It is not always the case that regulatory authorities and policy makers mess up things affecting ease of doing business and vitiating investment climate. Quite often, it is none other than the businessmen and industrialists themselves who vitiate the environment by exploiting loopholes in the system or blatantly violating the extant laws while taking decisions and conducting business.
There could not be a better example than the dispute between Japanese telecom major NTT DoCoMo and Tata Teleservices [TTSL] – a Tata group company which is currently pending adjudication by Delhi High Court [DHC]. Briefly, facts of the case are as under:-
In November 2009, NTT-DoCoMo had acquired 26.5% stake in TTSL for about Rs 12,740 crore [at Rs 117 per share] with an agreement that in case it exits the venture within five years, it will be paid a minimum 50 per cent of the acquisition price. This was done to give comfort to the Japanese company that in a scenario of erosion in the share value, at least half of its invested capital would be protected.
DoCoMo got its reading of the future up to the mark. From the day one, TTSL has been struggling to find its feet in an intensely competitive environment with established big players such as Airtel, Vodafone and Idea Cellular dominating the market. Unable to grow subscribers and achieve requisite scale, it has been making losses continuously. By 2014, its share had nose-dived to just about 20% of its acquisition price.
This prompted DoCoMo to exit the joint venture with TTSL which it did in April 2014 and invoked the clause in the agreement to demand Rs 7,200 crore @ Rs 58 per share from the latter for buy back of its shares. But, Tatas expressed their inability to buy at this price citing Reserve Bank of India [RBI] guidelines under which a global firm can only exit at a valuation “not exceeding a price arrived at on the basis of return on equity”. Accordingly, TTSL offered only Rs 23.34 a share as prescribed under RBI guidelines.
This forced the Japanese firm to drag Tatas to the London Court of International Arbitration [LCIA] where it won a $1.17 billion award over breach of the agreement on June 22, 2016. After the award, Tata approached RBI for permission to comply with the terms of the adjudication, but this was rejected by the regulator leading to current proceedings before DHC.
Meanwhile, on February 28, 2017, the two companies reached a settlement to enforce the LCIA award and submitted it for court’s approval. But, RBI has objected to it highlighting ‘how it was an Indian law that governed the contract and yet, the LCIA proceeded to allow the share transfer in the garb of an award for damages’. It further noted that ‘the award, if enforced, would set a precedent for similar matters currently under dispute and in the future.’
Now, the companies see RBI as playing the role of an obstructionist. Perhaps, even the judiciary may be feeling likewise as the settlement if allowed to go through, would help in promptly closing the case and easing its burden. But, no one can deny that the regulator’s stance is perfectly justified.
Both the parties viz. DoCoMo and Tatas are to be blamed squarely for the fiasco. It is naïve to believe that they were not aware of such a crucial regulation under Foreign Exchange Management Act [FEMA]. This was all the more so for the latter who was committing a huge liability towards repatriation of foreign exchange in clear violation of the law of the land.
Yet, if Tatas got such a clause incorporated in the agreement, it only showed their determination to somehow get DoCoMo to invest, come what may. As regards the consequences, there was no reason to worry under subsisting era of ‘crony capitalism’ when body corporates were prone to managing the bureaucrats and politicians.
The delay in making payment to DoCoMo – as per terms of the contract – may appear to have dented India’s credibility as a good investment destination. But, this has nothing to do with any policy flip flop or unpredictable changes in laws which is normally the case. This has to do primarily with a serious omission [deliberate or otherwise] on the part of the companies while entering in to a contract.
What then, is the way forward? The RBI/government should refrain from condoning this violation or taking recourse to amendment of the extant guidelines [albeit with retrospective effect] to legitimize such transaction. This will tantamount to condoning all other similar violations and set a wrong precedent for the future.
Conceptually also, granting legitimacy to such a practice is seriously flawed. It strikes at the root of the underlying philosophy behind an investment in the form of equity. Unlike debt wherein, repayment of principal amount along with interest is assured, this is not the case with equity which is ‘risk’ capital. A person investing his money in this form should be prepared for losing the entire amount in the same stride as it partners in making gains without limit.
By guaranteeing 50% of amount invested even when TTSL was making losses and eroding its capital base, the agreement made an onslaught on the very principle of equity. The absurdity of this clause may also be seen from another angle. If, a business does well and capital grows, will an investor [in equity] ever accept a cap on the gains? Would DoCoMo have acceded to this if TTSL were to make gains?
If, RBI does not allow this payment to be made, DoCoMo won’t lose as the award could still be taken to other countries viz. UK, US and enforced there under the terms of the New York Convention. In that scenario, the government would be spared the ignominy of having compromised on its laws even as India will still lose foreign exchange [as payment is made by Tatas], .
Hopefully, RBI will stay on course and won’t allow itself to be bullied by the companies.