New foreign capital policy won't help Tata-Docomo like disputes

NEW DELHI: India’s new policy on hybrid instruments for infusion of foreign capital is unlikely to cover Tata-Docomo type pure equity instruments with built-in exit price options, dealing a blow to hopes that new norms could pave the way for settlement of the dispute between the two companies.

“The policy will cover instruments that display distinct equity as well as debt characteristics,” a senior official told ET. Transactions involving pure equity instruments will not be covered, the official added.

Prospects of an amicable resolution of the dispute between the Tatas and NTT Docomo, which centres around the Tatas not acquiring the Japanese company’s stake in a 50:50 joint venture at a pre-determined price as agreed between them, have brightened after Ratan Tata replaced Cyrus Mistry as the boss of Tata Sons. A favourable hybrid instrument policy could have paved the way for the Tatas to get regulatory approval to honour their commitment.


The hybrid instrument policy, which is expected to be taken up by the Cabinet shortly, seeks to bring about clarity on the use of quasi-equity instruments in cross-border transactions.

CONVERSION PRICE BAND LIKELY
These are usually debentures that have an option of conversion into equity at a later date. The policy is expected to liberalise norms by introducing a conversion price band for such instruments instead of following a ‘fair price’ fixed by a pre-determined formula.

The Reserve Bank of India had wanted the proposed policy to cover equity instruments with ‘built-in optionality’, but the government wanted to restrict it to ones that were explicitly quasi-equity having some debt character. The government had also shot down RBI’s suggestion that this policy be applied retrospectively.

TATA-DOCOMO ROW
The Tata Group and Docomo have been sparring over the latter’s investment in their joint telecom venture Tata Teleservices. Docomo had invested $2.2 billion in 2009 in Tata Teleservices. The agreement provided that if Tata Sons was unable to find a buyer for Docomo’s stake, it would be obliged to buy back shares at fair value or 50% of subscription price, whichever is higher. Docomo invoked this clause after Tata Teleservices failed to meet stipulated performance indicators by March 31, 2014.

The Tata Group wrote to RBI and sought exemption to carry out the transaction as it was not allowed under the existing policy that allowed an exit only at fair market prices determined by a fixed formula.

RBI, after consulting the government, conveyed to the Tatas that no special exemption could be given. Docomo, subsequently, secured a $1.2-billion arbitration award against the Tatas in the UK and the matter is now before the Delhi High Court. The Tatas’ stated position has been that they would like to honour their part of the agreement and purchase Docomo shares at the preagreed price, but they are hamstrung by the law of the land.

POLICY EXPECTED SHORTLY
The hybrid instrument policy is expected to be taken up by the Cabinet shortly. Finance Minister Arun Jaitley had, in his February Budget speech, announced that the basket of eligible instruments would be widened to include hybrid ones to expand the scope of tools that foreigners can use to invest in India. Quasi-equity instruments such as optionally convertible debentures are a popular tool with foreign investors and the proposed policy aims to provide a stable and simple framework.

Instruments that are fully and mandatorily convertible into equity within a specified period are regarded as equity under the foreign direct investment policy and eligible to be issued to persons residing outside India. Any instrument that is not mandatorily converted is considered debt and governed by external commercial borrowing rules.