Guidelines

for

Selection of

Consultants/Advisors,

Developers for PPP Projects &

Private Partners for Disinvestments

in

UTTAR PRADESH

Department of Infrastructure Development

Government of Uttar Pradesh

INDEX - I : Consultants

Chapter Description Page

Executive Summary 2

I Overview of Selection of Consultant 7

II Steps for Selection of Consultant :Detailed Procedure 13

III Methods of selection of consultants 22

Annexure -I Important Provisions in RFP/Contract 26

Annexure - II Types of Contract 29

Annexure - III List of Firms/Consortia Empanelled as Transaction Advisers 31

Appendix-I Format for Simplified Evaluation of Quality 34

Appendix-II Format for Detailed Evaluation of Quality 35

INDEX - II : PPP

Chapter Description Page

Executive Summary 38

I Steps, Procedures & Documents for PPP 42

II Procedure for Selection & Contract with PPP Project Developer 47

Schedule-I Projects for which PPP Route may be considered 56

Schedule-II Nature Of Concession Agreements 57

Annexure-I Memorandum for PPP Evaluation Committee

(for final ‘in principle’ approval)

59

Annexure-II Term Sheet of the proposed Concession Agreement

(Appendix A)

60

Annexure-III Memorandum for PPP Evaluation Committee

(for final approval of Selected Developer)

61

Appendix-A Indicative Bar Chart/Active Chart of Developer Selection

Timelines

62

INDEX - III : Disinvestment

Chapter Description Page

Executive Summary 64

1. Systems and Procedure of Disinvestment 70

2. Various methodologies for Disinvestment 75

3. Strategic Sale 86

4. Valuations 103

5. Employee's Issues 104

Annexure - I

Annexure - II

Annexure - III

Annexure - IV

Annexure - V

Annexure - VI

Annexure - VII

Annexure - VIII

List of Annexures

Agreement for Advisory Services

Guidelines for Advisors and Bidders

Expression of Interest

Statement of legal capacity

Request for Qualification

Qualification for Bidders

Valuation Methodologies

Salient Points about Disinvestment

111

121

123

125

126

128

135

148

(Revised as per G.O. No. - 1996/77-6-06-LC-21/07TC dated -30 July, 2007)

(Revised as per G.O. No. - 1208/77-3-07 dated -10 October, 2007)

1

PART - I

Policy Framework for

Selection of Consultants

for

Various Studies including Studies for

Financing, Construction, Maintenance And Operation

of

Infrastructure Projects

Through PPP

in

Uttar Pradesh

2

Executive Summary

1. The purpose of these Guidelines is to primarily define the broad policies and procedures of Government of Uttar

Pradesh for selection, contracting and monitoring of consultants and other professional services providers for

projects/assignments funded through PPP or partially or wholly through State Budget as well as for Disinvestment.

These Guidelines may also be used for selection, contracting , monitoring, etc. of consultants / professional service

providers by Departments / Organizations of GoUP for purposes other than PPP or Disinvestment.

2. These guidelines are applicable for selection of consultants by any Ministry/ department/ organization of

Government of U.P. where the costs of the Project/Assignment are funded by the PPP or partially or wholly

through Government of U.P.. The guidelines for selection of Consultants shall be applicable only in case of

Consultancy worth more than Rs 5.00 lacs.

3. The consulting services to which these Guidelines apply are of an intellectual and advisory nature. These

Guidelines do not apply to other types of services in which the physical aspects of the activity predominate

4. In all cases where Consultant is required for PPP Projects or Advisors are required for Disinvestment, the

following additional procedures would follow:-

4.1 The Administrative Department of State Government/the Department of Infrastructural Development (Employer)

may identify the project for an area requiring study by a Consultant/Consultancy concern.

