Saturday 24 February 2018

Messy corporate divorce adds to woes at top of Tata

Tata’s chairman Ratan Tata
Tata’s chairman Ratan Tata

Bruce Einhorn

It seemed like the perfect marriage: the dominant mobile operator in Japan and the premier conglomerate in India operating a cellular service in one of the world's hottest markets.

In 2009, NTT Docomo and the holding company of Tata Group formed Tata Teleservices, with the Japanese company paying 260bn yen (€2.26bn) for 26.5pc of the carrier.

Docomo arranged a prenup providing the option of selling its shares back to Tata for at least half the purchase price, in case things didn't work out.

As it turned out, the business struggled as competition in India intensified. By 2014, Docomo had had enough and said it wanted 50pc of its money back. Tata sought permission from India's central bank, the Reserve Bank of India (RBI).

The bank said commitments such as the one Tata made to Docomo violated a law passed in 2014 allowing foreign investors to exit deals only at prevailing fair value, not at a predetermined exit price.

The messy divorce adds to Tata's problems. On October 24, Ratan Tata, the septuagenarian patriarch who was chairman at the time of the Docomo deal, came out of retirement to replace his successor, Cyrus Mistry, because of what the firm called a growing "trust deficit".

Mistry accused directors of wrongfully dismissing him and warning that the $104bn tea-to-software giant may face $17.6bn in writedowns because of unprofitable businesses. Mistry on November 1 released a statement saying that any suggestion that he acted contrary to "Tata values" in the Docomo case "is as false as it is mischievous".

All of this adds to the pressure to resolve the Docomo debacle, which puts the spotlight on the challenges Prime Minister Narendra Modi faces as he tries to make India an alternative to China as an engine for global growth. Since winning office in 2014 on a pro-business platform, Modi has often travelled abroad to sell the idea of India being open for business. In June, he eased restrictions on foreign investment in broadcasting, defence, pharma and civil aviation.

Foreign direct investment climbed 23pc in the 12 months through March 2016, to $55bn, according to government data.

The economy expanded 7.6pc in the fiscal year ended in March and is on track to grow 7.7pc in 2017 and 7.8pc in 2018, according to data compiled by Bloomberg. "India is going through a Goldilocks scenario" of lower interest rates and strong growth, says Manishi Raychaudhuri, a strategist in Hong Kong with BNP Paribas Securities. "It's a rare combination."

In June, a London arbitration court sided with the Japanese company, ordering Tata to pay about $1.2bn for breach of the agreement. In July the RBI again refused to allow the Docomo payment.

"Regulation in India changes with dramatic speed, so long-term business planning can be tricky," says Richard Rossow, Wadhwani chair in US India Policy Studies at the Centre for Strategic and International Studies in Washington.

Despite reforms, India remains a difficult place to do business. In many states, laws limit land purchases for factories and investments. Investors are also wary of labour laws restricting the ability to lay off workers during downturns.

A sore point is tax policy.

"In most countries, if you have a tax dispute, you try and settle it," says Dinesh Kanabar, Mumbai-based chief executive officer of Dhruva Advisors, who works with multinationals on tax disputes.

In India, "it gets litigated all the way to the very top" - and it's a country where cases can drag on for 15 years. (© Bloomberg)

Irish Independent

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