Bombay High Court
Reliance Asset Reconstruction Company ... vs Reserve Bank Of India on 11 August, 2023
Author: Neela Gokhale
Bench: G.S. Patel, Neela Gokhale
934-OSWPL-21858-2023.DOC
Shephali
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION (L) NO. 21858 OF 2023
Reliance Asset Reconstruction Co Ltd ...Petitioner
Versus
Reserve Bank of India & Ors ...Respondents
Mr Ashish Kamat, Senior Advocate, with Malhar Zatakia, Ankit
Paleja & Ragini Jaitha, i/b Crawford Bayley & Co, for the
Petitioner.
Mr Prasad Shenoy, with Aditi Phatak, Parag Sharma, Kirti Ojha &
Vijay Salokhe, i/b BLAC Co, for Respondent No. 1
SHEPHALI
SANJAY
MORMARE
Mr Janak Dwarkadas, Senior Advocate, with Ravitej C, Vishnu
Digitally signed
Shriram, Riya Agicha & Aafreen Noor, i/b Khaitan & Co, for
by SHEPHALI
SANJAY
MORMARE
Respondent No. 2.
Date: 2023.08.12
11:30:40 +0530 Mr Vinod Kothari, with Sonal Sanap, i/b Apex Law Partners, for
Respondent No. 5.
CORAM G.S. Patel &
Neela Gokhale, JJ.
DATED: 11th August 2023
PC:-
1. Mr Kamath presses for urgent ad-interim relief.
2. The first prayer in the Writ Petition under Article 226 of the Constitution of India is for a mandamus to the Reserve Bank of India, Respondent No.1 represented by Mr Shenoy, to withdraw and Page 1 of 10 11th August 2023 ::: Uploaded on - 12/08/2023 ::: Downloaded on - 13/08/2023 02:46:08 ::: 934-OSWPL-21858-2023.DOC cancel clause 85(d) of the RBI's "Master Direction (Transfer of Loan Exposure)" circular. This circular is dated 24th September 2021. It was amended on 5th December 2022.
3. The second prayer is to permit the Petitioner and all other prospective bidders to bid for the acquisition of the debt(s) of one Vidarbha Industries Power Ltd ("VIPL") on the same terms and conditions as were offered to Respondent No.3, CFM Asset Reconstruction Company Pvt Ltd ("CFM").
4. In sum and substance, the Petitioner assails the "Swiss Challenge" method stipulated in the impugned circular. CFM is the base or "Anchor Bidder". What the Petitioner seeks is that the terms of the Swiss Challenge auction be changed after the Petitioner knowing these terms participated in that auction, made bids, and found that CFM was willing to match the Petitioner's last bid. Mr Kamat's submission runs like this. The Swiss Challenge method adopted in the impugned circular gives an unfair advantage of a near-veto to the Anchor Bidder. It need not participate in the bid at all. It only needs to say that it is willing to match the highest bid, and this will result in the auction being knocked down in favour of the Anchor Bidder, even if another bidder is willing to go higher. The purpose of a 'proper' Swiss Challenge, he says, is to get the highest possible bid. This is defeated by the present method adopted in the circular.
5. The Petitioner ("Reliance"), CFM (the 2nd Respondent), Respondent No 4 ("Aditya Birla ARC") and Respondent No.5 Page 2 of 10 11th August 2023 ::: Uploaded on - 12/08/2023 ::: Downloaded on - 13/08/2023 02:46:08 ::: 934-OSWPL-21858-2023.DOC ("ARCIL") are all asset reconstruction companies. Respondent No.2 is Axis Bank. Respondent No. 6, SBI Capital Markets ("SBI Cap") is a category 1 merchant banker. It is the process advisor to coordinate the bid in question.
6. Following a Prudential Framework for Resolution of Stressed Assets issued on 7th June 2019, and which is not in dispute, the RBI came out with the impugned circular of 24th September 2021. Chapter IV of this circular says that a stressed asset can be sold following the Swiss Challenge method, the contours of which are said to be set out in Clause 85 (pages 133-134).
7. In June 2023, CFM submitted a bid to Axis Bank expressing its interest in acquiring the debts of VIPL to Axis Bank. And here is the rub: following the impugned circular, CFM was declared the Anchor Bidder. Notably, Reliance made no such bid or offer. It never sought to be declared the Anchor Bidder.
8. On 10th July 2023, Axis Bank published an Expression of Interest inviting prospective bidders to Swiss Challenge auction of the debt of VIPL.
