The unceremonious ouster of Cyrus Mistry as the Chairman of the Tata group has everyone speculating about the reasons behind the move. The most common ones being cited are lack of vision, sale of Tata Steel assets and the manner in which the dispute with NTT Docomo over the stake-sale in Tata Teleservices was managed.
Here we dwell on the nitty-gritty of the Tata Docomo skirmish to examine if Cyrus Mistry could have handled it any differently.
The background
NTT Docomo had acquired 26.5 per cent stake in Tata Teleservices Ltd (TTSL) between 2009 and 2011 for ₹13,070 crore. The two companies signed a deal in 2009, which gave Docomo the option to sell its entire stake in TTSL by December 2014. Tatas had to find a buyer for these shares, else they had to buy them back from the Japanese company at half the amount invested — ₹7,250 crore.
The Japanese company decided to exit the joint venture in April 2014. Since a buyer could not be found for these shares, Tata Sons had to buy them at ₹58.05 a share, according to the 2009 agreement.
The catch
The Tatas had not been opposed to meeting its contractual obligation. But the deal got stalled because the company could not obtain permission from the Reserve Bank of India for the share buy-back. This was because the RBI had barred the inclusion of put options (that gave the buyer the option to sell the shares at a defined price in future) in FDI deals. It was held that inclusion of these made the overseas investor get a fixed return after a period, and hence qualified as external commercial borrowing, and not as FDI.
The Central Bank gave some leeway to foreign investors in 2014 by allowing share buy-backs in FDI, but these had to take place at fair value as determined by the stock market price or other specified financial metrics such as the return on equity as per the latest audited balance sheet.
The value of shares of TTSL, as valued by an independent consultant, was ₹23.34 a share when NTT Docomo divested its stake. This was therefore almost half of the value that was due as per the original deal.
The RBI relented in 2015 and agreed to the buy-back as per the original deal in 2015, but the Centre has held on to its stance that the buy-back should take place at fair value only.
International arbitration
NTT Docomo went on to seek international arbitration in the matter and in June this year, the London Court of International Arbitration ruled that Tata Sons should pay $1.17 billion to NTT Docomo, as the commercial agreement was valid when the deal was signed. Tata Sons, however, continues to wring its hands at its inability to do as per the ruling, as Indian laws and policies forbid it to do so.
The ball is now in the Delhi High Court, with both parties presenting their cases here. The Tatas have deposited the amount under dispute with the High Court and the next hearing in the case is scheduled in the first week of December.
Docomo has, meanwhile, tried to enforce the LCIA’s judgement in the US District Court for Southern District of New York. “The decision of the LCIA (London Court of International Arbitration) that Tata has breached its commercial agreement and owes Docomo $1.2 billion in damages is enforceable in any country, which is a signatory to the New York Convention, including the United States. Until Docomo receives the full amount due, it will continue to seek enforcement globally,” said a statement from the Japanese company.
Cyrus’ role
As the dispute drags on, there is little that Tata Sons or Cyrus Mistry can do to sort out this tangle. Since this is an FDI, any deal between the two parties would require clearances from the government as well as the central bank. With the price at which the deal has to be done, also specified under the law, Tata Sons has little room to manoeuvre. It is therefore only fair that Cyrus Mistry is absolved from the blame that he botched up this settlement.