By these proceedings under Article 226 of the Constitution, the petitioner seeks to challenge the legality and validity of a condition imposed by the second respondent, the Uttar Pradesh Expressway Industrial Development Authority, in the Request For Qualification (RFQ) in respect of five packages of the Agra to Lucknow Access Controlled Expressway. Under clause 2.2.2 B which is in question, bidders who apply for Corporate Debt Restructuring (CDR) in the last five financial years, shall not be considered for bid qualification. Clause 2.2.2 B is to the following effect:
"2.2.2 To be eligible for pre-qualification, an Applicant, shall fulfill the following conditions of eligibility:
A. Technical Capacity: For demonstrating technical capacity and experience (the 'Technical Capacity'), the Applicant shall, over the past 5 (five) financial years preceding the Application Due Date, have received payments for construction of Eligible Project (s), or has undertaken construction works by itself in a PPP project, such that the sum total thereof is more than Rs.3,225 Crore (Rs. Three Thousand Two Hundred and Twenty Five Crore Only) (the "Threshold Technical Capacity").
Provided that at least one similar EPC work of Rs. 645 Crore (Rs. Six hundred and forty five Crore) shall have been completed/substantially completed1 from the Eligible Projects in Category 1 and/or Category 3 specified in Clause 3.2.1.
B. Financial Capacity: The Applicant shall have a minimum Net Worth (the "Financial Capacity") of Rs. 129 Crore (Rs. One Hundred Twenty Nine Crore only) at the close of the preceding financial year;
AND The Applicant should be financially sound and should not have applied for Corporate Debt Restructuring (CDR) during the last five years. The Applicant has to give a certificate as per the format given at Appendix-I, Annex-II."
2. The second respondent has decided to undertake the construction of a six lane Greenfield Expressway with service roads between Agra and Lucknow. By a notice dated 18 January 2014, RFQs were invited for shortlisting of contractors for participating in the next stage of bidding. The second respondent intends to put in place international competitive bidding separately for five packages of the project. Consequently, RFQs were issued in five packets for each of which a separate document was issued containing, amongst others, the details of the work, estimated contract value put to tender and period of completion together with other tender conditions. Clause 2.2.2 of the RFQ documents contains eligibility criteria. The notice dated 18 January 2014 was cancelled and a fresh notice was issued on 22 February 2014. The RFQ document stipulates that the applicant should not have applied for CDR in the previous five years. This condition is challenged on the ground that it is arbitrary and unreasonable, and that it seeks to discriminate between various corporate entities/bidders on the sole basis of CDR which has no nexus with the pre or post execution stage of the project. Hence, it has been urged that the conditions imposed under clause 2.2.2 are violative of Articles 14 and 19 (1) (g) of the Constitution. According to the petitioner, the CDR mechanism was evolved as a voluntary, non-statutory system based on Debtor-Creditor Agreements in pursuance of a circular issued by the Reserve Bank of India on 23 August 2001. The entire focus of the CDR mechanism, it is urged, is to restructure and revive a company facing financial difficulties by providing the necessary flexibility and facilitating timely intervention for debt restructuring. Under CDR, a borrower virtually gets a moratorium of two years and a repayment schedule of eight years which, it is submitted, is an internal arrangement between the borrower and the lender, with which third parties have no concern. According to the petitioners, in the current global scenario and slow pace of growth, all sectors including infrastructure and development, have been adversely affected and many companies have adopted the CDR mechanism to restructure their debts and smoothen their finances.
3. On 28 March 2014, the Secretary in the Union Ministry of Finance (Department of Economic Affairs) addressed a communication to the Chief Secretary of the State Government, stating that it has been brought to the notice of the Union Government that some State Governments and State-owned Public Sector Undertakings had modified recently their eligibility conditions in public procurement bids to exclude corporate entities which have incurred losses or have applied for or are undergoing CDR. The opinion of the Secretary to the Union Government was that the viability of an entity is not decided by its profitability and the parameters for establishing financial soundness is in the form of debt procurement guidelines on restructuring including the detailed methodology and norms for restructuring of advances. It was opined that restricting competition in public procurement by disqualifying companies that otherwise satisfy the accepted norms of financial soundness and viability may not be prudent. Hence, a request was made to have such conditions reviewed at the earliest, in consultation with the Department of Expenditure, Ministry of Finance of the Union Government.
