Finance ministry’s opposition prompts RBI to deny request for higher valuation of shares

The Reserve Bank of India has denied a request by Tata Sons to acquire Japanese telecom giant NTT DOCOMO’s stake in Tata Teleservices Ltd at a price higher than the current fair value of TTSL shares.

RBI’s denial followed the finance ministry opposing the proposal, on the grounds that it would set a wrong precedent for all such transactions.

A statement by Tata Sons (the holding company of the Tata group) said, “RBI has conveyed it cannot accede to this request, as it is not in conformity with the extant FEMA (Foreign Exchange Management Act) regulations, and has advised that any such purchase of shares be at the current fair value of shares.”

This means the issue will now have to be resolved through arbitration between the parties.

DOCOMO has filed for arbitration with Tata Sons at the London Court of International Arbitration, alleging the Indian firm failed to honour its commitment to buy its Rs 7,250-crore (Rs 72.5 billion) stake in their joint venture.

In 2009, DOCOMO had paid $2.2 billion for a 26.5 per cent stake in TTSL.

According to the agreement, DOCOMO has the right to sell stake at 50 per cent of the acquisition price or the fair market value, whichever is higher, if performance targets are missed.

After TTSL failed to deliver, DOCOMO announced plans to exit the joint venture by selling its 26.5 per cent stake in April last year.

By virtue of its first right of refusal, Tata Sons agreed to buy out the Japanese company according to the shareholders’ agreement and made an application to RBI for a special permission to pay DOCOMO a price that was higher than the current fair value of TTSL shares. In January, RBI recommended the request be granted.

In a note to the finance ministry, RBI had said the Tata group be allowed to buy back DOCOMO’s stake at a predetermined price of Rs 58 a share, despite the company's valuer, Price Waterhouse, estimating the stake at Rs 23.34 a share, 60 per cent lower.

“The larger issue here is of fair commitment in the contracts in relation to an investment and a downside protection of an investment rather than an assured return.

Besides, our relationship with Japan in relation to foreign direct investment flows is also a matter to be kept in view.

“Therefore, we are inclined to accept the (Tata) proposal,” RBI had said in a note.

No way out for Docomo

2009

• March: NTT DOCOMO buys 26.5% stake in Tata Tele for $2.22 bn

2014

• April: DOCOMO announces plan to exit loss-making Tata Tele
• July: DOCOMO asks Tata to find a buyer for its stake, valued at Rs 7,200 cr
• December: Tatas fail to find a buyer for DOCOMO’s stake within 90 days

2015

• January: DOCOMO moves London court of arbitration, threatens to foreclose Tata Sons’ assets
• January:  RBI backs Tata group's proposal to buy back DOCOMO’s 26.5% stake in Tata Tele at Rs 58 a share in the interest of fair commitment in the contracts, but seeks finance ministry’s approval
• March: RBI rejects Tata application after the ministry asks it to stick to existing norms