2025 (6) TMI 1871 - HC - Indian Laws

Suit for declaration that a notice issued by the defendants/appellants inviting Expression of Interest (EoI) for assignment of debt is non est illegal and void and for ancillary reliefs - locus standi/cause of action - lack of transparency - Violation of the RBI Circular - appellant no.1 is a Government entity or not - appellants argues that the appellant no.1 is not a Government company coming within the purview of Article 12 of the Constitution of India and as such is not bound by the rigours applicable to a Government company in such cases. Locus standi/ cause of action - HELD THAT - The attempt of the plaintiff/respondent to challenge the auction process is suspect since it took a resolution at 11 a.m. on April 16 2024 itself the date on which the impugned notice of Expression of Interest was published without even submitting its EoI for the same. It is clear from the impugned notice that upon submission of EoI the short-listed eligible bidders would be allowed access to the Bid Process Document and Virtual Data Room containing further information for commencing due diligence in the concerned debt account and making their irrevocable binding bids. Thus from the notice itself it is clear that the EoI had no binding effect and did not even require a prior deposit to be made. The EoI as is self-explanatory from the term itself merely expresses the willingness of the entity submitting the same to participate and does not bind the entity making such submission in any manner or subject the entity to losing out on something or to any penalty if it later on withdrew from the tender process after having access to the Bid Process Document and Virtual Data Room containing further information. As such having not met the above dual test the plaintiff/respondent does not prima facie have the locus standi or cause of action to file the suit. Alleged lack of transparency - HELD THAT - In Ravi Development 2009 (5) TMI 1009 - SUPREME COURT the Supreme Court held that the Swiss Challenge method is transparent inasmuch as all the parties were well aware of the right of first refusal accorded to the originator of the proposal . As per the method it was known to all the parties that the originator of the proposal must in consideration of his vision and his initiative be given the benefit of matching the highest bid submitted. It was further held that the said method is beneficial to the Government inasmuch as the Government does not lose any revenue as it is still getting the highest possible value - In fact in the Expression of Interest in the instant case read with the Deal Summary the defendants/appellants clearly mentioned the base- bid and the mark-up price and fixed the reserved prices on the basis of the same. By doing so it could not be said to proceed in an opaque manner. Thus there could not be any challenge to the transparency of the process per se. The impugned EoI notice clearly provided that the short-listed eligible bidder would be allowed access to the Bid Process Document and virtual data room containing further information before making their final irrevocable binding bids. Thus it was premature for the plaintiff to say that the process lacked transparency. Violation of the RBI Circular - HELD THAT - No clear averment has been made that there were no external valuation reports obtained by the transferors or that there was no clear policy in place which in any event such state of affairs could not have been within the knowledge of the plaintiff since it did not even submit the EoI for becoming entitled to have access to relevant information. Only upon participation by submitting EoI and making proper enquiries and examining the data which would be made available to the eligible bidders during the due diligence period would it be possible for the plaintiff/respondent to ascertain the same. Thus the said challenge also cannot be upheld. There is no palpable violation of the clauses of the RBI Master Circular in the impugned notice inviting EoIs or the accompanying Deal Summary. Whether the appellant no.1 is a Government entity? - HELD THAT - There are no palpable violation of natural justice being either alleged or proved at the stage by the respondent. In any event such issue is rather academic as the RBI Master Circular is applicable to the appellant no.1 in any event in terms of Clause 3 of the Chapter-I thereof. Sub-clause (f) includes all NBFCs within the fold of the Master Circular and it is admitted in the very first paragraph of the stay application filed in the present appeal that the appellant is an NBFC. Thus we are not required to further dwell unnecessarily on such issue. Conclusion - No prima facie case and/or possibility of irreparable injury has been made out by the plaintiff/respondent more so since the suit itself is prima facie not maintainable at the behest of the plaintiff/respondent. Application disposed off.