4. When the petition came up for hearing, this Court, by an order dated 23 April 2014, while taking notice of the letter addressed by the Union Ministry of Finance to the Chief Secretary, considered it appropriate that before the Court was called upon to decide the constitutional validity of the criterion, the Chief Secretary of the State should, in consultation with the relevant stake holders, have a comprehensive look at the need for, efficacy of, and consequences of a such provision. The petitioner was specifically granted liberty to pursue its representation to the Chief Secretary.
5. In pursuance of the interim directions issued by this Court, the Chief Secretary has conducted an exercise, as directed, and has formulated a detailed response in the form of an order dated 7 May 2014 which is taken on record. The Chief Secretary has adverted to the background in which clause 2.2.2 was introduced and to the recommendations of the Committee of Secretaries of the State Government made in the meeting held on 13 February 2014 which is approved by the Cabinet. The Chief Secretary noticed that the Committee of Secretaries had formulated the following rationale for the introduction of the condition in question:
"a) In view of the Eway project being of highest priority for the Government, it's very large size and importance and the need to complete it in time while ensuring quality, it is imperative that the contractor selected should be financially and technically very sound and capable;
b) The contractor should, financially and economically, be sufficiently strong to complete the project in time and should not abandon the project halfway. All concerned would be left in a big dilemma if such a situation arose as the implementing agency would have spent substantial amount and the project would be left incomplete. Such an eventuality would result in prolonged court cases and arbitration etc.;
c) The Committee observed that to ensure technical and financial soundness of contractors in EPC projects, states like Gujarat and Andhra Pradesh have imposed strict conditions;
d) The consultant for the project also opined before the committee that it would be advisable, in the interest of the project, to keep strict criterion for eligibility of contractors; and
e) The Committee felt that a suitable provision should be made in the eligibility condition so that applicants should be financially sound and to ensure this objective a condition that the applicant company should not have applied for CDR in the past five years was recommended."
The Chief Secretary has also stated in his order that the Bid Evaluation Committee, in its meeting held on 18 April 2014, decided to retain clause 2.2.2-B in its present form for the following reasons:
"a) The Public Procurement Guidelines which have been referred in the letter dated 28.03.2014 of Ministry of Finance, Department of Economic Affairs, are of Government of India. The Committee was of the view that for the financial soundness of a concern, its profitability and cash flows are very useful indicators.
b) It was also deliberated that in the process of CDR, whereas the interest of the banks is to provide relief to the companies not able to repay their loans so that banks may get back their money, the interest of companies going for CDR is to somehow continue their business even in their negative financial position. The Committee was of the view that companies going for CDR are under financial stress and therefore banks and such companies try to continue their business even though they are in financial trouble.
(c) In contrast, the agency responsible for development of the project (UPEIDA/GoUP in this case) has the prime objective to bid out the project in a transparent manner and to select such a contractor, who is financially and technically sound and who can complete the work maintaining quality and within the time schedule. In this case UPEIDA/GoUP would prefer to select the soundest contractor, whereas banks and weak applicants would make efforts so that comparatively weak agencies may also get the business. This will lead to unhealthy competition which will not be in the interest of the project.
d) 'Agra to Lucknow Expressway Project' is fully financed by Government of Uttar Pradesh and GoI has no stake in the project. Therefore, the State Government is free to autonomously lay down the implementation process for the project. There is no standard/indicator fixed in the State for measuring financial soundness of a company and the State Government has incorporated the CDR related condition in the FRQ after serious consideration.
