AGR judgement: SC erred in what could be construed as straying into executive’s domain

The challenge, however, was that, in its judgment, the SC gave telcos just three months to pay cumulative dues in excess of Rs 1.5 lakh crore.

By Mukesh Butani & Karan Lahiri

Last Tuesday, the AGR saga seemingly achieved some sort of closure, with telcos getting clarity on an issue that has been lingering since the pronouncement of the apex court’s initial verdict in October 2019.  Under the revenue-sharing model contained in the licence agreements between the government and telecom service providers, the licence fee and spectrum usage charge (SUC) payable by the telcos is a percentage of adjusted gross revenue (AGR). Last year, the Supreme Court, after a legal battle that kicked off in 2003, upheld DoT’s more expansive understanding of AGR, effectively binding telcos to pay outstanding dues along with interest and penalty.

The challenge, however, was that, in its judgment, the SC gave telcos just three months to pay cumulative dues in excess of Rs 1.5 lakh crore. The judgment could not have come at a worse time for telcos like Vodafone and Airtel, whose performance was flagging, especially after Jio’s entry into the market. The judgment led to serious doubts of whether some of these telcos could continue as going concerns, and prompted talks of some players withdrawing investments from India.

Ideally, once the court had resolved the legal issue, which was interpretational, it ought to have left the realisation of dues to the executive, in addition to allowing the executive breathing room in the matter of interest and penalties (which, over a protracted period, had reached astronomical proportions). It would have been in the fitness of things to allow the appropriate administrative ministry to determine the timeframe and modalities of payment, while balancing the interests of the exchequer against acute stress in the telecom sector, acknowledged by all stakeholders including the high-level Committee of Secretaries in its December 2019 meeting. The court erred, therefore, in setting an unrealistic deadline.

Thereafter, the SC initiated contempt proceedings against the telcos and the concerned government officers in order to enforce this deadline, after the Union Cabinet, on November 20, 2019, approved a moratorium of two years. In the present proceedings, after the court’s diktat to adhere to its original judgment, the Solicitor General, appearing for the DoT, correctly pointed out that the Cabinet had decided on a 20-year timeframe for payment, which, in the circumstances, was a considered and reasonable decision—especially given the intervening impact of the Covid-19 pandemic. In the judgment passed last Tuesday, the apex court acknowledged this, stating that the “decision of the Cabinet is based on various factors, and in the interest of the economy and the consumers” and that this was taken after “extensive deliberations and consultations”. Despite this, the court once again chose to second-guess the executive, and compounded its earlier error, by halving the timeframe for repayment to 10 years (with 10% being payable by March 31, 2021).

The impact of this, however, remains to be seen. While it may help Airtel, for instance, which has already paid about Rs 18,000 crore of its dues of approximately Rs 43,000 crore, this would be less than adequate for Vodafone Idea which has only paid Rs 3,500 crore of its total dues of over Rs 58,000 crore. The only silver lining is that this judgment provides some modicum of certainty for strategic investors and relief for lending institutions. At this point, as we see it, there is only an upside potential, in the event that the telcos succeed in seeking review of the AGR judgment, given that a clear ruling has eliminated downside risk.

It is equally important, however, to point out what the court got right. It dealt with the issue of spectrum-sharing with precision, holding that a service provider sharing spectrum cannot be held liable for the past dues (prior to sharing) of the original licensee. Therefore, Jio (which had entered into a spectrum-sharing arrangement with RCom) and Airtel (which had availed of Aircel and Videocon spectrum) were not liable to pay the past dues of the original licensee.

Further, it was correctly noticed that after a spectrum-sharing arrangement was entered into, the operator availing of another licensee’s spectrum paid licence fee and SUC on its entire revenue, including the revenue derived from the shared spectrum, apart from an increment of 0.5% on the SUC rate in all cases where spectrum was shared. Therefore, the existing mechanism itself limited the liability of the operator sharing the spectrum of the original licensee.

Similarly, the court arrived at a correct conclusion while dealing with the cases of telcos which were undergoing insolvency proceedings. In its order dated July 20, 2020, it appeared that the SC was anxious about the question of recovering dues from the companies under liquidation (RCom, Aircel etc) and was, evidently, concerned about their “bona fides”. On this issue, it appears that the DoT took the view that spectrum cannot be the subject matter of IBC proceedings, and that licence fee towards the use of such spectrum cannot be considered to be an operational debt, while the department of commerce took the view that licence fee dues do, in fact, qualify as operational debt. The telcos correctly contended that while the SC could examine the question of whether the initiation of IBC proceedings was an invidious attempt to avoid paying AGR-related dues, the question of whether licence/spectrum can be the subject matter of IBC proceedings and could be transferred in the course of the resolution process was for the NCLT to decide.

While the court attempted to touch upon the legal issues involved, it ultimately took the right call in holding that all such issues in respect of scope and ambit of the IBC ought to be decided, in the first instance, by NCLT as a jurisdictional issue. This clearly leaves open several questions, which the NCLT will have to deal with in the IBC resolution process. After all, spectrum is a state asset held in public trust, and a licensee only has a right to use such asset under a contract, lending some force to the Union of India’s arguments that spectrum cannot be an asset falling within the ambit of the resolution process delineated under Section 18 of the IBC.

In leaving such issues to the NCLT, the Supreme Court recognised the limits of its own jurisdiction, in a case where interference would have amounted to riding roughshod over the IBC process. It would have been in the fitness of things if the court had shown similar restraint in deciding the timeframe for repayment, deferring to the expertise and information available with the executive on the basis of which it had decided that 20 years would have been an appropriate repayment schedule (after the court rejected the original Cabinet decision of a two-year moratorium). Such restraint may have safeguarded the health of the telecom sector and may ultimately have led to greater recovery by the government (an outcome which would be threatened if telcos go into liquidation), besides averting the adverse impact on recoveries by lending institutions and disruption of services to consumers.

Butani is partner at BMR Legal & Lahiri is an advocate, practising before the Supreme Court.Views are personal