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Docomo plans foreclosure action against Tata Sons

The relations between former partners NTT DoCoMo and Tata Sons seem to have touched a new low. The Japanese company is threatening to foreclose Tata Sons’ assets if the Tatas fail to honour its commitment to buy back its 26.5% stake in Tata Teleservices. DoCoMo also moved the London Court of International Arbitration on Saturday against Tata Sons for its failure to honour the buyback agreement.

In a statement on Monday, DoCoMo said the foreclosure action with respect to the assets of Tata Sons could be taken by a court in India, after a ruling is made by the London Court of International Arbitration. DoCoMo was reacting to a statement by its spokesperson who said “in the worst case scenario, if the agreement is not followed through, a foreclosure is a possibility.”

DoCoMo paid $ 2.22 billion for 26.5% of Tata Teleservices in 2009 and as per the agreement, the Tata group,  which owns 65% stake in Tata Tele, were to buy back the stake at least at half the valuation or at fair market price – whichever is higher than DoCoMo’s purchase price. The option was to trigger if Tata Teleservices failed to meet performance targets.

DoCoMo decided to exit in April 2014 after Tata Teleservices reported a record loss of Rs 6,166 crore on revenues of Rs 10,452 crore for the fiscal 2014.  The company had reported a loss of Rs 4,858 crore in the fiscal 2013 on revenues of Rs 10,770 crore even as its net worth eroded by Rs 1800-crore in FY 2013.

DoCoMo then exercised its right (option) in July 7 to request that a suitable buyer be found to purchase  its stake and gave Tata Sons 90 business days to find a buyer for Rs 7,250 crore ($ 1.15 billion) or fair market price. As a buyer was not found by December 3 by the Tatas, DoCoMo filed an arbitration request on January 3 with the London Court of International Arbitration to ensure the stake is sold.

“Pursuant to the shareholders agreement, DoCoMo submitted its request for arbitration to ensure that its right be exercised after Tata Sons had failed to fulfill its obligation, despite DoCoMo’s repeated negotiations with Tata Sons regarding the sale of its entire stake in TTSL,” a statement by DoCoMo said.

When contacted, a Tata group spokesperson said: “From the outset, Tata Sons has been committed to honouring its obligations to DoCoMo, and has taken every possible step keeping in mind the interests of all stakeholders and in accordance with law. Tata Sons has made the necessary application to the Reserve Bank of India, and is awaiting a response. Tata Sons will continue with its endeavour to find an amicable solution.”

Legal sources say the hurdle is a Reserve Bank of India rule that says a put option, when exercised, should be based on the prevailing return on equity at the time the option is exercised and not based on a pre-determined valuation. The Tata-DoCoMo agreement pre-fixed the buy back price, hence it’s not as per the RBI’s norms. A DoCoMo spokesperson did not reply to the mail seeking comments on the RBI’s objection.

Both Tatas and DoCoMo have already set up a legal team to look into the valuation issues. While the Tatas have hired Amarchand Mangaldas, Tata DoCoMo is represented by Khaitan & Co.

Telecom analysts say the losses by Tata Teleservices show the difficult conditions faced by Indian telecom operators in the past few years owing to the spectrum mess, which resulted in many telecom companies losing billions of dollars of investment. DoCoMo wants an early transaction as with every passing day, the valuation of Tata Tele is falling as its licenses will expire in the next few years.

While briefing analysts on April 25 last year, DoCoMo executives had  said the reason why they pulled the plug on India was the spectrum mess. “We thought things were moving very, very smoothly in the beginning… but the spectrum administration in India was so confusing and was beyond our expectation and totally unpredictable.”

Tata Teleservices’ spectrum in three circles was taken back after the Supreme Court in February 2012 cancelled 122 licences handed out in 2008-09 when A Raja was the telecom minister.  In the all-important circle of Delhi, the company was never allotted spectrum, in spite of having paid for it. “Tata (Teleservices) is struggling today to make a profitable business,” the DoCoMo executive had told analysts.

Meanwhile, Tata Sons has already spent Rs 2,480 crore in early 2014 in Tata Teleservices to help the company pre-pay its loans to the financial institutions. It has also promised to spend another Rs 2,000 crore in the next two years to the banks. The Tatas even started talks with other players for a merger including with Telenor but it did not result in any success so far.

DoCoMo-Tata Teleservices’ stormy affair

* March 2009: NTT Docomo buys 26.5% stake in Tata Tele for $ 2.22 bn

* April 2014: Docomo announces plan to exit loss-making Tata Tele

* July 2014: Docomo asks Tata to find a buyer for its stake valued at Rs 7,200 cr

* December 2014: Tatas fail to find a buyer for Docomo stake within 90 days

* January 2015:  Docomo moves London court of arbitration, threatens to foreclose Tata Sons assets

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