e) The Committee discussed in detail, the representations made by M/s HCC Ltd. and M/s Gammon India Ltd. in respect of the condition of CDR. The Committee was of the view that the assessment of technical and financial soundness of a prospective applicant can be done only on the basis of eligibility conditions declared in the bid document. If any company claims its eligibility on the basis of conditions other than eligibility conditions laid down in the bid document, its claim cannot be accepted. If accepted, this will be an arbitrary decision. It is always possible that a company which does not fulfill one or more eligibility conditions may approach the government and request to change the eligibility conditions as per its requirement. If this is allowed, the implementing agency/State Government will never be able to finalize its decision and there would be indefinite delay in the project.
f) The Committee took cognizance of the argument contained in the letter of M/s Gammon India Ltd. stating that in the present economic conditions, many infrastructure companies are facing financial problems and have to battle delayed payments making their cash flows negative. The RBI has introduced CDR process for giving relief to such companies.
g) The Committee felt that from the above it is clear that companies go into the CDR process only when their financial condition is not sound. All members of the Committee felt that in view of the fact that considerable funds are to be invested by the Project Implementation Agency/State Government in the project, companies who have approached for CDR are obviously financially weak and should be avoided from selection.
h) The BEC, in view of the above facts and deliberations decided that there should not be any change in the financial condition of clause 2.2.2 B of RFQ document and the CDR related condition should be kept as it is."
6. Apart from adverting to these reasons, which have been adopted by the Chief Secretary, it has been noted in his order that (i) there is nothing which prevents the State while assessing financial soundness of an applicant from considering a CDR related criterion; (ii) the criterion was adopted after detailed deliberations in various high level Committees and approved by the Cabinet; (iii) as many as 87 applications have been received for the five packages from 24 separate entities which is indicative of a strong competitiveness in the bids; (iv) a similar criterion has been upheld by the Andhra Pradesh High Court; (v) the RBI guidelines on CDR govern the relationship between banks and the borrowers but are not applicable to implementation of public projects by the concerned agencies; and (vi) clause 2.2.2 is not unreasonable and there is no reason to modify the eligibility criterion laid down in the RFQ document.
7. In view of the decision of the Chief Secretary, the submission which has been urged on behalf of the petitioner by the learned senior counsel, is as follows:
(i) As regards the application of clause 2.2.2 B, there is a threshold rejection of an entity, such as the petitioner which has applied for CDR during the previous five years;
(ii) On the other hand, if clause 2.2.2 were not to be included in the tender criterion, the case of the applicant-petitioner would be evaluated independently. In the event, that the tender inviting body comes to the conclusion that the position of an applicant is financially weak, it would still be open to the body to reject the bid. However, because of the condition in question, the bid is rejected at the threshold depriving the entity of the applicant to participate in a competitive bid; and
(iii) A company which is facing a decree of a large amount, a company which is facing securitisation proceedings which are pending against it or against whom proceedings have been initiated before the Debt Recovery Tribunal, would not have to be shut out at the threshold. Similarly, a company which is under the BIFR would not be excluded. Hence, it has been submitted that the criterion violates Articles 14 and 19 (1) (g) of the Constitution.
