The Tata-Docomo lesson

Rules cannot be applied retrospectively

The Delhi High Court’s decision on Friday to approve a settlement between Tata Sons and NTT Docomo, allowing the former to buy out the Japanese firm’s stake in Tata Teleservices will, hopefully, end one of the long-pending corporate cross-border disputes in India. Hopefully, because the Reserve Bank of India, which had opposed the settlement citing violation of the Foreign Exchange Management Act (FEMA) and other rules, has the option of appealing before a bigger bench or the Supreme Court. But such a move will not be worth its while if the RBI is serious about allaying foreign investor concerns over exiting loss-making ventures in the country. There is no doubt that the issue did dent the country’s reputation in respecting the sanctity of legally sound private contracts. 

The central bank’s refusal to allow the contract to go through at a pre-set price also showed little regard for international arbitration awards. After all, on June 22 last year, the London Court of Arbitration had ordered Tata Sons to pay damages of $1.17 billion to Docomo for a breach of the shareholders’ agreement. Tata Sons was also willing to play ball and after its initial opposition to the arbitration order under the previous leadership, the holding firm of the conglomerate agreed to accept the terms of the settlement and sought the court’s declaration that the award was enforceable in India.

The high court was clear that contractual obligations between parties were sacrosanct and had to be honoured, as did the global arbitration awards that flowed from these agreements. Contrary to the view that the price guarantee contravened FEMA, the court said while FEMA ruled out open-ended repayment guarantees, this particular deal was not open-ended as the guarantee was only to be invoked in case the project was unable to meet certain performance criteria. 

It was clear from the start of the dispute that any argument about the new settlement formula being in contravention of rules did not hold water. In 2009, NTT Docomo invested roughly $2.6 billion in order to buy its stake in Tata Teleservices with a “put option” at a time when there were no clear rules that barred pre-set buyback pricing. The RBI came out with a clear set of rules that banned any exit by a foreign equity investor at an assured price much later. Docomo exercised its option in 2014, five years after the deal was done, and wanted to sell its stake at half the acquisition price. So there was no reason why the RBI would seek to make a rule applicable with retrospective effect. 

That is probably the reason why the central bank initially wanted to allow the payment, because it was a question of an Indian company honouring an agreement, and sought the finance ministry’s advice in December 2014. It was only after the ministry turned down the suggestion on grounds that a policy change could not be made for a single company that the central bank hardened its stand and said that the agreement was void in law, as it had failed to consider the existent regulatory prohibitions. To avoid such a situation in future, the RBI should clarify that its rules on this issue are only prospective and do not apply to arrangements entered into before 2014 — an assurance that will go a long way in demonstrating to foreign investors that India is serious about providing a level playing field and business-friendly environment.