SBI, Centre clash in SC over whether spectrum can be sold in insolvency

The State Bank of India (SBI) told the Supreme Court on Wednesday that telecom spectrum should be treated as part of the insolvency process and sold to recover dues, setting up a direct clash with the government over the treatment of this key asset when a telecom operator undergoes bankruptcy proceedings.

Arguing in the Aircel spectrum ownership case, SBI said that spectrum is an intangible asset that can be monetized for creditors’ recovery, while the government maintained it belongs to the state and held in trust for the public, not subject to the Insolvency and Bankruptcy Code (IBC).

The SBI backed its arguments on the grounds that the tripartite agreement that is entered between the lender, the corporate debtor (Aircel in this case) and the government at the time of sanctioning loans is underpinned by the fact that spectrum acts as a security interest for lenders.

“…the important aspect of this loan agreement is that it stipulates I (lender) should have the first charge over this asset (spectrum) otherwise I have no security. And this project will never take off (in the absence of financing),” the lawyer representing SBI told the Supreme Court.

The apex court was hearing a batch of petitions filed by lenders of bankrupt telecom operator Aircel Ltd, challenging the National Company Law Appellate Tribunal’s (NCLAT’s) 2021 order, which had held that spectrum can be transferred or sold under an insolvency resolution plan only after all government dues are cleared. The court will continue hearing the matter on Thursday.

The decision on the spectrum ownership case assumes significance, as this would give clarity whether spectrum, which is a natural resource, Constitutionally recognized to be owned by the people of India with the government acting as a trustee, can be liquidated under the IBC for lenders to recover dues.

The government, however, has maintained that the state holds the spectrum as a trustee and the licence granted to operators is only a permission to operate the airwaves. “The interim resolution professional (IRP) in the course of any proceedings in IBC cannot reach out to this asset (spectrum),” R. Venkataramani, the Attorney General of India, the government’s top lawyer, told the Supreme Court.

Venkataramani cited Section 18 and Section 36 of the IBC, which say assets owned by third parties (in this case, government) but then in possession of the corporate debtor held under trust or under contractual arrangements including bailment, shall not be included as assets for the purpose of the IBC and shall not be used for recovery in liquidation.

SBI, however, pointedly countered the government’s reliance on the exclusion clauses in Section 18 and Section 36. It said “the government of India is not a third party. They are the granter of the licence. They have entered into a tripartite agreement and therefore they are a party which is very much involved in the project.”

After the NCLAT order in April 2021, appeals were filed in the Supreme Court the following month. The apex court issued a notice in June 2021, but the case has since seen little progress, with repeated adjournments, according to court orders reviewed by Mint. The arguments began only in September this year.

At the core of the dispute lie two crucial questions: whether telecom spectrum belongs to the government or the operator, and whether the company’s right to use it under a government licence can be treated as an asset that may be monetized during insolvency.

The lenders of Aircel contend that monetizing spectrum is critical to maximizing recovery and completing the resolution process. Without it, they warn, Aircel would face liquidation, leading to substantial losses for banks, employees, and other creditors.

The stance of the department of telecommunications (DoT) has been that if a telecom company defaults on statutory dues such as licence fees, spectrum usage charges, or adjusted gross revenue (AGR) dues, the spectrum must revert to the government, and cannot be sold or transferred under insolvency proceedings.

Founded in 1999 by entrepreneur C. Sivasankaran and later sold to Malaysia’s Maxis Communications in 2005 for about $1 billion, Aircel once served over 90 million subscribers in India. The company thrived for nearly a decade before being hit by the intense price war following Reliance Jio’s entry in 2016, which forced several smaller players to exit the market.

In Aircel’s case, these dues stand at around ₹12,389 crore. In February 2018, Aircel and its subsidiaries, Aircel Cellular and Dishnet Wireless, filed for bankruptcy before the National Company Law Tribunal (NCLT), Mumbai, citing unsustainable debt of ₹58,670 crore.

In June 2020, the NCLT approved a ₹6,630 crore resolution plan submitted by UV Asset Reconstruction Co. Ltd (UVARCL), which proposed taking over Aircel’s assets, including spectrum, with lenders accepting an 89% haircut. UVARCL planned to raise between ₹800 crore and ₹1,300 crore through the sale of spectrum in the 1800 MHz and 2100 MHz bands.

The DoT opposed the plan, insisting that spectrum cannot be sold before clearing all government dues, leading to a protracted legal battle.

In April 2021, the NCLAT sided with the government, ruling that telecom spectrum cannot be transferred or sold under insolvency proceedings unless statutory dues are fully paid.

UVARCL and the lenders then approached the Supreme Court, seeking permission to sell Aircel’s spectrum and deposit the proceeds in an escrow account until the court delivers its final verdict.

The case is now being closely watched, as its outcome will determine how spectrum, a critical but government-controlled asset, is treated in future telecom insolvencies. It may also have a bearing on the resolution process of Reliance Communications, since the legal issues involved are similar.