No, this is not about Federer challenging Rafa to a match on clay court. As many corporate bankruptcy cases in India get held up by skirmishes between bidders, Indian banks are now looking to use the Swiss Challenge route to decide on winning bidders. This week, as Adani Wilmar and Patanjali vied to buy out Ruchi Soya Industries, lenders tried out a Swiss Challenge to decide who gets to snap up the soya processor.
What is 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 I 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.
The Swiss know how to get more bang for the buck.
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