The Delhi high court on Wednesday is going to continue hearing Docomo’s plea seeking enforcement of a $1.17 billion arbitral award against Tata Sons. The Delhi high court verdict will have far-reaching implications not only for the stakeholders in the case, but on how India treats foreign investment and rules on tax laws.
Mint brings you an FAQ on the dispute:
What is the Tata DoCoMo fight about?
In the most basic terms, it’s how much money Docomo gets to exit its investment in a joint venture with the Tatas. In March 2009, the Japanese telecom firm bought a 26.5% in Tata Teleservices for $2.6 billion.
The shareholder’s agreement it signed with the Tatas had a put option. That gave the Japanese firm the right to sell its stake at “fair value”, or half the acquisition price, whichever is higher.
With the venture not being much profitable, in July 2014, Docomo told the Tatas it wanted to exit the investment. It exercised its put options and asked for Rs7,250 crore for its stake (half of the original acquisition price).
Did the Tatas refuse to pay?
Not exactly. It would be more correct to say they couldn’t pay.
What happened was this: In January 2014, the Reserve Bank of India (RBI) came with new norms that specified that foreign companies can only exit investments at a valuation based on the return on equity.
While neither Tata nor Docomo has specified what the sale price would be when RBI norms are applied, it is likely to be much lower than what Docomo had paid in 2009.
Thus, when Tata Sons applied to RBI to buy back Docomo’s stake at Rs58.5 a share (half of the Rs17 which the latter had paid in 2009), the central bank turned it down.
What did Docomo do?
In January 2015, DoCoMo filed suit at the London Court of International Arbitration (LCIA). By June 2016, this London court ordered Tata Sons to pay $1.17 billion to Docomo for breach of contract and asked Docomo to give back its Tata Teleservices shares to Tata Sons.
So, now the Tatas have to pay?
Again the Tatas applied to the Reserve Bank of India for permission. The central bank’s answer too was the same. Mint has reviewed a copy of RBI’s rejection. It seems to have been based on the fact that the London award looked like enforcement of the original contract (pay money, transfer shares) and the London court didn’t consider Indian law.
What happened next?
Docomo submitted that order to the Delhi high court and asked it to enforce the award. That’s what Wednesday’s hearing is all about.
Simultaneously, it had approached London’s Commercial Court seeking enforcement action assets such as Jaguar LandRover and Tata Steel, which it argued, are controlled by Tata Sons. The latter has disputed Docomo’s assertion and said Tata Sons is a promoter with a minority shareholding of not more than 30% to 35%. The London Court had allowed Docomo to enforce the order, but Tata Sons has filed an application.
Tata Sons deposited $1.17 billion with the Delhi high court, saying it’s willing to pay if Indian law permits. However, it has also filed an affidavit saying the London arbitration award contravenes Indian laws, which Docomo says “directly contradicts its statements of intent to meet its payment obligations”.
Why is this case important?
The Delhi high court verdict will set a precedent on how such cases relating to foreign investors exercising put options are treated. As the Economic Times reported last month, the hearing has the potential to many other cases including those involving 3i private equity, Krishnapatnam Ports, Navyuga Engineeringing, GMR Airports, JM Financial, Macquarie, and Standard Chartered Private Equity. It might also force a policy rethink on part of regulators.
What do legal experts say?
One key point that is emerging is why RBI should have a say in the enforcement of an arbitral award.
“It’s perplexing what the role of RBI is now that there’s an arbitral award. It is for the court to test if the award is contrary to the fundamental policy of India. Mere violation of an RBI regulation may not be enough. The culture of the courts being more hands-off in relation to awards is still emerging. We need to be there for the international investor community to feel secure. There have been lots of reforms in the law, some driven by the Supreme Court. This will be a test case,” said Sitesh Mukherjee, national head of the disputes practice group at Trilegal, a law firm.
Shreeja Sen in Delhi contributed to this story