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Coal Block Auctions: Winning Bid Rejected!

Published on Sat, Mar 28,2015 | 15:53, Updated at Mon, Mar 30 at 17:57Source : CNBC-TV18 |   Watch Video :

Can a winning bidder lose the auction? The recent coal block auctions threw up an interesting twist when the government rejected the winning bids of Jindal Power and Balco. The news broke on Twitter when Coal Secretary Anil Swarup said winning bids for 8 blocks were re-examined and only 5 passed muster. The government rejected Balco’s winning bid for Gare Palma IV/1 and Jindal Power’s winning bids for Gare Palma IV/2 & 3 and Tara. Coal minister Piyush Goyal says the bids were rejected because they were ‘outliers’?!?

Can a winning bid, that has cleared technical eligibility criteria and is above the mandated price thresholds, be rejected for being too low? Can the government’s ‘outlier’ argument sustain in court? To discuss this, Menaka Doshi is joined by well known Counsels, Vikram Nankani and Gopal Jain.

WINNING BIDDER REJECTED!
Coal Block Auction: Power

Reverse Auction
1.    Meet Technical Criteria + Submit Initial Price Offer
-    Initial Price Offer < Ceiling Price
2.    Top 5 of 50% of technically qualified bidders proceed to final round

WINNING BIDDER REJECTED!
Gare Palma IV/2 & IV/3

Technically Qualified Bidders
Jindal Power Ltd
Adani Power Maharashtra
DB Power Ltd
GMR Chhattisgarh Energy
Jindal India Thermal Power
JSW Energy
KSK Mahanadi Power
Reliance Geothermal Power
Sesa Sterlite

WINNING BIDDER REJECTED!
Gare Palma IV/2 & IV/3

Ceiling Price: Rs 700/tonne
Floor Price (after Initial Price Offers): Rs 0
JPL Bid: - Rs 108/ tonne

WINNING BIDDER REJECTED!
Gare Palma IV/2 & IV/3

‘…Jindal Power has not been declared as Successful Bidder of Gare Plama IV/2 & 3 by Central Government interalia on the ground that the highest bidder does not reflect fair value’

Government Letter to JPL
20.03.2015

Doshi: If you look at the two step reverse bidding auction or reverse auction process for power companies when it comes to coal blocks, both Jindal Power and Balco met all the technical criteria, they cleared the price thresholds, their bids were above that, that is the only way they could have participated in the e-auction. They made the final highest bid so to speak and yet they lost the auction. On what grounds if you have cleared all the criteria, participated in the auction, won the auction, yet not be granted the blocks?

Jain: It would be most unfair and unjust because after the race is over and there is a winner you can't put the clock back. The whole purpose of having a transparent auction system is that whoever is the winner of that process is entitled to the block and it was to minimise any form of government intervention or exercise of discretion. However, clearly the government wants to still have the last word and that would send out a wrong signal because when you have a concluded process and it has been done as per the rules of the game then the result should stay as it is, which is why I think the court has also entertained it and it has given protective orders till it decides the matter finally.

WINNING BIDDER REJECTED!
Standard Bid Document

Preferred Bidder not to become Successful Bidder in certain cases
‘…in the event that the Nominated Authority or the Central Government determines that a Preferred Bidder should not be declared the Successful Bidder on account of any reason whatsoever…then the Coal Mine may be subjected to re-auction or being granted to the custody of a Designated Custodian, and this tender process may be annulled’

WINNING BIDDER REJECTED!
Standard Bid Document

Rejection of Bids
‘Notwithstanding anything contained in this Tender Document, the Nominated Authority reserves the right to reject any Bid and/or to annul the tender process and reject all Bids at any time without any liability or any obligation for such acceptance, rejection or annulment, and without assigning any reasons thereof’

Doshi: The government can have the last word, can't it? Because if you look at the standard bid document in several places where it deals with such circumstances there is no requirement for the government to explain why a preferred bidder will not become the successful bidder or why a bid is being rejected?

Nankani: We must remember that tendering ultimately falls in the realm of contract law. However, because we have the government on one side and that is who is the tenderer in this case you have to import certain overarching principles which are found in constitutional law. What are the parameters of those principles under the constitution? Essentially what they mean is that in the decision making process the government must act fairly and transparently.

As long as the government does not act in an arbitrary manner or the decision is not perverse the courts will not interfere because they will keep this factor in mind that ultimately a contract is concluded only when the bid is accepted and the proposal made by the bidder is found to be in order by the government. So, these are the broad principles on which the government would like to exercise its prerogative.

The government has inbuilt in the tender conditions also certain clauses which give this authority or prerogative to them. There are clauses which would give government the right not to accept a bid without assigning a reason. In fact, the government can go to the extent of abandoning the entire process of tendering. Given all of that, the government can tomorrow as they have said in this case that they have found the value not to be fair. The government will have to marshal all material to justify this, it can't just get away by saying that it is not fair.

Doshi: That is the problem, the government hasn’t offered any explanation to the two bidders involved here as to why they think it is a bid that does not represent fair value. Even in court as yet, while they have submitted the file to the bench, they haven’t offered any explanation in public as to why JPL and Balco made the winning bids but are not the winning bidders?

Nankani: On one extreme you have a situation where government need not assign any reasons. On the other hand this is not some kind of a quasi judicial order where copious reasons have to be given and pages have to be written in support of those reasons.

Doshi: Gopal, do you agree that no further explanation is required on behalf of the government? Optically these do look like low bids because if you look at some of the other blocks that were bid out, they were bid out at far higher prices. Of course this is different grades of coal, there are different distances from railways etc but this was a block owned by Jindal Power earlier on. So, everybody's expectation was that Jindal would be desperate to win back this block and therefore the bid prices would in fact be very high. That has not turned out to be the case. Yet don’t you think the government needs to offer some explanation?

