Swiss Challenge Method – Enabling Low Vintage and Debt aggregation

In Indian Express dt 24th April 2019, a news has been flashed as under: "Central Bank of India on Friday put up two non-performing assets (NPAs) worth Rs 251 crore for sale through the Swiss challenge method."

“The auction for Srinagar Banihal Expressway (Rs 200 crore) and Maa Mahamaya Industries (Rs 51 crore) are being offered on a 100 per cent cash basis account(s) and  is through ‘Swiss Challenge Method’, under Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act, 2002 on without recourse basis based on an existing offer of firm bid from an investor, who will have the right to match the highest bid,” the lender said in bid documents for both accounts." Follow link for full report: CBI to sell NPA under Swiss Challenge Method

What is Swiss Challenge Method under SARFAESI Act 2002?

As the name itself suggest Swiss Challenge System is a new bidding process to help private sector initiative in core sector projects. It's an offer made by the original proponent to the government ensuring his process to be best (in terms of effectiveness including both the factors cost and time) by his initiative as a result of his own innovative approach or on the demand of the government to perform certain task. It entails a private sector enterprise (the original proponent) sou motu identify a project and then going to the government with the proposal.

A Swiss challenge is a form of public procurement in some (usually lesser developed) jurisdictions which requires a public authority (usually an agency of government) which has received an unsolicited bid for a public project (such as a port, road or railway) or services to be provided to government, to publish the bid and invite third parties to match or exceed it.

A Swiss Challenge is a method of bidding, often used in public projects, in which an interested party initiates a proposal for a contract or the bid for a project. The government then puts the details of the project out in the public and invites proposals from others interested in executing it. On the receipt of these bids, the original contractor gets an opportunity to match the best bid.

Applied to the ongoing bankruptcy cases, a Swiss Challenge may entail two rounds of bidding for a distressed company or its assets. Assume that Company A wins the first round of bidding by a quoting a price of 5,000 crore for a power plant. This will be made public and a second set of bids invited. If Company B quotes 5,500 crore, Company A will be offered a second opportunity to match it. If it refuses, Company B would be declared the winning bidder. If Company A steps up, then it will bag the power plant at 5,500 crore.

Why is it important?

The Swiss Challenge allows a seller to mix-and-match the features of both an open auction and a closed tender to discover the best price for an asset. In the recent bankruptcy proceedings of Binani Cements, Indian banks came up against a sticky situation where UltraTech Cements bettered the winning bid by the Dalmia group, after the official bidding process came to an end. Bankers predictably were all for relaxing the rules a little bit if it meant more money in their coffers. But this position was legally challenged by the Dalmias.

The Swiss Challenge method would solve this problem by allowing for two rounds of bidding.

The method also has other uses. In its original form, a Swiss Challenge allows an infrastructure developer to come up with a suo motu proposal for a new project without waiting for the government to call for bids. This can foster innovation, as contractors or developers may initiate projects that the powers-that-be didn’t even think of. The method was upheld by the Supreme Court of India for awarding public projects and the Government of India has tried out this method in road and railway projects.

Why should the Banks care?

If Swiss Challenge is applied to bankruptcy cases, banks may get to squeeze out more from the auction of stressed assets.

If applied to public projects, it may lead to more innovative project proposals and quicker execution, as a bidder with a good idea needn’t wait for the government to set the ball rolling. But on the flip side, by allowing a bidder to initiate an idea and giving him the first right of refusal, the Swiss Challenge can promote favouritism in the award of public projects, opening the doors to corruption. To guard against this, legal experts suggest an open list of public projects that allow Swiss Challenge and full public disclosure of bid details when the government receives a proposal.

(Source: Business line:All you wanted to know about...Swiss Challenge )

Reserve Bank of India has included the Swiss Challenge Method of Recovery under the "Guidelines on Sale of Stressed Assets by Banks" as under:
Swiss Challenge Method – Enabling Low Vintage and Debt aggregation

In order to bring down the vintage of NPAs sold by banks as well as to enable faster debt aggregation by SC/RCs, banks shall put in place board approved policy on adoption of Swiss Challenge Method for sale of their stressed assets to SCs/RCs/other banks/NBFCs/FIs, etc. For this purpose, as indicated in paragraph 2 of this circular, the board/committee of the board shall conduct periodic review (at least once in a year) of their stressed - asset portfolio, with a view to decide on the proposed course of action to resolve the portfolio in terms of their loan recovery policy. During such review, the bank should identify the assets which will be offered for sale among prospective buyers and an authenticated list of such assets shall be maintained by the bank. The list may, at the discretion of the bank, be disclosed to prospective bidder on entering into confidentiality agreement. The broad contours of the Swiss Challenge Method are as under:

I. A prospective buyer interested in buying a specific stressed asset may offer a bid to the bank;

II. If the asset features in the list of assets for sale maintained by the bank, and if the aforesaid bidder offers more than the minimum percentage specified in the bank’s policy (say, 30 percent of outstanding loan) in the form of cash, the bank shall be required to publicly call for counter bids from other prospective buyers, on comparable terms;

III. Once bids are received, the bank shall first invite the SC/RC, if any, which has already acquired highest significant stake (as indicated at paragraph 6 above) to match the highest bid. Ceteris paribus, the order of preference to sell the asset shall be as follows: i) The SC/RC which has already acquired highest significant stake; ii) The original bidder and iii) The highest bidder during the counter bidding process.

IV. Bank will have the following two options:

i. Sell the asset to winning bidder, as determined above;

ii. If the bank decides not to sell the asset to winning bidder, bank will be required to make immediate provision on the account to the extent of the higher of:

  1. The discount on the book value quoted by the highest bidder; and
  2. The provisioning required as per extant asset classification and provisioning norms.

For full details of Guidelines please click on the following link: Guidelines on Sale of Stressed Assets by Banks

Source: Scribd.com, Business Line & rbi.org.in

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.