In what could be good news for the Tata Group and for the investment climate in India, Tata Sons and NTT DoCoMo of Japan have agreed to settle their long standing dispute out of court. In fact, the Tata-DoCoMo dispute had assumed larger proportions under Cyrus Mistry and the way the NTT DoCoMo case was handled by Mistry was one of the reasons for the Tata Group being unhappy. But first the background to the case….
What exactly was the genesis of the Tata-DoCoMo dispute?
The original transaction dates back to 2009 when NTT DoCoMo of Japan bought a 26.5% stake in Tata Teleservices for an approximate consideration of $2.34 billion. Back then it had been one of the biggest and most prestigious FDI transactions in India. It also needs to be mentioned that the FDI agreement between Tata Sons and NTT DoCoMo had an in-built exit clause for DoCoMo. Under the clause, the Japanese company will have the right to exit its investment at the end of 5 years either at fair value of the investment or at 50% of the investment price, whichever was higher. Between 2009 and 2014, the Indian telecom space became extremely tight and crowded and NTT DoCoMo decided to exit its Indian Telecom business entirely in 2014. Since the Tatas could not find a buyer for that stake considering the weak prospects of telecom in India, the Tatas agreed to buy back the stake at 50% of the original investment at $1.17 billion. That is when the RBI objected to the transaction and declared the clause of assuring returns null and void.
Why did the RBI block the buyback of shares by Tatas from DoCoMo?
The decision of the RBI had its genesis in a small amendment to the Foreign Exchange Management Act (FEMA) Rules earlier in 2014. Under the new rules, Indian companies were not permitted to give any assured buyback offer to FDI investors as it went against the basic grain of risk-based investing. Additionally, RBI had also mandated that any exit of FDI could only happen at the ROE determined fair value and any clause to assure returns in any form would be void ab initio. It was this amendment to the FEMA that impelled the RBI to reject the buyback clause. In response NTT DoCoMo initiated legal proceedings in the Indian courts as well as the London courts to recover the amount of $1.17 billion from the Tatas. The situation came to a boil under the leadership of Mistry, who had simply refused to abide by the buyback clause unless the RBI gave its prior approval.
Why have the Tatas pushed through a compromise deal…
For the Tata group, the issue was never about the payment. Even when the dispute was on, the Tatas had deposited the complete liability of $1.17 billion with the court in Delhi to underline its commitment to the fulfilment of its side of the contract. While Cyrus Mistry had been rigid in his approach to the Tata DoCoMo issue, it must be said that Ratan Tata and Chandrasekharan have taken a more pragmatic approach to the subject. The following are the key takeaways from this out-of-court settlement…
- Any legal wrangle entails a huge cost in terms of cost, time and management bandwidth. Letting the case fester did little good for the Tata group.
- One of the key focus areas under Chandrasekharan was to focus on return on equity and stock market performance of group companies. The fact that Tata Tele was 20% up today is testimony to the fact that markets hate uncertainty of any sort.
- NTT DoCoMo being a global company with well spread out operations, the case could have larger ramifications for the Tata business globally. Today, the Tata group gets over 70% of its revenues from overseas and it remains the largest employer in UK. Under these circumstances, the Tata group could not afford its name to be dragged into messy legal battles.
- However, it needs to be remembered that the final approval from the RBI is still pending. Even an out-of-court settlement is workable only if the RBI approves the same. But what this settlement does is that it allows both parties to adopt a more calibrated approach and regroup their resources.
- Lastly, with NTT also agreeing not to pursue any legal options till the final order comes out, the Tata group gets around 6 months to have a more meaningful dialogue with DoCoMo. The Tatas are a group extremely conscious of their DNA. Notwithstanding legal niceties, the Tatas will not want to be viewed internationally as a group that tries to shield itself behind the letter of the law to renege on commitments. That is never something that the Tatas have stood for!
The contours of the settlement and the way forward may be clearer in the days to come. However, for the time being, the Tatas have bought peace and in the process ensured that the climate for FDI into India continues to be robust. That could actually be worth a lot!