4.2. Accordingly, the Employer would prepare a brief note for the study in consultation with the Administrative

Department. Thereafter the proposal would be placed before the Competent Authority for initial in-principle

approval on the proposal alongwith approval of broad outline of TOR for the proposed Consultancy. However the

concurrence of Department of Infrastructure Development shall be sufficient, i.e. in principle approval of

competent authority will not be required except in following cases

i. where Department of Infrastructure Development disagree with proposal of Admn. Deptt. or ii. PPP proposed, is

likely to have statewide impact or iii. disinvestment process is proposed.

4.3. The Administrative Department shall, thereafter, initiate the process for selection of Consultants from its level in

accordance with the initial in-principle approval obtained by it from the Competent Authority.

4.4. Alternatively, after obtaining the initial in-principle approval of the Competent Authority, the Administrative

Department may send the proposal for engagement of Consultant alongwith broad outlines of TOR as

approved by the Competent Authority to the Department of Infrastructure Development to select the

Consultant on its behalf.

4.5 The Employer shall use the specified Nodal Agency for the selection. The specified Nodal Agency shall

select the Consultant/ Advisor in accordance with these Guidelines.

4.6 Govt. of U.P. may designate one or more agencies as the specified Nodal Agency for these purposes.

4.7 The process for constituting a 'SPV' with the consultant for project formulation can be adopted. This SPV may be

constituted only for projects, which are based on new concept and where success is not guaranteed i.e. SPV may be

constituted for such projects where risk is perceived about the successful selection of a developer by a consultant.

5. These Guideliens may also be used by the Administrative Department for all cases other than 4 above for Selection

of Consultants.

3

6. For selection of the consultants, normally, the employer shall adopt the following two stage

procedure which is as per the terms of Rules 168 to 175 of General Financial Rules, 2005 as framed

by Govt. of India (reproduced below). However,

In the first stage, the employer shall identify the likely sources on the basis of formal or informal

enquiries and by inviting Expression of Interest (EOI) through advertisement as per Rule 168 of GFRs as

referred above. On the basis of responses received, Consultants meeting the requirement will be short listed by

Consultancy Evaluation Committee (CEC) for further consideration. In the second stage, the short-listed

consultant will be invited to submit (Request for Proposals or RFP) their Technical and Financial Proposals.

The consultant shall be selected based on evaluation of their Technical and Financial bids, the details of which

are provided in Chapter - II.

6.1 Identification of likely sources:

(i) Where the estimated cost of the Consultancy or service is upto Rupees twenty-five lakhs, preparation of

a long list of potential consultants may be done on the basis of formal or informal enquiries from other

Ministries or Departments or Organisations involved in similar activities, Chambers of Commerce &

Industry, Association of consultancy firms etc.

(ii) Where the estimated cost of the Consultancy or service is above Rupees twenty-five lakhs, in addition to

(i) above, an enquiry for seeking ‘Expression of Interest’ from consultants should be published in at least

one national daily and the Ministry's web site. The web site address should also be given in the

advertisements. Enquiry for seeking Expression of Interest should include in brief, the broad scope of

work or service, inputs to be provided by the Ministry or Department, eligibility and the pre-

qualification criteria to be met by the consultant(s) and consultant’s past experience in similar work or

service. The consultants may also be asked to send their comments on the objectives and scope of the

work or service projected in the enquiry. Adequate time should be allowed for getting responses from

interested consultants.

6.2 Short listing of consultants: On the basis of responses received from the interested parties as per 8.1

above, consultants meeting the requirements should be short listed for further consideration. The number

of short listed consultants should not be less than three.

6.3 Preparation of Terms of Reference (TOR): The TOR should include

(i) Precise statement of objectives;

(ii) Outline of the tasks to be carried out;

(iii) Schedule for completion of tasks;

(iv) The support or inputs to be provided by the Ministry or Department to facilitate the

consultancy.

(v) The final outputs that will be required of the Consultant;

(vi) Physical survey (for Data collection or otherwise) if required, may be clearly stated.

