions (Clause 21) are reproduced below.
a) Deferment of the payment of such amounts as part thereof.
b) Conversion of part or all of the amounts payable by the licensee, registered entity, or assignee, into shares in the licensee, registered entity, or assignee.
c) Write-off of such amounts or part thereof.
d) Relief from payment of such amounts or part thereof.
Implication
The implications of these new provisions in the Draft are huge. The good news is that it will allow a sick company to continue to function, even when it has lost all its capability to pay its dues to the government. Please note that a bulk of telecom operators’ liabilities are towards the government. VI — 76% of its total debt, and for Bharti and RJIO these numbers are also very significant.
But the bad news is that such a company will lose all its capability to invest in new networks and technology. Why? As the GOI will demand its dues to be paid first as soon as the company is able to find some resources. If it doesn’t it will have to face allegations of lending undue favors to corporates and businesses. The promotors will lose interest as the company’s fate will hang in balance — neither it will be able to fully exit nor earn reasonable profits. In nutshell, the entity will virtually become a government-run entity and end up meeting the same fate as the existing loss-making PSUs.
Conclusion
Though the intent of the bankruptcy provisions in the draft telecom bill is noble, however, the GOI will face huge practical difficulties in executing them. Why? While traversing this path it has to drive two objectives simultaneously. A) It needs to manage its image (of not causing undue benefit to the company). B) To keep the promotor’s interests alive (to continue to invest in networks). The former is a political necessity, and the latter is as important to keep the market stay competitive — to protect consumer interest (the whole purpose of these provisions). Both these objectives will drive the GOI into a situation of true dichotomy.
But what if these options weren’t there? How bad would be the situation then? In my view, really bad. As, without these provisions, the demise of an insolvent company will be exponentially faster. These provisions arm the government with enough power and buy more time with the hope of finding some more solutions to protect the consumer’s interest and preserve market competitiveness.
To be continued in part(3)…
(Views expressed are of my own and do not reflect that of my employer)
PS: Find the list of other relevant articles in the embedded link.
