8/19/2016

TatavsDoCoMo:TwowarringpartnersandonebigmessTheEconomicTimes

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TatavsDoCoMo:Twowarringpartnersandonebigmess
PostaComment

ByDEEPALIGUPTA&ArijitBarman,ETBureau|Aug18,2016,08.36AMIST

CyrusMistry,sourcesclosetohimsay,hashighregardforSoftbank.SowhenMasayasi
Son,thefounderofthe$68billiontechinvestmentbehemoth,choseBhartiAirtel'sSunil
BhartiMittalashisallyinIndia,theseniorleadershipinBombayHouse,thecorporate
headquartersoftheTataGroup,wasnotamused.Asthemostrespectedandstaggeringly
diversifiedIndianmultinationalconglomerate,the148yearoldsalttosoftwaregroupisused
tobeingalodestarformostglobalcorporationslookingtoenterorconsolidateinIndia.
SeveralTatacompaniesasdiverseasTCSandTataSteelalreadyhavedeeprooted
businesslinkswithJapanesecounterparts.Mistry,chairmanofTataSons,thepromoterof
majorTatacompaniesiskeenonadeeperengagementwithJapanInc,accordingtoTata
insiders.Japanisamongthe12globalmarketsthatthe$100billiongroupwantstotapinto.

Mistry,chairmanofTataSons,thepromoterofmajorTata
companiesiskeenonadeeperengagementwithJapanInc,
accordingtoTatainsiders.

Butthoseambitionsmighthavetobeputinthebackburnerbecauseofaseriesof
disconcertingeventsthathavefollowedthemeltdownofitsmosthighprofilealliancewitha
JapanesecompanyNTTDoCoMoinitstelecombusiness.OnJune24,DoCoMowona
RELATEDCOMPANIES
rulingbyaninternationalarbitrationcourtthatorderedTataSonstopayit$1.3billiontobuyits
TataSteel
stakeinthemobilephonejointventure,TataTeleservices.Thecompany,Japan'slargest
telecomoperator,saidinastatementtheawardwasforTataSons'breachoftheir
BhartiAirtel
shareholders'agreementafteritwasdeniedexitofthelossmakingTataTeleservicesatapre
agreedpriceofhalftheoriginal$2.7billioninvestment.

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Anastypublicfightensued.DoCoModraggedtheTatastotheDelhiHighCourtseekingenforcementofthearbitrationruling.Itaccusedits
erstwhilepartnerofmakingexcusesnottohonourthearbitralaward.
TataSonstoldthecourtthatitisbeingmalignedbyDoCoMo.NewsreportssuggestedthattheTatas'overseasassetslikeJaguarLand
RoverorTataSteelcouldbeattached.
Theseeventsprompted,accordingtopeoplefamiliarwiththematter,MistryandhispredecessorRatantoTatameettheJapanese
ambassadorKenjiHiramatsuinMumbaitoseekdiplomaticinterventionandreinitiateadialogue.

