In a bid to recover INR 467 Cr from 11 of its stressed assets, SBI has announced an auction under the Swiss Challenge Method in the first week of November 2019 and another one for INR 134 Cr worth of assets in the third week of November, 2019. Asset Reconstruction Companies (ARCs), Banks, NBFCs and other financial institutions are likely bidders and buyers.
But how will the auction work?
Under a conventional auction, interested buyers placed their bids and the best bidder takes home the asset. Imagine the same with a financial asset – in this case, some of SBI’s stressed loans. That gives you sale of a financial asset using a typical auction process.
What if it were possible to filter out non-competent or frivolous bidders and streamline the process? It would result in a much more focused, efficient and competitive auction with a more effective price discovery mechanism. This is exactly what the Swiss Challenge Auction method facilitates.
Under this method, the auction process opens with a bid already in hand which maybe ‘challenged’ going forward, so to say. Here is how the process unfolds:
- The auctioning entity already has a proposal from an interested credible party
- Details of this proposal in hand are published
- Counter proposals are invited
- The initial bidder has the opportunity to improve / rectify their proposal after counter proposals are received
- Like the conventional auction, this auction too concludes with the object of the auction being awarded to the most suitable bidder
In line with regulatory guidelines, the Swiss Challenge Method can be used to find a means to exit stressed assets by banks. An RBI report published in September 2019 outlines how the central bank’s guidelines for stressed asset sale by banks envisage development of a vibrant secondary market for the same through auctions. This would help achieve a 3-fold agenda:
- A clean-up of banks’ balance sheets
- Acquisition of financial assets by ARCs / FIs at a competitive, market-determined price
- Stressed asset resolution by the ultimate buyers i.e. through non-bank entities using multiple resolution options – restructuring, change of management of the borrower, security enforcement, referring the borrowers under IBC (Insolvency & Bankruptcy Code), amongst others
The Swiss Challenge has been used in the past to award large scale housing, road and infrastructure projects in India. Also, this is not the first time SBI is using this solution to off-load its stressed assets.
Here’s how SBI adopts the Swiss Challenge Auction method, with the technical and legal requirements woven in:
- EOI (Expression of Interest) to be submitted by interested participants
- Execution of NDA (non-disclosure agreement) to accompany submission of EOI
- Details of the stressed accounts under auction to be shared with the bidder via Preliminary Information Memorandums
- Due diligence exercise to be conducted by bidders / participants immediately after submission of NDA
- Final bids to be submitted by participants through e-auction method
SBI proposes to off-load these financial assets on “as is where is” basis. Top 5 of these exposures, aggregating to ~INR 400 Cr, of the total 11 stressed assets scheduled to be auctioned in early November 2019, are:
Once this process concludes successfully, SBI’s balance sheet will be lighter by INR 467 Cr. The bank also has another sale of ~INR 135 Cr of stressed assets lined up, for which the e-auction is scheduled in the third week of November, 2019.