It looks unlikely that Reliance Communications (R-Com) will have an easy time trying to monetise its assets and reduce its debt.
In the latest headache for the Anil Ambani-led Reliance Group’s telecommunications firm, the National Company Law Tribunal (NCLT) admitted on Tuesday a case filed by unsecured and operational creditor Ericsson against it to initiate proceedings under the Insolvency and Bankruptcy Code (IBC) for outstanding dues.
According to industry sources, R-Com owes at least Rs 1,150 crore to Ericsson for services rendered by the latter in maintaining the telco’s network; and this sum may have risen to Rs1,300 crore after factoring in other charges like accrued interest and penalties.
The decision of the NCLT comes just when it appeared R-Com would be able to repay lenders, after consummating a deal to sell assets such as telecom towers and an extensive optic fibre cable network to Reliance Jio, led by Mukesh Ambani, Anil’s elder brother.
If bankruptcy proceedings go ahead after the appointment of an interim resolution professional, the deal with Jio, and the monies of a consortium of secured creditors led by State Bank of India (SBI), would be in jeopardy as the other companies will join the fray to acquire R-Com. Typically, lenders have been required to take a haircut whenever a company’s ownership has changed hands through the IBC route. It isn’t even clear immediately if Jio would technically qualify to bid for R-Com through the IBC process, given that the promoters of the two companies are siblings.
However, reports emerged over Thursday and Friday that R-Com may be exploring an out-of-court settlement with Ericsson to come to an understanding regarding the settlement of dues. “We confirm that R-Com and Ericsson are in advanced stage of discussions to expeditiously resolve commercial issues. This will enable R-Com to exit the NCLT process,” R-Com said in a statement issued on Friday afternoon. “R-Com is confident to expeditiously proceed with its monetization plan with Reliance Jio and overall resolution plan with lenders, keeping in mind the interests of all stakeholders.”
As developments unfold, R-Com is witnessing massive volatility in its stock price. After tanking 15.26% on the BSE on Wednesday, a day after Ericsson’s plea was admitted by the NCLT Bench in Mumbai, R-Com’s share price rose close to 30% on Thursday when the possibility of an out-of-court settlement process came to light. On Friday, R-Com’s shares closed the day’s trade at Rs15.35 per share, down 7.25%, on the BSE. The S&P BSE Sensex lost 0.86%, or 300 points, on the same day to end at 34,848.30 points.
However, a person familiar with the matter told Fortune India on condition of anonymity, that while R-Com was keen on settling the matter out of court, Ericsson wasn’t interested in anything less than the security of being able to recovering its dues in full. “Else, they will go ahead with the case in the NCLT,” this person said.
Another person aware of the developments stated that Ericsson may be satisfied with a bank guarantee from SBI, on behalf of the joint lenders forum comprising R-Com’s financial creditors, on the understanding that the lenders will release the Swedish telecom and network services firm’s dues to it, once it receives the proceeds from the R-Com-Jio deal, pegged at around Rs 18,000 crore. He, too, declined to be identified.
“The ball is in the court of the banks,” the second person said. “If the case proceeds under the IBC then the outcome is uncertain for all stakeholders, including Ericsson. So they have to decide on whether they should and could extend the guarantee.” But he did agree that by getting the case admitted by the NCLT, Ericsson had scored a “moral victory” over R-Com and its negotiating power had significantly risen. This person said that R-Com had earlier made an offer of paying Ericsson Rs 400 crore, but that had been spurned by the latter. Fortune India couldn’t independently verify this.
A spokesperson for Ericsson said the company doesn’t comment on market speculation. A spokesperson for R-Com declined to add anything more than what the company said in the statement issued on Friday.
But the way this saga has unfolded gives rise to several unanswered questions. The first is whether R-Com’s lenders would agree to extending a bank guarantee, which hinges on a deal between R-Com and Jio that is yet to materialize. While the certainty around the intentions of Jio and R-Com to proceed with the transaction is high, R-Com has witnessed several failed attempts to monetize assets including a proposed sale of telecom towers to Brookfield Asset Management and merger of its wireless business with Aircel in 2017. If, hypothetically, the deal with Jio weren’t to materialize for whatever unforeseen reasons, it would mean that the lenders wouldn’t get repaid and may have to end up spending further, if Ericsson were to invoke any potential bank guarantee they extended.
R-Com’s current outstanding debt is Rs 45,000 crore, and banks have given the company a moratorium till December 2018 on principal and interest repayment, hoping that the deal with Jio would go through by then and they will recover their dues in full. While the deal with Jio would yield around Rs 18,000 crore, R-Com hopes to service the remaining portion of the debt on a regular basis through cash flows from its remaining global enterprise business, which it is bullish on.
Second, assuming R-Com and Ericsson come to an understanding, is it at all going to be possible for them to withdraw the case once it has been admitted under IBC?
According to a Delhi-based lawyer, R-Com still has time to seek an out-of-court settlement with Ericsson. “There have been a couple of cases where the Supreme Court has allowed an out-of-court settlement after the insolvency process began under the IBC. For example, the case of one Lokhandwala Kataria Construction was allowed to be settled outside the NCLT,” this lawyer, said on condition of anonymity.
However, the same lawyer added that if R-Com can’t convince Ericsson to settle the matter bilaterally before the IBC process commences then the law and precedence on what to do under such circumstances is “ambiguous”.
“In the case of Binani Cement, after the bidding was closed the promoter tried to seek an out of court settlement with a third party but that was struck down by the Supreme Court and the matter was sent back to the NCLT. So there is still a bit of ambiguity but in my view, there is still time for an out of court settlement,” the lawyer added.
In the case of Binani Cement, Dalmia Bharat had emerged as the highest bidder through the IBC process, but after bidding closed, Binani announced that it had come to an agreement with UltraTech Cement to sell its business to the Aditya Birla group company. The Supreme Court disallowed the bid that came from outside the process playing out in the NCLT. But UltraTech put in a bid at a later stage through the IBC process, and Dalmia Bharat has moved the NCLAT (National Company Law Appellate Tribunal) seeking the quashing of UltraTech’s late bid.
Third, if R-Com and Ericsson are allowed to withdraw the case under IBC, it would lead to further troublesome questions arising with respect to the sanctity of the process. To begin with, several of the big-ticket cases under IBC are mired in litigation—initiated by the promoters, whose assets are on the block, potential buyers of such assets and lenders. The subject of these cases deals with whether existing promoters of companies that face bankruptcy proceedings should be allowed to re-bid for their assets, after failing to repay debt; and whether bids of competing firms that have come in either outside the IBC process or through it (albeit at a later stage) should be considered.
To add to this, if Ericsson is allowed to withdraw the suit from NCLT, what is to stop other companies from also approaching the NCLT and using the threat of bankruptcy and insolvency proceedings as a bargaining chip?
Matters are clearly reaching a tipping point rapidly. As things stand currently, it remains to be seen who blinks first: Ericsson, R-Com or its lenders.
Read also -RCom shares tank 15% as NCLT orders bankruptcy proceedings.
