Rejecting RBI plea for exempting Tata-DoCoMo deal from foreign exchange Act, the Finance Ministry has said the two firms had entered into a share buyback contract in contravention of prevalent law and the case will now have to be legally settled.
Japan’s largest mobile phone firm NTT DoCoMo had in November 2009 acquired 26.5 per cent stake in Tata Teleservices for about Rs 12,740 crore (at Rs 117 per share). This was as per a 2008 understanding that in case it exits the venture within five years, it will be paid a minimum 50 per cent of the acquisition price.
A top Finance Ministry official said the Tata-DoCoMo buyback contract was signed despite Reserve Bank of India (RBI) rules barring pre-set buyback pricing.
The RBI had in 2007 come out with regulations barring pre-determined share buyback contracts, he said, adding the Tata-DoCoMo contract was signed despite RBI FEMA rules barring such deals.
DoCoMo in April 2014 decided to exit the joint venture that struggled to grow subscribers quickly. It sought Rs 58 per share or Rs 7,200 crore from Tatas.
But the Indian Group offered Rs 23.34 a share in line with RBI guidelines that states that an international firm can only exit its investment at a valuation “not exceeding that arrived at on the basis of return on equity”.
The Japanese firm dragged Tatas to international arbitration where it won a USD 1.17 billion award. To honour that award, an application was made to the RBI seeking exemption from the foreign exchange act.
The official said the RBI in turn wrote to the Finance Ministry exemption from the rules as such a measure would boost investor confidence.
The Finance Ministry, he said, believes monitoring investor confidence is not the matter of a regulator like RBI.
According to the ministry, it’s not only Tata-DoCoMo but many other legacy issues which will have to be given exemption if one case is allowed.
The RBI suggested some middle path for pending legacy issues but the ministry believes buy back contract pricing cannot be in violation of FEMA rules, he said.
There are many such contracts of pre-set pricing exit entered into by insurance companies and government fears substantial FDI outflows if Tata-DoCoMo is given an exemption and similar rules are to be applied to all such cases.
Government, the official said, is not keen on grandfathering put/call options in violation of FEMA rules and so it cannot grant exceptions for buyback at pre-set price in Tata-DoCoMo case.
This case will have to reach logical conclusion in court, he added.