Tata Sons ordered to pay NTT Docomo $1.17 billion in damages for JV stake

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Mumbai: Tata Sons Ltd, the promoter of the major operating Tata companies, has been ordered by an international arbitration panel to pay $1.17 billion in damages to Japan’s NTT Docomo Inc. for breach of agreement.

In January 2015, NTT Docomo Inc., a unit of Japan’s Nippon Telegraph and Telephone Corp., had filed a request with a London court for arbitration against Tata Group holding company Tata Sons, claiming the latter failed to fulfil its obligation to find a buyer for Docomo’s stake in Tata Teleservices Ltd.

In April 2014, NTT Docomo had decided to sell its entire 26.5% stake in money-losing Tata Teleservices, possibly at a big discount, and withdraw from mobile telephony in India after a five-year struggle that highlighted the challenges in the domestic market.

Under the terms of the shareholder agreement between Docomo, Tata Teleservices and Tata Sons, Docomo exercised on 7 July 2014 its right (option) to request that a suitable buyer be found to purchase its Tata Teleservices shares for 50% of the acquired price, amounting to Rs.7,250 crore (or 125.4 billion yen), or a fair market price, whichever is higher.

Japan’s largest communications service provider entered India in March 2009 by acquiring the stake in Tata Teleservices for $2.7 billion after the Indian telco was granted a dual-technology licence that allowed CDMA-based operators to offer rival GSM-based services as well.

“The award orders that Tata Sons pay damages to Docomo in the amount of approximately $ 1,172 million for Tata Sons’ breach of the shareholders agreement, upon Docomo’s tender of its entire stake in Tata Teleservices to Tata Sons or its designee,” Docomo said in a statement on Friday.

Docomo said as of today certain matters remain uncertain, including whether Tata Sons will pay the awarded damages and when the delivery of Tata Teleservices’ shares will be made.

“Accordingly, Docomo is not able to predict how events will unfold. The effect on Docomo’s corporate earnings for the fiscal year ending 31 March 2017 cannot be forecast at this time due to these uncertainties. Docomo will update this information in a timely fashion regarding any matters requiring disclosure,” Docomo said.

Tata Sons spokesperson confirmed that the firm has received the arbitration award and it is currently studying it.

“We will not be able to comment further at this stage, beyond maintaining our consistent position that Tata Sons has always been and continues to be committed to discharge its contractual obligations in a manner consistent with the law,” the Tata Sons spokesperson said.

The financials of Tata Teleservices were also not encouraging to find a potential buyer. As of September 2015, Tata Teleservices total stand-alone debt was at Rs.10,187.30 crore.

According to Capitaline data, in the last 60 quarters, the company has posted net profit only once in the June 2010 quarter.

Rohan Dhamija, partner and head of India and South Asia at consulting firm Analysys Mason, said the Tata Sons-Docomo spat is reflective of the broader underlying challenges that smaller operators (that entered the market late) in India face today.

“With market share getting concentrated across the top operators, the impending and potentially disruptive launch of the new entrant, and continuing large debt loads, Tata’s inability to find a buyer for Docomo’s stake is more to do with market realities rather than any lack of intent on its side,” Dhamija said.

Looking ahead though, Dhamija added that with the ongoing spectrum consolidation, as well as allowance of spectrum trading, Tata’s 800 Mhz holdings would imply that the future might look better, and Tata might be able to go down a sale (partial or full) route if it wished to help alleviate all shareholders’ capital concerns.

Spectrum trading liberalization has finally spurred consolidation in India’s telecom sector, where as many as 11 operators are competing, driving down prices and profits, even as the high cost of spectrum is adding pressure on already stressed balance sheets.

The country’s telecom operators have a combined debt of more than Rs.3.5 trillion on annual revenues of more than Rs.2 trillion.

In November, Anil Ambani’s Reliance Communications Ltd said it was acquiring Sistema Shyam TeleServices Ltd, which operates communications services under the MTS brand name. The deal gave Reliance Communications access to spectrum in nine circles. Reliance Communications is also in the process of merging Aircel Ltd with itself, though a definitive agreement is not signed yet.

Bharti Airtel Ltd, India’s largest phone company, in April said it will spend Rs.3,500 crore to acquire fourth-generation (4G) spectrum from Aircel Ltd in eight telecom zones as it prepares for a high-stakes battle with Reliance Jio Infocomm Ltd.

The purchase will make Bharti Airtel a pan-India 4G operator, matching Reliance Jio, which is preparing for the commercial launch of its high-speed services later in 2016.