A missed connection: The Supreme Court's AGR judgment
In an interview last year, Senior Counsel Harish Salve noted that the Supreme Court was to be squarely blamed for the economic slowdown. The recent judgment of the Supreme Court of India with respect to the payment of outstanding Adjusted Gross Revenue (AGR) dues is likely to have a jeopardizing impact that could threaten the very existence of telecom companies in India.
It all started on October 24, 2019, a day on which a three-judge Bench of the Supreme Court in Union of India v. Association of Unified Telecom Service Providers of India & Ors. (AGR-I) rendered an all-encompassing interpretation as to what would constitute revenue for the purposes of calculating the outstanding AGR dues payable by the Telecom Service Providers (TSPs) to the Central government. The said AGR dues were payable in consideration for the spectrum that was licensed by the Centre to the TSPs pursuant to Section 4 of the Indian Telegraph Act, 1885.
This judgment came as a huge blow to the financially fragile telecom sector, which has witnessed a number of telecom companies undergoing proceedings initiated under the Insolvency & Bankruptcy Code, 2016 (IBC) or facing the prospects of undergoing the insolvency resolution process. This led to a pertinent question of law as to whether the spectrum licensed to such telecom companies could be auctioned off in IBC proceedings so as to clear the debts payable to the range of creditors of these telecom companies.
The Centre, with a view to ease the burden on this sector, moved an application before the Supreme Court inter alia seeking an extension of time to be provided to the TSPs who have been impacted by the aforesaid judgment so as to clear the said AGR dues. The total dues payable by the TSPs, as calculated by the Centre, was pegged at a little over Rs. 1.43 lakh crore, inclusive of the principal, penalty and interest components.
Furthermore, another issue arose with respect to the liability of the past dues of those TSPs who have shared spectrum with other TSPs.
The September 1 ruling
On September 1, 2020, the Supreme Court in Union of India v. Association of Unified Telecom Service Providers of India & Ors. (AGR-II) inter alia held that the National Company Law Tribunals (NCLT) would determine the issue as to whether the spectrum licensed to telecom companies (who presently face insolvency proceedings) could be auctioned off in IBC proceedings, considering the same was a jurisdictional issue.
Furthermore, on the question of shared spectrum and the liability of past dues, the Bench held that a TSP would not be liable for the past dues of those TSPs from whom it shares spectrum. On the issue of extension of time to be granted to the TSPs to clear the outstanding AGR dues, the Supreme Court was not inclined to accede to the request of the Centre for a staggered payment over a twenty-year period. Instead, the Supreme Court granted a ten-year period, directing the TSPs to deposit 10% of the amount each year over a period of ten years, failure of which would attract contempt proceedings.
A missed opportunity?
Spectrum, like any other natural resource, is a sovereign asset that belongs to the custody of the Central government. The right to use spectrum is licensed to TSPs by way of auction, in accordance with the terms of the License Agreement that may be laid down by the Centre. It would have been prudent if the Supreme Court had adjudicated on the issue as to whether spectrum could have been auctioned off in insolvency proceedings rather than leaving it to the wisdom of the NCLT, considering that there are divergent views that are possible on this issue.
The first view that would support the contention of the Centre is the fact that spectrum, being a natural resource, cannot be classified as an asset of a corporate debtor under the provisions of the IBC, since it is merely the right to use such spectrum that is licensed to the TSP. This was the argument that was advanced on behalf of the Centre in the present proceedings.
On the other hand, it could also be argued that for accounting purposes, spectrum is classified as an intangible asset of the corporate debtor, which can be disposed in an insolvency proceeding, so as to realize the dues that are payable to the creditors of such insolvent telecom companies. The IBC, being a special legislation, places financial creditors on a higher pedestal as compared to the government to whom statutory dues are payable.
Furthermore, there may be an instance where an arrangement exists between the lenders, the TSPs and the Centre, so as to create a security interest over the spectrum license that has been issued for the purposes of securing a loan from a lending institution. In such a situation, ideally, the banks would be given primacy in the event of any payout in an insolvency proceeding.
If the Supreme Court had settled this position, the same would have been binding upon the NCLT by virtue of Article 141 of the Constitution of India. However, a potential scenario now arises that may result in conflicting views adopted by different NCLTs over the course of protracted litigation or appeals that may lie against a finding of a particular NCLT. These would eventually find their way up to the National Company Law Appellate Tribunal (NCLAT) and finally the Supreme Court, so as to determine the issue finally.
On the issue of extension of time, respectfully, the Supreme Court should have sanctioned the twenty-year period that was proposed by the Centre to enable the TSPs clear the outstanding AGR dues in a staggered manner. This period was formulated after taking into consideration the representations made by the Indian Banks Association and the telecom companies. The Supreme Court should have humbly considered the economic rationale behind this view, keeping in mind the interests of all stakeholders, including the government, the industry and the consumers.
The Supreme Court should have atleast taken into consideration the impact of COVID-19, which is causing an economic slowdown worldwide. There is no question of contempt, since it was a policy decision formulated keeping in mind the economic interests of the nation, whilst complying with the order and judgment of the Supreme Court. Though the ten-year period granted by the Supreme Court may give some respite to the telecom companies, the brunt may ultimately be borne by the end consumer, who may be subjected to pay higher tariffs in order for the TSPs to comply with the order of the Supreme Court within the stipulated ten-year period.
Most respectfully, the judiciary must adopt a more holistic approach when it comes to adjudicating matters that tend to have a reverberating impact on the economy. In the current economic climate, the telecom sector is a bleeding industry. Ideally, policy decisions that have been made keeping in mind what is in the best economic interest of the country should not be interfered judicially, unless there is a gross violation of fundamental rights or the basic structure doctrine.
There is no doubt that the judiciary has ruled correctly that TSPs cannot be absolved from their liability with respect to the outstanding AGR dues. The amounts realised by the Centre from these outstanding AGR dues can be effectively utilized to improve the telecom infrastructure and provide efficient services in rural and hilly regions of our country. However, the judiciary must also give due regard to other stakeholders, such as banks and other lending institutions, who not only pump in finance to the industry and economy, but are also custodians of public money – money that belongs to the tax payers of India.
The author is a Senior Advocate practicing at the Supreme Court. She acknowledges the inputs of Advocate Partha Mansukhani in the writing of this article. Views expressed are personal.