The two companies have appointed bankers - Rothschild for Sistema, which operates under the MTS brand, and Standard Chartered Bank for the Tata Group - said one of the two people.
However, the transaction will be held up till a new merger and acquisition policy is announced for the telecom sector. A senior official in the department of telecommunications, asking not to be named, said the policy is likely to be announced in three months.
Current M&A norms are not conducive for the deal as they may require MTS to either surrender or pay the market price to retain the airwaves held by Tata Tele.
In an emailed response, MTS said, "The immediate focus of the company is to efficiently run its 9 circle operations and turn OIBDA (operating earnings before depreciation and amortisation) positive by end of 2014."
A questionnaire sent to the Tata Group went unanswered. The two people quoted earlier said the Tata Group plans to reduce exposure to the telecom sector to a minority stake. As a result of the deal that is in the works, MTS would take a majority stake in the company.
Valuations had not yet been decided, the people said.
Japan's NTT Docomo had bought 26% stake in Tata Teleservices in November 2008 for around Rs 13,000 crore, valuing the company at over Rs 50,000 crore, or over $8 billion, according to current exchange rates.
The company, however, is saddled with a debt of nearly Rs 22,000 crore and apart from ballooning interest charges, it may even find it challenging to repay the principal amount when the time comes.
People involved say the Tata Group has withdrawn funding for the telecom venture, resulting in operations being shut in three service areas and partial closure in another five. The company has entered into intra-circle roaming agreements with Aircel to cover the gaps in its network.
Further, Tata Teleservices is making losses and has little by way of reserves and surplus. The company, which operates under the Docomo brand, has also let go of more than 10 million customers since last year. Its customer base stood at 66.9 million as of February 2013, compared with 80.2 million at the end of June 2012.
The Tata Group also surrendered CDMA spectrum beyond 2.5Mhz in all circles barring Mumbai and Delhi to avoid paying a one-time charge of more than Rs 1152.7 crore. MTS, which had been scouting the market and had serious talks with Aircel, may have found a better strategic fit in Tata Teleservices.
Merger talks between Tata Teleservices and Russia's Sistema have advanced substantially, with negotiations centered on a deal that transfers NTT Docomo's stake as well as part of the Tata Group's holding to Sistema, giving it a substantial shareholding, said two people familiar with negotiations.
MTS has chosen CDMA as its mobile operations technology, in which only Tata Teleservices and Reliance Communications have all-India operations. MTS requires additional airwaves to launch faster broadband services, an all-India footprint and a big user base - something a deal with the Tata Group can offer.
Investment bankers active in the telecom sector said MTS is the only player that has the money and is willing to acquire a telecom company in India. Sistema, which recently appointed a new chief executive for India in Dmitry Shukov, has challenged the Supreme Court's decision to overturn licences under a bilateral trade agreement.
Strategy failed
Following Docomo's entry in 2008, the Tata Group's telecom arm launched services based on GSM technology under the brand name Tata Docomo. It entered the market as a price warrior by introducing per-second billing at 1 paisa per second, almost half the prevailing tariffs.
But Tata Teleservices has failed to accumulate momentum. It is currently India's sixth-largest operator by number of subscribers. NTT Docomo had planned to invest further to raise its stake in Tata Teleservices in 2010, but the 2G spectrum scam forced it to hold back. The subsequent cancellation of licences, which came as part of a Supreme Court judgement in February 2012, resulted in loss of valuation for the entire sector. Tata Teleservices, which badly needed funds at that time, had to go for two rounds of rights issues to sustain capital expenditure.
NTT Docomo, which has the right to sell back its shares to the Tata Group, is currently looking for exit options.
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