6.4 Preparation and Issue of Request for Proposal (RFP): RFP is the document to be used by the Ministry /

Department for obtaining offers from the consultants for the required work / service. The RFP should be

issued to the shortlisted consultants to seek their technical and financial proposals. The RFP should

contain :

(i) A letter of Invitation

(ii) Information to Consultants regarding the procedure for submission of proposal .

(iii) Terms of Reference (TOR).

4

(iv) Eligibility and pre-qualification criteria incase the same has not been ascertained

through Enquiry for Expression of Interest.

(v) List of key position whose CV and experience would be evaluated.

(vi) Bid evaluation criteria and selection procedure.

(vii) Standard formats for technical and financial proposal.

(viii) Proposed contract terms.

(ix) Procedure proposed to be followed for midterm review of the progress of the work and

review of the final draft report.

6.5 Receipt and opening of proposals: Proposals should ordinarily be asked for from consultants in ‘Two-

bid’ system with technical and financial bids sealed separately. The bidder should put these two sealed

envelops in a bigger envelop duly sealed and submit the same to the Ministry or Department by the

specified date and time at the specified place. On receipt, the technical proposals should be opened first

by the Ministry or Department at the specified date, time and place.

6.6 Late Bids: Late bids i.e. bids received after the specified date and time of receipt, should not be

considered.

6.7 Evaluation of Technical Bids: Technical bids should be analysed and evaluated by a Consultancy

Evaluation Committee (CEC) constituted by the Ministry or Department. The CEC shall record in detail

the reasons for acceptance or rejection of the technical proposals analysed and evaluated by it.

6.8 Evaluation of Financial Bids of the technically qualified bidders: The Ministry or Department shall

open the financial bids of only those bidders who have been declared technically qualified by the

Consultancy Evaluation Committee as per 6.7 above for further analysis or evaluation and ranking

and selecting the successful bidder for placement of the consultancy contract.

7. Evaluation of Technical and Financial Bids of shortlisted consultants shall be done normally through

Quality and Cost Based Selection Method (QCBS) or in cases where complex studies are required their

quality of the Consultant is at a premium Quality Based Selection Method (QBS) may be followed.

Details of QCBS and QBS methods are given in Chapter - III.

8. The Administrative Department / Department of Infrastrustructure Development will have the option to

invite RFPs (Request for Proposals) including Technical and Financial Bids from the empanelled

Consultants / Advisors of the relevant Ministry of Govt. of India or of GoUP. The list of empanelled

Consultants by the concerned Ministry/ Department of GoI / GoUP shall be treated as equivalent to

shortlist of Consultants prepared subsequent to EOI/ RFQ for these purposes and accordingly only

the second stage i.e. RFP Submission would be needed. Evaluation in such cases would be as per limited

QCBS / QBS method as given in Chapter -III.

9. Consultancy Evaluation Committee (CEC) : For all cases, a CEC comprising of at least three members at appropriate level shall be constituted by the employer in order to carry out the Consultant selection procedure. The

CEC shall be responsible for all aspects and stages of the Consultant selection i.e. issuance of EOI, evaluation of

EOI, short-listing of Consultants, deciding Terms of Reference, issuance of RFP, evaluation of technical and

financial proposals, negotiations and final recommendation for selection of the Consultant.

10. Empowered Committee :- The proposal as recommended by CEC may be placed before the Empowered

Committee for approval. For selection of Consultant / Advisors as per para 4, the Empowered Committee shall be

formed under the Chairmanship of the Industrial Development Commissioner. For approval of Consultancies

estimated to cost above Rs.50 lakhs, the Empowered Committee shall be constituted under the Chairmanship of the

Chief Secretary.

5

11. Various forms of the contracts may be entered into by the Employer with the consultant depending upon the

nature of the assignment. The lump sum contract is the preferred form of contract and under normal

circumstances,the employer shall use this form of contract.

