RCom Insolvency Case: The Downfall of the Telecom Giant

RCom Insolvency case has reached a point where non-payment can lead to Jail term for its Chairman, Mr Anil Ambani. But what led to the telecom giant's downfall?

4th Mar 2019
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It was not so long ago when Reliance Telecommunication was a name synonymous with the word “telecom”. However, when you consider the amount of news we’ve been hearing about this telecom giant's current situation, it appears to be a long time ago. The legal tussle between the Swedish Telecom-Gear Company, Ericsson, has reached new heights this Wednesday. The Supreme Court, on 20th February has held Anil Ambani (RCom’s Chairman) on contempt. Therefore, the highest court of India has ordered that RCom and two other companies pay Rs. 453 Crores within the next 4 weeks or else, it is jail time for the younger Ambani.

How the situation reached to this point? Could Anil Ambani have done something to avoid it? And most importantly, what is going to happen to the Shareholders now that is sure that RCom is going to completely go under? These are the most important financial questions in this climate, and I am going to provide you with the answers for all of them.

RCom Insolvency


How the situation reached to this point?

By the end of 2017, the financial conditions of Reliance telecommunications were bad enough that it halted its operations at the time. The company’s closure was in the face Ericsson, a Swedish Telecom gear company that moved against RCom in the Indian’s bankruptcy court. The Swedish company, who had an agreement with RCom years prior, came in seeking insolvency proceedings against the telco company. The claim was of amount Rs 1,150 Crores.

But what led RCom being in the financial condition that forced it to be closed down? Well, the reason of this can be attributed to not one, but three main factors:

Reliance Communication Insolvency


Factors of Devolution

1.    Introduction of CDMA: When GSM was the new thing in providing high end internet speeds (speeds that were considered to be fast in 2006), Anil Ambani’s RCom decided to go with the CDMA. The reason: CDMA was cheaper. Additionally it had the capabilities of the GSM to some extent. “Optimizing Telecom at Cheaper Rate but with exclusive technology”-it was something that Anil Ambani thought at that time. However, when time came, RCom was not able to accommodate the new internet speeds.

2.    Being Stubborn with the old tech: While GSM technology evolved with time, and it became a foundation of new advances in telecommunication advances, RCom was stubborn enough to not leave CDMA at any cost. As a result, as the telecom-tech progressed, RCom stopped progressing. Consequently, when time came, The Reliance Communication’s hardware was obsolete. Therefore, the company’s services were not in demand anymore.


3.    Too many debts: As of this moment, the company owes a debt of an astounding Rs 45000 Crore. When you convert it into dollars at current exchange rate, the amount comes out to be about USD 6.13 Billion. To get the matter into perspective, the current net worth of Anil Ambani is about USD 4.4 Billion. Not that it would make any difference, but when Ericsson took the company to the NCLT, it was about Rs 35000 Crore in debts.


When you consider the first two points, you can think of the phrase “RCom pulled a Nokia”. It is a right phrase to think about-isn’t it?  To be honest, it is indeed the same thing happened to Nokia, the once-greatest giant of Mobile Phones.


But this was merely the beginning of the problems for Anil Ambani, for now he is facing something even more.

The inception and worsening of the problem:

1.    The start of the problem: In September 2017, Ericsson filed the petition of insolvency resolution under section 9 of the Insolvency and Bankruptcy Code. This petition was against RCom, who owes Rs 1,150 to the Swedish telecom company. The proceedings went on and NCLT decided that RCom should be liquidated. Why not insolvency resolution? Well, RCom was in the debt of INR 35000 Crores, and its potential buyer, Reliance Jio had filed a petition that they are not going to bear the debts held by RCom. As one can expect, RCom decided to go against the decision of the NCLT (National Company Law Tribunal) and filed a petition against it in the NCLAT (National Company Law Appellate Tribunal)

2.    The worsening of the problem: During the above proceedings, the Swedish telecom firm got into advanced talks with RCom for an out-of court settlement. Under the terms of the settlement, the Indian telecom Company agreed to pay Rs. 550 crore. This agreement, although was much less desirable (as Ericsson has claimed that the original debt was of Rs 1,500 Crore), was taken into account by Ericsson. This agreement was signed upon and Supreme Court ordered RCom to pay the said about by September 2018. However, the payment was delayed and the Court had to reaffirm its actions after the plea of contempt from Ericsson. The Court gave RCom three months to go along with the payment. As a result, Company now had until December 2018 to pay the debts. However, this deadline was neglected too. As a result, Ericsson finally filed a second contempt plea against Anil Ambani and Two other Directors.


Presently, the court has given Anil Ambani a time of 4 weeks, and an ultimatum: If the company reneges from paying the amount this time, there shall be prison time for 3 months.


How could Anil Ambani have avoided the Insolvency?

Now, the current news does make us wonder if there was any instance where the younger Ambani could have avoided the current predicament. Well, we can only retrace some of the factors that led to insolvency to come up with the following ideas:

RCom Shareholder

What shall happen to me?


1.    He could have gone with the Flow:  CDMA was cheap and for all intents and purposes, at that particular time, it was a good and logical idea to stick with the technology. However, it seems like this was the extent to which RCom allowed themselves to go with the tech. With time, CDMA practically became obsolete. If Anil Ambani could have grown with the technology around him, there could’ve been a chance for RCom.


2.    He could have not made so many promises: The reason for such a large amount of debt that the company is under is because of a range of broken promises. RCom took a lot of money and wasn’t able to fulfill any of the services.


3.    He could have defragmented the firms: When the Ambani Brothers were split in 2002, Anil Ambani got the reins of Reliance Infocom, Reliance Energy and Reliance Capital. On the other hand, Mukesh Ambani had Reliance Industries and IPCL under his control. As of now, Mukesh Ambani has two registered firms: Reliance Industries and Reliance industries Infrastructure. On the other hand, Anil Ambani has 7 listed firms, namely: Reliance Infra, Reliance Communications, Reliance Capital, Reliance Power, Reliance Naval, Reliance Home Finance, and Reliance Nippon Asset Management. However, if you go by the performance snapshot, there is a 9.4% increase in Profits for Reliance Industries as compared to the 12.4 % decrease for Anil Ambani’s ADA group of companies. Now, if you look at it, some of the business ventures have flat-out failed. Lack of focus can be attributed to the cause of loss. Therefore, we can say that if Anil Ambani could have defragmented his firms or taken a step back from some business ventures, he would not have filed for insolvency at the NCLT.

Regardless of what the above points say-there is no use crying over spilled milk. However, there is one matter remains and that is the most important one.

What will happen to the Shareholders of RCom?

For those people who have been following the case since RCom filed for Insolvency, this is the most important question. Well, when the final fast track insolvency resolution process initiates, following are the things that these people have look forward to:

1.    The liquidation process is inevitable.

2.    After the liquidation process, the proceedings shall be distributed among the banks.

3.  If something remains after the proceedings are complete, that something would be distributed among the shareholders.

However, there is a huge caveat associated with the last point-something SHOULD remain. There can be also an instance where the shareholders might actually have to pay-up during the liquidation proceedings.

Conclusion

If Insolvency and Bankruptcy Code has proved one thing, it is this: there is no one safe from it, not even a company like Reliance Communication. The above points that we have discussed are meant as news, but they sure do have a lesson hidden underneath: up your game with the business technology around you, or face going obsolete and insolvent

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