The RBI / DoCoMo case continues to baffle with its twists and turns. On Friday, the 28th of April, the Delhi High Court has ruled that the RBI cannot intervene in a settlement between two consenting parties. In this case, both DoCoMo of Japan and the Tata Group have agreed for the compensation to be paid by Tatas to DoCoMo of Japan. Where does the case go from here? There some interesting scenarios that emerge, but first a quick background of the case
Where the dispute started in the first place?
The origins of the dispute dates back to 2009 when DoCoMo of Japan took a stake in Tata Teleservices by infusing a sum of approximately $2.4 billion into the company. As part of the comfort clause to the investor, the two parties had agreed that in the event of set financial parameters not being achieved, the Japanese company will have the facility to exit its stake at 50% of the value. That would have been a little under $1.2 billion. When the 5-year look-in period lapsed in 2014, the DoCoMo management decided that the telecom business in India was hardly growing at the rate they had envisaged and the market was just getting too competitive to be profitable. Therefore, DoCoMo decided to excise its option to exit the stake in Tata Teleservices at 50% of the initial investment. As per the terms of the policy, the Tata Group had to make efforts to find a buyer for that stake. Since the buyers were not forthcoming for the stake due to the weak outlook for telecom in India, the Tata group agreed to buy out the entire stake of DoCoMo in Tata Tele for the agreed consideration of $1.17 billion. But that is exactly where the regulatory problem arose!
RBI has a counter view on the subject…
The RBI as the regulator of the financial system had raised an objection to the transaction since the foreign direction investment (FDI) rules did not permit an assured return on an equity investment. The logic was that since equity was a risk investment, assuring any kind of minimum return amounted to violation of the FDI rules, which required arm’s length pricing only. Since the 50% payable to DoCoMo was in the nature of an assured compensation, the RBI refused to approve the same. The matters got a little complicated when the Tatas and DoCoMo reached an out-of-court settlement. Under the terms of the settlement, Tatas would pay them the compensation of $1.17 billion as agreed upon and in turn DoCoMo will simultaneously transfer the shares back to the Tatas and also ensure that all outstanding cases against the Tatas are withdrawn from courts across geographies, which included India, London and Singapore. However, enforcement of this out-of-court settlement was still subject to RBI approval.
Now it will be hair-splitting on compensation versus damages…
With the Delhi HC deeming that the settlement was outside the ambit of the RBI, the next steps will amount to hair splitting on compensation versus damages. The RBI is of the view that even though it is just 50% of the original value, it is still tantamount to an assured compensation. And any assured compensation, as the RBI has already pointed out, is in violation of the FDI norms governing capital flows. Therefore, the contention of the RBI is that paying any amount of assured money to the Japanese company will be in the form of compensation and therefore will be against public policy.
Tatas and DoCoMo of Japan have taken a different stand altogether. Their contention is that Tatas first did attempt to find a buyer for the stake at fair value on an arm’s length basis. However, since the buyer could not be found, Tatas had to intervene and agree to buy the stake at the price of $1.17 billion. Hence it is tantamount to damages for non-performance of contractual obligations by the Tatas and hence would not amount to compensation. Since this does not amount to compensation, it would be outside the ambit of RBI since both parties are agreeable to it.
What is the road ahead?
The implementation of the High Court order will much easier said than done. It will be a lot more complicated than just classifying the money as damages and approving the payout. There has been a transfer of shares from Tatas to DoCoMo and there is going to be a transfer of shares back from DoCoMo to Tatas. To that extent, it does become a form an assured returns. The RBI’s future course of action is not clear but they still have the option to approach the Supreme Court against this High Court ruling. We need to understand that it has a lot to do with the credulity of the RBI as a regulator and the RBI’s stand is perfectly legitimate within the ambit of the rule-book. To that extent the RBI still has a very strong case with them.
There is also the case of the way Japanese companies conduct themselves. We have seen Dai-Ichi of Japan crying foul after a bad investment decision in Ranbaxy and DoCoMo seems to be doing a similar act in the Tatas case. For the government it will not be just about FDI flows or global capital. It will be about maintaining the integrity of the regulatory mechanism in India. The RBI surely has a point in preventing the compensation payable to DoCoMo. The last word on the subject may have not been said yet and there may be more interesting twists and turns ahead in this case.