Slots and Sandcastles: Bidders under India’s insolvency law struggle with unexpected regulatory shocks
By Gausia Shaikh (REDD Intelligence)
It's not worth it to build castles on the sand if they get destroyed by the waves of reality. - Mladen Đorđević
It’s been over 700 calendar days since the in-court restructuring of Jet Airways (India) Limited began before the bankruptcy court under India’s Insolvency and Bankruptcy Code (IBC). However, an issue which is intrinsic to the nature of operations in the aviation industry, and which will affect future airline insolvencies is that of allotment of airport slots to the airline once it is restructured.
Airport slots are time slots allotted to airlines to take off and land from an airport, while also accessing other airport infrastructure. Without these slots you could have a fleet of aircraft but they would be futile as the basic acts of take-off and landing an aircraft both require these slots to be obtained from airports.
It seems quite logical that any bidder hoping to acquire an airline company would want some assurance as to the availability of such slots for when the company is restructured and it begins to run the airline.
However, such assurance has proven to be quite an ask in the Indian insolvency and restructuring space. This is because the general airport slot allocation procedure is such that the number of slots allotted to an airline depend on its past operations which provide an indication to the airport operator that the slots will not be wasted as the airline has requisite capacity to use the slots.
One would argue that an insolvent airline which went into insolvency in the first place because it could not continue its operations for want of money to even pay fuel charges would be permitted to use statistics from its pre-insolvency days to seek such airport slots.
This is what the winning bidder seeking to restructure and acquire Jet Airways - i.e. the consortium comprising financial advisory firm Kalrock Capital and UAE-based entrepreneur Murari Lal Jalan - expected. However, the Directorate General of Civil Aviation (DGCA), India’s aviation regulator, and the Indian Ministry of Civil Aviation have burst this bubble.
The authorities have stated that while they support the revival of Jet Airways, airport slots are merely permissions granted to the airline to use airport infrastructure and do not constitute assets of the airline, and therefore the allotment of such slots would be subject to the ordinary procedure for slot allotment - a procedure based upon a “use it or lose it” principle. This is quite a conundrum for an airline which has not taken to the skies in almost 800 days!
It is surprising that such an important revelation has come to the fore only now, after almost two years of comprehensive in-court restructuring procedures with multiple creditor-bidder meetings and the selection of a creditor-approved bid.
That said, this is not a first for the IBC ecosystem. Jet Airways’ slot allocation situation is quite reminiscent of another restructuring in an industry where the status of an important co-called asset at the heart of the operations in the industry is still being discussed at the very end of an in-court restructuring process.
Case in point is that of spectrum as a vital “asset” of a telecom company without which the company cannot operate its telecom business. The question of whether spectrum can be sold under IBC proceedings is presently pending before the Supreme Court of India because the telecom regulator has, quite like the DGCA, stated that use of spectrum is a permission granted to the telecom company and not an asset of such company, and can therefore not be transferred under an in-court restructuring process.
Assuming that both regulators are right in their identification of airport slots and spectrum as mere permissions, arguably, this stand of the regulators should have been offered or sought upfront so that bidders could participate in cumbersome restructuring processes with full knowledge of what they were getting into.
Understandably, knowing that even after what may be a few hundreds of days spent in the restructuring process, there is a likelihood of not having access to important rights imperative to running a company which they seek to acquire, might act as a disincentive to bidders and may shrink the bidding pool. However, that is a small price to pay when weighed against the huge investments which unsuspecting bidders make while participating in restructuring processes.
The ideal restructuring process is a clear, transparent and predictable process. Further, it must account for the specific contours and requirements of all sectors and industries. Sectors such as the aviation sector not only have complex transaction structures but also require certain rights essential to operation, without an understanding of which, a successful restructuring is close to impossible.
It is essential that policymakers, lawmakers and regulators come to a concensus when dealing with restructurings in such industries/sectors such that their unique features are reconciled with the restructuring procedure, sooner rather than later.
Further, restructuring of companies which depend so heavily on continuation of operations in order to get access to better rights, as is the case with access to airport slots on a “use it or lose it” basis - a practice which is seeing suspension in other economies - calls for expeditious restructuring processes. India’s IBC has been quite infamous on the speedy resolution front, thus adding to the woes of those attempting to restructure such companies.
If the above issues are not resolved at the earliest in existing cases, and at the outset for other industries with similar “assets”, the future of restructurings for such industries in India seems quite bleak. One can only hope that after not one but two such examples involving industry giants, the higher powers have begun their rumination on these issues.
(*) A modified version of this post was published on the REDD Intelligence website.