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Soured Tata-Docomo deal tests India's investment appeal

NTT Docomo Inc bought a stake of more than $2 billion in a phone company from Tata Group

Policy Pulse
Publish Date: Sep 16 2016 3:44PM | Updated Date: Sep 16 2016 3:44PM

Soured Tata-Docomo deal tests India's investment appeal

Imagine buying a home on condition that you could sell it back anytime for half price. Then imagine trying to do so a few years later only to hear that the agreement wasn't legal. 


That's effectively what's happening to Japan's largest mobile-phone carrier. Only instead of a house, NTT Docomo Inc. bought a stake of more than $2 billion in a phone company from Tata Group, India's biggest conglomerate, which says law bars foreigners from selling out of their investments at above a "fair value.” 


Though an international arbitration panel sided with Docomo in June, the years-long dispute has since moved to courtrooms in London and New Delhi. More broadly, the case has highlighted the legal risks in Indian economy as Prime Minister Narendra Modi seeks to bring in foreign investment, as per a ET report.


"Among those doing business in India, there is some level of anxiety towards its administration and the execution of laws," said Kotaro Tanaka, an official at the South Asia Department of Japan International Cooperation Agency, which makes loans and investments in developing countries. 


Tokyo-based Docomo spokesman Yousuke Oowada declined to comment, as did Tata. 


Modi is seeing some success in bringing money from overseas as India grows faster than any major economy as his administration seeks to ease investment curbs. Foreign direct investment into India climbed 23 per cent to $55 billion in the 12 months through March 2016, according to government data. 


India is a democratic country with a large population and growing economy that make it an attractive market, Tanaka of JICA said. 


Modi is partly trying to restore India's image after legal wranglings contributed to some of the world's biggest multinational companies foundering in the country. 


For example, when former Prime Minister Manmohan Singh eased restrictions on the entry of foreign-owned retailers in 2012, Wal-Mart Stores Inc. and Carrefour SA began setting up plans to expand in the country. Singh then reversed course and supported restrictions that effectively barred foreign entrants. 


Then there's Vodafone Group Plc, which has been disputing a tax bill involving more than $2 billion related to its acquisition of Hong Kong billionaire Li Ka-shing's Indian phone business. While Vodafone has said it doesn't owe the Indian government money because the transaction was conducted offshore, Indian authorities have sought to collect because the deal involved assets in the country. 


Nevertheless, investors drawn to India's rapid economic growth and relatively young population will probably be willing to overlook these issues, said Abhimanyu Sofat, vice president at brokerage India Infoline Ltd. in Mumbai. 


"While the Docomo-Tata spat may impact sentiment, for an investor seriously looking to enter India, it won't be a huge concern," he said. 


The feud traces its roots back to 2009, when Docomo agreed to buy shares in Tata Teleservices from Tata Sons Ltd. to enter the fast-growing Indian phone market. But as insurance, the agreement entitled the Japanese company to sell its shares back at 50 per cent of the purchase price, or let Tata find a suitable buyer for the stake. 


But as competition drove Indian operators to charge less than a penny a minute for calls - among the lowest rates in the world - profits turned elusive for smaller carriers. Tata Teleservices, the nation's seventh-largest operator, has accumulated more than 300 billion rupees in losses, according to company data accessed from Ministry of Corporate Affairs.