Revisions undermine bidding

Closure on a pre-agreed date will make the IBC process both credible and ethical

In cases where bidding is the norm for the sale or lease of an asset, or even for government procurement, it is accompanied by a disclosure on the last date of bid submission. Under the current insolvency resolution processes that is going on for a host of companies, there have been instances of bids being revised, sometimes even after the last date.

While the Insolvency and Bankruptcy Code (IBC) empowers the committee of creditors (COC) to decide on which bid to accept, the Supreme Court set the rule by telling the National Company Law Appellate Tribunal on July 17 that it was not empowered to permit or reject offers in the Bhushan Power & Steel (BPSL) case.

Tata Steel, that was the winner after two rounds of bidding for BPSL, had gone to the apex court challenging the NCLAT direction to allow bids for a third time. Yet, revised bids were called. The whole episode started after the UK-based Liberty House, which has two insolvent companies in its pocket, decided to submit a resolution plan on February 20 after the bid submission date on February 8. Since this put the creditors in doubt, the Tata Steel bid could not be finalised though by June-end bids had been called twice over and Tata Steel had communicated that it was the highest qualified bidder for BPSL.  

This leads us to the question whether the last date for bid submission has any sanctity or can bidders be permitted to revise offers as many times as they want? More importantly, should the authorised entity to whom a bid is submitted accept revisions if they appear more lucrative?

Creditors will any day prefer a higher bid so that the haircuts for them are smaller and, hence, the risk of being questioned for letting an asset go cheap is somewhat mitigated. Take the case of Ruchi Soya, where the bid put forth by Adani Wilmer, as reported by Business Standard, was higher than that of Patanjali after a revision.

The value of various resolution plans is never declared by creditors. BPSL was a peculiar case where Abhishek Manu Singhvi, Tata Steel lawyer, openly stated in the NCLT that the Liberty House bid was higher by “only Rs10 billion”. The Liberty House offer, he argued, came after it was informed that the Tata Steel bid was the highest. Given that, he said, the Liberty House offer should not be considered. 

This clearly implies that if bid value secrecy is not maintained, then revision of bids even after the due date can happen endlessly, deteriorating the morale of employees of the insolvent company and the condition of plant and machinery.

Outside the resolution process, bidding for procurement has had a tradition of allowing the second preferred bidder to match the price of the most preferred bidder even after the closure of the first round of bidding. Earlier, this was practised to give purchase preference to PSUs and now it is used for Make in India. The methodology for these revisions, however, is well laid out.

As recently as last week, the bidding method for the second auction for small fields of oil and gas allowed bidders to “revise or change” bids, but before the bid closing date. Here, the winner will be decided on the basis of the revenue it is willing to share with the government at the lower revenue point (LRP) and the highest revenue point (HRP). Bidders, however, are expected to revise their bids once they find out bid value of rivals or if they are able to form a cartel with other bidders.

While revision of bids, in principle, may not be harmful for the firm that has put assets on offer, it can vitiate an otherwise transparent process. Closure on a pre-agreed date will make the process both credible and ethical if bidding is transparent where everyone can see each other’s bid value during the process itself, making it a true auction.