9. Reliance placed its bid on 12th July 2023. Paragraph 13 of the Petition says so. A copy of the bid is at Exhibit "D" at pages 140 to
142. It does not appear to have been made without prejudice or subject to any challenge. It was, prima facie, an unqualified acceptance of the terms of the Swiss Challenge auction.
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10. SBI Caps confirmed on 21st July 2023 that Reliance was a prospective bidder.
11. The objection is to the stipulated Right of First Refusal or ROFR conferred on the Anchor Bidder under Clause 85. This is alleged to be anti-competitive.
12. Clause 85 as five sub-clauses. It reads:
85. The broad contours of the Swiss Challenge Method are as under:
a. A prospective transferee interested in acquiring a specific stressed loan may offer a bid to the lender(s), which shall be termed as the base-bid.
b. The lender(s) shall then publicly call for counter bids from other prospective buyers, on comparable terms, by disclosing the essential elements of the base-bid and also clearly specifying the minimum mark-up (as specified in Clause 82) that would be acceptable.
c. If no counter bid crossed the minimum mark-
up specified in the invitation, the base-bid becomes the winning bid.
d. If counter bid(s) cross the minimum mark-
up specified in the invitation, the highest counter bid becomes the challenger bid. The prospective transferee who provided the base-bid is then invited to match the challenger bid. If the prospective transferee who provided the base-bid either matches the challenger bid or bids higher than the Page 4 of 10 11th August 2023 ::: Uploaded on - 12/08/2023 ::: Downloaded on - 13/08/2023 02:46:08 ::: 934-OSWPL-21858-2023.DOC challenger bid, such bid shall become the winning bid; else, the challenger bid shall be the winning bid.
e. The lenders will then have the following two options:
i. Transfer the loan to winning bidder, as determined above;
ii. If the lender decides not to transfer the loan to winning bidder, the lender will be required to make immediate provision on the account to the extent of the higher of the following:
• The discount on the book value
quoted in the challenger bid,
and
• The provisioning required as per
extant asset classification and
provisioning norms.
(Emphasis added)
13. The only challenge is to Clause 85(d).
14. Paragraph 15 of the Petition makes reference to a letter dated 24th July 2023 from the Association of ARCs said to highlight 'onerous' clauses of the Expression of Interest. A copy of this communication is at Exhibit "E" at pages 143 to 147. It makes no reference at all to Clause 85(d). It is unclear why this letter was included in the Petition or what is to be made of this reference. Far from assisting Reliance, it would prima facie indicate that the Association of ARCs saw no difficulty with Clause 85(d) as it stands.Page 5 of 10
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15. Reliance's protest is of 4th August 2023 (Exhibit "F" at pages 148 to 153). This seems to be the first protest to Clause 85(d). It alleges that the method does not provide a 'level playing field'. The apprehension is that the auction will be knocked down in favour of CFM which has indicated it will match Reliance's last bid. Reliance is not being permitted to bid higher, following the terms of Clause 85(d). Hence, it is alleged, Clause 85(d) is arbitrary and even ultra vires Article 14 of the Constitution of India.
16. Mr Kamath's submission is that the finalization of the bid should be halted, at least temporarily. There is, he submits, a strong prima facie case. The balance of convenience favours not just the Petitioner but the larger public interest to ensure that the highest bid will be received. There is no conceivable prejudice to CFM, RBI or Axis Bank. To the contrary, he submits, Axis Bank only stands to gain from a higher bid.
17. Having considered these submissions and having briefly heard Mr Shenoy for RBI and Mr Dwarkadas for CFM, we are not inclined to grant ad-interim relief staying the bidding process. There can be no doubt that the Petitioner participated in the bidding process as long ago as on 12th July 2023. That participation by Reliance was not only unconditional but was after being made fully cognizant that the bidding was in a Swiss Challenge method, and that too by a clearly defined process including the now impugned Clause 85(d). The present outcome that Reliance apprehends was a clear possibility. Clause 85(d) specifically contemplates it. At the time of its bid, Reliance did not protest. It references the letter from Page 6 of 10 11th August 2023 ::: Uploaded on - 12/08/2023 ::: Downloaded on - 13/08/2023 02:46:08 ::: 934-OSWPL-21858-2023.DOC the Association, but even that does not impeach Clause 85(d). It is only now, well into the process, and after it participated knowing fully well all terms and conditions, that Reliance wants to mount a challenge to the circular -- which is itself not new and has been in place since 2021, with an amendment of 2022.