12. Consultancy Monitoring Committee (CMC) : The employer shall constitute a CMC comprising at least three

members at appropriate level, after the selection procedure is over for monitoring the progress of the assignment.

If considered appropriate, the employer may select all or any of the members of CEC as members of CMC.

13 The Employer may appoint another qualified Consultant as Escort Consultant to assist the CEC or CMC as

provided.

14. The Competent Authority for In principle approval and broad TORs for start of selection process as per Para 4

shall be the Hon'ble Cabinet of Ministers, Govt. of U.P.

15. Flow Chart for Selection of Consultants

The selection process shall normally include the following steps:- Identification of Project by Administrative Department

Preparation of TOR

* Proposal to be put up before Competent Authority/Deptt. of Infra. Dev. for in principle approval/Consent

* In principle approval/Consent & Broad TORs to be sent to Deptt. of Infrastructure Development for Consultant selection

Proposal to be processed for inviting EOI in accordance with the in principle approval/Consent of Competent Authority/DID

Advertising

Shortlisting of Consultants

Preparation and issuance of RFP (which should include the Letter of Invitation (LOI); Instructions to Consultants (ITC); the

TOR and the proposed draft contract)

Receipt of proposals

Evaluation of technical proposals: consideration of quality

Public opening of financial proposals

Evaluation of financial proposals.

Final evaluation of quality and cost; and

Negotiations as may be necessary in order to ensure optimal economy and award of the contract to the selected

Consultant/Consultancy concern

Proposal to be put up to the Empowered Committee for final approval

* Applicable only for selection of Consultants / Advisors for PPP Projects / Disinvestment respectively.

6

16. Time Frame : EOIs may be normally invited within 21 days of advertisement but in no case shall be allowed

less than 14 days from the date of first advertisement. The employer should allow enough time to the short listed consultants to prepare their proposals (RFPs). The time allowed shall depend on the assignment, but normally shall not be

less than two weeks and more than three months. In cases, where participation of international consultants is contemplated,

a period of not less than four weeks should normally be allowed.

7

Chapter-I

Detailed Procedure for Selection of Consultant

Objective

1. The purpose of these Guidelines is to primarily define the broad policies and procedures of Government of Uttar

Pradesh for selection, contracting and monitoring of consultants and other professional services providers for

projects/assignments funded through PPP or partially or wholly through State Budget as well as for Disinvestment

funded through PPP or partially or wholly through State Budget. Projects funded partially or in whole by

loan/grant from International organizations like International Bank for Reconstruction and Development (IBRD),

International Development Association (IDA) or grant from the Bank or trust funds would normally be governed

by guidelines agreed to in the respective loan/credit agreement with them.

2. Consultant(s): For the purpose of these Guidelines, the term consultant(s) includes a wide variety of private and

public entities, including consulting firms, engineering firms, construction management firms, management firms,

procurement agents, inspection agents, auditors, investment and merchant bankers, universities, research

institutions, government agencies, non governmental organizations (NGOs) and individuals/experts. These

organizations as consultants could be used for help in a wide range of activities – such as advice on policy matters;

institutional reforms; management; engineering services; construction supervision/ project management; feasibility

studies, financial services; privatization studies and procedures, procurement services; social and environmental

studies; and identification and preparation of projects, development of Computer hardware/ software services etc.

to augment the capabilities of the State Government/ departments or other Government authorities( referred as

“employer” hereafter).

3. The Guidelines for selection of consultants/advisors, for selection of PPP Developers/Investors and for selection of

klPrivate Partners for Disinvestment shall not be mandatory for cases where the above selections are required to be

done under the procedures decided by the Govt. of India or where GoUP has agreed to follow guidelines as per

loan / credit / grant agreement with donor agencies.

4. In case where the procedures for selections of consultants / developers / private partners etc. are already laid down

by an Act of the State Govt., the provisions of the Act shall take precedence over these guidelines. Subject to not

being inconsistent with the Act, the concerned department shall have the option to adopt these guidelines.

