On 29 July, Tata Sons deposited $1.17 billion in fixed deposits favouring the Delhi High Court registrar. The amount is towards an arbitral award after Tata lost against NTT DoCoMo in the the London Court of International Arbitration. DoCoMo is seeking enforcement of that arbitral award in India and approached the Delhi High Court for the same.
Currently Tata Sons has coughed up the money, but seven other group companies will also end up footing the bill. Of the seven, Tata Communications Ltd. (it has reported losses in five of the past seven years) will have to pay up to Rs 1,055 crore, while Tata Power will pay up to Rs 781 crore.
In 2009, Tata Sons and seven other Tata group companies including Tata Communications and Tata Power, together sold a 5.5 percent stake in Tata Teleservices Ltd. (TTSL) to NTT at Rs 116.09 per share, raising nearly Rs 2,700 crore from this secondary sale of shares. NTT acquired an additional 20 percent stake in TTSL by subscribing to new shares.
Tata Comm sold 3,65,42,378 shares or 0.87 percent for Rs 424.2 crore, Tata Power sold 71,13,60,000 shares or 0.65 percent in TTSL, as part of that secondary sale to NTT.
That same year, Tata Communications and Tata Power along with the five other Tata companies entered into an ‘inter-se’ agreement with Tata Sons. According to the agreement, in the event that NTT exercised a sale option to exit the TTSL investment, Tata Communications and Tata Power would acquire the shares held by NTT, in the same proportion as the shares it sold to NTT. This information was disclosed in the 2014-15 annual reports of the two companies.
On 7 July 2014, five years after it first invested in TTSL, NTT decided to exit and exercised the ‘sale option’. The option gave NTT the right to sell TTSL shares back to Tata Sons and the seven Tata group companies at 50 percent of the acquisition value or the fair market value, whichever was higher.
On 30 June 2014, the fair market value of TTSL stood at Rs 23.34 per share, much less than 50 percent of the acquisition price or Rs 58.05 per share. Tata Sons agreed to buy NTT’s stake in TTSL at Rs 58.05 per share and sought the permission of the Reserve Bank of India (RBI). At the time RBI regulation did not permit an Indian promoter to buyback, from foreign investors, shares in an unlisted Indian company at pre-determined prices. Any such buyback was only permitted at fair market value.
RBI did not permit the transaction unless it was done at fair market value. Since Tata Sons could not honour the sale option, NTT approached the London Court of International Arbitration and last week it won. The arbitral award orders Tata Sons to pay NTT $1.17 billion, the same amount NTT claimed as owed to it on exercising the sale option.
Tata Communications and Tata Power are likely to have a combined liability of Rs 1,827 crore.
Tata Communications’ 2015-16 annual report does not disclose the amount it may have to pay, to buy back the TTSL shares from NTT, but it does reveal the number of shares to be purchased.
“The Company is required to acquire shares, in the range of 15,83,50,304 to 18,02,80,389, of Tata Teleservices Limited in accordance with the terms of the inter-se agreement,” the Tata Communications Annual Report, 2015-16, says.
Assuming that the Tata group companies pay NTT the same price as determined by the sale option, that is Rs 58.05 per share, Tata Communications will have to pay between between Rs 926.34 and 1,054.64 crore to purchase TTSL shares.
Tata Power is yet to release its annual report for 2015-16. But its 2014-15 annual report reveals the extent of the company’s liability in this matter.
“The company sold 2,72,82,177 shares of TTSL to DOCOMO at Rs 116.09 per share, resulting in a profit of Rs 255.62 crore. As per the inter-se agreement the company is obliged to acquire 13,45,95,551 shares of TTSL in a similar proportion in the event the Sale Option is exercised by DOCOMO,” the annual report says.
Based on that disclosure and using the same price assumption, Tata Power will have to pay Rs 781 crore to purchase shares from NTT.
Tata Communications and Tata Power, did not respond to an email query, and their spokespersons were not reachable on telephone.
Even though Tata Communications and Tata Power have disclosed the obligation to acquire shares of TTSL, neither have made any specific provision for it in the FY16 full year earnings.
But it is also not clear if any of the Tata companies will be able to honour this arbitral award, due to foreign exchange regulations. The Delhi High Court has given both Tata Sons and DoCoMo up to 30 August 2016 to resolve the issue. But, to do so they will need permission from RBI and the finance ministry. And the central bank and the finance ministry will either have to change the existing policy on buyback of equity from foreign investors or make an exception for the Tata-NTT matter.