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BothTataGroupandNTTDoCoMospokesmendeclinedtocommentforthisarticle,sayingthematterissubjudice.
"SuchJapaneseaggressionisunheardof,"saysaseniorinvestorwithclosetieswiththeTatas."Somethingmusthavegonehorribly
wrong."TataSonsarguablyhasneverdefendedsuchhighprofilelitigationotherthantax.That'swhatisworrying."
ButthebiggerworryisthewideramificationsthespatholdsforthegroupaswellasforIndia.
BadforBusiness
JapanhasalwaysbeenstrategicfortheTatas.SeveralgroupcompaniesasdiverseasTCStoTataSteelorTataCapitaltoTataRealty
andmanyothersalreadyhavedeeprootedbusinesslinkswithJapanesecounterparties.
TokyohasalsobeenakeyeconomicallyforIndia.Governmentstatisticsshow,betweenApril2000andJune2015,Japanese
corporationshavemadeactualinvestmentsof$18.81billiontoIndia,accountingfor7%oftotalFDIinflowintoIndiaandmadeJapanthe
4thlargestinvestorinIndia.
Yet,formanyJapanesecompaniestheexperienceinIndiahasbeennothingshortofturbulent,frayedbywarringIndianpartnersand
unscrupulousIndianemployees.
TakeDoCoMo'scase.InApril2014,itannouncedplanstoexitthejointventure.SincethenithasbeenfeudingwiththeTatasover
paymentlinkedtoitsexit.
DoCoMo'sannouncementtoexithappenedjustamonthafterdrugmakerDaiichiSankyoendeditsdisastrousassociationwithIndian
pharmacompanyRanbaxybysellingittoSunPharma.InJunethisyear,theIndianunitofJapaneseimagingandelectronicsmajorRicoh
detectedmassivefinancialirregularitiesandfraudinthecompany,promptingittolodgeapolicecomplaint.Thecompany'sthreetopIndia
executivesincludingMD&CEO,thethenCFOandchiefoperatingofficerhaveallbeensentonleavependinginvestigations.
"EventslikeDaiichiorDocomohavereconfirmedJapanInc'sfearsaboutIndia.Theyarefarmoreconsciousandcarefulabout
partnerships,"feelsSanjeevSinha,aformerTataGrouprepresentativeinTokyo."Insteadofcommittinglargechequeslikebefore,they
arenowdiversifyingtheirrisksandmakingmuchsmallerinvestments."
FujisakiTerruo,formerCEOHondaSielCarsinIndia,saysbigdisputesinvolvingbignameswillmakeJapanesecompaniesevenmore
cautious."Manyofthemarealreadyinunderstress,soalotisatstakehere."
Globalmediaweremorescathing."DoCoModebacleisadepthofdumb,"screamedaheadlinefromBloomberg.ReferringtotheTata
DoCoMofight,arecentWashingtonPosteditorialsaid,"Onceagain,Indiaisindangerofsabotagingitsowneffortstoraiseforeign
investmenttoChinalikelevels."

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TatavsDoCoMo:TwowarringpartnersandonebigmessTheEconomicTimes