5. The Guidelines for selection of consultants / advisors, for selection of PPP Developers / Investors and for selection

of Private Partners for Disinvestment shall supercede any other guidelines or Govt. Orders which may have been

issued from time to time, before 29th June 2007.

6. The guidelines shall apply with prospective effect from 29th June 2007. In cases where certain selection

procedures have been initiated before the 29th June 2007, the remaining steps after 29th June 2007 shall be taken

in confirmity with the guidelines to the best possible extent.

When and how to engage Consultant

1. The specific purpose, rules and procedures to be followed for engaging Consultants depend on the circumstances

of the case. The identification of scope of work and the time frame for which services are to be availed of must be

ascertained and specified adequately and transparency in the entire process of engaging Consultants must be

followed. However, following main considerations would guide the need and the selection process:-

(a) Absence of required expertise in-house;

(b) The need for high quality services;

(c) The need for economy and efficiency;

(d) The need to have qualified Consultants for providing the specific services;

8

2. Engagement of Consultants / professional service providers in any office of the Government of U.P. will follow the

guidelines for administrative and financial sanctions as laid down by the Government of U.P. from time to time.

3. Engagement of Retired Officers either in their individual capacity or as a part of a Consultant’s team will be made

keeping in view the guidelines of the State Government issued from time to time in this regard.

4. A Consultant/Consultancy concern which has been engaged by the Employer to provide goods or works for a

project and any of its affiliates will be disqualified from providing consulting services for the same project.

Conversely, a Consultant/Consultancy concern hired to provide consulting services for the preparation or

implementation of a project, and any of its affiliates, will be disqualified from subsequently providing goods or

works or services related to the initial assignment for the same project.

Consultants or any or their affiliates will not be hired for any assignment, which by its nature, may be in conflict

with another assignment of the Consultants.

Applicability of Guidelines

1. These guidelines are applicable for selection of consultants by any Ministry/ department/ organization of

Government of U.P. where the costs of the Project/Assignment are funded by the PPP or partially or wholly

through Government of U.P.. The guidelines for selection of Consultants shall be applicable only in case of

Consultancy worth more than Rs 5.00 lacs.

2. The consulting services to which these Guidelines apply are of an intellectual and advisory nature. These

Guidelines do not apply to other types of services in which the physical aspects of the activity predominate (for

example, construction of works, manufacture of goods, operation and maintenance of facilities or plant).

Consortium of Consultants

Consultants may associate with each other to form a consortium to complement their respective areas of expertise, or for

other reasons. Such an association may be for the long term (independent of any particular assignment) or for a specific

assignment. The consortium may take the form of a joint venture or of a sub consultancy. In case of a joint venture, all

members of the joint venture shall sign the contract and shall be jointly and severally liable for the entire assignment.

Initiation of Process for Consultants Engagement

In Principle Approval/Consent The Administrative Department of State Government/ Department of Infrastructure Development (DID) in consultation

with concerned Department (the Employer) may identify the project for an area requiring study by a

Consultant/Consultancy concern. Accordingly, the Administrative Department of State Government/the Employer would

prepare a brief note for the purpose which would be placed before the Competent Authority for initial in-principle approval

on the proposal alongwith approval of broad outline of TOR for the proposed Consultancy. The Administrative Department

shall, thereafter, initiate the process for selection of Consultants from its level in accordance with the in-principle approval

obtained by it from the Competent Authority. However the concurrence of Department of Infrastructure Development shall

be sufficient, i.e. in principle approval of competent authority will not be required except in following cases -

i. where Department of Infrastructure Development disagrees with proposal of Administrative Department or

ii. where PPP proposed, is likely to have statewide impact or

iii. where disinvestment process is proposed.

