Tata Companies To Pay 146% to Buy Tata Teleservices Stake From NTT DOCOMO

NTT DOCOMO just added to the long list of challenges facing Cyrus Mistry, chairman of the $100 billion Tata Group. The group’s holding company Tata Sons recently lost a $1.17 billion arbitration case against NTT DOCOMO in the London Court of International Arbitration.

In 2009, Tata Sons and seven other Tata group companies together sold a 5.5 percent stake in Tata Teleservices Ltd. (TTSL) to NTT DOCOMO (NTT) at Rs 116.09 per share, raising nearly Rs 2,700 crore from this secondary sale of shares. NTT additionally acquired 20 percent stake by subscribing to new shares of TTSL.

That same year, the seven Tata companies entered into an ‘inter-se’ agreement with Tata Sons. According to the agreement, in the event that NTT exercised an option to exit the investment, these seven Tata companies would acquire the shares held by NTT in the same proportion as shares sold to NTT. This information was disclosed in the Tata Communications 2014-15 annual report.

NTT Sale Option

On July 7, 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 June 30, 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.

The Potential Liability

Will Tata Sons pay the entire $1.17 billion or share the burden with the seven other Tata group companies? When BloombergQuint emailed Tata Sons for a comment the company spokesperson said he was unable to share any details.

Tata Communications’ stock exchange filing, after the arbitral award was announced, was also scant in detail.

Tata Power made a similarly worded disclosure to the stock exchanges last week. But its 2014-15 annual report reveals the extent of the company’s liability in this matter.

BloombergQuint found a similar disclosure in Tata Steel’s annual report for 2014-15.

The disclosures made by Tata Steel and Tata Power in their annual reports and the ‘inter-se’ agreement signed between Tata Sons and the seven Tata companies in March 2009 indicate that the buyback ratio for all eight Tata companies is 4.93. That is, if a Tata company had sold 1 share to NTT in 2009, it would now have to buy back 4.93 shares from NTT.

BloombergQuint arrived at this ratio by dividing the shares to be acquired by Tata Steel with the shares sold by Tata Steel in 2009. That amounts to 4.933. The same calculation using information in Tata Power’s annual report yielded the same ratio.
Using this ratio, BloombergQuint estimated that Tata Communications will have to pay NTT Rs 1,046 crore, Tata Power will have to pay Rs 781 crore, Tata Industries will have pay Rs 537 crore and Tata Steel will have to pay Rs 150 crore. Obviously the biggest burden will fall on Tata Sons, it will have to pay NTT Rs 4,122 crore to acquire TTSL shares.

BloombergQuint sought to confirm this calculation, the ratio and payment amounts with Tata Sons, Tata Steel, Tata Power, Tata Communications and Tata Chemicals, but none of the companies responded to the questions. Tata Steel reiterated that it continues to be committed to its contractual obligation consistent with the law. Tata Sons too reiterated its earlier response.

The London Court for International Arbitration has ordered Tata Sons and its group companies to pay NTT Rs 7,250 crores for the 26 percent stake it holds in TTSL.
According to data compiled by BloombergQuint, Tata Sons will pay Rs 4122 crores and the seven other Tata companies will have to pay Rs 2,500 crore - that’s 146 percent more than the Rs 1,027 crore these companies received when they sold their TTSL stakes in 2009.

Provisions So Far

So far only a few Tata companies have provided for such a contingent liability. Tata Communications has provided Rs 39.86 crore in its 2014-15 balance sheet towards this dispute. Tata Power has provided for Rs 29.76 crore in its 2014-15 balance sheet. It’s not clear if the other Tata companies have made such provisions.

The Way Forward

But it is also not clear if any of the Tata companies will be able to honour this arbitral award. 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.