Reliance ARC challenges RBI Circular on Swiss Challenge as being discriminatory and arbitrary

The Reliance Asset Reconstruction Company (RARC), a subsidiary of Reliance Capital Ltd., has challenged the Reserve Bank of India's Master Circular on the Swiss Challenge Mechanism as being discriminatory, unjust and arbitrary.

Reliance Capital has recently been acquired by the Hinduja Group company, IIHL through NCLT. 

In a writ petition filed before the Bombay High Court, the Reliance ARC has stated that clause 85 of the RBI's Master Direction (Transfer of Loan Exposure) accords unlimited rights to the Anchor Bidder to match any bid in the Swiss Challenge process, which discourages the competition from the other prospective bidders and defeats the principle of maximization of value for the banks and lenders.

As per the clause 85 of the Master Direction, in a Swiss Challenge process once an Asset Reconstruction Company (ARC) has placed a bid for acquiring a stressed asset or NPA it is automatically accorded the status of Prospective Transferee or Anchor Bidder.  Consequently, such Anchor Bidder gets an unlimited Right of First Refusal (RoFR) to match the highest bid which is received during the Swiss Challenge Process, without any requirement to improve the bid.

The petition elaborated that this unlimited right of the Anchor Bidder is antithetical to the competition as the other prospective bidders/challenge bidders participating in the Swiss Challenge process know in advance that any bid they may submit will be matched by the Anchor Bidder. The Anchor Bidder does not even have to beat the counter bid. It just has to match it, and hence, the challenger bidder practically stands no chance of emerging as the winner.

This unlimited right vested in the anchor bidder is violative of the principles of equity and natural justice, and hence the clause 85(d) of the RBI Circular is liable to be struck down.

 The petition further states that an anchor bidder is given an undue and unfair advantage even before the actual Swiss Challenge is carried out, as the RBI Circular allows the lenders to accept a bid from the anchor bidder without a price discovery process which is not reflective of transparency or equal opportunity.

Notably, Reliance ARC is one of the three shortlisted Asset Reconstruction Companies (ARCs) who are allowed to participate in the Swiss Challenge process being conducted by the SBI Caps for the sale of Vidarbha Industries Power Ltd.’s  (VIPL) debt. The two other shortlisted ARCs are Aditya Birla ARC and ARCIL. The lenders of VIPL have declared a Rs 1,220 crore bid submitted by the Ahmadabad based CFM ARC as the anchor bid.

The Reliance ARC apprehends that in the Swiss Challenge process being carried out for the sale of VIPL  debt, the anchor bidder, CFM Asset Reconstruction Company, with an unlimited right to match the counter bids from challenger bidders, will ultimately emerge as the winner by following a process which is both, discriminatory and arbitrary.

The petition states that CFM ARC has been selected as the Anchor Bidder without any non refundable pre-deposit, while the other prospective bidders in the Swiss Challenge process are forced to provide a non-refundable fee of Rs 10 lakh while submitting the Expression of Interest (EOI). Further, the prospective bidders are also required to submit a bid bond of RS 25 lakh.