Alternatively, after obtaining the initial in-principle approval of the Competent Authority/Department of Infrastructure

Development, the Administrative Department may send the proposal for engagement of Consultant alongwith broad

outlines of TOR as approved by the Competent Authority/Department of Infrastructure Development to the Department of

9

Infrastructure Development to select the Consultant on its behalf. The Government may use the specified Nodal Agency to

undertake selection process as per these guidelines. GoUP may designate one or more bodies as specified Nodal Agency

for these purposes.

Selection of Consultants

The selection process shall normally include the following steps:-

Identification of Project by Administrative Department

Preparation of TOR

*Proposal to be put up before Competent Authority/ Department of Infrastructure Development for in principle approval/consent

*In principle approval/consent & Broad TORs to be sent to Deptt. of Infrastructure Development for Consultant selection

Proposal to be processed for inviting EOI in accordance with the in principle approval/consent of Competent Authority/DID

Advertising

Shortlisting of Consultants

Preparation and issuance of RFP (which should include the Letter of Invitation (LOI); Instructions to Consultants (ITC); the

TOR and the proposed draft contract)

Receipt of proposals

Evaluation of technical proposals: consideration of quality

Public opening of financial proposals

Evaluation of financial proposals.

Final evaluation of quality and cost; and

Negotiations as may be necessary in order to ensure optimal economy and award of the contract to the selected

Consultant/Consultancy concern

Proposal to be put up to the Empowered Committee for final approval

* Applicable only for selection of Consultants/ Advisors for PPP Projects/ Disinvestment respectively.

For selection of the consultants, normally, the employer shall adopt two stage procedure in terms of Rules 168 to

175 of General Financial Rules, 2005 as framed by Govt. of India (reproduced below). Rule 168. Identification of likely sources:

(i) Where the estimated cost of the work or service is upto Rupees twenty-five lakhs, preparation of a long

list of potential consultants may be done on the basis of formal or informal enquiries from other

Ministries or Departments or Organisations involved in similar activities, Chambers of Commerce &

Industry, Association of consultancy firms etc.

10

(ii) Where the estimated cost of the work or service is above Rupees twenty-five lakhs, in addition to (i)

above, an enquiry for seeking ‘Expression of Interest’ from consultants should be published in at least

one national daily and the Ministry's web site. The web site address should also be given in the

advertisements. Enquiry for seeking Expression of Interest should include in brief, the broad scope of

work or service, inputs to be provided by the Ministry or Department, eligibility and the pre-

qualification criteria to be met by the consultant(s) and consultant’s past experience in similar work or

service. The consultants may also be asked to send their comments on the objectives and scope of the

work or service projected in the enquiry. Adequate time should be allowed for getting responses from

interested consultants.

Rule 169. Short listing of consultants: On the basis of responses received from the interested parties as

per Rule 168 above, consultants meeting the requirements should be short listed for further

consideration. The number of short

listed consultants should not be less than three.

Rule 170. Preparation of Terms of Reference (TOR): The TOR should include

(i) Precise statement of objectives;

(ii) Outline of the tasks to be carried out;

(iii) Schedule for completion of tasks;

(iv) The support or inputs to be provided by the Ministry or Department to facilitate the

consultancy.

(v) The final outputs that will be required of the Consultant;

Rule 171. Preparation and Issue of Request for Proposal (RFP): RFP is the document to be used by

the Ministry / Department for obtaining offers from the consultants for the required work / service. The

RFP should be issued to the shortlisted consultants to seek their technical and financial proposals. The

RFP should contain :

(i) A letter of Invitation

(ii) Information to Consultants regarding the procedure for submission of proposal .

(iii) Terms of Reference (TOR).

(iv) Eligibility and pre-qualification criteria incase the same has not been ascertained

through Enquiry for Expression of Interest.

(v) List of key position whose CV and experience would be evaluated.

(vi) Bid evaluation criteria and selection procedure.

(vii) Standard formats for technical and financial proposal.

(viii) Proposed contract terms.

(ix) Procedure proposed to be followed for midterm review of the progress of the work and

review of the final draft report.

