RBI ruling on Tata-DoCoMo deal raises questions on exit agreements

Tata Sons' move to buy its joint venture partner NTT DoCoMo's stake in the telecom business at a price higher than present fair value of the stake has been struck down by the Reserve Bank of India (RBI) in accordance with the views of finance ministry, opening a debate on the loosely framed exit agreements in the country.

It would be surprising for many to notice that the prior fixed exit clauses are not in lieu with the regulations in Foreign Exchange Management Act (FEMA). According to the agreement, Tata Sons had agreed to pay Rs 58.05 a share to Japan's NTT DoCoMo for the latter's 26 per cent stake in Tata Teleservices (TTSL) when the independently determined 'fair value' stood at Rs 23.34. But the fact is that the fair value is less than one fourth of DoCoMo's initial investment. Now the companies look to resolve the issue through arbitration.

The other side of the worry is that the issue will send negative notes like how the Vodafone tax issue affected foreign investment flow. After a lull of two-three years, the investment weather has improved in the country, seeing a new line of investors like Jack Ma (Alibaba), Masayoshi Son (SoftBank, Japan), Jeff Bezos (Amazon) and Prem Watsa (Fairfax Financial, Canada), spending for growing their business as well as nurturing start-ups in the country.

But NTT DoCoMo has been desperately looking to move out of the Indian market because of the hassles around the telecom business and growing competition. During the initial days of the JV, Tata-DoCoMo gained popularity with the 'one paise per second' offer. But it had failed to sustain the initial growth.

Rule by rule, RBI would be right. There are famous exits of foreign partners in the past that had burned their fingers while exiting the Indian JVs.

To the surprise of many, Honda Motor Co had agreed to sell its 26 per cent stake in Hero Honda to the Munjal family for just US $854 million - less than half its then market value. Industry experts speculated that Hero would be required to make higher royalty payments to compensate Honda for the cheap sale price. But the royalty continued around 3 per cent of annual sales.

In 2009, when US petro major Chevron exited from the refinery JV with Mukesh Ambani-run Reliance Industries, it got the same value that it paid three years ago. RIL has paid Rs 60 per share aggregating to Rs 1,350 crore, the same price at which the US firm had bought five per cent stake in RPL in April 2006.

Wal-Mart Stores paid dearly to end its relationship with Bharti Retail, with whom it had partnered to open retail stores in India. The US retailer paid about $100 million to acquire its New Delhi-based partner's stake in Bharti Wal-Mart, the joint venture that was formed in 2007. Wal-Mart also had to write off $234 million in debt and other investments to complete the corporate break-up, resulting in a net loss of $151 million.

There is urgency in clearing the air around foreign investments. Like the entry, the exit also should be in a friendly way. The central government needs to set it as a priority.