Smart Cell Faces Legal, Financial, and Administrative Disputes Amidst License Revocation and Arrest

Once recognized as the third-largest telecommunications service provider in Nepal, 'Smart Cell' is now at the center of legal, financial, and administrative disputes. The company's license revocation, billions in arrears, government-controlled assets, and investigation into its directors have brought this issue back into focus.

In recent days, the Central Investigation Bureau of Nepal Police arrested Sarvesh Joshi, the former chairman and director of Smart Telecom, bringing this case back into public debate. Police stated that an investigation is underway against him on charges of fraud and criminal breach of trust.

Where did the problem start?
Smart Cell's main problem began with its license renewal fee and the arrears owed to the government. According to the Telecommunications Authority, the company's permit was automatically revoked in Baishakh 2080 (mid-April 2023) as it failed to renew its license on time.

The government had previously given the company an opportunity to pay the amount in installments. However, after failing to pay the stipulated amount, the process of taking action against the company was initiated. At that time, Smart Telecom's liability to the government was mentioned to be around 30 billion rupees, including interest.

After the license was revoked, the company's towers, network, systems, and other infrastructure came under the control of the Nepal Telecommunications Authority. According to the Authority, there is a legal provision for the telecommunications infrastructure and assets of a company to come under government control after its license is automatically revoked. However, the dispute began thereafter, when banks that had collateral relationships with the company sought to auction those assets to recover their loans.

Smart Telecom had taken loans from various banks during its operation. The company's assets, including towers, equipment, and network infrastructure, were mortgaged as security for those loans. The dispute arose when banks initiated the auction of collateral assets to recover their loans even after the license revocation.

How is the investigation proceeding?
The investigation is currently focused on three main issues. First, the question of who owns the company's assets after the license revocation. Second, whether banks can execute collateral and auction the assets. Third, whether attempts were made to sell assets that automatically went under government control.

The main legal dispute in this case is related to the ownership rights over the assets of a license-based business. After the revocation of the license to operate telecommunications services, whether the company's assets automatically go under government control or if the bank's collateral rights take precedence is currently at the center of legal and administrative debate.

According to banking sector insiders, if the government's claim is established, banks may have to exercise greater caution when investing in industries that operate with government permits, such as telecommunications, energy, and aviation, in the future.

According to experts, the Smart Cell case has simultaneously exposed legal ambiguities in Nepal regarding the authority of regulatory bodies, banking security systems, protection of private investment, and government ownership. This case is analyzed to potentially establish new precedents regarding investment, collateral, and property rights in businesses operating with government permits in the future.

From the banks' perspective, it cannot be said that their actions are wrong. Smart Telecom had taken loans from various banks during its operation, and its assets, including towers, equipment, and network infrastructure, were mortgaged as security. The primary job of banks is to invest depositors' money safely and ensure loan recovery. Therefore, in case of non-payment of loans, initiating legal procedures to execute collateral assets falls within the normal practice of banks.

The Banks and Financial Institutions Act (BAFIA) provides for banks to take possession of movable and immovable assets, including machinery, after notifying the borrower in case of non-payment of loans. Similarly, BAFIA also has provisions allowing banks to auction such assets and, if necessary, insure the machinery themselves and recover the expenses from the borrower.

The Secured Transactions Act also clearly recognizes the rights of banks and financial institutions. According to that act, the lender has a primary right over the mortgaged property, and in case of non-payment of the loan, there is a provision to recover the loan by executing such mortgaged property. Based on this, the argument that banks are proceeding with the auction process according to their claims appears legally valid.

Even if ownership rights over the borrower or the company are established by others, it does not mean that the bank cannot recover its loan. The company remains liable for the loan, and if it cannot repay the loan, the bank can complete the recovery process as per the agreement and recover the money, which is a regular function of the banking system, according to insiders. If the narrative of police investigation, arrest, and sale of government property is proven during loan recovery, banks may become unable to provide loans.

It is also argued that the bank is not trying to seize any new property but is seeking to secure its investment from property that was legally mortgaged earlier. The bank had established a primary claim over Smart Telecom's assets according to BAFIA even before the Authority acquired it.

Banks hold deposits of the general public rather than specific individuals. If that loan investment defaults, it will affect the general depositors. As a strong aspect of the Secured Transactions Act, it is reported that the bank can easily settle its outstanding amount of 3.95 billion rupees from the 4.60 billion rupees offered by Ncell in the auction process of Smart Telecom.