Rule 172. Receipt and opening of proposals: Proposals should ordinarily be asked for from consultants

in ‘Two-bid’ system with technical and financial bids sealed separately. The bidder should put these two

sealed envelops in a bigger envelop duly sealed and submit the same to the Ministry or Department by

the specified date and time at the specified place. On receipt, the technical proposals should be opened

first by the Ministry or Department at the specified date, time and place.

Rule 173. Late Bids: Late bids i.e. bids received after the specified date and time of receipt, should not

be considered.

Rule 174. Evaluation of Technical Bids: Technical bids should be analysed and evaluated by a

Consultancy Evaluation Committee (CEC) constituted by the Ministry or Department. The CEC shall

11

record in detail the reasons for acceptance or rejection of the technical proposals analysed and

evaluated by it.

Rule 175. Evaluation of Financial Bids of the technically qualified bidders: The Ministry or

Department shall open the financial bids of only those bidders who have been declared technically

qualified by the Consultancy Evaluation Committee as per Rule 174 above for further analysis or

evaluation and ranking and selecting the successful bidder for placement of the consultancy contract. In the first stage, the employer shall identify the likely sources on the basis of formal or informal enquiries and by inviting

Expression of Interest (EOI) through advertisement as per Rule 168 of GFRs as referred above. On the basis of responses

received, Consultants meeting the requirement will be short listed by Consultancy Evaluation Committee (CEC) for further

consideration. In the second stage, the short-listed consultant will be invited to submit (Request for Proposals or RFP) their

Technical and Financial Proposals. The consultant shall be selected based on evaluation of their Technical and Financial

bids, the details of which are provided in Chapter III.

Consultancy Evaluation Committee (CEC)

1. For all cases, a CEC comprising of at least three members at appropriate level shall be constituted by the employer

in order to carry out the Consultant selection procedure. The members of CEC will have to give an

undertaking/declaration that none of them has any personal interest, directly or indirectly, in the individual

Consultants/Consultancy concern interested in the consultancy contract in question. The CEC shall be responsible

for all aspects and stages of the Consultant selection i.e. issuance of EOI, evaluation of EOI, short-listing of

Consultants, deciding Terms of Reference, issuance of RFP, evaluation of technical and financial proposals,

negotiations and final recommendation for selection of the Consultant.

2. For the assignments which are very complex and/or are of highly technical nature, the employer may decide to

appoint another qualified consultant as Escort Consultant to assist the CEC in carrying out its functions. However,

the cost of such additional consultant shall not exceed five per cent [5 %] of the total cost of the assignment

monitored.

3. Empowered Committee :- The proposal as recommended by CEC may be placed before the Empowered

Committee for approval. For selection of Consultant / Advisors for PPP Projects/ Disinvestment the Empowered

Committee shall be formed under the Chairmanship of the Industrial Development Commissioner. For approval of

Consultancies estimated to cost above Rs.50 lakhs, the Empowered Committee shall be constituted under the

Chairmanship of the Chief Secretary.

4. Competent Authority

The Competent Authority for In principle approval and broad TORs for start of selection process shall be Cabinet

of Ministers, Govt. of U.P.

Difficulty Removal Committee (DRC) :

A Difficulty Removal Committee shall be constituted under the Chairmanship of Infrastructure & Industrial

Development Commissioner to decide on matters necessary for removal of difficulties which may arise out of the

provisions of these guidelines. The Committee shall also be empowered to examine and decide on cases where

deviations in the guidelines are being sought. The Committee shall also include Principal Secretary / Secretary

Finance, Law and may co-opt any other officer(s) as its member, as deemed fit.

Consultancy Monitoring Committee (CMC)

12

1. The employer shall constitute a CMC comprising at least three members at appropriate level, after the selection

procedure is over for monitoring the progress of the assignment. If considered appropriate, the employer may

select all or any of the members of CEC as members of CMC. The CMC shall be responsible to monitor the

progress of the assignment, to oversee that the assignment is carried out as per agreed TOR and contractual

conditions, to assess the quality of the deliverables, to accept / reject any part of assignment, to levy appropriate

liquidated damages or penalty if the assignment is not carried out as per the contract and if the quality of services is

found inferior and for any such deficiency related to the completion of the assignment.

