Telecom companies don’t own spectrum, so can’t sell it under IBC: Supreme Court

In the resolution process, the right of use of spectrum is getting transferred to another party so that usage charges can be paid to the government.

The resolution process of insolvent telecom operators like Reliance Communications (RCom) and Aircel may get stuck, with the Supreme Court on Wednesday questioning how spectrum can be sold by such companies when it does not belong to them. The apex court also raised the contradiction between sale of spectrum through spectrum trading where there’s a provision of recovering all past dues of the government, and the Insolvency and Bankruptcy Code (IBC) where the government’s dues do not get priority as it is categorised as an operational creditor and put behind financial creditors like banks.

“You can only sell what is in your possession. If telcos only have a right to use and don’t own the spectrum, how can they sell? Sale of spectrum is allowed under trading guidelines. But how can spectrum be sold under IBC?” a bench led by Justice Arun Mishra observed.

“Spectrum trading guidelines provide that dues need to be taken care of before sale of spectrum is allowed. But IBC has relegated government dues to only operational creditors, behind banks. In such a scenario, how will prior dues be paid, as required by spectrum trading guidelines. We will not go into apportionment of resolution plan funds between sets of creditors,” the bench said, adding, “Spectrum is not a manufacturing input and can’t be treated as such. Under the revenue sharing regime currently in place, spectrum dues can’t be dealt with as operational dues”.

Arguing on behalf of the committee of creditors (CoC) of Rcom, senior counsel, Harish Salve agreed with the bench that spectrum is not owned by the telcos and belongs to the government, but said that under the contractual arrangement the telecom operators have the right to use it and pay the usage charges to the government.

In the resolution process, the right of use of spectrum is getting transferred to another party so that usage charges can be paid to the government. For this transfer also the approval of department of telecommunications (DoT) is required. Salve argued that the court should allow the IBC process to carry on at present and the DoT can take a view on transfer of spectrum when the matter comes before it. “Spectrum can be sold only with the DoT nod. It is premature for SC to decide if spectrum can be sold, SC should not trouble itself now. If resolution plan succeeds, DoT will decide on sale of spectrum at that stage, let government decide,” Salve submitted. “Spectrum is recorded as an asset, by virtue of having been purchased in an auction. Telecom companies own the right to use the spectrum, which is an extremely valuable right. They are not seeking to sell the spectrum, but only looking to transfer the right to use. Relationship between telecom company and the government is akin to relationship between landlord and lessor of property,” Salve said.

According to Salve, if spectrum is not classified as an asset of the insolvent telco then it will end up in liquidation. “Without spectrum being a valuable asset, a telecom operator is unlikely to receive any viable resolution plan,” he said, adding that all natural resources, be it spectrum or mines, come under the scope of IBC.

The hearing in the matter will continue on Thursday.

As reported earlier, the SC has brushed aside technicalities related to IBC and thus far observed that the AGR dues of insolvent companies amount to Rs 45,000 crore and someone needs to pay this. It has fo far held the position that the government needs to come out with a proposal for payment of the dues or else every company will go into liquidation and dues won’t be recovered.

The apex court is examining whether companies like Rcom and Aircel filed for bankruptcy to escape paying their AGR dues. It is also examining how the government will ensure that their AGR dues are recovered, thirdly whether these insolvent firms can put their spectrum up for sale when the government will not have the first charge on the proceeds.

While Rcom has AGR dues worth Rs 25,000 crore, Aircel’s is around Rs 12,389 crore.