A legitimate deal

There is need for a fresh look at the Tata-DoCoMo agreement

In an application to the Delhi High Court last week, Tata Sons said it had no objection to the enforcement of a $1.18-billion international arbitral award favouring its telecom joint venture partner NTT DoCoMo. Tata Sons has already deposited the cash with the Delhi High Court and if the court sanctions the application, the money will move to DoCoMo's account, which will allow the Japanese telecom giant to transfer its 26.5 per cent stake in Tata Teleservices to Tata Sons or any of its investment companies. DoCoMo, in turn, has said that “full satisfaction” of the award through the court’s judgment will enable it to consider reinvestment of a part of the amount in India under a new “cooperative relationship” with Tata Sons. The settlement between the two groups was preceded by DoCoMo initiating legal proceedings against Tata Sons in the London Court of International Arbitration on the ground that the Tatas had failed to abide by a 2009 agreement. It won the matter in June 2016. Subsequently, the Japanese firm moved the London Commercial Court, the Southern District Court in New York and the Delhi High Court to enforce the arbitral award. The issue also became the subject matter of a high-voltage spat between the former chairman of Tata Sons, Cyrus Mistry, and Ratan Tata and culminated in the ouster of Mr Mistry.

While the court is slated to hear the matter on Wednesday and the exact contours of the deal are still awaited, there is a case for approving the new settlement formula, as the argument that it is in contravention of existing policy does not hold water. Here’s why. In 2009, the Japanese telecom giant invested roughly $2.6 billion in order to buy its stake in Tata Teleservices at a time when there was no clear law against options embedded in such an investment. When the investment was made, the agreement had a “put option”, which meant that when DoCoMo wanted to sell its stake, it had the right to sell it at either “fair value” or half the “acquisition price” if certain targets such as the number of subscribers and towers and financial milestones like EBITDA and profits were not met in five years. By 2014, five years after it made the investment, DoCoMo wanted to exit, thus exercising its put option.

The problem arose as by that time the Reserve Bank of India (RBI) had come out with a clear set of rules that banned any exit by a foreign equity investor at an assured price. But the central bank itself 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. The latter, however, turned down the suggestion on the ground that a policy change could not be made for a single company. The matter came up once again after the arbitration order, and again, permission was denied by RBI.

The fact is that when the Tata-DoCoMo agreement was signed, there were no clear rules that barred pre-set buyback pricing. In that sense what DoCoMo signed was a legitimate business agreement at that point of time and, hence, there is a case for an exception being made. Or, RBI should say that the order is only prospective and does not apply to existing arrangements. which would clarify the principle and not need a one-off exception. This must be done at the earliest as a reassurance to foreign investors that the government believes in transparent and good-faith dispute resolution.