Understanding Aircel's Bankruptcy Case

Aircel Cellular Limited, one of the largest telecom operators has filed an application for bankruptcy in the National Company Law Tribunal (NCLT) in Mumbai. The application has been filed under Section 10 of the Insolvency and Bankruptcy Code, 2016 (IBC) (the charging section which allows the initiation of corporate insolvency resolution process by the corporate debtor itself) for undertaking the Corporate Insolvency Resolution Process (CIRP). Aircel together with its subsidiaries Dishnet Wireless Limited and Aircel Limited collectively owe an amount aggregating to about Rs.50,000 crores to the creditors (of which Rs.15,545 crore is towards financial creditors and around Rs.35,000 crore is towards operational creditors). The major portion of the debt comes from the loans raised by the corporate debtor to buy spectrum, including broadband wireless airwaves in 2010.

The decision to file for the bankruptcy has come as a surprise to many people. This decision of the management of Aircel was certainly after lot of deliberation. It may therefore be of relevance to understand the background as to how Aircel reached at this juncture of bankruptcy.

It is now a known fact that the entry of Reliance Jio Infocomm Limited in September 2016 with free calls and cheap data drastically changed the business dynamics in the Indian telecom sector. Sensing the urgency to have a competitive edge in the market, Aircel was also considering various options, including venturing into 4G services through partnerships.

In 2016, in an effort to undertake the first mobile industry consolidation, Aircel contemplated merger of its wireless business with another operator, Reliance Communications Limited. However, on account of various issues, the merger did not succeed and Reliance Communications Limited called off the plan to merge its wireless business with Aircel, citing legal and regulatory uncertainties.

During the same time, other major player like Bharti Airtel country’s largest telecom operator was also in the process to acquire Norwegian telecom operator Telenor's local arm and broadband service provider Tikona, and Tata group’s mobile business. Idea Cellular and Vodafone India also proposed to merge in early 2017. Subsequently, Reliance Jio Infocomm acquired the wireless assets of debt-laden Reliance Communications Limited, bringing down the number of private operators to just three (3) as against nine (9) during 2015-16, besides state run Bharat Sanchar Nigam Limited.

Due to consolidation, fierce competition and drop in tariff rate, Aircel started witnessing fall in revenues, dwindling cash flow and increase in the outstanding dues.

In a bid to survive, Aircel entered into a detailed discussion with the financial lenders to restructure its debt through Strategic Debt Restructuring, with a view to ensure that more stake of the promoters is involved in reviving the ailing Aircel. Discussions were also held with the shareholders for infusion of fund, in particular by Maxis Communications BHD (a Malaysian based promoter holding 74% stake in Aircel).

Despite various discussion, there was no consensus with the lenders with respect to restructuring of its debt. Even Maxis Communications, the majority shareholder, decided against pumping additional funds into Aircel on the ground that the same was not a viable proposition.

In wake up of these developments, intense competition, disruptive pricing policy of the new players, legal and regulatory challenges, high level of unsustainable debt, increased losses, lack of resolution with the lenders and the decision of the Malaysian promoter, Aircel eventually decided to file for bankruptcy under the IBC.

In terms of the provisions of the IBC, after the bankruptcy petition has been admitted, the insolvency resolution professional (IRP) is appointed. The CIRP is required to be completed within a moratorium period of 180 days which may be extended by another 90 days. After the appointment of the IRP, the management of the affairs of the corporate debtor shall be the responsibility of the IRP and IRP shall be responsible for the day to day management of the corporate debtor. The IRP is required to exercise reasonable care and diligence and take all necessary steps to ensure that the corporate person undergoing any process under the IBC complies with the applicable laws, failing which the IRP shall be responsible for the non-compliance.

This will be the last attempt to revive the corporate debtor failing which the extreme route of liquidation will be initiated by the NCLT.

As on date, the insolvency petition has been admitted by the NCLT after it was argued that the non- acceptance of the Section 10 petition may result in the sale of assets of Aircel. Any sudden stoppage of services by the corporate debtor will affect the existing subscribers. The IRP for Aircel has also been appointed to start the CIRP.

Shisham Priyadarshini, Partner

Amish Shroff, Associate Partner

Shaily Soni, Associate