SeasonedbankersworkingwithlargeJapanesefinancialhouseshoweverremainfarmoreoptimisticbuteventheyadmitthatJapanese
dealsizesaregoingdownifnotthetotalvolumes."Bigbang,$500millionplusM&As/JVsarerare.Appetiteforlargechequeshasgone
downsignificantly.Thesweetspotisnow$50$200million,"feelsanMDwithaJapaneseinvestmentbank.
"Corporatememoryisfarshorter,motivatedandselfish.JapanesecompaniesmaybecautiouslyoptimisticbutaccesstoIndianmarketis
stillahugejewelthattheseMNCsarechasingfor,"quipsanother."EventheTatashaveseveralJVswithJapanesecompanies.Theyare
flourishingwithoutanyissues."
StaticConnection
WhydidtheDoCoMopartnershipturnouttobedifferent?
Inearly2009,endingalmostayearandhalfofnegotiations,DoCoMoinvested$2.7billioninTata'swirelessbusinessTataTeleservices
(TTSL)ontheunderstandingthatifcertaintargetsnumberofsubscribersandtowers,financialmilestoneslikeEBITDAandprofits
weren'tmetinfiveyears,theTataswouldeitherfindabuyerfortheJapanesecompany's26.5%stakeatfairmarketvalue,orpayhalfthe
originalinvestment,whicheverwashigher.
"TheDoCoMoboardwasreluctanttoputmoney.Thiscontractgavethemadownsideprotection,"recallsapersonawareoftheoriginal
discussions.
TTSLfaredbadly(seeDialT...)andwhenDoCoModecidedtoexit,therewasnotakerfortheunprofitablecompany.TheTatasthen
soughtRBI'spermissiontopayDoCoMo$1.3billion.
Bythen,RBIhadframednewrulesthatbannedtheexitbyaforeignequityinvestoratanassuredprice.Still,thecentralbanksoughtthe
financeministry'spermissiontomakeanexceptionbecauseitwasaquestionofanIndiancompanyhonouringacontract.Thiswasalso
therareexampleofaninvestoragreeingtoa50%haircutafterfiveyears.Moreover,thiswasn'tacaseofforeigncurrencydebt
masqueradingasequity,anarrangementRBIalwayshadfrownedupon.
Buttheministrydecidedagainstgrantinganexemption,deemingthatitwouldsetabadprecedent.IthastossedtheballbacktotheRBI's
court,insistingthatthecentralbankadministersFEMA,orforex,regulationsandergo,ithastotakeacall.
ButthefinanceministryiswillingtoreviewtherulethatledtotherejectionofDoCoMo'sproposaltosellsharestoTataSonsatapre
agreedprice.Itislookingtoallowgreaterpricingflexibilityforsecuritieswithanexitvaluationclauseataratesetbeforehand,technically
knownasa'callandputoption.'
RBIhassincewrittentotheministrytoapplythepolicyretrospectively.ButFDIpoliciesareusuallyprospectiveandnotapplied
retrospectivelyastheycouldhavewideramificationsforinvestors.SotheministrydeclinedRBI'srequest.Thecabinetisduetodecideon
thispolicy.
AseniorgovernmentofficialsaystheTatascanseekapprovaloftheirtransactionfromtheRBIoncethispolicyisinplace.Butthe
governmentstandisclearanydecisiononTataDoCoMoisRBI'sremit.
Nevertheless,theimpassecomesatatimewhenglobalcorporationslikeVodafoneandCairnhaveallegedtheirassetshavebeen
wronglyexpropriatedbytheIndiangovernment.SomehaveeveninvokedbilateralinvestmenttreatiesthatIndiahassignedworldover.
AsfortheTatasandDoCoMo,neitherpartnerimaginedthattheequityvalueofTataTeleserviceswouldhalveinfiveyears.Actuallyitnow
ishalfofhalf.SowhiletheTatassaytheyarewillingtobuyoutDoCoMo,theyargueithastobeatarevisedRs23.34/sharepriceandnot
thepreagreedpriceofRs58.045/share,usingadiscountedcashflow(DCF)valuationmethoddonebyPricewaterhouseCoopers.The
TatascontendthattheywereforcedtofollowthemethodbecauseDoCoMo'sapplicationcameadaybeforevaluationmethodswere
relaxedbyRBIforcalculationoffairvalue.DoCoMosaysthiswasdonetosuppresspricing.
CountingtheMoney
TheTatasalsomaintainthatitiswillingtopayDoCoMomoney,butitistheRBIrulethatpreventsthepayment.Itdepositedthemoney
withtheDelhicourtasa"gestureofgoodfaith".
ButattheheartoftheproblemremainRBIguidelinesthatnomoneycanbepaidtoDoCoMoifthepriceisprefixedandhigherthanfair
value.TheTatagroupontheirparthasalwaysmaintainedthatthismoneyisduetoDoCoMoandevendepositedthemoneywiththeDelhi
courtasa"gestureofgoodfaith,"butsaidtheycannotpayuntilafurtherIndianrulingisobtained.
DoCoMohascalledthedepositalipservice.Aswhilepresentingtothearbitrationcourt,theymaintaintherearemanywaysfortheTata
grouptoworkaroundthematter.

