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Saturday, 29 April 2017

Tata-DoCoMo case: Delhi HC okays $1.18-billion damages, rejects RBI's plea - 29 Apr 2017

Signalling an end to a long-drawn regulatory tussle, the Delhi High Court (HC) on Friday upheld a settlement agreement between Tata Sons and NTT DoCoMo to realise the $1.18-billion London Court of International Arbitration (LCIA) award in favour of the Japanese telecom giant. 

This is a significant development as the DoCoMo settlement is learnt to have been priority for the new Tata Sons chairman, N Chandrasekaran. 

The Tata Teleservices-DoCoMo joint venture (JV) was scripted in 2008 when Ratan Tata was the chairman of the group.
Rejecting the Reserve Bank of India (RBI) intervention in the enforcement proceedings, Justice S Muralidhar pronounced the verdict after coming to the conclusion that there was nothing contrary to any provision of Indian law in the February 2017 settlement plan submitted by the two companies to resolve their dispute. 

“It appears to be a well-settled legal position that parties to a suit, or as in this case, an award, may enter into a settlement even at the stage of execution of the decree or award,” said Justice Muralidhar in a single-Bench judgment. 

Friday’s decision held that the issue of an Indian company honouring its commitment under a contract with a foreign entity would have a bearing on its goodwill and reputation in the international arena and have an indubitable impact on strategic relationships between countries. 

It also concluded that a third party (the RBI) could not be allowed to oppose the compromise arrived at between the two companies in such a manner. 

The RBI had opposed the enforcement of the LCIA award in the high court, saying it was void in law, as it had failed to consider the existent regulatory prohibitions and would effectively allow something that could not be done directly to be done in an indirect manner. 

According to the RBI, the award was in violation of Regulation 9 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (as amended in 2013), which prohibited the transfer or sale of shares at a price exceeding the market price of shares arrived at by any international valuation methodology. The banking regulator had also said that the award was in violation of Section 6 of the Foreign Exchange Management Act, 1999, which empowers the RBI to prohibit, restrict or regulate the transfer of any security by a person outside India. 

Stating that the award had allowed a restricted capital account transaction in the garb of a breach of contract, the RBI had claimed that the award (and the settlement agreement) was against the fundamental policy of India and incapable of enforcement in any circumstance. The lawyer for the RBI had also highlighted its apprehensions of the issue becoming a dangerous precedent for similar cases in the future, if the award was eventually enforced.

DoCoMo’s lawyer, senior advocate Kapil Sibal, had opposed the RBI stance by highlighting that the banking regulator could not object to civil proceedings between two private parties for the enforcement of a valid international arbitration award. After initially opposing the enforcement, Tata’s counsel, senior advocate Darius Khambata, had also supported the enforcement in line with their joint settlement agreement and said that the realisation of the award would send a strong signal for future foreign direct investments to come into India.

“The court’s decision is very welcome. It is of huge significance for foreign investment in India because it shows that Indian courts will recognise their international obligations and enforce an award,” said DoCoMo sources.

Welcoming the order, Tata Sons, in a statement, said the court "allowed both the enforcement of the award and implementation of the consent terms between the two entities". Tata Sons and NTT DoCoMo are taking further steps in terms of the order, the statement added.

The two-year long arbitration between the companies relates to disputes over Tata’s inability to buy back DoCoMo’s 26 per cent share in their joint venture (JV) Tata Teleservices, as had been initially agreed upon by the two groups in their JV agreement. According to the terms of the JV, DoCoMo had been allowed the option of exiting the venture after a period of three years at a pre-determined share price, which were to be bought by Tata or 
an external buyer that the Indian company was to arrange. 

In 2014, after the collaboration failed in generating the desired returns, DoCoMo decided to exercise its exit option at a time when the share price of Tata Teleservices had plummeted far below the earlier agreed exit agreement. Unable to find a buyer, Tata made an application to the RBI to purchase the shares as per the terms of the venture. The RBI refused the application on the ground that such a transfer could not be made at a pre-determined share price on a later date, as per existent regulatory restrictions.

The deadlock resulted in the international arbitral proceedings that followed, resulting in the $1.18 billion LCIA award now sought to be enforced by DoCoMo. After the award, Tata had approached the RBI once again for permission to comply with the terms of the adjudication. However, this application was also rejected by the regulator, which resulted in the enforcement proceedings before the high court. Apart from approaching the courts in India, DoCoMo had also pressed for the realisation of the award in London and New York. 

There’s been some back and forth between the Union Finance Ministry and the RBI as well on the matter. In December 2014, under Raghuram Rajan as the governor, RBI is reported to have communicated to the Finance Ministry that it was inclined to allow a settlement between Tatas and DoCoMo in view of international relations. However, the North Block took a contrary stand, and in February 2015 told RBI to follow the guidelines.      

Friday’s verdict lays down how the amount of the award (currently with the registrar of the high court) can be realised by NTT DoCoMo in line with the procedure mentioned in the agreement, after the necessary tax withholding certificate and Competition Commission of India clearance requirements are fulfilled. It has also directed the simultaneous transfer of NTT DoCoMo’s Tata Teleservices shares to Tata Sons when the Japanese company receives its funds. As part of the agreement, DoCoMo has agreed not to press for enforcement of the award in any other court during the suspension period decided upon to complete the necessary formalities.

Timeline of events in the NTT DoCoMo-Tata Sons dispute

November 2008: DoCoMo purchases a 26.5 percent stake in the Tata Teleservices for $ 2.22 billion in terms of the joint venture (JV) agreement

July 2014: DoCoMo exercises exit option against Tata on previously agreed terms

November 2014: Unable to find an external buyer, Tata's makes an application with RBI to purchase DoCoMo stake at Rs 58 per share amounting to Rs 27,000 crore - RBI rejects application

December 2014: Tata's deadline to find external buyer (or purchase the shares) expires

January 2015: DoCoMo approaches London Court of International Arbitration (LCIA) against breach of the JV agreement

March 2015: RBI again rejects Tata's November 2014 application to purchase DoCoMo's shares at the pre-determined rates

July 2015: DoCoMo refuses to accept Tata offer to buy stake at fair market value of Rs 23 per share amounting to Rs 11,000 crore (less than half of the previously agreed upon price)

June 2016: LCIA awards $1.18 billion in favour of Docomo

July 2016: DoCoMo approaches Delhi High Court to enforce LCIA award - RBI reiterates former stance against stake-sale via letter issued to Tata - Tata agrees to deposit full sum of the award with the Delhi High Court pending final determination

September 2016: Tata files affidavit opposing the enforcement of the international award in Delhi High Court

November 2016: RBI intervenes in Delhi High Court challenging the enforcement of the award

February 2017: Tata and DoCoMo submit joint settlement plan to put an end to the arbitral dispute

March 2017: RBI objects to the settlement agreement between the two companies - Says award cannot be enforced in any circumstance

March 2017: Justice Muralidhar reserves judgment in the case

April 2017: Delhi High Court rejects RBI intervention - Upholds Tata-DoCoMo settlement in line with the terms of the agreement

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