Putting an end to an almost three-year-long judicial battle between Tata Sons and Japan-based NTT DOCOMO over the latter’s exit from their joint venture, Tata Teleservices Limited (TTSL), the Delhi High Court has approved the terms of settlement agreed upon by the two parties and rejected the Reserve Bank of India’s (RBI) intervention in the case. The move has paved the way for Tata Sons to pay DOCOMO a $1.17 billion arbitral award and for the latter to transfer its shares in TTSL to Tata Sons.
Story so far
In November 2009, DOCOMO had acquired a 26.5 per cent stake in TTSL for about Rs 127.4 billion. The two companies had agreed that in case DOCOMO exited the venture within five years, it would be paid a fair market price or minimum 50 per cent of the acquisition price through the purchase of its shares by a buyer, who would be found by Tata. Else, Tata would take over DOCOMO’s shares at half the original value of investment.
In 2014, after the collaboration failed to generate the desired returns, DOCOMO decided to exercise its exit option. However, Tata was unable to find a buyer for DOCOMO’s stake in TTSL for 50 per cent of the acquisition price, which came to around Rs 58.45 per share. Moreover, DOCOMO declined to accept the fair market value of Rs 23.44 per share that Tata was willing to pay as per the shareholders’ agreement.
On Tata’s failure to fulfil its obligation as per the terms of the agreement between the two companies, DOCOMO initiated arbitration proceedings against Tata Sons in January 2015.
In June 2016, the London Court of International Arbitration asked Tata Sons to pay $1.17 billion to DOCOMO for the alleged breach of agreement. Subsequently, in July 2016, DOCOMO moved the Delhi High Court for the enforcement of the award. At the time, Tata Sons agreed to furnish $1.17 billion in fixed deposit receipts with the registrar of the Delhi High Court to secure the award amount.
However, in October 2016, RBI intervened in the matter, stating that the award was in violation of the Foreign Exchange Management Regulations, 2000, which prohibit the transfer or sale of shares at a price exceeding the market price of shares determined by any international valuation methodology. Further, RBI contended that the award had allowed a restricted capital account transaction in the garb of a breach of contract, and therefore, it was against the country’s fundamental policy and not eligible for enforcement under any circumstance. RBI had also expressed its apprehension regarding the issue becoming a dangerous precedent for similar cases in the future, if the award was enforced.
In February 2017, Tata Sons and DOCOMO filed a joint application in the Delhi High Court stating that they had decided to settle the dispute. Under the settlement agreement between the two companies, Tata agreed to withdraw its objections to the enforcement of the award. DOCOMO said it would suspend its related enforcement proceedings in the UK and the US for a period of six months.
The Delhi High Court has now ruled that there is nothing contrary to any provision in Indian law in the settlement plan submitted by the two companies to resolve their dispute. Further, the court has noted that the issue of an Indian entity honouring its commitment under a contract with a foreign entity, which was not entered into under any duress or coercion, will have a positive effect on its goodwill and reputation in the international arena, and have an indubitable impact on strategic relationships between countries. It also concluded that a third party (RBI) could not be allowed to oppose the compromise arrived at between the two companies in such a manner.
Implications of the verdict
The Delhi High Court’s judgment clearing the Tata-DOCOMO settlement is likely to have a far-reaching impact on similar cases where foreign investors are looking to exit Indian joint ventures, particularly those cases where an overseas arbitration court has given an award in favour of a foreign investor. The verdict has allayed foreign investors’ concern that the central bank’s interpretation of investment rules would effectively prevent them from exiting loss-making ventures and is expected to boost investor confidence in the Indian market.
Meanwhile, the resolution of the dispute is likely to allow Tata Sons to move forward with its plan to turn around TTSL, which has lost subscribers in the recent price war and currently has a debt of around Rs 300 billion. The company was earlier learnt to be in talks to combine with the Reliance Communications-Aircel-MTS merged entity; however, the dispute with DOCOMO was a sticking point. If the merger takes place, the combined entity would become the third largest telecom player in the country after Vodafone-Idea and Bharti Airtel.
Puneet Kumar Arora