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Thecontentionstoodonarticle5.7.2oftheTataandDoCoMocontract,thatsaysTata"shall"findabuyeror"shall"buythesharesor
provide"indemnity"payasprotectionagainstlosstoDoCoMoshoulditnotmeetcertainparametersofbusiness.In2014ithadnotmet
theprofitabilitytargets,butmetsubscriberadditionandtelecomtowertargets,whenDoCoMoexerciseditsrighttoexitthejointventure.
AtthetimetheTatagroupinformedDoCoMothatitwillneedRBIapprovalisamustformakingsuchabigforeignexchangetransfer.
DoCoMobelievedandstilldoesthattherearealternateroutesavailableforpayments.Tatasonlyfocussedonfindinganoverseasbuyer.
ApartfromIndianoperations,Tatagroupcompanieshaveassetsworldoversofundsfromthoseoffshoreentitiescouldhavebeen
deployedtobuyoutDoCoMo,saidtheJapanesecompanyinatimelinementionedonthearbitrationaward.
Foritspart,thearbitrationpanelsetasidetheRBIrequirementandinsistedonhonouringthecontractwhilerulinginfavourofDoCoMo.
EvenJusticeLordHoffman,Tata'snomineeonthearbitrationpanel,concludedthatTata'scommitmentwasbindingbecausetherewasan
optiontofindabuyer,accordingtoapartnerataleadinglawfirm."Heisanauthorityoncontractuallaw.Nooneinanyinternationalcourt
willgoagainstwhathehasdecided."
"IthinkeventuallytheSupremeCourtwillgrantenforcementoftheaward,"saidHirooAdvani,foundingpartnerofAdvani&Coand
eminentarbitrationlawyer."IfIndiadoesn'tenforceanaward,itwouldamounttoappropriationandthenproceedingscanbeinitiated
againstIndiaunderbilateraltreatiesforunfairtreatmentofforeigners."IndiaisasignatoryoftheNewYorkconventionofarbitrationthat
makeshonouringanawardanimperative.
AlegalexpertfamiliarwithTata'sperspectivesaidthegroupwillnowargueforapolicyexemption,aclausebuiltintothesameNY
conventionthatallowsacountry'scourttoturndownaninternationalawardiftheawardconflictswith"publicpolicy."TheSupremeCourt
in1993ruledthatFERA,whichwastheprevailingRBIpolicyonforeignexchange,wastantamounttopublicpolicy,andtherefore
overturnedaninternationalawardintheRenuSagarversusGeneralElectriccase.
AnotherlawyerconcurringwiththeTataviewpointedattheIndiabullsFinancialServicecaseagainstAmaprop,inwhichtheDelhiHigh
CourtJudgetoyedwiththeideaofoverturningtheaward,forcingthepartiestosettleoutofcourtatfairvalueratherthananagreedprice.
DoCoMoisn'treadytobecaughtunawareseither.FouroutoffiveseniorlawyersnotappointedonthecaseandinterviewedbyET,on
conditionofanonymity,holdtheviewthattheTataDoCoMoawarddoesn'tcomeunderapolicyexemption.
Theypointoutthatthereareotherwaysofpaying.Forone,overseasunitscouldbeusedforpayouts,althoughtheTatassaythemoveis
illegal.Foranother,dilutionofsharescouldbepursued.TataSonsandothergroupcompanieswhichtogetherownaround60.75%inTata
TeleservicescouldhaveissuedbonussharesorarightsissueatpartoallowDoCoMotosubstantiallyhikeitsshareholdingandbring
downitsaverageacquisitioncosts.TheTatascouldthereafterhaveboughtthemoutentirely,accordingtothem.

