FM rejects RBI’s suggestion of retrospective policy for hybrid instruments

The finance ministry has rejected RBI's proposal for retrospective application of a proposed foreign investment policy for hybrid instruments. The move has come at a time when there is an ongoing dispute between India’s Tata group and Japan-based ally Docomo.

The proposal could allow domestic companies to issue hybrid instruments, like optionally and partially convertible debentures, to overseas entities under the foreign direct investment (FDI) policy. Had the ministry accepted the suggestion, the Tata-Docomo issue could have been solved, although the impact on other such transactions would have been different.

"An FDI policy change cannot be carried out with retrospective effect," a government source aware of the negotiations told ET.

The ongoing dispute between the Tata Group and Docomo is regarding their joint telecom venture Tata Teleservices.

When the Japanese company had invested $2.2 billion in 2008, both companies had agreed that Tata would buy 26.5% stake in 2014, and on failing to reach milestones, would find a buyer for it. It was only last week that Docomo alleged that the Tata Group was shying away from its commitments, citing that the RBI policy bans exits by overseas investors at an assured price. This, Docomo said, is being done to avoid paying $1.17 billion in arbitration damages won recently in London.

Tata Sons, on the other hand, said that it had deposited $1.17 billion with the Delhi High Court, and its overseas assets can't be seized, given that they are not a part of the dispute.

A while back, the RBI had written to the finance ministry regarding a new framework for hybrid instruments, suggesting retrospective application of the draft policy based on the Budget proposal. RBI said that by accepting this proposal, such disputes arising out of stringent pricing norms could be settled.

"We observe the proposed structure is not in line with extant provisions, as fair value of the shares is Rs 23.34 per share. However, the larger issue here is of fair commitment in contracts in relation to an investment and a downside protection of an investment, rather than assured return," said the RBI letter. Other than the strategic relationship that India shares with Japan, the ministry should also keep in mind the possible impact on FDI flows, it had said. "In view of this, we are inclined to accept the proposal and in future, in all such cases, similar principle shall be applied," it added.

However, after the finance ministry told RBI that the decision should be taken as per its own guidelines, the central bank rejected Tata Sons' proposal to pay Docomo a price that was higher than the fair value.

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