8. While evaluating merits of the submission, it would be appropriate, at the outset, to formulate the nature and extent of judicial review where a challenge is made to a condition imposed by a body which invites tenders by a bid document or, as the case may be, in a Request For Qualification. The principles which must govern such a case have been formulated in a recent judgment of the Supreme Court in Michigan Rubber (India) Limited Vs. State of Karnataka & Ors.2:
"From the above decisions, the following principles emerge:
(a) the basic requirement of Article 14 is fairness in action by the State, and non-arbitrariness in essence and substance is the heartbeat of fair play. These actions are amenable to the judicial review only to the extent that the State must act validly for a discernible reason and not whimsically for any ulterior purpose. If the State acts within the bounds of reasonableness, it would be legitimate to take into consideration the national priorities;
(b) fixation of a value of the tender is entirely within the purview of the executive and courts hardly have any role to play in this process except for striking down such action of the executive as is proved to be arbitrary or unreasonable. If the Government acts in conformity with certain healthy standards and norms such as awarding of contracts by inviting tenders, in those circumstances, the interference by Courts is very limited;
(c) In the matter of formulating conditions of a tender document and awarding a contract, greater latitude is required to be conceded to the State authorities unless the action of the tendering authority is found to be malicious and a misuse of its statutory powers, interference by Courts is not warranted;
(d) Certain preconditions or qualifications for tenders have to be laid down to ensure that the contractor has the capacity and the resources to successfully execute the work; and
(e) If the State or its instrumentalities act reasonably, fairly and in public interest in awarding contract, here again, interference by Court is very restrictive since no person can claim a fundamental right to carry on business with the Government.
(24) Therefore, a Court before interfering in tender or contractual matters, in exercise of power of judicial review, should pose to itself the following questions:
(i) Whether the process adopted or decision made by the authority is mala fide or intended to favour someone; or whether the process adopted or decision made is so arbitrary and irrational that the court can say:
"the decision is such that no responsible authority acting reasonably and in accordance with relevant law could have reached"; and
(ii) Whether the public interest is affected. If the answers to the above questions are in negative, then there should be no interference under Article 226."
9. A body which invites a bid is entitled, as a matter of first principle, to formulate appropriate conditions of qualification or eligibility. The conditions of eligibility are formulated to ensure that a bidder is able to discharge the contractual obligations that would be imposed upon the entity following the award of the contract. Hence, the criterion may include such conditions as the technical ability of the intending bidder, the financial soundness of the bidder and the nature of the experience possessed by a bidder in implementation of a project of comparative dimensions. As the Supreme Court has held, interference in the exercise of the power of judicial review with tender conditions is confined to a limited arena. The Court may interfere in a given case, if it is found that a tender condition has been tailor made with a view to exclude competition or to create a monopoly in favour of a particular bidder. Similarly, it may be open to an applicant to challenge the legality of a tender condition on the ground that the tender condition is entirely malicious or a misuse of statutory power which is conferred upon the tender inviting body. But this is a burden of a high order. The Court would not interfere into the wisdom of imposing a particular criterion or of demanding that a bidder should meet certain specific criteria in order to be technically qualified or to be regarded as financially sound. So long as the criterion which has been propounded is not extraneous to the capability of a bidder to perform the contract to the satisfaction of the authority inviting the bid, the tender condition cannot be set aside or interfered with.
10. Now, the CDR mechanism was put into place following a circular issued by the Reserve Bank of India on 23 August 2001. The object of the CDR framework is to provide a mechanism for restructuring of corporate debts of viable corporate entities. The CDR mechanism is a non-statutory process and is voluntary, based on Debtor Creditor Agreements. The issue before the Court is as to whether the State Government in the present case and the second respondent which is an entity owned by the State Government is duty bound to consider the bids of an entity which has subjected itself to the CDR mechanism and whether the decision to prescribe as a condition of eligibility in the RFQ that the applicant should not have undergone CDR in the previous five financial years is arbitrary and violative of Article 14 of the Constitution. The order which has been passed by the Chief Secretary contains a detailed reference to the reasons for the inclusion of the condition. The expressway project is required to be completed in time and is a matter of the highest priority for the State Government. The project is financed by the Government of Uttar Pradesh. The State Government has, therefore, considered it appropriate that the contractor selected should be financially and technically very sound and capable, having regard to the magnitude of the project and the priority which has been placed on the successful completion of the expressway. The Committee of Secretaries in its recommendations of 13 February 2014 took a considered view that a company which has applied for the CDR in the past five years should not be considered eligible. The Bid Evaluation Committee again in its meeting held on 18 April 2014 revisited the wisdom and efficacy of clause 2.2.2 B of the RFQ document. The Bid Evaluation Committee was also of the view that whereas the interest of banks which are involved in the CDR mechanism is to provide relief to the borrower who may not be able to repay a loan so that the amount can be recovered within time, it is in the interest of the companies which apply for CDR to continue their business, even though they are under financial stress. In contrast, the agency responsible for development of a project must have as its prime objective selecting a contractor who is financially and technically sound and can complete the work within the time schedule prescribed.
