Japanese telecom company NTT DoCoMo is filing for arbitration against its Indian partner Tata Teleservices (TTSL), the unlisted mobile telephony arm of the Tata Group, over the latter’s failure to give NTT DoCoMo an exit yet.
In July, NTT DoCoMo announced its intention to exit its partnership with the Tata Group by selling its entire 26.5% stake in Tata Teleservices. Under the agreement between the two parties, Tata Sons would have to either acquire NTT DoCoMo’s stake in the company or find another buyer for the same. The agreement also specified that the minimum consideration to be paid to the Japanese company for its stake would be R7,250 crore, which is around half of its original acquisition cost.
NTT DoCoMo entered the Indian market in March 2009 by acquiring a 26.5% stake in Tata Teleservices for $2.7 billion (R15,285 crore) after the latter was allowed licences to offer GSM services in addition to its existing CDMA services. The two companies jointly launched telephony services in India under the Tata DoCoMo brand name.
The Japanese telco said on Monday, in a filing with the Tokyo Stock Exchange, that its request for arbitration against Tata Sons in the London Court of International Arbitration was “pursuant to the shareholders agreement regarding the exercise of DoCoMo’s option to sell its stake in Tata Teleservices”.
“Under the terms of the shareholder agreement between DoCoMo, TTSL and Tata Sons, DoCoMo exercised on July 7, its right (option) to request that a suitable buyer be found to purchase its TTSL shares for 50% of the acquired price, amounting to Rs 7,250 crore, or a fair market price, whichever is higher,” NTT DoCoMo’s statement said. “Thereafter…DoCoMo submitted its request for arbitration to ensure that its right be exercised after Tata Sons had failed to fulfil its obligation, despite DoCoMo’s repeated negotiations with Tata Sons regarding the sale of its entire stake in TTSL.”
A Tata Sons spokesperson said that it is aware that NTT DoCoMo has requested for arbitration in London. “From the outset, Tata Sons has been committed to honouring its obligations to DoCoMo, and has taken every possible step keeping in mind the interests of all stakeholders and in accordance with law. Tata Sons has made the necessary application to the Reserve Bank of India (RBI), and is awaiting a response,” the spokesperson said in an email.
NTT DoCoMo’s proposed stake sale is subject to guidelines governing foreign investment in India, and as per regulations, the outflow of dollars from the country requires requires RBI consent. The rules framed last year do not permit put and call options to be exercised at a predetermined price. The RBI valuation requirement for a put option mandates for a return-on-equity parameter. Any valuation that does not conform to this will require specific approval from the regulator. Since TTSL is in the red, an RoE-based valuation would not be possible, so the RBI’s permission is required.
Two telecom sector analysts, who spoke to FE on condition of anonymity, said that the matter could drag on for months, even before the court, as international arbitration courts too cannot give a judgment until approvals from the desired regulatory authorities, in this case the RBI, come through.
“There are three scenarios that could unfold. One: Tatas sell NTT DoCoMo’s stake at a lower price to another interested party and make up for the shortfall in payment to DoCoMo itself. Second: It could buy DoCoMo’s stake itself, work on improving TTSL’s operational performance, increase the company’s value and then sale a stake. The second scenario is least likely though. Third, it could simply wait for the arbitration process to conclude — which will take a long time — before taking a further decision on this,” said to one of the analysts.
“At present, investing in TTSL is not a desirable option for existing telecom companies because of issues facing the company,” the second analyst said. “But a telecom firm like like Telenor, which is looking to expand in India after circumstances forced it to cut down on operations, could be interested.”
FE couldn’t independently verify this with Telenor.
The second analyst also added that he did not expect Tata Sons to acquire and retain NTT DoCoMo’s stake in TTSL, as they had already invested enough in the company without the desired results.
But a senior Tata Group executive had told FE in December that the group may wait for the upcoming spectrum auctions in February to conclude, to assess where it stands vis-a-vis competition before taking a final call. He had declined to be identified. TTSL can retain the spectrum with it for a few more years, before they come up for renewal.
The Indian telecom sector faces several challenges ranging from availability of spectrum, litigation over allegations of wrongdoing in allocation of airwaves, high cost of operations and a price war among rivals.
The spectrum administration in India was confusing, NTT DoCoMo’s president Kaoru Kato had said, at a conference call with analysts in April.
Kato had observed that in India, spectrum was awarded on a circle-by-circle basis and while TTSL had paid up for spectrum in a circle like Delhi, which has one of the highest data and voice traffic, it was yet to receive the spectrum.
TataTele writes to RBI, seeking solution
* NTT DoCoMo invested R15,285 cr for a 26.5% stake in TTSL
* NTT DoCoMo’s president Kaoru Kato said in April that Tata DoCoMo was yet to get spectrum in a lucrative market despite having paid
* It recognised an impairment of R3,433 cr in its FY14 report on account of erosion in the value of its investment in TTSL
* It announced its exit by deciding to sell its entire holding in TTSL in July 2014
* The pact between DoCoMo and the Tata Group stated that if TTSL failed to achieve certain performance targets by March 31, 2014, the former would be entitled to exercise an option to offload its entire holding in TTSL
* Tata Teleservices (Maharashtra), TTSL’s listed arm, reported a loss of R560 cr in FY14 on a turnover of R2,731 cr. According to Bloomberg data, the listed company’s net debt stood at R6,498 cr as on March 31