A back-door attempt by Adani Ports and Special Economic Zone Ltd (APSEZ) to buy Karaikal Port Pvt Ltd has sailed into rough weather with GRK Reddy, the promoter of Marg Ltd that runs the port, challenging the Swiss Challenge process run by Edelweiss Asset Reconstruction Company to sell the Port’s debt of ₹2,059.24 crores, along with its 11 percent equity, for a base price of ₹1,500 crore.

Marg Ltd has alleged in a petition filed in the Madras High Court that Edelweiss ARC has opted for a different procedure in the case of auction of assets of Andhra Cements Ltd on a separate case, while restricting the participation only to a few entities to benefit Omkara ARC, in the case of Karaikal Port.

The Swiss Challenge auction by Edelweiss ARC of Karaikal Port’s debt was prompted by an offer from Omkara ARC, which is understood to have the backing of APSEZ.

Under the SARFAESI Act, 2002 and the RBI guidelines, only banks, financial institutions and asset reconstruction companies can participate in the auction for take-over of debt of a non-performing asset. “But corporates can come in by striking a deal with banks, financial institutions and asset reconstruction companies,” he said. When the debt is assigned, everything goes along with it, including all the right, title and interest in the underlying securities and guarantees on the loan.

Edelweiss ARC did not receive any counter bids when the auction deadline ended on October 14, a source briefed on the process said.

Swiss challenge method

Under the Swiss challenge method, the entity that had made the original offer is given a chance to match the highest bid discovered through an open auction. If the entity that had put in the original offer declines, then only the deal is given to the highest bidder. Edelweiss ARC was looking to sell the debt on a 100 per cent cash basis.

After the sale of debt, the next step would be taking control of the board of Karaikal Port Pvt Ltd by writing off existing equity through NCLT.

“With no bids coming in, Edelweiss ARC will now have to decide whether to go ahead with the offer of Omkara ARC or scrap the process,” the source said.

Reddy has challenged the sale of debt from Edelweiss ARC to another ARC and impleaded the Reserve Bank of India, based on whose circular Edelweiss ARC is planning to sell the debt to Omkara ARC.

Reddy has pleaded that asset reconstruction companies are mandated as per the act to reconstruct the company under stress or to conduct a sale by taking possession and going for recovery and not to indulge in trading of debts.

On a petition filed by Reddy in September, the Madras High Court declined to entertain the matter, asking Marg to approach the Debt Recovery Tribunal, instead, to settle his grievances.

Reddy then approached the Supreme Court which permitted him to file a review petition in the Madras High Court against the earlier order.

With the matter pending before Madras High Court, the outcome of Swiss Challenge auction depends on the question of legal validity of sale of debt by an ARC to another ARC.

Sources say that the plan was not in interest of the banking system and is likely to short circuit the resolution process under the IBC and the auction of debt under SARFAESI Act, wherein anyone can participate without any restriction based on well-advertised, well laid-out, established process and regulations unlike in the case of recovery by one ARC by selling the debt to another ARC.

Sources said that an international entity had submitted a One Time Settlement (OTS) offer for ₹1,500 crore to Edelweiss ARC, matching the base price of the Swiss Challenge auction but it was not considered.

“If the OTS offer is accepted, Edelweiss ARC will receive the same amount of Rs1,500 crore offered by Omkara ARC, while helping Karaikal Port to reduce its debt to ₹559.24 crore. But, if the Swiss Challenge mode is opted, the entity taking over the debt will get the benefit of the haircut being taken by Edelweiss ARC, banks and other stakeholders,” the source said.

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