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Reeba Zachariah & Boby Kurian, TNN | Dec 14, 2011, 05.

54AM IST

MUMBAI: Japanese giant NTT Docomo is set to discuss an option of increasing its stake in Tata Teleservices to 35% in the next four months. This is part of a two stage plan that allows Docomo to ramp up shares if the Indian mobile operator meets certain performance parameters, said two separate sources privy to the development. Docomo bought a 26% stake in Tata Teleservices for $2.7 billion in 2008. The telecom biggie has two call options (it gives an investor the right, but not the obligation, to buy shares) available in March 2012 and two years later in 2014 to emerge as the largest shareholder in the Indian telco. It can refrain from exercising both the options and sell the entire stake back to Tata in 2014, in case the company is unable to achieve certain benchmarks. These benchmarks are linked to the performance of Tata Teleservices, said a source who declined to divulge more details. The $83 billion Tata Group through multiple entities hold about 60% stake in the telco, in which private equity investor Temasek and serial entrepreneur C Sivasankaran are minority investors with 7% and 6% stake each. But, if Docomo exercises the first option of increasing the stake to 35%, then it cannot force a buyback on Tatas two years later. Hence Docomo's decision in the coming few months will be significant for the joint venture. Docomo can buy more shares at a fair market value, while Tata is obligated to buy back the stake at the higher of fair value or half of the value foreign partner paid for the 26% stake. The flagship telecom company of the Tata Group has been struggling to make profits over the last several years and the task has become even tougher in a competitive market with low margins. "The relationship between the two partners is still intact," added a second source, who did not wish to be named as the matter was private. Docomo invested $176 million in Tata Teleservices through a rights issue earlier this year that allowed the Japanese phone carrier to maintain its 26% stake. An emailed query to NTT Docomo remained unanswered at the time of going to press. Tata Sons 2010-11 annual report revealed that the shareholding agreement with Docomo obligates the Indian conglomerate to buy back the shares in the event of the Japanese partner deciding to divest its entire shareholding in Tata Teleservices. Tata Sons, the single largest shareholder with 37.92% stake, disclosed that if Docomo divested shares at a lower price, then a compensation representing the difference between such price and the fair value would have to be paid. The mobile telephony, which reported Rs 1,330 crore loss in FY11, is the biggest loss making unit of the Tata Group, whose interests' spans from salt to swanky cars. Besides the 26% stake in the privately-held Tata Teleservices , Docomo also holds 12.12%

stake in the listed Tata Teleservices (Maharashtra). Tata Teleservices recently consolidated all its telecom services across CDMA and GSM platforms under one brand Tata DoCoMo to drive efficiencies and bring down costs. Tata Teleservices also saw subscriber numbers declining from 9 crore in June to 8.8 crore in October.