How the SC order on use of natural resources could muffle investments

If a resource has become useful only because someone has improved it through an investment, there should be no reason not to let that addition be counted and the valuation determined accordingly

The Supreme Court has just thrown a curve ball at companies doing business in India--at least those that deal with natural resources ranging from dirty coal mines to new-economy data mines. All of them may need to do a rethink of their models based on what the Supreme Court has to say on sovereign rights to natural resources. For instance, the government is planning to award contracts for the use of the national health data stack. Should companies remain interested if they cannot pass on their value addition when there is a bidder for them? 

The Reserve Bank of India has floated plans for a competitor to the National Payments Corporation of India in the retail payments sector. Would these issues need to be re-examined? 

And while companies may have some time to figure them out, the two upcoming auctions-- those of airwaves for 5G services and of coal mining rights on a commercial basis--could certainly head back to the files for a fresh assessment. And since the new bankruptcy regime set up in 2017 was also discussed threadbare in the courts, there could be implications there too. For Indian banks, how the Court reads the law will decide whether or not they have added another layer of dud loans to their asset. 

These issues have come up in a significant case the Court is deciding upon in the telecom sector. While the court will soon give its  judgment in the case about how much telecom service providing companies need to pay the government as a percentage of their adjusted gross revenues, what has made the headlines is the Court’s insistence that any resource given out for use by the central or the state governments cannot be resold by the companies concerned as their assets. At the very least the government, should have a say in it. 

The implications could be drastic depending on which way the court writes its judgment. It is a measure of how seriously it takes the case that it has been hearing the case every day through the past fortnight of August, wanting to know from the government if telecom companies which have gone bankrupt have done so to duck their dues. A stand either way will have a large impact on several sectors in which companies are coming up in digital sector as well as the old economy to make use of some of these natural resources. Could the judgment upset those calculations? The markets have already begun to react nervously to the impending judgment as the chart shows. While the broader market moved up by over 5 per cent in August, both telecom and IT stocks have underperformed.  

BSE index	August 3, 2020	August 25, 2020	% change
Telecom	1,263	1,252	-0.87
IT	18,133.07	18,151.45	0.1
Sensex	36,939.6	38,843.88	5.1
BSE 100	10,991.48	11,601.09	5.55

The Supreme Court’s position has, however, been consistent on first principles, says Arghya Sengupta, founder and research director at Vidhi Central for Legal Policy. A resource can only be licensed for use. A decade ago it used the same principle to judge a case between the Ambani brothers (Mukesh versus Anil) on pricing of natural gas. Ownership of natural resources of the country has to vest with the people and the government, therefore, can only act as their trustees, the Court held. 

In subsequent cases, various benches of the Court rapped the then government for the allocation of air waves (2G spectrum case) and of coal and other mines drawing on the same principle. Between 2012 and 2014, the Supreme Court handed down judgments, as a result of which it became almost a given that natural resources have to apportioned only through a price discovery mechanism. The governments since then have moved to make auctions a standard operating procedure for any allocation of natural resource. The argument was since the companies will pay a fair price for the resource they can have it for keeps. 

This too, it would seem, is under question now. In obiter dicta statements (so far) a bench of the Supreme Court has noted that even if the natural resource has been given to a company through a price discovery mechanism, the resource cannot be used as an asset by the company, as part of its winding up operation. The implication is that it should revert to the state. Sengupta says this reading of the observations is correct. “Whether a company can pass on the data it has got from the government to its legal heir has to depend on the terms at which the government has got it from the people and then the contract it has signed with the company.” In other words a one-size-fits-all approach may not be applied. But would this keep investors satisfied? 

Dhiraj Nayyar, director, economics and policy at the Vedanta Group, which has extensive mining interests, said the government takes in close to 60 per cent of the top line. "Revenue maximisation by the government in the short run is one of the reasons the sector has not expanded to its potential. Revenue first principle harms exploration prospects for these companies in India". Just like the telecom sector, Nayyar emphasises production should be allowed to expand, which can only happen if the government take is lowered.

As of now, no one within the government is willing to go on record. A senior official of the Insolvency and Bankruptcy Board of India said it is possible that the Court will not insist on laying down fresh rules again. A battery of lawyers appearing for the companies have argued that the right to sale of assets a company has bought in an auction, must be retained, else no lender will give money for such projects. 

The ministry of coal, which has already had to postpone the auctions for commercial coal mining to November should be the first to be concerned. For them it is a simple question. When a company will bid for a mine, it would want to know if it has resale rights!  A yes or no answer could shift the prices dramatically. In a seminar organised by Ficci on Monday, Prabodh Parikh, deputy managing director, State Bank of India accepted this was one of his key concerns. He said he was happy that the current rules for successful bidders stipulate they will be able to change ownership if the company goes under insolvency or otherwise. “Transfer of ownership rights is a key element of the auctions which we are pleased to see”.

The answer becomes complicated for start-ups in the information technology sector too. Many of them are planning to bank on public data as raw material for their business platform as part of Digital India. When these companies get sold or merged, a key part of the valuation comes from their resource. There is a problem here, acknowledged Bornali Bhandari, Senior Fellow at NCAER, Delhi one of India’s leading think tank on economic issues. “It is application of the principle of accession to publicly owned resources. There may be differences of perspective in terms of efficiency and equity”. If a resource has become useful only because someone has improved it through an investment, then there should be no reason not to let that addition be counted and the valuation determined accordingly. In other words, if a data company has made good use of health data to develop an app, that improvement has to be factored in to its valuation. A straightforward application of this principle is the ongoing project to lay optical fibres in every village. The government may need to rope in private sector companies to manage last-mile connections. At stake would be whether these companies could sell their rights after reaching connectivity to each household. These companies would need seed funding. Yet, as Suman Sengupta, Head, Professional Services and CFO at Lead Angels, which finances a wide range of start-ups, says, "This could impact value discovery for the assets, since it call into question their revenue assumptions." 

As of now, the ball is literally with the Court. As a senior official of the Insolvency and Bankruptcy Board of India remarked, “Courts try to preserve the financial rights of the executive. This is one of those cases. It has to reconcile it this time with that of the overall interests of the economy.”