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RBI Seeks To Be Heard In Tata-Docomo Case

The RBI’s plea before the Delhi High Court was objected to by NTT Docomo.

Traffic moves past an advertisement for Tata DoCoMo (Photographer: Dhiraj Singh/Bloomberg)  
Traffic moves past an advertisement for Tata DoCoMo (Photographer: Dhiraj Singh/Bloomberg)  

The Reserve Bank of India approached the Delhi High Court on Wednesday seeking to be heard in the 2009 NTT Docomo versus Tata Sons case, and has been asked to file an application on the same.

Docomo in an affidavit filed before the Delhi High Court – which has been accessed by BloombergQuint – claimed that Tata Sons does not require permission from the RBI for enforcement of the London Court of International Arbitration's (LCIA) arbitral award. The matter dates back to 2014 when Docomo decided to exit its 26 percent stake in its joint venture with Tata Sons – Tata Teleservices Ltd. At the heart of the dispute is the price at which Docomo could exit its investment. Since Docomo and Tata Sons could not agree on the exit price, the Japanese mobile carrier moved the LCIA in January 2015. The LCIA ruled in Docomo's favour and directed Tata Sons to pay $1.17 billion for breach of contract.

The Tata Sons’ position is that it is not permitted to pay the amount as per the arbitral award, in the absence of regulatory approval from the RBI.

Subsequent to the LCIA award, Tata Sons wrote to the RBI on July 1, 2016 seeking permission to pay Docomo damages as directed by the tribunal, the company said in its affidavit filed before the Delhi High Court last month. As per the affidavit, the RBI had responded to Tata Sons in the negative saying, “…Tribunal has not decided on the contested issue arising out of FEMA Regulations. Thus, it is clear that LCIA is also cognizant of the fact that the SHA (shareholders agreement) was structured in such a manner that its compliance would entail contravening the provisions of FEMA.”

The Foreign Exchange Management Act (FEMA) provisions referred to by the RBI do not permit an Indian promoter to buy back shares in an unlisted Indian company at pre-determined prices from foreign investors. Any such buyback is only permitted at fair market value.

On Wednesday, Docomo argued in court that RBI incorrectly concluded that payment of damages under the award would amount to violation of FEMA rules.

Failure to obtain RBI permission does not excuse contractual performance nor can it prevent enforcement of an award.
Docomo’s affidavit in Delhi High Court

Docomo also stated that the RBI had not taken into account the LCIA’s arbitral award.

Docomo told the court that FEMA regulations permit Tata Sons to transfer shares to a non-resident buyer and Docomo is entitled to receive the present sale price of shares as per the contract even if it is higher than the market value.

The high court will consider Tata and Docomo’s arguments on enforcement of the arbitral award during the next date of hearing on October 1.

In 2009, Docomo acquired 26 percent stake in the Tata Group-owned Tata Teleservices. When TTSL failed to meet key performance indicators as envisaged in the shareholders’ agreement, the Japanese telecom major exercised an exit clause that gave NTT the right to sell its TTSL shares back to Tata Sons at 50 percent of the acquisition value or the fair market value, whichever was higher.

In July 2014, when Docomo exercised the option, 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. So Docomo demanded Rs 58.05 per share. But Reserve Bank of India (RBI) and regulations under the Foreign Exchange Management Act (FEMA) do not permit guaranteed returns on such an equity investment. And so Tata Sons claimed it could neither pay that price nor had it found a buyer that was willing to pay over twice the fair market value.

After Docomo failed to get an exit as contemplated under the shareholders’ agreement, it invoked the dispute resolution clause and moved the London Court of International Arbitration (LCIA) on January 3, 2015.