Private FIs get more leeway in PPP projects

Written by Arun S | Surabhi Rastogi | Surabhi | New Delhi, Sep 29 | Updated: Sep 30 2008, 08:03am hrs
Private financial institutions, like PE funds and mutual funds, will now find it easier to invest in infrastructure projects done through public private partnership (PPP); the finance ministry has clarified that bidders cannot be disqualified because a common private financial institution holds shares in them beyond the prescribed norms.

It is clarified that bidders should not be disqualified on the ground that a private financial institution has a de minimis stake in them, the finance ministry said. The bidding criteria laid out under request for qualification (RFQ) for PPP projects state that bidders having common controlling shareholders or other ownership interestthat is, where the direct or indirect shareholding by an entity in one bidder is over 5% of its paid-up and subscribed capital and more than 1% of such capital in another biddershall be considered to have a conflict of interest that affects the bidding process and may be disqualified.

North Block has now said this clause in the RFQ should be modified. This will ensure that institutions such as PE funds, private mutual funds and private foreign institutional investors (FIIs) are exempted from the clause. The earlier guidelines only provided exemption from disqualification to banks, insurance companies, pension funds and public financial institutions.

One of the biggest casualties of the stringent criteria could very well have been the modernisation of the New Delhi railway station. As reported by FE earlier, award of the project contract has been delayed largely because of this clause.

In fact, 11 bidders for the New Delhi station project faced disqualification as they were having some indirect shareholding by common investors, including private equity or domestic and international mutual funds as well as FIIs.

The move comes at a time when a number of projects, especially in sectors like aviation, highways, railways and ports, are being bid out under the PPP model where the guidelines will apply. It is estimated that the sector requires investments worth $475 billion during the Eleventh Five-Year Plan, of which a sizeable portion should come from the private sector. While the decision will throw open the arena to more players, analysts point out that such a blanket exemption may not be a very positive step and could lead back to the original issue of conflict of interest.

Hemant Sahai, whose eponymous law firm has worked on many infrastructure sector contracts, pointed out, A complete clearance such as this is not very good, as there should be some regulation on private financial entities to ensure that they do not distort the entire bidding process.

Sahai pointed out that there is also a lack of clarity on the expression de minimis in the context, as it is not clear who will decide what level of equity is irrelevant. In legal parlance, the term is meant to be too small a matter to be relevant.

Shailesh Pathak, senior director & head of infrastructure, ICICI Venture, also reflected similar concerns while welcoming the decision, Cross-holdings by public market operators like domestic mutual funds dont influence managements. However, with other private financial institutions, care is necessary to guard against collusive bidding; a total exemption would be inadvisable.

Vinayak Chatterjee, chairman, Feedback Ventures, an infrastructure consultancy, said industry chambers have recommended that the government should raise the limit of direct or indirect shareholding by an entity in bidders to 11% to establish the conflict of interest.