AGR ruling: Supreme Court spares IBC, but batters Vodafone Idea

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September 2, 2020 7:30 AM

NCLT to take final call on spectrum sale to clear dues

Analysts at Jefferies estimate that after the upfront amount of Rs 5,040 crore that needs to be paid by March 2021, the annual dues would be Rs 6,800 crore or 111% of the firm’s Ebitda.Analysts at Jefferies estimate that after the upfront amount of Rs 5,040 crore that needs to be paid by March 2021, the annual dues would be Rs 6,800 crore or 111% of the firm’s Ebitda.

In a crucial verdict, the Supreme Court on Tuesday directed the National Company Law Tribunal (NCLT) to decide whether spectrum can be monetised without payment of government dues in cases where telecom companies filed for bankruptcy.

The ruling salvages the Insolvency and Bankruptcy Code (IBC) and comes as a respite for banks. The apex court has directed the NCLT to decide the matter within two months.

In an order on adjusted gross revenue (AGR) of telcos, that allowed other operators like Bharti Airtel and Vodafone Idea to repay their dues over a 10-year period, a bench led by Justice Arun Mishra said it would not be proper for the SC to interfere in the insolvency process as it is a jurisdictional matter.

Banks have initiated insolvency proceedings against both Aircel and Reliance Communications and these are at different stages of being approved. However, there could be a hitch at a later stage, given the department of telecommunications (DoT) has the final power to approve the transfer of licences and spectrum. The DoT has already opposed spectrum monetisation in the case of RCom in NCLT, Mumbai. It has also moved the National Company Law Appellate Tribunal against the NCLT’s approval of the resolution plan of an asset reconstruction firm, UVARCL, in the case of Aircel.

Allowing telecom operators like Bharti Airtel and Vodafone Idea to pay their dues over 10 years, the SC mandated that 10% be paid upfront, by March 31, 2021. Thereafter, the deferred payment cycle would run from April 1, 2021 till 2031.

The companies need to report compliance of payment of annual instalments every year on April 7. This means that after the upfront 10% payment, the next payment would be due on April 7, 2022. The companies had initially sought a 20-year period, lowering it later to 15 years, after the court said 20 years was a long time. The DoT had also batted for a 20-year repayment schedule for the telcos.

While the 10-year period may not be a problem for Bharti Airtel, for Vodafone Idea it surely is a setback. The telco needs to pay Rs 50,400 crore and would need to raise funds to meet the commitments.

Analysts at Jefferies estimate that after the upfront amount of Rs 5,040 crore that needs to be paid by March 2021, the annual dues would be Rs 6,800 crore or 111% of the firm’s Ebitda.

If the promoters do not infuse funds, the company would need the Ebitda to triple and the Arpu to rise to Rs 275 from the current Rs 114. Moreover, the company would need to cut capex, which anyway was at a historical low of Rs 600 crore in Q1FY21. The reduced timeline apart, a bigger problem for Vodafone Idea is the court’s order that companies, through managing director/chairman or other authorised officer, furnish an undertaking within four weeks, to make payment of arrears as per the order. The existing bank guarantees that have been submitted regarding the spectrum shall be kept alive by the operators until the payment is made and in the event of any default in making payment of annual instalments, interest would become payable as per the agreement along with penalty and interest on penalty automatically without reference to court. Besides, it would be punishable for contempt of court.

Senior advocate Meet Malhotra believes this needs to be revisited as it not only goes against the principles of business and commerce but also against company law. “How can an MD give a personal guarantee? What happens if he leaves the company or tomorrow if the the business fails?” Malhotra asked.

Legal observers believe the telcos could file a review or curative petition on the contentious issues, such as the one relating to personal guarantees by the MDs and CEOs.

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