Home / Opinion / Views /  Draft telecom bill's bizarre way to protect business continuity

If a telecom operator goes bankrupt, its customers should not suddenly find themselves bereft of connectivity. Therefore, protecting business continuity is a legitimate concern in dealing with insolvency of a telco. However, the manner in which the draft telecom bill seeks to protect business continuity is bizarre. It seeks to take over the troubled telco’s spectrum, leaving banks that could have lent money to the telco to acquire this valuable asset in the lurch. This not just erodes the creditworthiness of telcos but also undermines property rights in general and the accepted cascade of rights to the proceeds of insolvency, in particular.

There are better ways to protect business continuity of telcos than such disruption of the rules of capitalism.

“In the event the licensee," goes the text of the draft bill, “or assignee that has become subject to insolvency proceeding, fails to comply with the conditions stated in sub-section (2), then the spectrum, if any, assigned to such entity shall revert to the control of the Central Government, and the Central Government may take such further action, as may be prescribed, which may include allowing such licensee, or assignee to continue to use the spectrum, subject to placing the revenue of such entity in a separate designated account with license fee and charges applicable being paid first in priority during such period."

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Sub-section (2) says the following: A licensee, or assignee that becomes subject to any insolvency proceedings may continue to operate under the terms and conditions specified under such license 19 or assignment, if such licensee, or assignee meets the following conditions cumulatively:

(a) continues to provide telecommunication services or operate the telecommunication network or utilise the assigned spectrum, as the case may be;

(b) does not default in the payment of any dues under such license, or assignment, including any fees, charges, and other amounts payable under such license or assignment of spectrum; and

(c) complies with such additional or modified terms and conditions, as may be prescribed.

In other words, if a telecom licensee or another operator who has been assigned spectrum defaults on dues to the government, would no longer qualify to operate its business, and its spectrum would revert to the government. Thereafter, the government might consider allowing the defaulting entity to continue to operate, while its revenues would be confiscated.

Does the government appreciate what this means to the prospects of the telecom industry’s ability to raise a loan?

In a fully outsourced model, a telecom licensee does not need to own any of the gear required to run a network. It can lease space on telecom towers that cohost different operators’ telecom kit. It can outsource the equipment and its maintenance to makers of telecom kit like Ericsson, buying use of the equipment for an annual payment. Its entire asset might consist of just the spectrum it has bid for and obtained in expensive auctions. Its job is to build its brand, acquire customers and keep them happy.

To finance the acquisition of spectrum, the operator would take loans from a bank. The bank’s primary recourse is the valuable spectrum that the operator holds – it has few other assets, apart from its brand.

If its business fails, its primary asset, according to the draft law, would be confiscated by the government. The revenue generated by any business it does would go to a government dues account, entertaining no claim by the lender.

In which world would a bank lend money to such a telecom operator?

Business continuity is a legitimate concern. The government is right to worry that a telecom operator’s mismanagement of its own business would endanger key connectedness of a chunk of the citizenry. But the way to address this concern is not to take away the spectrum.

Rather, it is to mandate business continuity as an additional condition of the insolvency resolution process.

The lender should be able to take over the business, complete with the valuable spectrum, keep it going and sell it as a going concern to a willing and capable buyer. For the government to interpose itself between the lender and the asset it finances is to break the chain of rights and obligations that allow the public’s savings to be mediated to new value creation.

The government should mandate business continuity and remove the rest of the legalese contained in the section on insolvency.

In the government’s defence, it could be said that, for practical purposes, the government is the primary lender to telecom operators, as it allows deferred payments for the spectrum acquired in auctions. However, it cannot make a law as if spectrum were the only purpose for which a telecom operator needs to borrow or that the government alone matters among a telco’s lenders.

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