Ties between former partners NTT DoCoMo and Tata Sons seem to have touched a new low, with the Japanese company threatening to foreclose Tata Sons’ assets if the Tatas fail to honour a commitment to buy back its 26.5 per cent stake in Tata Teleservices. On Saturday, DoCoMo moved the London Court of International Arbitration against Tata Sons for failure to honour the buy-back agreement.
In a statement on Monday, DoCoMo said the foreclosure action with respect to the assets of Tata Sons could be taken by a court in India, after a ruling by the London Court of International Arbitration. The company was reacting to a statement by one of its spokespersons, who said, “In the worst-case scenario, if the agreement is not followed through, foreclosure is a possibility.”
In 2009, DoCoMo paid $2.22 billion for 26.5 per cent stake in Tata Teleservices. According to the agreement, the Tata group, which owns 65 per cent stake in Tata Teleservices, was to buy back the stake at least at half the valuation or at the fair market price, whichever was higher than DoCoMo’s purchase price.
The option was to be triggered if Tata Teleservices failed to meet performance targets. In April 2014, DoCoMo decided to exit, after Tata Teleservices reported a record loss of Rs 6,166 crore on revenue of Rs 10,452 crore for 2013-14. For the previous financial year, the company had reported a loss of Rs 4,858 crore on revenue of Rs 10,770 crore, even as its net worth was eroded by Rs 1,800 crore in FY13.
On July 7, DoCoMo exercised its right (option) to request a suitable buyer be found to purchase its stake; it gave Tata Sons 90 business days to find a buyer for Rs 7,250 crore ($1.15 billion) or the fair market price. As the Tatas couldn't find a buyer by December 3, DoCoMo filed an arbitration request with the London Court of International Arbitration to ensure the stake was sold.
"Pursuant to the shareholders agreement, DoCoMo submitted its request for arbitration to ensure its right be exercised after Tata Sons failed to fulfil its obligation, despite DoCoMo's repeated negotiations with Tata Sons regarding the sale of its entire stake in Tata Teleservices," said a statement by DoCoMo.
When contacted, a Tata group spokesperson said: "From the outset, Tata Sons has been committed to honouring its obligations to DoCoMo, and has taken every possible step, keeping in mind the interests of all stakeholders and accordance with law. Tata Sons has made the necessary application to the Reserve Bank of India (RBI) and is awaiting a response. It will continue with its endeavour to find an amicable solution."
Legal sources say the hurdle is an RBI norm according to which a 'put' option, when exercised, should be based on the prevailing return on equity at the time the option is exercised, not on a predetermined valuation. As the Tata-DoCoMo agreement prefixed the buy-back price, it went against the RBI norm.
A DoCoMo spokesperson did not reply to a mail seeking comment on the RBI's objection. Both Tatas and DoCoMo have already set up legal teams to look into valuation issues. While the Tatas have hired Amarchand Mangaldas, Tata DoCoMo is represented by Khaitan & Co.
Analysts say Tata Teleservices' losses point to the difficult conditions faced by Indian telecom operators in the past few years. Owing to the 2G telecom spectrum scam, many operators lost huge investments in this segment.
DoCoMo is keen on an early sale of its stake because with every passing day, the valuation of Tata Teleservices is falling, as its licences will expire in the next few years.
While briefing analysts on April 25 last year, DoCoMo executives had said the company had pulled the plug on India due to the 2G spectrum scam. "We thought things were moving very, very smoothly in the beginning…but the spectrum administration in India was so confusing, beyond our expectations and totally unpredictable."
Tata Teleservices' spectrum in three circles was taken back after the Supreme Court had, in February 2012, cancelled the 122 licences handed out in 2008-09, when A Raja was telecom minister. In the all-important circle of Delhi, the company wasn't allotted spectrum, despite having paid for it. "Today, Tata (Teleservices) is struggling to make a profitable business," a DoCoMo executive had told analysts.
In early 2014, Tata Sons had spent Rs 2,480 crore in Tata Teleservices to help the company pre-pay its loans to financial institutions. It had also promised to pay another Rs 2,000 crore to banks in the next two years. The Tatas have also started talks with other companies, including Telenor, for a merger. However, it is yet to see any success on this front.
March: NTT DoCoMo buys 26.5% stake in Tata Tele for $2.22 bn
April: DoCoMo announces plan to exit loss-making Tata Tele
July: DoCoMo asks Tata to find a buyer for its stake, valued a Rs 7,200 cr
Dec: Tatas fail to find a buyer for DoCoMo’s stake within 90 days
Jan: DoCoMo moves London court of arbitration, threatens to foreclose Tata Sons’ assets