March 11, 2019

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Pay up or face prison time: SC tells R Com

- Legal Era, [ ]

A look at the major developments leading to the faceoff between the ANIL AMBANI-led group and Ericsson...

Following Swedish telecom equipment manufacturer, Ericsson’s moving the National Company Law Appellate Tribunal (NCLAT) against ANIL AMBANI-led Reliance Communications (R Com) for non-payment of dues worth more than INR 1,000 CRORE, R Com held off the insolvency process by agreeing to pay dues worth INR 550 CRORE to Ericsson by September 30, 2018, from the sale of spectrum to RELIANCE JIO helmed by ANIL’s elder brother, MUKESH AMBANI.

Three days before the September 30, 2018, deadline, however, R Com approached the Supreme Court (SC) for a 60-day extension, saying that its spectrum sale had hit a roadblock in the form of the Department of Telecom (DoT) insisting on a bank guarantee of INR 2,900 CRORE for grant of No Objection Certificate (NOC).

Ericsson refused the extension, saying it had already waited for long to recover its dues. The Swedish major accused ANIL AMBANI and other executives of willfully defaulting on the payment of dues and not complying with due process of law. A day after the September 30, 2018, deadline, Ericsson filed a contempt of court petition against ANIL AMBANI in the SC. Senior Counsel representing Ericsson, ANIL KHER, confirmed the development to a leading financial daily.

Two days after Ericsson filed the contempt of court petition in the apex court, the TDSAT stayed the DoT’s demand for a bank guarantee, clearing the decks for R Com’s sale of spectrum to RELIANCE JIO, the proceeds from which would help R Com repay its dues to Ericsson and others.

However, R Com did not cough up the INR 550 CRORE to Ericsson despite the passage of the second deadline of December 15, 2018.

On January 7, 2019, the SC issued notice to R Com, seeking the latter’s response to the contempt plea filed by Ericsson, within four weeks. Ericsson claimed that R Com had the money to invest in the RAFALE jet deal but could not clear its dues worth INR 550 CRORE. R Com accused the Swedish company of sensationalizing the matter and agreed to deposit INR 118 CRORE with the SC’s registry. Ericsson’s refusal to accept R Com’s offer notwithstanding, R Com said it remained committed to clearing Ericsson’s dues after its spectrum sale.

Sometime in February 2019, ANIL AMBANI’s counsel, SENIOR ADVOCATE MUKUL ROHATGI, reportedly told the SC, “The payment of INR 550 CRORE to Ericsson was subject to the sale of assets to RELIANCE JIO. There was a deal with JIO for the sale of assets for INR 18,000 CRORE, which includes the amount mentioned in the statements given to the stock exchange. This deal did not takeoff with JIO.” ROHATGI informed that R Com did its best to make the deal happen but unfortunately, the talks failed in the apex court itself when JIO refused to take R Com’s past liability.

Towards the end of February 2019, a SC bench comprising Justice R.F. NARIMAN and Justice VINEET SARAN held ANIL AMBANI and two directors of the R Com Group - Reliance Telecom Chairman SATISH SETH and Reliance INFRATEL Chairperson CHHAYA VIRANI, guilty of contempt of court, and asked them to pay INR 453 CRORE to Ericsson within four weeks (the amount to be paid to the Swedish major had been calculated at INR 571 CRORE with interest). Non-compliance would invite imprisonment for three months, the court ruled. This was in addition to the INR 118 CRORE deposited with the top court’s registry by R Com.

Observing that despite R Com’s claims to the contrary, its undertaking to pay Ericsson wasn’t linked to the sale of any specific assets to JIO or any other entity, the bench said, “We have seen that right from the beginning, INR 550 CRORE was undertaken to be paid without having to depend upon any act or omission of a third party.”

The bench also noted that R Com’s sale of spectrum to JIO did not materialize only because JIO refused to give an undertaking to the effect that it would absorb R Com’s past liability, and not because the DoT refused to grant the NOC, as alleged by R Com in its earlier pleadings. “Meanwhile, in parallel proceedings, this court did its utmost to lend a helping hand, so that, independently of these orders, the sale of assets could also be affected,” the bench asserted.

It further directed R COM, Reliance Telecommunication, and Reliance INFRATEL to deposit INR 1 CRORE, each, to the SC’s registry within four weeks. In the event the companies failed to comply with the court order, their chairpersons would have to undergo an additional jail term of one month.

However, the CHAIRMAN of the State Bank of India (SBI), which led the lenders’ forum in the insolvency proceedings, escaped the court’s ire. Ericsson had accused him of colluding with R Com on non-payment of dues.

Responding to the SC verdict, a spokesperson for R Com said that the company respected it and that the R Com Group would comply with the same. A company statement reportedly read, “R Com is confident of raising the balance... Well, within the time of four weeks allowed by the HON’BLE Supreme Court.”

As to how R Com plans to raise the remaining funds in four weeks, a source requesting anonymity reportedly said that the company may sell its real estate assets in Kolkata and Chennai, and is also likely to urge JIO to accelerate its payment for the fiber assets acquired from R Com. It had been reported in August last year that R Com struck a deal to sell its optical fiber and ancillary telecom assets to JIO for INR 50 BILLION. The source said that R Com had received only INR 780 CRORE (7.8 BILLION) from JIO, and that the company could ask JIO to pay up sooner.

Significantly, this comes at a time when group companies of ANIL AMBANI’s diversified business empire are already facing falling valuations coupled with a loss of goodwill, triggering heavy selling of guaranteed shares.

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