Reliance Communications: End of the road or last throw of the dice?

Unable to monetise assets and repay dues, Reliance Communications (RCom), a part of the Anil Ambani-led Reliance Group, has decided to voluntarily file for insolvency and settle its debt woes through the National Company Law Tribunal (NCLT), under the ambit of the Insolvency and Bankruptcy Code (IBC).

Depending on which way one looks at it, either the endgame for Anil Ambani, who has desperately tried to hold on to at least a portion of his now-crumbled telecom empire is near; or this is a last-ditch attempt to get stakeholders including lenders, operational creditors like Ericsson and potential suitors like Reliance Jio Infocomm (Jio) to reconsider their respective positions.

“The Board (of directors of RCom) noted that, despite the passage of 18 months, lenders have received zero proceeds from the proposed asset monetisation plans, and the overall debt resolution process is yet to make any headway,” RCom said in a statement issued on February 1.

The beleaguered telco said that the “unfortunate outcome” was attributable to a lack of “100% approval and consensus, as mandated by RBI’s (Reserve Bank of India) 12th February 2018 circular, on all important issues, amongst over 40 lenders, Indian and foreign, despite the passage of 12 months and over 45 meetings.” The company also added that various legal challenges posed to its asset sales plans, pending in various high courts, the Supreme Court and the TDSAT (Telecom Disputes Settlement and Appellate Tribunal), threw a spanner in its plans of reducing its debt burden of around ₹46,000 crore.

RCom is faced with two more major challenges, to which it has been unable to find any answers over the last few months. One is its soured relationship with Swedish telecom network equipment maker Ericsson. RCom owes around ₹550 crore to the company, which is an operational creditor. Ericsson has dragged RCom to court in the past seeking recovery of its dues, but the latter managed assuage the company and buy some more time to monetise its assets and repay Ericsson.

The second challenge is to do with the asset monetisation deal that RCom was banking on to repay debt due to lenders, including banks and Ericsson. The idea was to sell RCom’s towers, optic fibre cable network and spectrum to Jio, which is owned by Anil Ambani’s elder brother Mukesh Ambani. The deal was supposed to bring in a total of ₹18,000 crore, which was to be used to pare debt. After much legal wrangling, RCom managed to secure the apex court’s approval to enter into a spectrum trading deal with Jio. The deal was stuck as in the government’s assessment RCom owed it around ₹3,000 crore in spectrum-related dues. But Jio’s subsequent insistence that the Department of Telecom (DoT) ring-fences it from being liable for any spectrum-related dues related to the period prior to its acquisition, unhinged the deal yet again, as the government wasn’t willing to play ball.

With Ericsson’s patience growing thin, it moved a contempt of court petition against RCom and Anil Ambani and demanded the latter’s arrest.

As mentioned earlier, the RCom’s board decision to go for voluntary debt resolution via IBC may be read as a proactive or reactive approach. It could be a proactive ploy to get Ericsson, Jio, and lenders to reconsider their stance.

Ericsson is an operational creditor to RCom and under the IBC process, operational creditors get second preference after financial creditors such as banks. Therefore it may stand to make much less, or nothing at all, if the NCLT admits RCom’s insolvency plea and proceedings are initiated. Even for the banks that have lent to RCom, a successful completion of the deal with Jio would mean that they stand a chance to be repaid in full. If they have to reclaim dues through the IBC process, they will have to almost certainly take a haircut, the severity of which is anybody’s guess.

For Jio, it is very much possible that it acquires RCom’s assets by bidding through the IBC process. But as some recent high profile cases, including that of Essar Steel, have proven, bidding for an asset through the IBC process is hardly straightforward. There is the possibility that it may end up paying more for it than earlier due to competitive bidding from other interested entities. Also, such bidding has been subject to various legal challenges by competing bidders and even the original promoters of the assets, which has delayed the resolution process.

The DoT, which has thus far stuck to its demand of recovering the spectrum-related dues from RCom, will need to evaluate whether it wants to see another telco go down under its watch after the likes of Aircel, Telenor, and Tata Teleservices have already shut shop and Vodafone and Idea have consolidated to survive. Also, DoT’s demand for past dues may not be palatable to any new potential owner of the company, which may drive down the value of the bids.

Then, of course, there is the relative less complicated explanation. It is indeed the end of the road for RCom and it simply sees no other plausible avenue of repaying its debt. The Reliance Group may have decided to stick by whatever the outcome of the NCLT-monitored be and move on with its other businesses. However, in doing so it may end up losing control of the remaining part of its telecom business – which deals with enterprise and data services. RCom has maintained that this business – though smaller in scale – was far more profitable than its wireless services business, which it shut down, and had potential for future growth. It seems unlikely that any bidder, including Jio, that evinces interest in RCom would agree to leave out this portion of the business, given there is general agreement that the future is in data.