Jain: I think it is not some explanation, you have to have a slid explanation because interference in such a process should be rare and exceptional. Merely because you think that it is not a fair value is not sufficient ground to interfere.

Please remember we are having the first set of auctions for coal blocks. We are moving from an administrative allocation regime to an auction regime. The whole purpose was there would be clarity and certainty and we won't have a cloud hanging on these things. Whereas all that these things ultimately do that if you decided to take a decision but not give an explanation, it only sends out a signal that nobody can be certain or plan their business affairs.

WINNING BIDDER REJECTED!

Block                                    Reserves(MT)  Bid Price
Amelia North                           70                           712
Talabira                                    10                           478
Trans Damodar                      47                           940
Gare Palma IV/2, 3                 155                         108

Doshi: To turn it around a little bit, how would you respond to the fact that these bids do look optically low? What is it that you would expect the government to do, offer an explanation saying they are low bids, we want to rebid this block, offer that only to the bench in court, offer that to the bidders as well, make that public.. In making that public are you casting a shadow then on your entire auction process? I am not clear what you expect the government to do, can you spell it out?

Jain: First assuming they feel that it is not fair value and they have some good grounds on which they say so, they must certainly make it public because we are in a regime of transparency. When we talk of an auction we think of an open, fair and transparent process. So, if you have credible or actionable material you must first put it to the successful bidders to say this is what we believe is the information we have or this is what we have analysed from all the data points. Ask them for an explanation, consider it and only then take this extreme decision.

Second, what you said is all perception. It is not based on any hardcore evidence or material, at least none of it is in the public domain. This is not the way in which we should have decision making in the 21st century with good governance.

WINNING BIDDER REJECTED!
JPL Writ Petition

-    Govt has behaved in ‘arbitrary, irrational, biased and unreasonable manner’
-    Govt has not found any deviation in the auction process
-    Govt’s rejection order violates Articles 14 & 19 (1) (g)
-    Govt has violated principles of natural justice, hasn’t shared investigation findings

WINNING BIDDER REJECTED!
-    JPL Writ Petition
-    Revenue maximisation was not the goal of these coal block auctions
-    JPL’s bid not the only outlier
-    In 5 of the 8 bids re-evaluated there was only a Rs 2 difference between initial price & final price
-    As winning bidder JPL couldn’t bid for any other mine for that power project

Doshi: I am going to layout what the Jindal Steel petition says especially with the Gare Palma blocks just to give you a sense of what their argument in court is. I want both of you to tell me based on jurisprudence, how the Delhi High Court is likely to look at these arguments, the case is already underway. Jindal Steel says, the government behaved in an arbitrary, irrational, biased and unreasonable manner, that the government has not found any deviation in the auction process. In fact it is consistently claimed that the auction was fair and transparent, that its rejection order violates Articles 14 and 19(1)(g). It violates the principles of natural justice as it hasn’t shared its investigation findings with Jindal. Revenue maximisation was not a goal of these auctions therefore they cannot hold up this issue of revenue, that Jindal's bid was not the only outlier. There were 9 bids in total that were investigated and in some bids 5 out of those 8 or 9 bids there was only Rs 2 difference between the initial price and the final price. Finally, Jindal says that since we were winning bidder in this particular block we couldn’t bid for any other coal blocks with regards to that particular power plant. So, we have been left out of the auction altogether. I know you hold the view, Vikram, that the government can intervene, the government can cancel a bid, the government can reject without explanation. How will the court look at these arguments?

Nankani: The court will have to balance this. On one hand you have a larger public interest and on the other hand you have issues where a bidder needs to know in a good governance environment as to why he has not been accepted even though he has satisfied all the criteria. As we understand, the government has submitted the file to the court, that is where the court may perhaps find some material. If the court finds that the privilege claimed by the government in not disclosing it to the other side but handing over the file merely to the court is not good enough, the court will then take a decision as to whether to share these documents with the petitioner and maybe the petitioner will get an opportunity to deal with them.

However when you use the word jurisprudence, the jurisprudence is very clear that the government is not bound to even accept the lowest bid. This law has been laid down for the last almost three decades. Therefore as long as the government and this more so in the case of natural national resources that we have now seen and  very often we find that if in round one the government has cancelled the process and have gone in for the second round of bidding the price is much better or the government gets a better deal. These are all issues which have to be tested today on the yardstick of reasonableness. However I think the latitude which is available to the government is very wide. It has got a very wide elbow room and I think the court will respect that and look at it from that perspective.    

Doshi: Would you agree, Gopal, especially keeping in mind that natural resource and public interest have now become catch phrases? If the government says I don’t want to give this out if I have the slightest suspicion that this is not the best bid I can get and I want to rebid this, is the court going to stand in its way?

Jain: The grounds that you read out seem to be powerful grounds. Second, what is public interest? Public interest also lies in maintaining the sanctity and integrity of the decision making process by which there is now a winning bidder. As you said, the race is over and they have won fair and square at least so far as the outside world is concerned.

When you have a bidding strategy, when you plan your business affairs and the Supreme Court clearly in the Vodafone case says, we need to have certainty so that people can plan their business affairs. So, when you participate in this, this is part of your bidding strategy. The whole point is that even in the presidential reference the government has clearly said that revenue maximisation is not our objective. The only ground which at least we hear from the debate in the public domain is that the price was not fair, it is lower. You yourself say that there is a larger public purpose in first having an auction process and then the end result of supporting power plants or steel plants etc and generation of cheaper power. So, you have to look at it in the larger public interest context that do you want to have an auction process and apply old rules which apply to tenders of a different kind.

 
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