The NDA decision not to allow the Tatas to honour their 2009 agreement with Japanese telco DoCoMo was always problematic, and has come back to haunt the government since a London arbitration panel has just ruled on it – if the Tatas are not allowed to pay the sum the panel has ordered, investors will see this as yet another sign of the rule of law not applying in India. The case pertains to DoCoMo investing Rs 14,500 crore for a 26.5% stake in Tata Teleservice, and both parties agreed that were certain physical targets not met, the Tatas would either pay DoCoMo a fair market value or half the investment value – whichever was higher. Since the targets were not met and there was no question of finding a buyer considering the firm was making huge losses, DoCoMo exercised its option and asked the Tatas to pay it Rs 7,250 crore.
Based on advice from the prime minister’s office (PMO), RBI cited its policy on options to tell the Tatas they could only offer DoCoMo a price based on an independent valuation – that worked out to Rs 2,915 crore, a pittance compared to what the two had agreed upon. The problem was this RBI rule on options came into being only in 2014 while the Tata-DoCoMo deal was signed many years earlier. Indeed, the policy on options was so grey, even the government of India signed an option deal with Sterlite Industries when it sold Balco and HZL in 2001 – it is a different matter than the UPA did not honour this NDA-1 commitment to allow Sterlite the option to buy out the government stake in these companies at a pre-agreed formula, and that Sterlite did not challenge this. While RBI is right in saying that, if such pre-agreed pricing is allowed under options, you can have debt instruments disguising themselves as equity to circumvent the caps the central bank puts on debt. The point that both RBI and the PMO missed was that this was very clearly not debt – apart from the fact that deals signed when the law is unclear should be honoured, why would anybody lending money sign a deal where he gets back only half the amount ‘lent’? If there is an example of the bureaucracy rigidly applying rules, this is it. It remains to be seen if the government is able to now appreciate this, and whether it realizes that the arbitration panel award actually leaves it with little choice – the Tatas, needless to say, cannot make the payment unless the government allows it to.