DoCoMo woes challenge India reform rhetoric

When the Japanese telco spent $2.2 billion on a 26.5 per cent stake in Tata Teleservices Limited in 2009, it built downside protection into the deal.

DoCoMo had an agreement that it could sell its shares for 50 per cent of the acquisition price or the fair market value, whichever was higher.

A rule change last year prevents foreign investors from selling stakes in Indian firms at a pre-determined price

India wants to attract more foreign capital but appears reluctant to do what it needs to reassure weary investors. That’s the message sent by the Reserve Bank of India’s refusal to allow conglomerate Tata Sons to buy NTT DoCoMo out of their underperforming telecoms joint venture for $1.1 billion.

When the Japanese telco spent $2.2 billion on a 26.5 per cent stake in Tata Teleservices Limited in 2009, it built downside protection into the deal. DoCoMo had an agreement that it could sell its shares for 50 per cent of the acquisition price or the fair market value, whichever was higher. A rule change last year prevents foreign investors from selling stakes in Indian firms at a pre-determined price. The decision effectively rendered DoCoMo’s agreement void and more than halved the amount it stood to receive.

Nevertheless, the rebuff is a surprise. Tata and DoCoMo are agreed on a solution. Moreover, a memo from the RBI to the Finance Ministry in December indicated that it would be ‘inclined to accept’ Tata’s proposal after the domestic company failed to find another buyer. The central bank cited the importance of allowing investors to negotiate safeguards as well as Japan’s large foreign investment commitment to India.

DoCoMo is not alone. The government’s reluctance to scrap or make exceptions to highly controversial rules has similarly caught out Cairn Energy. The London-listed oil explorer was this month slapped with a $1.6 billion retrospective tax demand relating to an internal reorganisation ahead of the listing of its Indian operations in 2007. The demand seemed at odds with Prime Minister Narendra Modi’s campaign pledge to end ‘tax terrorism’.

Bureaucrats may see international arbitration as a way to give foreign companies a good chance of getting what they want without the government exhausting political capital that it needs to fight other big battles. If that’s the case, foreign companies in India should continue to expect a disconnect between reform rhetoric and reality when it comes to solving their problems.