Spectrum mortgage: IMG says no government, first right should of banks to recover dues

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Updated: October 24, 2017 9:07:05 AM

The IMG has said that the required changes should be done by the department of telecommunications in consultation with the department of financial services.

Spectrum mortgage, ing, img on Spectrum mortgage, telecom industry, telecom companies, Trai, IMG’s report, business plan, lending by banks, tangible asset Govt gets first right on airwaves now; analysts say unlikely to be adopted as suggestion made earlier as well. (Image: IE)

The inter-ministerial group (IMG) on telecom, which recently submitted its report to the government suggesting measures to help stressed telecom operators, has said that the design of spectrum mortgage should be done in a manner that the first right to sell it to recover their dues should be of the banks and not the government as it is currently. This would make the nature of lending secured and give banks comfort against the present structure where the nature of lending is unsecured. The IMG has said that the required changes should be done by the department of telecommunications in consultation with the department of financial services. However, since the matter is an old one and since the government had reservations on the matter in the past even though the Telecom Regulatory Authority of India (Trai) had recommended the same in September 2013, sources said that it is unlikely that this aspect of IMG’s report would be accepted by the government.

To put matters simply, the government had amended the tripartite agreement that is signed between the licensor, licensee and the lenders before the 2016 auctions to help operators raise funds by mortgaging their spectrum. However, in such cases if there’s any default by the operator the first right over the spectrum is not that of the lender but that of the government. This is because the spectrum does not belong to the operator but to the government, which has given the operator only the right to use it.

Under the present arrangement, spectrum is classified as an intangible asset, so when banks provide funds for roll-out of business plan or for meeting entry fee/bank guarantee requirement, the loans to that extent have to be treated as unsecured loans, even though the licences are assigned in favour of the lenders. Holding unsecured assets on the banks’ books has, in turn, several implications in terms of lower ratings, higher provisioning, etc.
In case spectrum to be auctioned in future is priced at high levels, then lenders may not be in a position to fund these business plans considering the unsecured nature of the lending. Hence, banks have suggested in the past that Trai may initiate a consultation process with the Reserve Bank of India for treating spectrum as a tangible asset that can be mortgaged for the purpose of lending by banks.

In case of default by operators, lenders can recover their dues by selling the spectrum on a trading platform or through any other method as prescribed by the regulator. The valuation of spectrum can be expected to increase if spectrum is made mortgageable. Spectrum holders on the other hand shall need to mark the value of spectrum to the market value as is happening in case of its other assets.

Since spectrum has been delinked from the licence, it should be included in the tripartite agreement to facilitate raising of capital by the licensee. Accordingly, in its recommendations on “Terms and Conditions of Unified License (Access Services)” dated January 2, 2013, Trai had recommended that the format of tripartite agreement to be executed amongst the licensor, licensee and lenders should be modified after including spectrum and should be prescribed in the WOL (wireless operating licence). However, this was not accepted by the government.

The IMG has basically repeated this very point and, therefore, the chances of government accepting it is very low, officials said.

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