Docomo looks at arbitration option to exit Tata Tele

This version adds a quote from Docomo spokesperson in the fourth para

Japanese telecom major NTT Docomo is looking at the option of moving an international court for arbitration to pressurise the Tatas to buy back its 26.5 per cent stake in the loss-making Tata Teleservices.

According to a 2009 agreement, the Tatas, which own close to 65 per cent stake in Tata Tele, were supposed to buy back Docomo's shares in Tata Tele at Rs 7,200 crore or at a fair market price. In April this year, the Docomo board decided to exercise its put option and informed the Tatas of its desire to exit the venture by selling the shares back to the Tatas. However, till date, no announcement has been made by the Tatas to buy back Docomo's stake.

Legal sources say the block is a Reserve Bank of India rule that says a put option, when exercised, should be based on the prevailing return on equity at the time the option is exercised and not based on a pre-determined valuation. This is delaying the transaction, making Docomo jittery. If the issue moves to an international court, legal sources say, it will expedite the transaction as a further delay will decrease the valuation of its shares further.

LEGAL TANGLE

• Docomo unhappy with delay in closing transaction
• RBI rule bars pre-determination of share value
• Docomo writes down part of Tata Tele investment

When contacted, a Docomo spokesperson said the company would neither confirm nor deny the information on moving international courts. A Docomo spokesperson added, “We couldn’t disclose further information due to confidentiality reasons.”

A Tata Group spokesperson said: "We remind you of what Tata Sons said when NTT Docomo announced its intention to exercise its sale option under the shareholder agreement between Tata Sons, NTT Docomo and TTSL, on April 25: "As also stated by NTT Docomo, it is not possible to predict how events will unfold; however, Tata Sons is cognisant of its responsibilities, and will act keeping in mind the interests of all stakeholders and in accordance with law."

The bone of contention between the Indian conglomerate and the Japanese company is the valuation of shares, falling due to the sagging financial health of Tata Teleservices. Tata Tele has reported revenue of Rs 10,452 crore for the financial year ending this March, with a record loss of Rs 6,166 crore. The valuation has thus come down drastically since Docomo invested Rs 14,400 crore in 2009.

Under the then agreement, NTT Docomo holds the right to sell back its shares in the event Tata Teleservices fails to achieve certain specified performance targets. The Tata group holding company, Tata Sons has already spent Rs 2,480 crore early this year in Tata Teleservices to help the company pre-pay its loans to the financial institutions. It has also promised to spend another Rs 2,000 crore in the next two years to the banks.

Both the companies have already set up a legal team to look into the valuation issues. While the Tatas have hired Amarchand Mangaldas, Tata Docomo is represented by Khaitan & Co.

The losses by Tata Teleservices shows the difficult conditions faced by Indian telecom operators in the past few years owing to spectrum mess, which resulted in many telecom companies losing billions of dollars of investment.

While briefing analysts on April 25 this year, Docomo executives said the reason why they pulled the plug on India was the spectrum mess. "We thought things were moving very, very smoothly in the beginning… but the spectrum administration in India was so confusing and was beyond our expectation and totally unpredictable."

Tata Teleservices' spectrum in three circles was taken back after the Supreme Court in February 2012 cancelled 122 licences handed out in 2008-09 when A Raja was the telecom minister. In the all-important circle of Delhi, the company was never allotted spectrum, in spite of having paid for it. "Tata (Teleservices) is struggling today to make a profitable business," the Docomo executive had told analysts.