18. Most crucially, to our minds, Reliance never itself made an initial offer or attempted to be the Anchor Bidder. Had it done so, it would have, we have no doubt, most stoutly defended the ROFR to the Anchor Bidder.
19. The Swiss Challenge method in its most basic form provides for the base bidder (or anchor bidder) to be able to match the bid of the highest bidder and thus effectively knock out the highest bidder by matching or bettering the highest bidder's bid. On its own, this does not, prima facie, make the process illegal, invalid, arbitrary or ultra vires.
20. We also do not think it is appropriate, even for ad-interim relief, to pluck out a clause in isolation or to read it without complete context. The impugned circular runs fully for 32 pages from page 107 to page 139. The introduction at page 108 itself provides the initial context, which is to prescribe comprehensive, self-contained regulatory guidelines governing transfer of loan exposures. Chapter IV from page 123 onwards deals with transfer of stressed loans, including transfers to ARCs. "Stressed loans" are defined in Clause 9(k). Clause 56 says that bilateral negotiations for stressed loan transfers must necessarily be on a Swiss Challenge Page 7 of 10 11th August 2023 ::: Uploaded on - 12/08/2023 ::: Downloaded on - 13/08/2023 02:46:08 ::: 934-OSWPL-21858-2023.DOC auction method where the loans exceed Rs. 100 crores. This clause is not challenged. Sub-Section C of Chapter IV deals with transfers of loans to ARCs. Then comes Sub-Section D of Chapter IV, captioned "Price Discovery through Swiss Challenge Method". Clause 82 makes a Swiss Challenge method for transfer of stressed loans mandatory. A minimum mark up over the base-bid required for the challenger bid is to be specified. This cannot be less than 5% or more than 15%. And then comes Clause 85. Most important is Clause 85(a), which allows for any ARC to offer a bid to the lender; and which, if accepted, would be the Anchor Bid. But it is also not a simple knock-out by ROFR as is being suggested, at least prima facie. For there is also the wording of Clause 85(e), which gives the lender (in this case Axis Bank) two options, as extracted above. The second option is not to transfer to the winning bidder (either the challenger or the anchor bidder as the case may be under Clause 85(d)).
21. Overall, the entire thrust of the impugned circular seems prima facie to protect lenders. It is not meant to confer advantages on ARCs. What the circular does is to provide a series of sequential fail-safes. Every initial offer need not be accepted. Only the one that the lender finds acceptable becomes the Anchor Bid. Any ARC may apply, subject to specified qualifications. It is nobody's case that Reliance was prohibited from making an offer. Once there is an accepted offer, and an Anchor Bid is in place, the provision for "Price Discovery" begins by the stipulated Swiss Challenge method. There is no challenge to the adoption of this particular method. Indeed, there was no challenge to the entire circular even when Reliance placed its bid. What seems to be now suggested is Page 8 of 10 11th August 2023 ::: Uploaded on - 12/08/2023 ::: Downloaded on - 13/08/2023 02:46:08 ::: 934-OSWPL-21858-2023.DOC that the bidding process must or can continue indefinitely. Prima facie, there appears to be a complete misconception about the role of the Anchor Bidder. It is simply being given a chance to match the best available bid. At that point, the process must end. We are unable to see how any bidder can say that a bidding process must be in a particular manner. It is always open to a bidder to participate or not participate if it finds the terms of the bidding process not to its liking. But having once decided to participate, and having once participated without protest (and we also do not see how that could be done), it seems to us inconceivable that any bidder could only at the end of the process seek to alter the very terms on which that process began.
22. None of the ARCs have ventilated any such grievance.
23. These are our observations only for declining ad-interim relief. We have been constrained to make them since the challenge was pressed most vigorously. We note that the first prayer in the Petition is for a cancellation of clause 85(d). Since this is only an ad- interim order with strictly prima facie views, all contentions are left open.
24. The bid process will presently continue according to the circular.
25. List the Petition itself on 22nd August 2023. Subject to the roster, we will endeavour to dispose of the Petition finally on that day, and all sides are put to notice accordingly. All Affidavits in Page 9 of 10 11th August 2023 ::: Uploaded on - 12/08/2023 ::: Downloaded on - 13/08/2023 02:46:08 ::: 934-OSWPL-21858-2023.DOC Reply are to be filed by 18th August 2023. At this stage, no rejoinder.
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