Why Vodafone Idea May Not Consider A Voluntary Bankruptcy Filing Yet
A debt is a debt, even when the obligation to pay it is also a regulatory condition.
In a 2003 ruling, the U.S. Supreme Court said so while dismissing the Federal Communications Commission’s attempt to revoke the spectrum licences from bankrupt NextWave Personal Communications Inc. The court relied on a U.S. bankruptcy law provision that bars the government from revoking an insolvent debtor's licence solely because of a failure to pay his debts.
A similar story is playing out for telecom insolvencies in India but with a twist.
Aircel Ltd. and Reliance Communications Ltd. are fighting the Department of Telecommunications to keep their licences. So far, they are losing. That's perhaps why a voluntary insolvency filing isn’t an obvious choice for Vodafone Idea Ltd., despite being on the brink of financial collapse.
As of March 2021, Vodafone Idea had a net debt of Rs 1,79,960 crore. That includes:
Deferred spectrum obligations: Rs 96,270 crore.
AGR liability: Rs 60,960 crore.
Debt from banks: Rs 23,080 crore.
As early as December 2019, Aditya Birla Group Chairman Kumar Mangalam Birla had warned of a Vodafone Idea shutdown if the government didn’t provide any relief on adjusted gross revenue liability.
Since then the company has continued to rack up losses — in March this year it suffered a net loss for the eleventh straight quarter.
In June, Birla wrote a letter to the cabinet secretary saying no investor was willing to fund the business in the absence of clarity on policy issues such as the AGR dues, a moratorium on spectrum dues and a floor pricing regime for the telecom industry. He offered to exit the business in favour of the government or any entity it chose.
Soon after, the Supreme Court dismissed applications by Vodafone Idea and other telecom firms seeking a recalculation of AGR dues. The government refused to support the telecom players in their request.
On Aug. 4, Birla stepped down as chairman of Vodafone Idea and director on its board — another group official was nominated in his place. No explanation has been offered for this sudden move but given the sequence of events the timing is significant.
The options facing Vodafone Idea are limited as the promoters, the Birla Group and Vodafone, do not intend to invest further capital in the business. Either the government offers policy support or the company eventually files for bankruptcy.
Voluntary Insolvency Resolution Is An Option, But...
To be clear, Vodafone Idea has not given any indication yet that it may consider the bankruptcy route.
So far the company has not defaulted on any debt, giving no creditor reason to initiate an insolvency resolution filing. That leaves the self-filing route which requires the company to seek shareholder approval via a special resolution—75% of the voting shareholders must approve the move.
With the two promoters holding 72% of the company's shares that threshold would not be difficult to achieve in a vote.
If it wanted to, the company could file for insolvency resolution citing its inability to pay the large quantum of AGR dues according to experts, as BloombergQuint had reported earlier. "...it’s exorbitant, extraordinary and would be difficult for shareholders to vote it down," Suharsh Sinha, partner at AZB & Partners, had said.
But, the uninspiring insolvency resolutions of telecom companies Aircel and RCom so far give Vodafone Idea little reason to pursue the IBC route. Yet.
Uninspiring Insolvencies of Aircel And RCom
In Aircel’s case, the National Company Law Appellate Tribunal has said telecom firms cannot be allowed to wriggle out of paying spectrum dues by initiating voluntary insolvency proceedings.
The NCLAT said it cannot allow insolvency proceedings initiated with the intention of “withholding the huge arrears payable to government, obtaining moratorium to abort the government’s move to suspend, revoke or terminate the licenses and in the event of a resolution plan being approved, subjecting the central government to be contended with the peanuts offered to it as operational creditor.”
The appellate tribunal acknowledged that dues of financial creditors have been given the highest priority in the payment waterfall under the IBC. And that dues to government rank lower and qualify as operational dues.
But when it comes to spectrum, this will not be the position. The NCLAT made this exception relying on the special nature of spectrum as an asset which is a natural resource held by the government. State Bank of India-led lenders and UV Asset Reconstruction Co. Ltd., the successful applicant for Aircel, have approached the Supreme Court against the NCLAT ruling.
In RCom’s case, the telecom department has refused to allow the long pending migration of the company's telecom licence, citing outstanding amounts including spectrum instalments due between 2013 and 2016.
The department has argued that RCom cannot get the benefit of Section 14(1) of the IBC which prevents cancellation of regulatory licences on grounds of insolvency as long as all current dues have been paid.
The DoT’s position is that payments relating to migration of existing licences to the new unified licence regime are “current” and not “past” dues. And that those must be paid if RCom wants its licence to be kept alive.
RCom and Aircel, their creditors and the resolution applicant are hoping that India’s judiciary takes the leaf out of U.S. Supreme Court's 2003 book.
And perhaps Vodafone Idea is awaiting their outcome before it considers the option of a voluntary insolvency filing.