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Tata Sons last week ousted Cyrus Mistry, the Indian conglomerate holding company’s chairman of almost four years, partly because of disagreements over the handling of a $1.2 billion sum owed to Japan´s NTT DoCoMo.
The problem is India has made the payment illegal.
A wily workaround would add to governance concerns swirling around Tata. Instead, New Delhi needs to fix the rules.
The Japanese telecommunications group tried to build in safeguards in 2009 when it bought 26.5 percent of Tata Teleservices for about $2 billion. The companies agreed DoCoMo could sell its stake back to Tata for half the original cost if the business performed badly, which it did.
But the Reserve Bank of India introduced a new rule in 2014 preventing foreign investors selling shares in local firms at a pre-determined price or at less than fair market value.
That has, essentially, obstructed a privately agreed deal. And the Indian government has refused to budge.
DoCoMo is trying to enforce a London arbitration award against assets in Britain belonging to the wider Tata group, including Tata Motors, owner of Jaguar Land Rover. Tata has opposed the effort, saying it can´t pay because of the Indian rules.
Even though Tata has deposited the cash with a third party in India as a sign of good faith, its resistance has created the impression that the group doesn´t really want to pay.
Amid this backlash, the 78-year-old Ratan Tata, back at the helm of the group, might be tempted to find a creative way to pay.
The tycoon may want to restore faith in the group´s ability to honour its debts. One option might be to tap cash held overseas.
But finding a creative way to defeat unfriendly local rules would raise further questions about decision-making at Tata, especially when it might expose the group to large fines. It is also not in India´s long-term interest for Tata to game the system.
New Delhi´s goal should be to create a predictable business environment. The government rightly gets lots of stick from foreign investors for failing to do so, and the DoCoMo issue hurts the message that India is open for business. Smaller companies in a similar situation are watching Tata´s case closely. A policy rethink is needed - not more corporate sleight of hand.
Resolving a dispute with Japan´s NTT DoCoMo is a priority for India´s Tata conglomerate, a person familiar with the situation told Breakingviews on Nov. 3.- A disagreement over the handling of the issue contributed to divisions among senior figures at Tata Sons, the holding company which last week abruptly ousted Cyrus Mistry, its chairman of almost four years.
In 2009, telecommunications firm DoCoMo paid 127 billion rupees, or about $2 billion at current exchange rates, for 26.5 percent of Tata Teleservices.
DoCoMo tried to exit in July 2014 under a pre-agreed provision requiring Tata to buy back the stake, or find another buyer, at no less than half DoCoMo´s original price.
However, a rule change by the Reserve Bank of India in January 2014 prevents foreign investors from selling stakes in Indian firms at a pre-determined price or above fair market value - and DoCoMo´s exit price is above fair value for Tata Teleservices.
Tata applied for special permission to pay DoCoMo, but the RBI rejected the request in 2015.- In June, the Court of International Arbitration in London ordered Tata to pay $1.2 billion to DoCoMo.
A month later the Japanese firm won an order from the London Commercial Court to enforce the award in Britain.
Tata Sons has filed an application to set aside the London court ruling, arguing it could not pay as India´s central bank had denied its request. Tata says it deposited the full $1.2 billion with New Delhi´s high court on July 30, as evidence of its willingness to pay. DoCoMo is also taking legal action in India to enforce the arbitration award.
The writer is a Reuters columnist
