Telcos' stressed assets: IBA tries to overcome the stumbling blocks

The Indian Bank Association (IBA) has asked the Department of Telec­om­m­unications (DoT) to push the Reserve Bank of India (RBI) to consider spectrum licence as a ‘secured asset’ and al­so allow ‘carved out resolution’ of various components of the telecom service providers’ operations under the IBC or outside the process. Under the existing rules, the resolution is for the entire firm which could include spectrum, tower, and real estate among others.

The IBA’s request highlights the roadblocks in resolving stress assets in this sector under the IBC, a fact reflected in the challenges faced both in the Aircel and Reliance cases, both of which are still awaiting completion of the process of finding buyers.

It has also raised concerns about the growing stress of the banks in lending to this sector and its adverse impact on them.  On the issue of spectrum holding, banks point out that before liberalization of spectrum, a tripartite agreement between the DoT, the lender, and the operator allowed the lenders to step in if the operator defaulted.

However, under the unified licensing scheme, only the DoT had the right to revoke or suspend the licence granted to the operator which included liquidation as well as the order to wind up. There is lack of clarity on the treatment of such spectrum on transferring it to the buyer at the time of sale in IBC process, according to the IBA.

The IBA points out that in the Aircel case, for example, the  DoT has challenged the powers of the Resolution Professional (or liquidator), saying that ownership of spectrum continues with the DoT and that only the right to use it remains with the telco. This substantially erodes the value of the telecom service provider up for sale.

The National Company Law Tribunal, however, has recently ruled that the spectrum licence cannot be cancelled by the DoT during the moratorium period under the IBC. Based on this contention, banks point out that there is now merit in considering the value of spectrum as a tangible asset.

Such a move will give banks relief in terms of provisioning. Also, no telco would buy a passive asset without possessing the spectrum. Nonetheless, the banks point out that there needs to be clarity on the legal position of the DoT on assets and whether it has limited or limitless right. The IBA also points out that one consequence of litigation with the regulator is that most of the telcos in the IBC have huge contingent liabilities which makes it difficult for an RP to ascribe a value for the company and this in turn acts as a dampener to a potential buyer.

It is also difficult to take control over assets which are spread over thousands of locations as most of them are rented and following the exodus of employees, especially during liquidation.

Another problem is that the value of spectrum in the IBC fetches a very low value, far lower than the market value because the original price was based on a period when there were more than 10 operators, leading to huge competition of scarce resources. Now, with so many telcos closing down, the value of spectrum paid earlier has turned out to be highly over-stated.

The banks have pointed out that, based on RBI data, the total outstanding exposure to the sector by Indian banks is to the tune of Rs 130,960 crore as on November 2019. State Bank of India alone has an exposure of Rs 67,811 crore. It is a leading lender and its NPAs are to the tune of Rs 12,165 crore because of accounts like Aircel, Reliance and Videocon Telecommunications.