After the very public spat between the Ambani brothers over ownership issues in Reliance, the next big corporate battle is the ongoing tussle between the two conservative promoters of Idea Cellular – the Tatas and the Birlas.
In the most recent development in the Tata-Birla showdown over the shareholding of the cellular company, the Tatas have slapped a termination notice to acquire the 50.15 per cent stake indirectly held by the Aditya Birla Group in Idea Cellular. Such a termination notice can be served if one party believes, and can validate, that there has been a breach in the shareholders' agreement.
The Tatas have accused the Aditya Birla Group of disclosing confidential financial data pertaining to Idea Cellular to investors of Aditya Birla Nuvo. Since Idea Cellular is a closely held company and does not make its financials public, the Birlas have committed a material breach, the Tatas contend.
The Tata Group has sent copies of the notice to the Department of Telecommunications (DoT) and is reportedly taking steps to appoint a group of auditors to compute the fair market value of the Birla stake.
But undeterred, ABG, in its response to DoT, has stated that there is not an "iota of substance" in the termination notice, and that it is "an attempt to divert attention" from the real issues.
The "real issue" is the Birla Group's challenge to the Tata Group for violating the competition clause. According to them, the Tatas currently own 48.14 per cent of Idea Cellular, which violates the regulatory norm that bars a company from holding over 10 per cent stake in more than one company in the same circle. The problem has arisen because the Tatas also hold 100 per cent equity in Tata Teleservices Limited (TTSL), a rival mobile company that offers services on a CDMA platform.
Since TTSL has a pan-Indian presence, it is in direct competition with Idea in several circles where both companies operate. Moreover, the Tatas have a representation on Idea's board, making the company's expansion and acquisition plans susceptible to bias, according to the AV Birla Group.
Idea, which is currently present in eight circles across the country, is in expansion mode. It is looking at raising funds from the primary markets to fund its foray into the Mumbai circle where TTSL has a strong subscriber base. There could hence be a conflict of interests here.
In keeping with regulatory norms, the Birlas have therefore asked the government to direct the Tatas to reduce their stake in Idea Cellular to 10 per cent or nil by March 2006, the date set by DoT for all telecom service providers to prove compliance with the terms and conditions of their licences.
The Tatas, however, contend that the allegations are incorrect and misleading. They claim that their holding in Idea is primarily an investment and they are not participating in any major decision-making of the company, including appointment of the CEO, although they had invested more than Rs 18 billion in the joint venture. Also, it is Tata Industries Limited that holds 31.69 per cent in Idea Cellular and has less than 10 per cent in TTSL (around 4.51 per cent). Tata Industries is not a promoter in Tata Cellular, TTSL or Tata Teleservices (Maharashtra) Limited. Also, according to the Tata Group, the licence conditions apply to the new applicants whereas it had switched to a unified access service licence following changes in the telecom policy.
Moreover, the Tata Group claims that the Birlas are raising issues that were already settled when the waiver agreement was signed and the Birlas specifically gave up all claims with regard to TTSL's unified access licences. According to Tata officials, ABG, acting through Grasim Industries, had executed a waiver agreement on December 11, 2004 with Tata Industries, under which the very issues raised by the Birlas regarding compliance were settled.
As the battle steams up, the Tatas claim that the whole issue has been deliberately raked up by the Birlas to force them out of the joint venture in distress. This would enable the majority holder (the Birlas) to buy out the stake themselves at less than the fair price, as the AV Birla Group, through Nuvo, enjoys the first right of refusal.
Earlier in the year, in an effort to comply with the DoT licence guidelines that are to come into effect soon, the Tatas had initiated a divestment process to offload their stake in Idea Cellular. However, they have not finalised any deal so far and have sought time till June 2006 to comply. Meanwhile, the Tatas have offloaded about 17 per cent stake in TTSL to Singaporebased Temasek Holdings and C. Sivasankaran in quick succession, with the total amount of the deal reported to be around Rs 27 billion.
But with the way the situation is developing, it seems unlikely that Idea's woes will be short-lived.