On assumption of office, prime minister, Modi made a huge commitment to substantially improve the ease of doing business in India. He set a very ambitious target of catapulting India’s ranking in this regard to amongt top 50 countries. That was in the mid – 2014.
Two-and-a-half years since then, India continue to languish at number 130 out of 189 countries in the ease of doing business as per World Bank’s Doing Business Report 2016 [a mere 4 places up from last year’s adjusted ranking of 134]. When, seen in the backdrop of far reaching reforms implemented by NDA – government [all aimed at achieving the goal set by Modi] in almost all areas of governance, this is a big disappointment.
Modi has asked all concerned ministries and departments to introspect for identifying areas where things are lacking and take necessary steps to remove the bottlenecks and improve performance. Meanwhile, one area of major concern relates to ‘enforcing contracts’. India’s ranking in this segment is dismal 178.
There are umpteen examples of the poor record of enforcing contracts in Indian jurisdiction. An ongoing case of NTT–DoCoMo [Japanese multinational] versus Tata Teleservices [a Tata group company] in the telecommunication sector, provides a classical instance of how Indian laws and regulations have stymied former’s efforts to secure a fair deal as per terms of the agreement between the two.
In November 2009, NTT-DoCoMo had acquired 26.5% stake in Tata Teleservices 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 clause was incorporated in the deal 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, Tata Teleservices has been struggling to find its feet in an intensely competitive environment with established big players such as Air-tel, 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 Tata Teleservices 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 Tatas for buy back of its shares [though, the agreement also provided for Tata Teleservices to find a buyer for DoCoMo shares at this price, in a scenario of plummeting share value, this was figment of imagination; so the obligation fell on Tatas only].
But, Tatas expressed inability to honor their commitment citing Reserve Bank of India [RBI] guidelines under which an international firm can only exit its investment at a valuation “not exceeding that arrived at on the basis of return on equity”. Accordingly, Tata Teleservices offered only Rs 23.34 a share as prescribed under the RBI guidelines.
This forced the Japanese firm to drag the Tatas to the London court of arbitration where it won a $1.17 billion award over breach of the agreement. However, the latter are resisting enforcement of the arbitration award in India as also other jurisdictions taking shelter under Indian law and public policy. The matter is currently pending in Delhi High Court [DHC] which even ordered Tata Teleservices to deposit the entire amount with the court.
Making revelations after his exit [albeit unceremonious] ex-chairman, Tata Sons has revealed Tata Sons consistent stance that ‘it will honor all its commitments within the law and that this was reiterated whenever the DoCoMo issue was discussed in its board meetings’. However, the reality was that Tata had no intent to pay DoCoMo and that it was merely using the RBI guidelines as a cover to avoid payment.
The Japanese company had even gone to the extent of proposing that Tatas could pay the amount out of foreign exchange generated from its international transactions [after all, the group has huge global presence with operations in over 100 countries]. The suggestion – pretty logical – was meant to circumvent the legal hurdle in the way of repatriating funds from India due to RBI regulation.
This too was not acceptable to the Tatas even as their legal contingent is trying all its might in the court and going to any extent in somehow getting the arbitration award quashed. Even RBI has been roped in as a party to the court proceedings if only to scuttle chances of the funds being released for payment to DoCoMo.
Without any doubt, the inability of a major foreign investor [read DoCoMo] to enforce the contract if only to secure its legitimate rights under the agreement has dented government’s credentials in regard to ease of doing business and sullied India’s reputation as a promising investment destination. Modi should take serious note of this and initiate steps to get the hurdles removed.
If, the RBI guidelines are coming in the way then, nothing prevents the powers that be from relaxing the guidelines with ‘retrospective’ effect [read 2014 when DoCoMo invoked the clause]. The gains to be made from such relaxation in terms of preserving the sanctity of contracts and resultant boost to investor confidence will be huge.
The RBI needs to make such a progressive move instead of joining court proceedings if only to cling to an archaic rule/guideline which only helps an Indian company save some money but ends up doing great damage to the country. And, government should goad the governor to bring about this change soonest possible.
There are hundreds of other cases where concerned parties exploit legal loopholes and other technicalities to prevent enforcement of contracts. Modi – government should set up a core group to identify all such cases where substantial investment by foreign companies is involved and take swift action to get those barriers removed.
Riding on a flurry of reforms one after the other, Modi should crack the whip on this front as well.