SKP Valuation Alert
27 March 2015 | Volume 1 Issue 1
RBI rejects Tata Group's offer for DOCOMO's Teleservices stake

Back to square one?
In a recent development, the RBI rejected Tata Group's offer to buy out its stake from its Japanese partner at a price which is greater than the 'Fair Value' price as mandated in the Pricing Guidelines issued by the RBI. The said matter was earlier referred to the Finance Ministry in which the Ministry has asked the Central Bank to take the decision as per the current rule i.e. the price should be equal to or less than the 'Fair Value'. Read 

Background
Earlier in January 2015, the Central bank had referred the said matter to the Finance Ministry for its approval. NTT DOCOMO had invested INR 145 billion for 26% stake in Tata DOCOMO, a joint venture with the Tata Group in 2008-09. According to the initial agreement signed between the Tata Group and NTT DOCOMO, the Tata Group was to make sure that its partner received at least half the amount it invested in the joint venture (making DOCOMO eligible to lay claim to INR 72.5 billion) or higher of the market price of the share.

As per the joint venture agreement, the previously agreed price per share was INR 58.045 which is considerably higher than the 'Fair Value' determined as per the existing rules of INR 23.34.

According to news reports, the parties in the joint venture were involved in arbitration and were unable to arrive at an amicable settlement as the RBI rule had earlier mandated
[1] that non-resident investor exiting with optionality clauses must be on the basis of return on equity (RoE). Since Tata Teleservices has been reporting losses and its net worth is negative, this clause meant that DOCOMO would have to settle for much less than what it had signed for. Further, the market price would correspond to the valuation offered by a strategic investor and the Tata Group was unable to find one.

Road ahead
Now since the Central bank has rejected Tata Group's offer after the Finance Ministry had asked to 'stick to the rule', the situation between Tata Group and NTT DOCOMO is back to square one with both the parties now having to settle the matter in an international arbitration court as the Japanese telecom giant hopes to recover the previously agreed price for exiting the joint venture. It would be interesting to see the outcome of this arbitration vis-à-vis the current RBI regulations.

The Central bank previously decided to revisit this issue and opined that a swift solution to the matter would boost the investor confidence and thus the foreign inflows. However, with the government advising the Central bank to adhere to the rules, the aforesaid matter needs to be solved via international arbitration.

In case you have any questions or any need any further clarification regarding the update, please write to us at skp.valuation@skpgroup.com.
 
[1] Prior to 15 July 2014 notification, the pricing guidelines for exit from foreign direct investment with optionality clauses for the unlisted Indian companies mandates that the non-resident investor shall be eligible to exit from the investment in equity shares of the investee company at a price not exceeding that arrived at on the basis of Return on Equity (RoE) as per the latest audited balance sheet.

However, on 15 July 2014, the RBI revised the pricing guidelines and mandated that non-resident investor can exit at a price not exceeding that arrived at as per any internationally accepted pricing methodology on arm's length basis. It is not exactly clear on why the news report is referring to earlier pricing norms.

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