Indirect holding rules threaten to block rail project

Almost all global and Indian bidders for one of India?s largest infrastructure project will get disqualified because of the government?s interpretation of indirect shareholding norms?the guidelines to prevent conflict of interest among companies. At stake is the Rs 6,000-crore ($1.43 billion) plan for modernisation of the country?s largest railway station at New Delhi.

Infrastructure experts are divided over whether the interpretation would knock the bottom out of financing plans for most such projects and make it difficult for the country?s plan to draw in $500 billion to finance sectors like roads, railways, power and ports.

At least 11 of the 13 bidders for the New Delhi station are going to be disqualified because they have common domestic or foreign investors with shareholding beyond the prescribed norms.

The guidelines of the request for qualification (RFQ) state that bidders with common controlling shareholders or other ownership interest?that is, where the direct or indirect shareholding by an entity in one bidder is over 5% of its paid-up & subscribed capital, and more than 1% of such capital in another bidder?shall be considered to have a ?conflict of interest?. The implication is they could affect the fairness of the bidding process and to prevent that should be disqualified.

The modernization project has drawn firms from Italy, China, Russia and Germany who have tied-up with domestic companies like DLF, GVK Group, MGF Land Ltd and DS Constructions. The foreign bidders include Italian government?s Grandi Stazioni SPA, which has tied up with Trif Infrastructure, while 25-billion-euro Deutsche Bahn AG has partnered DB Realty Pvt Ltd of Mumbai. Other contenders include the Russian Railways and the Chinese government-controlled China Railways? 18 Bureau Group.

A consultant involved with the project said all the 11 bidders have some indirect shareholding through common investors that include private equity or domestic and international mutual funds and FIIs. The project could be a test case for infrastructure project financing in the country, because the same principles have been applied to all infrastructure projects by the Centre and state governments.

According to the bidding norms, while banks, insurance companies and financial institutions as defined in the Companies Act are exempt from the ?conflict of interest? clause, private mutual funds, private FIIs and PEs are not. This has been inserted to ensure that there would be no conflict of interest or collusion to fix the bids. But as private equity funds, FIIs and many others invest through a network of common holdings, this has created problems for the bidders.

Shailesh Pathak, senior director, investments, ICICI Venture?that participated in the bid process, and is tying up with one of the bidders?said: ?In a project of such huge importance, crossholdings should mean ?common controlling shareholders with ownership interest? instead of mutual funds or private equity shareholding without management control. We at ICICI Venture would be co-bidding for large infrastructure projects in the future, and look forward to greater clarity on the crossholding issue.?

But leading legal expert Hemant Sahai, whose eponymous company has been vetting the agreements of several key infrastructure projects in India, said the conflict of interest norms was as per global norms. ?The strict guidelines will force evaluation based on technical capacity of the companies than just blind lowest cost tenders?, which ruin the project construction, he said.

Incidentally, neither the Delhi nor Mumbai airport modernisations had such clauses as they were bid before the Centre issued the current standard document for RFQs.

Sources said this is a reason why there has been no forward movement in the rail project although it has been a month since the shortlist was out. The railway ministry told FE there are a few issues to be sorted out at this stage. But as the bids are valid for six months the railways is confident of awarding the project before that.

It expects to shortlist six firms based on the technical evaluation and will then open their financial bids thereafter.

Other consultants agreed that in such landmark projects, crossholdings should definitely be looked at to avoid collusion. But the bidding criteria knocks off a majority of the competition only on the issue of crossholding, then it could be tough to find leading firms to participate.

Government officials involved with drafting these guidelines said that these are common to all sectors and they have not come across any such instance before. ?It depends on how the implementing agency deals with the matter,? an official said. The request for proposal (RFP) and the RFQ are standard documents and are used by a number of government agencies including the railways and the National Highways Authority of India for bidding out projects.