Docomo shocker for MNCs

Many Indian promoters will seek present market value from foreign partners

The Reserve Bank of India (RBI)’s move to reject Tata Sons’ proposal to buy back Tata Teleservices shares from NTT DOCOMO at a pre-determined valuation is bad news for multinational companies (MNCs) that have signed similar share transactions with Indian promoters and companies.

Lawyers say the impact of this will primarily be felt by those insurance joint ventures for which most shareholder agreements have been signed with a pre-determined valuation, though the market value of these shares has shot up. Therefore, while increasing their stake, MNCs will end up paying more for the shares.

“This is a good excuse for Indian promoters on the sell-side to re-negotiate contracts and demand current market valuations for the insurance venture, as it will fetch them better prices,” said a lawyer.

NOT AN EASY EXIT

• Reserve Bank of India rule makes it difficult for MNCs to exit with pre-determined price
• Most of the pre-determined price deals are in insurance JVs
• Indian promoters will seek present market value for insurance JVs
• Sectoral caps help local companies to warehouse shares, later sell at a premium

On Tuesday, RBI rejected the Tata buyback transaction after the finance ministry asked the regulator to stick to existing guidelines, which bar share buyback/sale based on pre-determined prices. The finance ministry directive came after RBI, in January this year, recommended the Tata buyback deal be cleared, as the larger issue in this case was “fair commitment in the contracts in relation to an investment and a downside protection of an investment, rather than an assured return”. The ministry, however, did not agree and asked RBI to reject the Tata application to buy back DOCOMO shares at Rs 58 a share when the fair price, as decided by Price Waterhouse, was Rs 23.34 a share, 60 per cent lower.

“With the finance ministry clarification, if it is a forward contract, it will not be legally enforceable in India and the parties will have to return to the table to re-negotiate the contract,” said R S Loona, managing partner, Alliance Corporate Lawyers. “Many times, a pre-determined price might not be correct, as the business environment changes drastically. It could either become better, as in the case of insurance companies, or worse, as in the telecom sector,” he said.

In 2001, the Bajaj group had signed two insurance joint ventures with Allianz of Germany, with the German company being promised a fixed compounded return of 16 per cent a year if Allianz increased stake before 2016. With the government now approving up to 49 per cent foreign direct investment in insurance companies, the Bajaj group wanted to seek a better price for its stake, said a source.

An Aditya Birla Group official said the company would start negotiations with Sun Life for selling stake in the life insurance joint venture, based on the current market price, not any previous pre-determined valuation.

Indian companies and promoters re-negotiate contracts when the fair price is lower than the current valuation, in case they want to buy shares from MNCs. But when the valuation is higher then the fair price, most Indian promoters do not re-negotiate contracts in case they want to sell shares. The sector caps in telecom and insurance helped many Indian companies to sell shares at a premium later, say lawyers.

A controversy over fair price and market price came to the fore after the Tata DOCOMO deal in 2009, under which DOCOMO paid $2.22 billion for 26.5 per cent stake in Tata Teleservices but an agreement between the two said if the Japanese company sold its stake after five years, it would get at least 50 per cent of its investment back from the Tatas.