* RCom agrees with Aircel to drop merger
* Cites regulatory delays and legal uncertainties for move
* RCom had net debt of $6.8 bln at end of March
* Bonds slip only marginally as subordination risk diminishes (Adds change in company's board, trader comment)
By Abhirup Roy and Sankalp Phartiyal
MUMBAI, Oct 2 (Reuters) - Reliance Communications is reassessing debt repayment options after a deal to merge its wireless arm with smaller rival Aircel was scrapped, dealing a fresh blow to the embattled Indian telecoms company.
Widely known as RCom and controlled by wealthy businessman Anil Ambani, the company is saddled with net debt of about $6.8 billion. It has earned a temporary reprieve from its banks, who have agreed to a standstill on its debt obligations as part of a planned debt restructuring.
The reprieve was largely predicated upon RCom reducing debt by 250 billion rupees by merging its wireless unit with Aircel, a subsidiary of Malaysia's Maxis Communications, and selling a stake in its mobile masts arm to a unit of Canada's Brookfield Asset Management.
Late on Sunday, RCom said it had agreed with Aircel to call off the merger due to regulatory delays and legal uncertainties. It is unclear whether the collapse of the RCom-Aircel deal will affect the Brookfield transaction.
RCom, Brookfield, Maxis and Aircel did not respond to requests for comment.
The collapsed deal raises further doubts about the company's ability to repay debt, the head of an institutional investor in RCom told Reuters, declining to be identified.
"Will the investors have to take a hit? Will there be any kind of haircut to all the lenders in RCom? Those questions will also come," the person added.
RCom's lenders could not be reached for comment, but a team of RCom's top banks is likely to meet soon to take stock of the situation, a source familiar with the matter said.
In a surprise move, RCom said on Monday it has elevated four senior company officials, including Punit Garg, president of its telecoms business and Manikantan V., its chief financial officer, as directors on its board. It did not provide any rationale for the move.
RCom said in its statement on Sunday that it is now looking at monetizing spectrum through trading and sharing arrangements and looking to make progress on its plans to sell its tower and fibre assets.
The company already shares airwaves with Reliance Jio, the network operator backed by Ambani's older brother and India's richest man, Mukesh Ambani.
RCom and other incumbents in India's telecoms sector have been roiled by free voice and cut-price data plans offered by Reliance Jio - the mobile market's newest entrant.
The collapse of the deal with Aircel comes just weeks after the local arm of Sweden's Ericsson filed a plea with an Indian insolvency court against RCom. Ericsson, which manages RCom's nationwide network, is seeking a total of 11.55 billion rupees ($177 million) from RCom and two of its subsidiaries.
Worries over RCom's ability to repay debt have sparked a series of downgrades by ratings agencies and the company's stock has plummeted nearly 44 percent so far this year, compared with a nearly 20 percent rise of a broader Mumbai market.
Indian markets were closed for a public holiday on Monday and shares in RCom will resume trading only on Tuesday.
But, RCom's overseas traded bonds fell marginally on Monday, with some analysts saying bond holders are now in a better position than before as subordination risk has diminished. Its bonds due 2020 were indicated at 53/54 cents on the dollar, showing the bid down by 3 points.
"While sounding negative, the development is positive for RCom note holders, because the merger if successful, would have put their claims in a subordinated position. At least RCom note holders now can expect slightly higher recovery value with the wireless assets in place instead of being spun off," said Trung Nguyen, analyst at Lucror Analytics.
Unsecured bondholders will find it hard to get their money out, but secured lenders such as State Bank of India will try to extract as much cash, or equity as possible, say traders.
"There are more immediate concerns about the merger falling through as they were supposed to pare down debt with this deal," said a bond trader at a European bank. (Reporting by Abhirup Roy and Sankalp Phartiyal; Additional reporting by Devidutta Tripathy and Rajendra Jadhav in MUMBAI, Umesh Desai in HONG KONG and Liz Lee in KUALA LUMPUR; Writing by Euan Rocha; Editing by Mark Potter and Muralikumar Anantharaman)