"If we we are not getting anything then I think it is end of story for Vodafone Idea" - that was Kumar Mangalam Birla’s warning soon after the Supreme Court’s AGR verdict that imposed large financial liabilities on telecom companies. Namely, Sunil Mittal-led Bharti Airtel Ltd. and Vodafone Idea Ltd., a company co-promoted by Birla’s Aditya Birla Group and global telecom company Vodafone Plc. The court ruled that non-core revenue must be included in adjusted gross revenue when calculating the impact of government levies.
By the government’s estimate, Vodafone Idea owes it over Rs 53,000 crore. The company is ascertaining the liability separately and has already paid Rs 2,500 crore to the telecom department with the promise to pay another Rs 1,000 crore by the end of this week. Its board will then take stock of the situation to see how further payments can be made, the company said in a regulatory filing. The court has set a deadline for March 17.
The problem - with an outstanding debt of over Rs 1 lakh crore, the loss-making telecom company is on the financial brink. Birla was hoping the government would amend or relax payment terms but that is unlikely to come to pass after an angry court recently threatened contempt proceedings for those disobeying its order.
While competitor Bharti Airtel Ltd. is also due to pay a large amount, its finances are in slightly better shape.
The developments and Birla’s warning put Vodafone Idea’s very existence under a cloud. Prompting the question - Is bankruptcy an option worth considering for a company in such a position?
The Starting Point
Section 10 of the Insolvency and Bankruptcy Code allows a company to file for insolvency after a payment default. Such a voluntary application requires shareholder approval via a special resolution—i.e. 75 percent of the voting shareholders must approve the move.
The default could be a failure to repay a loan, bonds or an operational debt, Suharsh Sinha, partner at AZB & Partners, said. If there’s a delay in payment of financial dues, companies can use that as a reason for default, or the AGR liability, he added.
Using AGR liability might be more tenable to convince the shareholders—it’s exorbitant, extraordinary and would be difficult for shareholders to vote it down.Suharsh Sinha, Partner, AZB & Partners
Section 10 might offer a protective umbrella for one or two companies and that’s what it is intended for, Ramji Srinivasan, senior advocate at Supreme Court, pointed out. In case of a legitimate business failure, there may be companies who are thinking along these lines, he added.
It’s clear from the definition of default that failure to pay on due date will constitute a default. An imminent failure to pay may also trigger insolvency. Under the English bankruptcy law, there’s a duty cast on the directors of the company to save the company and maintain its status as a going concern if they find that a liability can result in cascading defaults.Ramji Srinivasan, Senior Advocate, Supreme Court
Under the IBC, it is open to companies to recognise that their inability to pay the AGR dues considering inadequate cash flows and lack of funding could result in triggering insolvency, he added.
Dealing With The DoT
So far, the insolvency proceedings in Aircel Ltd. and Reliance Communications Ltd. have set a favorable precedent for other telecom operators contemplating the section 10 route.
In both these cases, the Department of Telecommunications had broadly argued that the government has exclusive ownership rights over spectrum and the licence agreement allowed it to partially or fully suspend or terminate a licence on account of default.
In Aircel’s case, the Mumbai bench of the National Company Law Tribunal had accepted the resolution professional’s argument that the usage of licence or spectrum is akin to ‘Essential Goods or Services’. Section 14 of the IBC prevents cancellation or interruption of essential goods or services of a company undergoing insolvency.
In December, the IBC was amended via an ordinance to say that a licence, permit, concession, etc. given by the central or state government cannot be suspended or terminated on grounds of insolvency. This, as long as there’s no default in payment of current dues arising out of such a licence during the moratorium period.
The amendment also said if the resolution professional considers supply of certain goods or services critical to preserve the going concern status of the insolvent company, such supply can’t be terminated as long as the dues are paid during the moratorium period.
Srinivasan said this amendment can provide protection to companies against any threat of licence termination.
The newly amended explanation to section 14(a)(1) under the Ordinance provides that licences may not be terminated by the government if current dues are being paid during the moratorium period, for instance, monthly or quarterly spectrum usage charges, etc. arising during the moratorium period.Ramji Srinivasan, Senior Advocate, Supreme Court
Of course, it is always open to the Supreme Court to pass further orders, keeping in mind the applicable law, he added.
The 29A Hurdle
The moment a section 10 application is admitted, the present management and promoters will lose control, and an interim resolution professional will take over.
The bigger risk, Sinha said, companies must be prepared for is losing control forever— once an expression of interest is published, it becomes an open tender process and the existing promoters will have to compete with other bidders for ownership of the asset.
That, if they are able to clear the section 29A hurdle that lays down ineligibility criteria for existing promoters. This section has several limbs—the most critical one to assess, before going down the section 10 route, is whether the ineligibility conditions apply to any related parties of the existing promoters or persons in control or management of the insolvent company.Suharsh Sinha, Partner, AZB & Partners
If companies are able to overcome all these hurdles, the unsustainable debt will be restructured, and the AGR dues will be treated as operational debt, Sinha added.
To be clear, Vodafone Idea has made no explicit mention so far of considering insolvency as a resolution to its current financial problems. But the IBC presents it with a route to reorganise its financial affairs, albeit at the risk of ownership change. Eventually it will come down to a decision by the Aditya Birla Group and Vodafone on whether the Indian telecom market is worth investing further in.
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