While NTT DoCoMo on Friday announced its decision to sell its 26.5% stake in Tata Teleservices (TTSL) back to the Tata Group, the transaction will need to be structured carefully keeping in mind the Reserve Bank of India’s (RBI) restrictions on the pricing of call and put options.
Although NTT DoCoMo put out a press note announcing that as part of their original agreement the Tatas would pay them a minimum of R7,250 crore — half the investment it has made since March 2009 — RBI rules do not permit put and call options to be exercised at a predetermined price.
“The RBI valuation requirement for a put option will be one that is based on a return-on-equity parameter. Any valuation that does not conform to this will require specific approval from the regulator,” Akash Gupt, executive director, tax and regulatory services, PwC India, told FE. Since TTSL is in the red — losses in FY13 were R4,858 crore, an RoE-based valuation would not be possible.
While market buzz is that a solution could be found if Vodafone picks up the DoCoMo stake in TTSL — this would help it consolidate its position in the Indian market — the M&A rules do not permit this. At the moment, a telecom company can buy up to 10% of the equity in a rival telco but the new rules — expected to be notified soon — do not allow this. In which case, a Vodafone would need to buy out the entire 100% equity in TTSL. TTSL owns 3G spectrum worth around R5,000 crore in nine circles and 2G GSM spectrum in 18 circles valued R8,500 crore based on the latest auction.
For most GSM players, the CDMA spectrum TTSL owns would be of little value. Under the rules, if another player is to buy TTSL, it will need to pay a one-time market-related charge to the government for the 2G GSM spectrum. Given the licence’s residual life of 14 years as well as the amount that TTSL paid in 2008, any buyer would have to pay the government around Rs 4,500 crore.
Getting 2G and 3G spectrum worth Rs 13,500 crore may still be worth it but in this case it comes with a debt of 23,491 crore, TTSL’s outstanding debt at the end of FY13. More important, since the 1800 GSM spectrum is only 4.4 MHz, it will not be possible for any buyer to