Supreme Court looking to rework Insolvency and Bankruptcy Code is positively dangerous

Rewriting the law is probably necessary at times, but the Supreme Court wanting to revisit the remit of the Insolvency and Bankruptcy Code (IBC) with respect to the sale of natural resources is worrying. To be sure, the IBC is a relatively new piece of legislation, but to question its fundamental premise, namely that financial creditors have the first right to the financial proceeds, can have deleterious consequences for the country’s financial system. If lenders can’t be sure they have total control over their collateral, not one of them would lend a penny. The law must protect them.

Debating whether the government is an operational or financial creditor is unwarranted. It seems quite clear that natural resources like spectrum, are like any other assets—a house or a piece of land—that have been paid for by the user. In the case of spectrum, even though the telcos have deferred payments, this was part of the agreement they signed; whether they paid all the money upfront or chose to pay part of it in instalments doesn’t make a difference. Nor does it make sense to say the government owns the spectrum since it gave these rights—for 20 years—to the telcos when it auctioned the spectrum. And, since the government hasn’t given the company a loan, it cannot be a financial creditor; it is an operational creditor, offering a particular kind of service.

Consequently, the banks have the first right to the proceeds, as laid out in the code, and the remaining creditors must await their turn. The matter of relooking the status of the government has arisen because insolvent telecom operators like Reliance Communications and Aircel have put up their spectrum for sale as part of the corporate insolvency resolution process. The issue of whether assets like spectrum can be transferred or not should have been decided decades ago.

The SC seems determined to ensure the government recovers the AGR dues from the insolvent telcos. It is possible the government may not get much by way of dues for adjusted gross revenues (AGR) after the banks have been given their share of the proceeds. But that is the law. Also, if the court is questioning how the government agreed to defer the revenue payments by the telcos, rather than claiming these upfront, it needed to have done so years ago when the government took the decision. As the telcos have pointed out—Aircel and Rcom, in this instance—they have the right to use and transfer the spectrum. Lawyers have pointed out, during the course of the hearings, that if the SC holds that spectrum is not saleable, it won’t help recover AGR dues anyway. The spectrum will merely be returned to DoT, to be auctioned for future use.

The SC is justified in asking whether some telcos have filed for bankruptcy to escape paying their AGR dues. But, it must examine the matter in great detail, without prejudice. While some telecom companies may have mismanaged their affairs and found themselves in the insolvency courts, that so many telcos have gone bankrupt or are in serious trouble suggests it isn’t entirely their fault. The fact is government policy hasn’t been friendly; while spectrum prices were artificially jacked up by keeping supply restricted and even when the government started charging market prices for spectrum, it still kept charging licence fees and spectrum usage charges that were introduced at a time when spectrum was given for virtually nothing. The court is right to be fighting for the AGR dues, but it is critical that banks stay healthy as the impact on the economy is far greater.