How Tata DoCoMo settlement could open up M&A option for the struggling Tata Tele
It was the intransigence of the Japanese partner which was holding up a solution to this dispute for all these months
New Delhi: Tata Sons and NTT Docomo filed a joint petition in the Delhi High Court today saying they have agreed to settle the dispute regarding the Tata Group paying an arbitration award of $1.17 billion (Rs 7,250 crore) to the Japanese telecom company.
If the two partners part amicably, this will not only be good news for the salt-to-software Tata group but it could also pave the way for further consolidation in India’s telecom industry. Tata Teleservices, where the two partners hold equity stake, has been a marginal player in India’s telecom industry. Like other small players, it has also been hit hard by the ongoing fierce battle between bigger telecom operators. The only way out may be merger with a bigger entity, but any M&A is possible only after the DoCoMo dispute is resolved.
The Japanese telecom major has been fighting with Tata Sons over the right to sell its stake in their Indian wireless venture Tata Teleservices for at least 50 percent of the original investment since 2014, when it decided to exit the JV. It had moved Delhi High Court to enforce an order it won in June from the London Court of International Arbitration, which ruled Tatas should pay $1.17 billion to NTT Docomo.
So, why have the two estranged partners come together and filed a joint petition now, after much public wrangling and international arbitration? According to sources close to the developments, it was the intransigence of the Japanese partner which was holding up a solution to this dispute for all these months. NTT DoCoMo allegedly insisted all this while that the money due to it should be paid in cash. This created problems for the Tatas, since the RBI had come out with norms specifying foreign companies can only exit investments at a valuation based on the return on equity. What the Japanese major was seeking was pre-determined value based on its JV agreement with the Tatas while what the RBI allowed was a value based on return on equity – much lower than what NTT DoCoMo sought.
Basically, RBI norms barred the Tatas from making the payment of $1.17 billion in cash to NTT DoCoMo despite the JV agreement clearly stating the terms under which the Japanese partner will walk out. Sources close to the developments said today that finally, the Japanese company may have agreed to take payment in a mode which will not violate the RBI norms. “It is possible that the entire dispute will be settled by working around the RBI norms now, the money paid to DoCoMo in a mode other than cash……everyone wants a solution so we do not think the RBI will have any problems in the way the deal will be structured now. The two sides will now work out modalities of how the payment should be routed”.
One must recall how the inability of Tata Sons to resolve the DoCoMo muddle was seen as a major failure of sacked chairman Cyrus P Mistry. The sources quoted earlier said that though the Tatas had offered many different solutions even during Mistry’s time to end the dispute, the Japanese partner continued to insist on cash payment – which would have violated RBI norms.
In his defence, Mistry had also said last November that the board of Tata Sons had discussed this issue multiple times and that the Tatas had repeatedly said they would honour all commitments “within the law”. He had also said that under his leadership, Tata Sons had requested DoCoMo to join the Tatas in seeking the approval of the Reserve Bank of India (RBI). “Docomo did not agree. Nevertheless, Tatas applied to the RBI for approval. Since RBI approval was not forthcoming, DoCoMo initiated arbitration. The award was passed in favour of DoCoMo and against the Tatas.” said Mistry then. Tatas under Mistry did not challenge the decision in UK. On the contrary, RBI was approached once again by the Tatas for permission to pay the amount awarded. RBI again refused permission. DoCoMo then sought enforcement of the award in the Delhi High Court. In order to show their bonafides, Tatas deposited a sum in excess of Rs 8,000 crore in court.
According to this story the accumulated losses of Tata Teleservices were at Rs 31,500 crore and the company’s net worth was eroded completely in 2015-16. Its loss in FY16 was Rs 3,386 crore against Rs 3,846 crore loss in the previous year. Revenue for the period was down to Rs 10,708 crore in FY16 from Rs 10,965 crore reported the previous year. The company had debt of about Rs 30,300 crore as on March last year.
Is it any wonder then that NTT DoCoMo wanted to call it quits? And wanted money in accordance with the agreement the two parties had signed at the time of entering a joint venture in 2009, where the Japanese company was mandated to get a fair value or half its stake acquisition price, whichever is higher? The government did not quite see the matter in the same light though, and the RBI refused permission to the Tatas to give DoCoMo the sum they sought as per the JV pact. Perhaps, the RBI can now look away as the two partners try to solve this puzzle.
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