Mumbai: Tata Sons Ltd, the holding company of the Tata group, on Tuesday said the Reserve Bank of India (RBI) has denied its request to buy back a stake held by Japan-based NTT Docomo Inc. in Tata Teleservices Ltd at a premium to the fair value of the shares.

The RBI told Tata Sons that it cannot accede to the request because it was not in conformity with the Foreign Exchange Management Act (Fema), and advised that any such purchase of shares should be at the current fair value of the shares, a spokesperson for the company said.

With this, Tata Sons and DoCoMo have entered an arbitration phase to find a resolution.

“From the outset, Tata Sons has been committed to honouring its contractual obligations to Docomo, and has taken every possible step keeping in mind the interests of all stakeholders and in accordance with Indian law. Tata Sons had made an application to RBI for a special permission to pay Docomo, as per the shareholders agreement, a price that was higher than the current fair value of the Tata Teleservices shares," the spokesperson said.

“This issue will now have to be resolved in the arbitration between the parties. Steps towards initiating arbitration have been taken. We will not be able to comment further as the matter is sub-judice," the spokesperson added.

A person familiar with the development said Tata Sons had hired consulting firm PricewaterhouseCoopers to ascertain the fair value of shares of Tata Teleservices. While Tata Sons has arrived at an exit price of 58 a share, the consulting firm valued the stake at 23.34 a share, he said.

“Tata Sons expressed its willingness to buy shares at premium price and had written to the banking regulator seeking special dispensation," he said on condition of anonymity.

PricewaterhouseCoopers declined immediate comment.

On 5 January, NTT Docomo, a unit of Japan’s Nippon Telegraph and Telephone Corp., filed a request with a London court for arbitration against Tata Sons, claiming the latter had failed to fulfil its obligation to find a buyer for Docomo’s stake in Tata Teleservices.

In a filing with the Tokyo Stock Exchange, NTT Docomo said it had submitted a request for arbitration with Tata Sons, “pursuant to the shareholders agreement regarding the exercise of Docomo’s option to sell its stake in Tata Teleservices, a telecommunication service provider in India".

The arbitration has been sought under the London Court of International Arbitration.

“The agreement with Docomo says buyout either at fair market price or at 50% of the price at which Docomo bought, whichever is higher. Fair market price found lower than 50% of entry price. So Tata Sons has applied to acquire, as per agreement, at 50% of the price at which Docomo bought," the person quoted above said.

The RBI had written to the finance ministry seeking its comment before eventually denying permission to Tata Sons to pay a higher price.

At present, the regulations prevent foreign investors from selling stakes in Indian units at a pre-determined price.

Japan’s largest communications service provider entered India in March 2009 by acquiring 26.5% stake in Tata Teleservices for $2.7 billion after the Indian telco was granted a dual-technology licence that allowed CDMA-based operators to offer rival GSM-based services as well.

The deal with NTT Docomo required certain performance targets to be met at the end of every fiscal year, which Tata Teleservices has struggled to achieve as competition heated up in the world’s second largest telecom market.

The Japanese company had the option of raising its stake to 33% from its current 26.5% in Tata Teleservices after three years, but decided against it after the Tata Group company failed to hit the targets from the third year on. If NTT Docomo had exercised this option, it would have had the option of further increasing this stake to 49% after five years, on 31 March 2014.

Eventually, in April 2014, NTT Docomo decided to sell its entire 26.5% stake in Tata Teleservices, possibly at a big discount, and withdraw from the mobile telephony market in India.

“Under the terms of the shareholders agreement between Docomo, Tata Teleservices and Tata Sons, Docomo exercised on 7 July 2014 its right (option) to request that a suitable buyer be found to purchase its Tata Teleservices shares for 50% of the acquired price, amounting to 7,250 crore (or 125.4 billion yen), or a fair market price, whichever is higher," Docomo had said in its filing.

However, the financials of Tata Teleservices were weak, making it tough to find a buyer. According to Capitaline data, in the last 59 quarters, the company has posted a net profit only once, in the June 2010 quarter. As of September 2014, Tata Teleservices’ total standalone debt was 6,116.27 crore.

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