Summary

1. ISSUES PRESENTED and CONSIDERED

The Court considered the following core legal questions:

(a) Whether the plaintiff/respondent, a Non-Banking Financial Corporation (NBFC), has locus standi and cause of action to challenge the notice inviting Expression of Interest (EoI) for assignment of debt issued by the defendants/appellants.

(b) Whether the Swiss Challenge method adopted in the auction process is valid and whether the selection of the Anchor Bidder and the mode of auction comply with applicable legal and regulatory frameworks.

(c) Whether the impugned notice and auction process comply with the Reserve Bank of India (RBI) Master Circular and related guidelines, including adequacy of due diligence period, disclosure of essential elements of the base-bid, and valuation requirements.

(d) Whether the appellant no.1 qualifies as a Government entity under Article 12 of the Constitution of India, thereby attracting stricter standards applicable to Government companies.

(e) Whether there is any collusion between the plaintiff/respondent and the borrower, potentially affecting the bona fides of the challenge.

(f) Whether the ad interim injunction granted by the Trial Court was justified based on the prima facie case and balance of convenience.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Locus Standi and Cause of Action

The Court examined the principle that ordinarily only participants in a tender process can challenge breaches of its terms. Reliance was placed on precedents distinguishing challenges to the terms of a tender itself (where participation is not mandatory) from challenges to breaches of such terms (where participation is mandatory). The Court referred to the Supreme Court decisions which held that if the tender terms themselves are challenged, a challenger need not participate but must demonstrate eligibility and genuine interest to participate.

In the present case, the plaintiff/respondent challenged the very terms of the tender. However, the Court found that the plaintiff failed to plead eligibility or bona fide interest to participate, as it did not submit any EoI nor claim to satisfy the eligibility criteria under the RBI guidelines or the EoI notice. The plaintiff's resolution to challenge the notice was taken on the same day it was issued, without any attempt to participate, raising doubts about bona fides. The Court held that to prevent frivolous or vexatious challenges, a two-pronged test must be satisfied: (i) eligibility to participate, and (ii) genuine interest in participating. The plaintiff/respondent failed both.

Thus, the Court concluded that the plaintiff/respondent lacked locus standi and cause of action to maintain the suit.

(b) Validity of the Swiss Challenge Method and Auction Process Transparency

The Court noted that the Swiss Challenge method is recognized as a valid and transparent method of auction, even in Government tenders, as affirmed in the cited Supreme Court precedent. The method inherently involves selection of an Anchor Bidder whose bid forms the base-bid, against which others can submit counter bids. The RBI Master Circular explicitly contemplates this method, requiring disclosure of essential elements of the base-bid and minimum mark-up price for counter bids.

The plaintiff/respondent challenged the arbitrary selection of the Anchor Bidder and alleged lack of transparency. The Court found no requirement in the RBI Circular to disclose the basis for selecting the Anchor Bidder. The Deal Summary accompanying the EoI notice clearly stated the base-bid, mark-up price, reserve price, and bidding procedure, demonstrating transparency. The Court held that the challenge to transparency was premature as short-listed eligible bidders would have full access to the Bid Process Document and virtual data room for due diligence before making binding bids.

(c) Compliance with RBI Circular and Adequacy of Due Diligence Period

The plaintiff/respondent contended that the due diligence period was inadequate and that two external valuation reports mandated by the RBI for loan exposures above Rs.100 Crore were not obtained. The Court analyzed Clause 59 of the RBI Circular, which requires "adequate time" for due diligence but does not specify a fixed duration, leaving adequacy to be assessed contextually.

The Court found that nine days were provided for due diligence, commencing immediately after the last date for EoI submission, with online access available throughout, including public holidays. This was held to be adequate and not violative of the RBI Circular. Regarding valuation reports, the Court observed that the plaintiff/respondent, without submitting EoI or accessing data, could not establish whether valuation reports were obtained or a valuation policy existed. The Court rejected bald allegations unsupported by material.

