In a first in the power sector, lenders of an under-construction project have opted for the Swiss Challenge auction to seek alternative investors. The lender consortium led by the State Bank of India (SBI) and comprising the State Bank of Bikaner and Jaipur, L&T Infrastructure Finance and PTC Financial Services, which has extended debt finance to SKS Power Generation (Chhattisgarh) Limited for the Binjkote thermal plant in Chhattisgarh, is conducting this auction. IDBI Capital Markets, the adviser appointed for the transaction, invited bids from interested parties in October 2016. This move follows the issuance of the guidelines on sale of stressed assets by banks by the Reserve Bank of India (RBI) on September 1, 2016.
These guidelines are an effort to improve the framework for the sale of stressed assets by banks, which are required to take steps to identify these early on and take suitable measures to ensure better price realisation.
The Swiss challenge auction is one of the recommended methods of selling stressed assets under these guidelines. The broad contours of this method are as follows:
- A prospective buyer interested in buying a specific stressed asset may offer a bid to the bank. If the bidder offers more than the minimum percentage specified in the bank’s policy (for example, 30 per cent of the outstanding loan) in the form of cash, the bank will be required to publicly call for counter bids from other prospective buyers.
- Once bids are received, the bank will first invite the securitisation company or asset reconstruction company which has already acquired the highest stake to match the highest bid. In the order of preference to sell the asset, the original bidder comes next, followed by the highest bidder during the counter-bidding process.
- Subsequently, the bank can either sell the asset to the winning bidder as determined above or make adequate provisions immediately as per the rules if it decides not to sell the asset.
The SBI-led lender consortium has resorted to this method to seek investors, as there has been considerable cost escalation and time delays in the execution of the two-phase 1,200 MW project, of which the 2×300 MW Phase I is under construction along with the infrastructure for the entire project. The original project cost of
Rs 37.87 billion approved by the lenders at 75:25 debt-equity has escalated to Rs 56.73 billion. This amount is the latest revision sought by SKS Power Generation and is yet to be approved by the lenders, who already approved a cost revision of Rs 52.4 billion in August 2015. In July 2015, the original scheduled commissioning date for the first two units was revised from April and July 2014 to March and June 2016 respectively. The lenders also accepted this. However, the company requested the lenders for another extension, until December 2016. The project has been delayed due to several factors, including non-performance of the selected engineering, procurement and construction contractor.
SKS Power Generation is developing the project based on an MoU signed with the Chhattisgarh government in January 2008. In 2010, the company signed the bulk power transmission agreement with the Power Grid Corporation of India for evacuation of the entire power. It placed the order for the boiler and turbine generator with Cethar Limited and Chinese Harbin respectively. The fuel supply agreement for 2.6 million tonnes per annum of coal required by Units 1 and 2 of Phase I signed with South Eastern Coalfields Limited in 2013 was valid only if the units started commercial operations by February 2016. However, since this has not happened, there is no clarity regarding fuel linkage. About 512 acres of land has been acquired, which the company claims is sufficient to build Phase I of the project that is under sale. The total land requirement for both the phases is 570 acres. The environment, civil aviation and water clearances are all in place.
As of June 2016, about 95 per cent of the engineering and procurement works and 77 per cent of the construction had been completed. The cost incurred as of August 2016 was Rs 43.92 billion. Interested bidders were required to submit a demand draft of Rs 10 million following which they had to sign a non-disclosure agreement for getting access to the data room with all documents related to the project. This was to be followed by the submission of a bid package comprising a cover letter, statement of legal capacity, request for qualification and the price bid for the purchase of the asset by interested bidders. Information on the outcome of this bid process is not available.
In the past, the Swiss Challenge method has been used in India for awarding infrastructure contracts for housing, roads and railway projects. However, following the new RBI guidelines, this is the first time that lenders to a power project have resorted to the Swiss Challenge method in an attempt to reduce their stressed assets. Although the nature
of the underlying asset is the key determinant of the success of any auction, the outcome of the Binjkote power plant auction will certainly set a precedent for other such stressed assets in the sector.