11. We are of the view that clause 2.2.2 B cannot be held to be arbitrary or violative of Article 14 of the Constitution. The criterion which has been laid down, is germane to the determination of the financial soundness of an intending bidder. The fact that a more relaxed criteria may also suffice in a given case is not sufficient, in our view, for the Court to question the wisdom of including such a condition. What particular condition should be imposed is a matter to be determined by the bid inviting authority based on the opinion of experts. The Court cannot second guess the view of the expert or substitute its own opinion for the wisdom of the authority which is ultimately responsible for the execution of a public project. This is not a case where the condition of eligibility has the effect of excluding competition or conferring a monopoly on a particular bidder. The fact that a large number of applications have been received in the present case may be a circumstance which is subsequent to the formulation of the bid. But the fact, as noted by the Chief Secretary that 87 applications have been received for the five packages from 24 separate entities, is certainly indicative of the fact that it is has actually not obstructed competition. The letter addressed to the Chief Secretary by the Secretary in the Union Ministry of Finance was, at the highest, only a request to review the tender condition. The Chief Secretary of the State has done precisely that and has found that there was no reason or justification to modify the tender condition. Again, this Court cannot enter into wisdom of policy. The condition is not violative of Articles 14 and 19 (1) (g) of the Constitution.
12. It may also be noted at this stage, that the legality of a similar condition has been upheld in a judgment of a learned Single Judge of the Andhra Pradesh High Court in M/s. T.A. Infra Projects Ltd. Vs. Infrastructure Corporation of Andhra Pradesh Ltd. & Anr.3. The learned Single Judge, while dealing with the condition, has observed as follows:
"...The object behind laying that clause as contended by the learned Advocate General is that only healthy companies which have not gone under CDR alone should participate to see the financial viability. The object with which the same is introduced cannot be said to be irrational. It is introduced with the purpose as pointed out by the learned Advocate General for ensuring that the project should be completed within the time and to see that the contractor has capacity and the resources to successfully execute the work...
It is also held in the above decisions that in the matter of formulating conditions of a tender document and awarding a contract, greater latitude is required to be conceded to the State authorities unless the action of the tendering authority is found to be malicious and a misuse of its statutory powers, interference by courts is not warranted..."
13. The decision of the Delhi High Court in Shapoorji Pallonji Roads Pvt. Ltd. Vs. Union of India & Ors.4 on which reliance has been placed by learned counsel for the petitioner did not involve a challenge to the legality of such a tender condition. The Division Bench of the Delhi High Court, in fact, noted that to be eligible for pre qualification and shortlisting, an applicant would be required to fulfill the condition of financial capacity that it shall have a minimum net worth of Rs. 757.50 crores at the close of the preceding financial year. In that case, it was not in dispute that the selected party fulfilled that criterion. Hence, it was held that on the basis of the tender condition which was prescribed, the selected bidder fulfilled the conditions. The fact that the bidder had approached the CDR Cell was regarded as not indicative of the fact that it was not financially sound. However, these observations were in the context of a particular tender condition in that case which, as noted earlier, did not contain as an eligibility criterion any reference to the CDR mechanism. In the present case, such a condition of eligibility has been introduced and the only issue which fell for determination in these proceedings is as to whether the condition is violative of Articles 14 and 19 (1) (g) of the Constitution. For the reasons indicated above, we are unable to accept the challenge to the validity of clause 2.2.2 B on the ground that it violates Articles 14 and 19 (1) (g) of the Constitution.
14. In view of the above, the petition is, accordingly, dismissed. There shall be no order as to costs.