Further, the Court found that the base-bid's essential elements, including reserve price and mark-up price, were disclosed in the Deal Summary, and the bidding process was clearly delineated, negating claims of non-disclosure or arbitrariness.

(d) Status of Appellant No.1 as a Government Entity

The Court considered the contention that appellant no.1 is a Government company bound by Article 12 of the Constitution. However, it found this issue academic because the Swiss Challenge method is valid even for Government tenders, and the RBI Master Circular applies to all NBFCs, including appellant no.1. Therefore, the question of Government entity status did not affect the legality of the auction process or the challenge.

(e) Alleged Collusion between Plaintiff/Respondent and Borrower

The appellants alleged collusion, supported by two factors: (i) the plaintiff/respondent challenged the reserve price as too low, a position beneficial to the borrower but adverse to prospective bidders, and (ii) the plaintiff/respondent took a resolution to challenge the notice on the very day it was issued, without submitting EoI or participating.

The Court observed that a low reserve price benefits bidders by enabling better bargains but harms the borrower's interest. A challenge on such grounds by a prospective bidder was thus suspicious. The timing and manner of the challenge suggested a pre-planned attempt to delay the auction, possibly to benefit the borrower. While the Court did not conclusively find collusion, these factors raised prima facie suspicion.

(f) Grant of Ad Interim Injunction by the Trial Court

The Court scrutinized the Trial Court's order granting ad interim injunction, finding that it failed to apply the correct legal tests or consider relevant facts and principles. The Trial Court relied on vague allegations of irregularities, arbitrary selection of the Anchor Bidder, and the need to maximize recovery, without appreciating the validity of the Swiss Challenge method or the absence of prima facie case and irreparable injury.

The Court held that the Trial Court's conclusions were erroneous in law and fact, and the injunction was wrongly granted in a blanket manner. The impugned order was set aside accordingly.

3. SIGNIFICANT HOLDINGS

The Court articulated the following crucial legal principles and conclusions:

"Since the purport of the challenge in the suit filed by the plaintiff/respondent in the present case assails the very terms of the tender document, it cannot be said that its participation in the process was a mandatory precondition for filing the suit."

"Only the entities who participated in the tender process pursuant to a tender notice can be allowed to make grievances about the non-fulfilment or breach of any of the terms and conditions of the tender documents concerned."

"A two-pronged test has to be met by the challenger in such cases, to have locus standi to prefer such challenge: (i) The challenger must have the eligibility otherwise to participate in the tender; and (ii) The challenger must otherwise be interested in participating in the auction process."

"The Swiss Challenge method is transparent inasmuch as all the parties were well aware of the 'right of first refusal' accorded to the 'originator of the proposal'. The said method is beneficial to the Government inasmuch as the Government does not lose any revenue as it is still getting the highest possible value."

"Clause 59 of the RBI Circular only stipulates that the transferor(s) must provide 'adequate time' for due diligence by prospective acquirers, which may vary as per the size of the loan. Hence, no specific time period has been stipulated. Interference by the court is limited to cases of gross high-handedness or violation of statutory provisions."

"The invitation for EoI is merely an inchoate stage in the auction process and cannot be said to be the commencement of the actual bid process. The said exercise is only a precursor to the actual bidding process, to screen out the unwilling and ineligible participants and fence-sitters."

"The learned Trial Judge erred in law and in fact in granting ad interim injunction in a blanket fashion by merely narrating the submissions of parties and without adverting to the aforementioned aspects of the matter at all."

"The impugned order is tainted by errors of law, fact as well as by perversity for non-consideration of relevant materials and legal principles."

On the basis of the above, the Court set aside the ad interim injunction granted by the Trial Court, holding that the plaintiff/respondent failed to establish a prima facie case or irreparable injury, and lacked locus standi and cause of action. The Court also observed that the findings were tentative and would not bind the Trial Court at the final hearing.