From Bailouts to Bail-Ins Revolutionizing Indian Telecom Insolvency

Introduction

The Indian Telecommunications Industry (‘TelCo’) is dominated by a few players with high debts, providing essential services like internet access to most of the population. The recent AGR case, resolved against TelCo players, has heightened financial burdens, underscoring the need for a clearer insolvency regime. This blog explores the challenges of TelCo insolvencies in India, the potential of bail-in provisions for smoother resolutions, and proposes a bail-in framework for the industry.

What Is A Bail-In

A bail-in refers to the cancellation of the existing debt of a firm, usually a bank, in exchange for issuance of equity worth a part of the cancelled debt. This bail-in is triggered by the concerned regulatory authority when there is a risk of the firm failing and is an emergency measure to ensure the continuity of the firm. Bail-in provisions are a failsafe mechanism used to resolve bank insolvencies since they provide much needed capital to the bank to help them stay afloat. In the blog, we will be looking at a modified version of a bail-in regime to fit the TelCo sector. The blog proposes a waterfall structure of bail-ins where the liability structure of the firm would be reconstituted to better protect operational continuity.

The AGR Judgement & TelCo Insolvencies

TeleCo firms are usually earmarked by high capital expenditure, large amounts of debt and an abundance of illiquid assets like spectrum licenses and network infrastructure. A major constituent of the debt that such firms are liable for are the spectrum fees that need to be paid to the Department of Telecommunications (DoT) for the leasing of spectrum licenses. In the recent AGR judgement, the Supreme Court has settled that Telecom companies must pay their usage and licensing fees for the spectrums they use (also referred to as ‘AGR Dues’) from core revenues as well as non-core revenue streams like interest received, dividends and profits from asset sales. This judgement has led to an increase of financial burden on TelCo firms and may push some major players to the brink of insolvency. With major players like Jio, Airtel and Vi holding almost 92% of the market share, the insolvency of any one of these firms could lead to a systemic disruption of facilities on a national scale. The current resolution framework, i.e. the IBC, lacks any specific measures to ensure the brevity of proceedings during such insolvencies or ensuring the continuity of operations in case of failure of the firm. Therefore, a proper insolvency regime to deal with TelCo insolvencies or, at the very least, minimize systemic risk is the need of the hour. However, what makes the failure of such firms hard to deal with is the high operational costs involved with running these firms and their balance sheets being heavy in illiquid intangible assets, debt. Along with the evident existence of a debt overhang in such firms. 

Let us explore how a bail-in regime could be suitable to fix these problems:

1. Financial Problems

Telco firms need to expend a large amount of capital in order to continue daily operations, however, bail-ins would lead to a reduced burden of debt servicing, freeing up capital for operational costs. As for the richness in illiquid assets, bail-ins can stabilize the firm enough so that the management can work out a proper restructuring plan and line up buyers or further capital infusions. The proposed framework also includes an industry funded resolution fund that may be used to further service these asset sales and stabilise failing firms.

2. Debt Overhangs

A debt overhang refers to a high level of debt that burdens a company and hinders its ability to grow. The burden of these dues is immense, especially after the AGR judgement, leaving Vi, Airtel and Tata Teleservices with dues of about 1.02 lakh crores. While players like Jio may have the support of Reliance Industries, other players cannot handle such massive burdens. A bail-in regime would ensure that such firms are in a better place financially in case of insolvency since this overhang would be eradicated and the firm could begin to grow organically. Bail-ins, specifically bail-ins that happen on the discretion of the regulator, primarily also help eliminate debt overhangs.

Proposed Framework

A bail-in regime that follows a securitised structure where the operational costs of the firm is given the utmost priority. Following the ‘failure’ of the firm, which may be defined as the point when the firm is unable to service its debt, the regulatory authority can step in to restructure the capital of the firm to prioritise the preservation of capital for operational costs in order to ensure continuity of services. The order of writing down of instruments would be as follows, 

1. Common Equity Tier: Since equity holders always share the losses first, the equity tier must always be the one to be written down in order to recuperate losses, as is common practice.

2. Additional Tier 1 Instruments: Subordinated debt that is convertible like Contingent Convertible Bonds (CoCos) would be the second in line to be written down. While CoCos are primarily only issued by banks and NBFCs, TRAI could impose industry wide requirements for subordinate debt issues for players that hold a major market share in order to provide a buffer for their insolvency.

3. AGR Dues and Licensing Fees: Since a major part of the liability faced by TelCo firms is constituted by AGR dues and licensing fees, they would be the next in line to be written down. The writing down of these dues would also help get rid of the considerable debt overhang present in their balance sheets. The usual approach towards resolving the non-payment of such dues consists of bailouts by the government, therefore a bail-in regime would prove to be more efficient since getting rid of the debt overhangs in these firms would lead to further growth.

4. Unsecured Debentures and Bonds: Unsecured debentures would be the last tier of the capital to be written down if the previous three prove inadequate to cover the liabilities of the firm. More tiers may be made by the regulatory authority as seen fit depending on the capital structure of the firm, however, these four tiers would generally be common amongst most TelCo firms and be the largest in value amongst the liabilities of the firm.

India follows the no creditor worse off principle with regards to creditor recovery, therefore, unsecured debentures, bonds and other debts must come last in this order. This is to ensure that each creditor is not worse off than they would have been had the company been liquidated and to ensure that the debt which is cancelled pari-passu amongst the creditors is minimal in value. A minimum value guarantee and a revamp of existing contract to include creditor consent would prevent a violation of creditor rights.

TLAC & Living Wills

The regime proposes that the regulatory authority create an estimated Total Loss Absorbing Capacity for the major players in the industry. Total Loss Absorbing Capacity (TLAC) basically includes instruments that can be subordinated to operational liabilities by the firm in times of financial stress. TLAC requirements can be set by the regulatory authority in order to ensure that there is enough subordinated debt to cover operational costs and primary contract dues since the TelCo industry relies upon long term contracts for its operations. Since such bail-ins wouldn’t be able to provide the necessary capital infusion, an industry funded resolution fund or regulator aid can serve as an economic way of lubricating the resolution process.

The regulator must also mandate players with major market shares prepare a ‘living will’ which is a pre-planned restructuring framework to be prepared by each firm in case of its insolvency. The loss of creditor and stakeholder confidence is a big worry in bail-in regimes because of the firm’s status as a ‘failing firm’. However, this worry is only half as prominent for non-banking institutions since being solvent is not a matter of going-concern for them, unlike banks. The preparation and submission of a living will would help ease worries about mass panic caused by bail-ins since the ambiguity about the future management of the firm would be alleviated. The implementation of such a framework, at face value, seems to be fodder for political and stakeholder resilience. But when compared to the existing practice of post-hoc bailouts, such a regime would certainly prove to be a much more efficient use of taxpayer money. A bail-in regime would also help preserve competition by curbing the monopolistic drifts in the industry. Market competition would also be in the public interest because it is mainly attributed to the extreme affordability of TelCo services in the country.

Conclusion

A tailored bail-in regime for India’s telecom sector ensures operational continuity by reducing debt burdens and stabilizing distressed firms. With tools like TLAC requirements and living wills, it offers a sustainable alternative to bailouts, preserving market competition and safeguarding critical services, ensuring resilience amid financial pressures in this vital industry.