SourcesclosetoDoCoMohavesaidtherepresentationtoRBIaftertheawardhadbeengrantedwasunilateralandmisrepresented.Tata
refutesthat,thecompanysaysateveryoccasionithascommunicatedandsoughtparticipationofDoCoMo.
"Thisisnotanawardforpurchaseofshares,"explainedasourcefamiliarwithDocomo'sviewpoint,"butanawardfordamagesforbreach
ofcontractualobligation.Tataspromisedsomethingandtheshareholderagreementwasdraftedaccordinglyandnowtheycannotrenege
onthat.ThepermissionfromRBIshouldbeforthatcommitmentobligationonly."
InacaseonafamilydisputeamongtheHiranandanis'aleadingMumbaibasedrealestatedeveloperfamilyRBIhadallowedpayment
ofRs300croreasindemnity,inasituationsimilartothatofDoCoMo,alawyersaid.
DoCoMowillleavenostonesunturned,saidpeoplefamiliarwiththecase.ThecompanyhasalreadyfiledintheLondonCourtofJusticeto
enforcetheaward.Theretheysay,ithasidentifiedassetsonwhichitmay"liftthecorporateveil"anddemonstratethosecompanies
belongtoTataSons,eventhoughtheyareheldthroughothergroupcompanies.
NewsreportshadsuggestedthatassetslikeJaguarLandRoverorTataSteelcouldbeattached,whichbothsidesagreemaybedifficult,
beingpartofseparatelylistedcompanies.Japan'sNikkeisaysDocomomightalsoaskaUScourttoseizeTataassets
"Ifanycompanyfailstohonouranaward,thesuccessfulpartywillhaveanopportunitytoenforcetheawardinallthe152signatory
countriesthatarepartytotheNewYorkConventionincludingcountriesUKandUS.Totheextenttheunsuccessfulpartyhasassetsin
thosejuridistictions,thenthecounterpartycanenforceagainstthoseassetsinthosecountries,"saysSingaporebasedNishShetty,
SingaporebasedPartnerCliffordChanceAsia,aspecialistindisputeresolutionandinternationalarbitration.
ButthepersonfamiliarwithTataperspectivequotedearliersaid,TataSonsisaseparatelegalentity.TataSonshasaminority
shareholdinginTataMotorsinIndiawhichinturnownsJaguarLandRover.SimilarlyTataSonshasaminorityshareholdinginTataSteel
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inIndiawhichinturnownsTataSteelEuropeviathroughSingaporeandNetherlandsarms."TheUKassetsofTataSteelandJaguarLand
RoverarenotownedbyTataSons.ThesearesubsidiariesofIndianpubliclistedcompaniesofwhichTataSonsisapromoterwitha
minorityshareholdingofnotmorethan30%to35%.Theseoverseasentitiesareseparatecorporatepersonalitieswhichlegalprincipleis
internationallyrecognized.Thesecompaniesarenotpartytothearbitrationproceedings,andnoawardhasbeenissuedagainstthem.It
followsthattheawardcannotbeenforcedagainstthosecompanies,"heexplainedfurther.
NTTDoCoMoisfurtherjadedbecauseduringthecourseofdiscussions,itfeltthatTatakeptissuingultimatum.Fromtherecordsinthe
arbitrationaward,DoCoMobelievesthatTataattempttoappointStandardCharteredBankasasellsideinvestmentbankerthatreportedly
approached17potentialbuyers,noneofwhomcamethrough"wasselfserving."
"Ifwedonotreceiveacommunicationfromyourendindicatingyourwillingnesstotransferthesalesharesontheaboveterms(fairvalue
foundbyPwC)within15daysfromthisletter,TSLwillapplytoRBIforaspecialpermissiontopayavalueofRs58.045asharetoNTT
DoCoMoinconsiderationofpurchaseofthesalesharesbyTSL,"readaletterfromTatatoDoCoMo,afteracoupleoflettersfromthe
othersideaskingTatatoexplorealternateroutes.Theawardtalksofasetofalternateswithoutelaboratingthem,allofwhichwere
rejectedbytheTatagroup,apersonquotedearliersaid.
DoCoMohasalsosuggestedthatTatamanipulatedtheoutcomefromtheFinanceMinistryafterRBIapprovedtheexemptiontogivefull
exittotheJapanese.
ThemootpointnowiswilltheDelhiHighCourtwilltakenoteofthearbitrationpanel'slackofdecisiononFEMA"TheTribunalexpresses
noviewonthequestionwhetherornotspecialpermissionoftheRBIisrequiredbeforeTatacanperformitsobligationtopayDoCoMo
damagesinsatisfactionofthisAward."OritwillupholdthearbitrationawardandasktheTatastotopayandfindanappropriaterouteto
dosobecausethecontractisbinding.TherulingwillnotonlyimpacttheTataDoCoMostrugglebutalsotheoverallbusinesssentimentin
India.
"Theawardisnotanindictmentofgovernmentpolicies,buthighlightstheuncertaintiesthatbusinessesoperatinginIndiaareconfronted
with,"saysTonyNash,CEOofdataanalyticsfirmCompleteIntelligence."HowmuchcontroldoesevenlargeconglomerateslikeTatas
haveoverchangingpolicyenvironmentinIndiaisthebiggestconcernforglobalinvestors."
AdditionalreportingbyDeepshikhaSikarwarinNewDelhi
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