SKP | Business Alerts
16 January 2015 | Volume 6 Issue 9

RBI allows the Tata Group to pay DOCOMO previously agreed price 

Transfer of shares from non-resident to resident - At what price?
In a recent development, the Reserve Bank of India (RBI or Central Bank) allowed the Tata Group to buy out its stake from its Japanese partner in their telecom joint venture at a price which is greater than the 'Fair Value' price as mandated in the Pricing Guidelines issued by RBI. The Central Bank has in turn referred this matter to the Department of Economic Affairs and the final call on this issue will be based on the Government's perspective. This is a positive sign for foreign investors at a time when the Government is looking to attract foreign investments.

NTT DoCoMo had invested INR 145 billion for 26% stake in Tata DOCOMO, a joint venture with the Tata Group. According to the initial agreement signed between the Tata Group and NTT DOCOMO in 2008-09, 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.

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 a non-resident 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 agreed to. Further, the market price would correspond to the valuation offered by a strategic investor and the Tata Group were unable to find one.

The point to drive home is that RBI has allowed the Tata Group to buy out its Japanese partner's stake at a price more than the 'Fair Value' price which contradicts the current regulations. Under the current regulations, transfer of shares from a non-resident to resident can take place at a price which is less than or equal to the 'Fair Value' derived as per the valuation exercise.

What is worthwhile to note here, is that there have been several changes in the pricing guidelines over the last few years. In April 2010, RBI had mandated that the valuation of unquoted securities should be carried out exclusively on the basis of Discounted Cash Flow (DCF). Later, in January 2014, it was further clarified that non-residents exercising the optionality clause to exit should do so on the basis of RoE. However, in July 2014, the RBI once again made amendments in the pricing norms and added more flexibility by mandating that valuation should be worked out according to any internationally accepted pricing methodology based on the arm's length principle.

This time, RBI's move points to the fact that although the transaction proposed was not strictly in accordance with the present rules, it is ready to demonstrate overall reasoning and fairness in such transactions.

Road ahead
It would be interesting to see how the regulatory regime in case of share valuation shapes up.  While RBI has made an exception for the Tata Group, how the policies will shape up for other transactions is yet to be discovered. Certainly, the final call will rest with the Government.

In case you have any questions or any need any further clarification regarding the update, please write to Anshuman Bhar at or Amit Jain at

[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 a 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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