Why The Delhi HC’s Verdict On Tata-DoCoMo Case Is More Important Than It Looks 

There has been all-round cheer after the Delhi High Court allowed Tata Sons and its Japanese partner NTT Docomo to implement the London Court of International Arbitration’s (LCIA) Award of 22 June, 2016 in the Tata Teleservices Joint Venture (JV) case. This means that the Japanese partner can exit the loss-making telecom joint venture at a pre-determined price. This exit of a foreign partner at a pre-determined price was being opposed by the Reserve Bank of India since it violated FEMA norms.

Not only was this judgement good news for NTT DoCoMo, it would also provide hope to other foreign investors similarly stuck with loss-making joint ventures where they would want to exit with some return on investment but are being opposed by India’s central bank. But here’s the catch: there is every possibility of the RBI moving the Supreme Court against the lower court’s verdict. One will have to wait and see if the government now finally takes a stand on what the future course should be about international arbitrations – in other words, should such awards be honoured or not.

Tata Sons and NTT DoCoMo had filed a joint petition in the Delhi HC in February this year saying they had agreed to settle the dispute regarding the Tata Group paying the arbitration award of $1.17 billion (Rs 7,250 crore) to the Japanese partner . If the two partners were to part amicably, this would be good news not only for the salt-to-software Tata group but could also pave the way for further consolidation in India’s telecom industry. Tata Teleservices has been a marginal player in India’s telecom sector. Like other small players, it has also been hit hard by the ongoing fierce battle between bigger telecom operators and the only way out may be merger with a bigger entity.

Any merger and acquisition however, is possible only after the DoCoMo dispute is resolved.

The dispute

NTT DoCoMo has been fighting Tata Sons over the right to sell its stake in Tata Teleservices for at least 50 percent of the original investment. The joint venture between the two partners (the Japanese company held 26.5 per cent stake) was signed in 2009. By 2014 NTT DoCoMo wanted an exit.

The JV pact specifies that in case capital investment of NTT DoCoMo falls below 50 per cent, it will exercise its put option and exit the JV at the pre-determined price. But the RBI has objected to this transaction since 2014, saying it violates FEMA. The RBI says it cannot allow the foreign partner a definite rate of return on investment since this then becomes a case of debt masquerading as equity and protection of debt cannot be allowed. It has also held that if it were to allow NTT DoCoMo to get a pre-determined exit price, other foreign investors would want to exercise a similar option.

This piece quotes corporate lawyers to say that many private equity firms and insurance majors are looking to exit their investments in India and had signed similar agreements with agreed valuations. But due to the Foreign Exchange Management Act, which bars predetermined valuations, they were stuck with their investments in India. The HC judgment in the Tata DoCoMo case will have far-reaching consequences on other pending matters as the Delhi HC has made it clear that the award by the London Court of International Arbitration Tribunal will have to be honoured by the Tatas.

On its part, Tata Sons welcomed the court order, saying it allowed “both, the enforcement of the award and implementation of the consent terms between the two entities. Tata Sons and NTT Docomo are taking further steps in terms of the order.”

A Tata Sons’ statement also said that the Delhi HC noted that the “shareholders’ agreement and the arbitration award were not opposed to any provision of Indian law or public policy. The consent terms too were not contrary to any Indian law…..Tata Sons honouring its commitment will have a bearing on its goodwill and reputation in the international arena.”

According to this story the accumulated losses of Tata Teleservices were at Rs 31,500 crore and the company’s net worth was eroded completely in 2015-16. Its loss in FY16 was Rs 3,386 crore against Rs 3,846 crore loss in the previous year. Revenue for the period was down to Rs 10,708 crore in FY16 from Rs 10,965 crore reported the previous year. The company had debt of about Rs 30,300 crore as on March last year. Is it any wonder then that NTT DoCoMo wanted to call it quits?

The fallout

If the RBI does appeal against the HC judgement in Supreme Court, the case could drag on. But if the government devises a framework to deal with this and other similar cases, then foreign investors looking to exit their Indian venture with minimal rate of return may be reassured.  The HC has made it clear that RBI’s jurisdiction in financial transactions between two companies lies only within India – it cannot oppose an arbitration award given out by an international court of law.

The HC verdict also means that the Indian judicial system favours a healthy investment environment, where foreign investors are assured of redemption in case the investments sour. Speaking to CNBC-TV18, former RBI Deputy Governor H R Khan said the Central Bank may appeal against the verdict in SC. Khan also said while the original RBI contention was to disallow return to the exiting investor on debt masquerading as equity, it is also true that investors wanting to exit a venture will like to have some return on their investments. “The point of view (in the RBI) for a long time has been to allow a reasonable but not very high return for exits….. large number of such cases hanging, we need to move on. We can now think of putting in a framework for handling more such cases”.