Tatas, Docomo may Ring in a Settlement Today
Cos to jointly propose compensation plan, workable only if HC rejects RBI’s intervention application
Deepali Gupta & Arijit Barman
Mumbai: Just days after N Chandrasekaran took charge as the new chairman of Tata Sons, India’s largest conglomerate is moving to resolve its spat with its Japanese joint venture telecom partner NTT Docomo.
Both parties are planning to file a joint petition on Tuesday (February 28) in the Delhi High Court (HC) to propose a mechanism to enable the Tata Group to pay the Japanese telco the entire $1.17 billion (.`7,250 crore) as compensation for its 26% stake in Tata Teleservices without infringing upon India’s foreign exchange norms, said four people with knowledge of the situation.
Details of the proposed mechanism are sketchy, but the sources cited suggest that the intent is to find a route that will bypass the objection of Reserve Bank of India (RBI), using a formula to allow for fair value of Docomo’s stake and pay out an additional sum.
Till date, both RBI and the finance ministry had said that a 2009 contract between the two companies — under which Docomo was guaranteed a payout — would violate foreign investment rules. In October 2016, RBI became a party to the case. The proposed solution is workable only if the court rejects the RBI’s intervention application.
Senior counsels Darius Khambata and Kapil Sibal are expected to argue on behalf of Tata and Docomo, respectively.
Spokespersons of Tata Sons and Docomo declined to comment.
Tata Group watchers say that Ratan Tata, who took charge of the $120-billion salt-to-software conglomerate last October through a boardroom coup that saw the unceremonious sacking of Cyrus Mistry, has been personally involved in seeking a quick resolution. He has been leading the discussions with the Japanese side. Tata has been of the view that not honouring the 2009 agreement would harm the group’s reputation.
“It is a solution that is being proposed. It is up to the court to give direction on it,” said one of the people.
In its last hearing, the Delhi HC was still contemplating whether to accept RBI’s plea to intervene in the matter. However, during arguments, the judge has repeatedly mentioned the possibility of a joint resolution. He asked questions on what the arbitration judgment was, pointing out that it had referred to alternative routes of satisfying the contracted clauses.
In a similar matter earlier this month, Justice Muralidhar, who is also presiding over the Tata-Docomo case, ruled that penalty under international arbitration is different from pre-determined value of shares. This is the crux of Docomo’s argument in the Delhi High Court at the moment.
Docomo has maintained that there are ways to sidestep the regulations being cited as hurdles to cashing the Japanese partner out. It had proposed, among other possibilities, a transaction with an offshore entity of the Tata group, finding a third-party buyer, or even diluting stake in Tata Teleservices – the telecom joint venture – through a preference share issue and then paying the fair market value for the unlisted company.
In 2009, Docomo bought 26.5% stake in Tata Teleservices for about Rs 12,740 crore. The two agreed that on failure to meet certain criteria, Docomo would have the right to exit the venture after five years and would get back a minimum 50% of its investment amounting to Rs7,250 crore (or 125.4 billion yen), or a fair market price, whichever was higher.
The RBI ruled that the option was not valid and the payment would have to be at the fair market value, as per an amendment in FDI rules in 2013, a few years after the deal. When Docomo sought to quit, the equity value of the company was significantly below the agreed half of the investment. Docomo moved the high court earlier last year to enforce an arbitration award of $1.17 billion that Tata Sons, the holding company of the Tata Group, was required to pay to the Japanese phone services provider as compensation for its stake in Tata Teleservices.
The Japanese telecom major has also filed for enforcement of the award in the UK and the US and threatened to attach assets on non-repayment. “Both the parties have (now) agreed to go easy and extend the trial dates (for these cases in the US and the UK) wherever they come up at the moment,” said a person close to Docomo, adding that negotiations towards a resolution had begun.
The court is to decide whether the arbitral award can be enforced in spite of the RBI and the finance ministry’s refusal to allow Tata to pay the Japanese company. Tata had so far claimed that the award violates the fundamental policy of India, a valid ground for it to be set aside.
Tata has deposited the necessary funds with the Delhi HC, should the court rule that the award is enforceable.