The Docomo Saga: RBI Says No to Big Tata Payment, Deal Hit By Archaic FEMA Rules

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The RBI refused to allow a dispute between Tata and NTT Docomo to be settled, by objecting to the terms of the deal in the Delhi High Court. But what really happened?

Tata Docomo

In 2014, Docomo decided it wanted out of the Tata-Docomo partnership that was part of the listed Tata Teleservices Limited entity. It has put in $2 billion for a 26% stake in 2009, and the deal then was that Tata would buy out Docomo’s stake for at least 50% of the investment, if things didn’t work out.

Well, things didn’t.

And now Tata was liable to pay. Docomo had paid Rs. 117 per share, and a sum of Rs. 12,740 cr. was paid. They wanted Tata to pay Rs. 58 a share back. But the problem really was that Tata Teleservices (listed as TTML) was trading at less than half of that value.

FEMA rules state that foreign equity investments cannot even be partially guaranteed, otherwise they become some sort of debt. RBI said look, we can’t allow Tata to pay according to an agreement because it amounts to a partial guarantee. RBI is the keeper of FEMA rules and it’s a little antsy about them.

Docomo went to a court in London. And the London court said to Tata that you have to pay up. They were told to pay $1.2 billion to buyout the Docomo stake.

The problem? That still amounts to what seems like over 75 rupees per share at today’s dollar-rupee rate. That’s way higher than the Rs. 8 the stock trades at now, or the Rs. 23 the stock traded at when Docomo wanted to exit.

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And FEMA doesn’t allow that. A foreign investor can’t really be paid a much higher value for his shares just because they wrote that in the contract. Such a contract amounts to a guarantee. And a guarantee is debt, not equity. Foreign debt is super-restricted and goes through other kinds of approval processes, which didn’t happen in this case because it was shown as equity.

The case is in the Delhi high court and the situation is:

  • Docomo wants to get the $1.2 billion to transfer shares
  • Tata is willing to pay (and has deposited the amount with the Delhi High Court)
  • RBI doesn’t want Tata to pay, and says the original contract is void because it’s effectively debt.
  • Tata Teleservices’ price is now Rs. 8 per share. For Docomo, there is no alternative buyer.

This will first require the Delhi High Court to rule that the original contract was valid (or invalid) based on the RBI stance. If it’s deemed valid, then RBI can challenge in the Supreme Court. If it’s deemed invalid, Tata/Docomo will go to the SC. Either ways there’s a long road ahead.

The Fix: Set FEMA Right

India really needs to stop mollycoddling corporate entities. FEMA rules about Debt and Equity are like this – invest in equity, and take all the risk. Or give Indian corporates debt under more rules (where the end-use is limited, and needs all sorts of approvals).

These rules are primarily about the fear that ooh, the precious Indian foreign reserves will go away. It’s a different world today. Flows will go if they have to go. Gating them using silly old-fashioned rules will not help.

Still, doing it only for Tata-Docomo is of little use. That would just be favouritism. The better thing would be to allow all such contracts, no matter what, and no matter when such contracts were made. If there are dollar outflows because of that, so be it. We should remove FEMA and keep something less fearful.

RBI shouldn’t have to be the gatekeeper for all foreign investments, honestly. And this transaction, which has taken three years in courts already, is going to hurt in just the perception that in India, things get delayed forever. But systematic change will happen only in a crisis, it seems.