After failing to resolve the tax issues of Vodafone and Cairn, and with two global arbitration awards going against it in the Antrix-Devas case, the government seems all set to compound the misgivings of foreign investors by continued bungling in the Tata DoCoMo case. If, as a result of it not allowing Tata group companies to honour their deal with DoCoMo—despite an international arbitration panel award on this—the Japanese telecom major is forced to try and seize Tata’s global assets like Jaguar Land Rover or Tata Steel, this will be a national embarrassment. The mess will be compounded by the fact that these firms are not wholly-owned by the Tatas either, so the government action will end up hurting minority shareholders as well.
While the government is adopting the high moral ground and arguing that the option deal signed by the two parties in 2009 is illegal—under this agreement, while DoCoMo invested R14,500 crore in Tata Teleservices, if various operational milestones were not achieved, the Tatas would have to buy out DoCoMo at half the original value. When the milestones were not achieved and the Tatas sought RBI permission to repatriate the money, based on advice from the PMO, the RBI refused to allow this—it said its 2014 policy stated that a buyback could take place only based on an independent valuation and that, in this case, worked out to R2,915 crore. The argument by both RBI and the government is specious. For one, the policy was always ambiguous till RBI’s 2014 guidelines and that is why, when the Vajpayee government privatised HZL and Balco, it gave a similar option to Anil Agarwal. When the law is ambiguous and a new rule is put in place, the standard protocol is to grandfather existing cases.
Besides, what matters more than the law is the spirit behind the law. The reason why RBI frowns on deals with a pre-agreed formula for a buyback is that this allows foreign debt—which RBI controls carefully given its tendency to be very volatile – to masquerade as equity. But even a simple application of mind makes it clear DoCoMo doesn’t fall in this category since no lender is going to sign an agreement asking for half the principal to be repaid after several years. The bureaucrats in the RBI and the PMO, however, have failed to get their heads around this simple solution to see whether the DoCoMo investment was debt masquerading as equity. While the Tata name will be badly hit if the group is not able to meet its international obligations—its willingness to deposit R7,250 crore with the court cuts no ice with foreign investors—the government action will ensure India’s international credibility will also take a big beating. What makes this worse is that, in this case, there is no outgo from the government’s coffers—or potential tax that is not coming in—and the Tatas are desperate to make the payment.