NTT Docomo Inc., which plans to sell its stake in Tata Teleservices Ltd., may get less than 50 percent of its acquisition price because of mounting losses and debt at the closely held Indian carrier.
The sale price guaranteed under the purchase contract may be far higher than what Indian laws permit, and that may prompt NTT Docomo to settle for less, said Sandeep Parekh, a former official at India’s markets regulator. The fair market value of the Mumbai-based carrier, as calculated by Indian laws, may have been dented by losses of about $1.4 billion accumulated since April 2012, according to Parekh.
Japan’s largest wireless operator, which paid $2.6 billion in 2009 and 2011 for the 26.5 percent stake in the Mumbai-based carrier, said on April 25 that while it hasn’t decided on the selling price, it expects 50 percent of the purchase value assured under the deal. It also said there’s a risk the agreement between the two companies may not pass muster under Indian laws.
“Whatever is the fair market value, that will be paid,” said Parekh, a former executive director of enforcement at the Securities and Exchange Board of India and founder of Mumbai-based Finsec Law Advisors. “In this case, it will likely be less than the 50 percent of their acquisition price.”
Many Indian carriers are grappling with debt and losses as competition reduced tariffs to as low as less than 1 cent a minute, while spectrum fees for second- and third-generation networks piled on debt. Docomo is seeking an exit from a highly price competitive market that has left the country’s leader Bharti Airtel Ltd. with about $9.3 billion in net debt and shrunk its net profit by almost 75 percent since 2010.
Tata Teleservices, the nation’s seventh-largest operator, reported a net loss of 34.9 billion rupees ($576 million) in the nine months through Dec. 31, according to data provided by Crisil Ltd., the Indian unit of Standard & Poor’s. It had a loss of 48.58 billion rupees in the financial year prior to that. Debt stood at 315 billion rupees as of Dec. 31.
The unit of Cyrus Mistry-controlled Tata Sons Ltd. remains “highly leveraged” even after an equity infusion of 24 billion rupees by the parent in January, Crisil wrote in a report dated March 28.
Law of Land
According to the shareholders agreement between NTT Docomo and the Tata Group, the Japanese company has the right to sell its stake at 50 percent of the acquisition price, which amounted to 72.5 billion rupees or the fair market price, whichever is higher if the Indian firm fails to achieve specified performance targets.
An international firm can exit its investment at a valuation “not exceeding that arrived at on the basis of Return on Equity (RoE)” according to Reserve Bank of India guidelines on January 9.
“Any contract between companies will not hold if it runs counter to the law of the land,” said Christopher Krishnamoorthy, Associate Partner at Mumbai-based Majmudar & Partners. “The contract will be void to that extent.”
Tata Sons is “cognizant of its responsibilities and will act keeping in mind the interests of all stakeholders and in accordance with law,” it said in a statement on April 25. It did not elaborate on the valuation.
“There is a risk where shareholders’ agreement between Docomo and Tata isn’t met because of India’s legal system,” NTT Docomo’s President Kaoru Kato said at a press conference in Tokyo. The company also said the impact of the sale on the company’s earnings is “uncertain.”