2. For the assignments which are very complex and/or are of highly technical nature, the employer may decide to

appoint another qualified consultant as Escort Consultant to assist the CMC in carrying out its functions. However,

the cost of such additional consultant shall not exceed five per cent [5 %] of the total cost of the assignment

monitored.

3. The employer may also include in CMC individual experts from Government/private sector/educational/research

institute or individual consultants. Cost of such members, if any, shall be borne by the employer.

Forms of Contracts

1. Various forms of the contracts may be entered into by the Employer with the consultant depending upon the nature

of the assignment. Following are various forms of contracts:

(i) Lump sum contract;

(ii) Time based contracts;

(iii) Success fee based contract;

(iv) Percentage contract;

(v) Indefinite delivery contract.

2. The lump sum contract is the preferred form of contract and under normal circumstances, the employer shall use

this form of contract. The other forms of contract shall only be used under special circumstances, as specified in

Annexure- 2.

13

Chapter-II

Steps for Selection of Consultant :Detailed Procedure

Invitation of Expression of Interest

For all consultancy an advertisement called “invitation for Expression of Interest” (EOI) shall be released in at

least one National Newspaper and the relevant website. Advertisement in newspapers may be brief and shall give reference

to departmental website. The detailed invitation for Expression of Interest alongwith complete EOI document shall be made

available on website. It shall be ensured by the Employer that the parties making use of this facility of website are not asked

to again obtain some other related documents from the department manually for purpose of submitting EOI i.e. all

documents upto date should remain available and shall be equally legally valid for participation in the tender process as

manual documents obtained from the Employer through manual process. If the concerned Consultants/Consultancy concern

wishes to charge for the application from downloaded from the computer then they may ask the bidding party to pay the

amount by draft/cheques etc. at the time of submission of the application form and bid documents. The advertisement must

include, among other things, the last date of submission of EOI, how to get copy of EOI document, contact information of

the employer with name of contact person etc.

Time Frame : EOIs may be normally invited within 21 days of advertisement but in no case shall be allowed less than 14

days from the date of first advertisement.

EOI Document

The Employer shall prepare an EOI document. The EOI document shall contain following information:

(i) Invitation to EOI: It shall include a copy of the advertisement whereby consultants are invited to submit their EOI.

(ii) Brief about objectives and scope of work : This may include brief description about objective of carrying out the

assignment, broad scope of work and expected deliverables of the assignment. This may also include the place of

execution of the assignment.

(iii) Instructions to the Consultants: It may include instructions regarding

nature of job; submission requirement; requirement of bid processing fees; if any; last date of submission; place of

submission; and any related instruction;

(iv) Pre-qualification Criteria; this may clearly lay down the prequalification criteria which shall be applied by the

employer for short listing the consultants.

(v) Formats for submission. This section shall specify the format in which the consultants are expected to submit their

EOI.

The prequalification criteria, performance criteria and evaluation criteria shall be incorporated in the documents in clear

and unambiguous terms to evaluate bids in transparent manner. The Bid security and Performance security required for

bidders must be specified in the documents. The EOI document shall be finalized by CEC.

3. The employer shall make available the copies of the EOI document to the interested Consultants/Consultancy

concern in hard copies as well as through its web site.

Shortlisting of Consultants

1. The CEC of the Employer shall evaluate the consultants for short listing, inter-alia, based on their past experience

of handing similar types of projects, strength of their man power and financial strength of the firm on the basis of

the report of CEC.

2. The employer may assign scores to the response of each consultant based on weightages assigned to each of the

criteria in EOI. For example, the indicative weightages for such evaluation may be kept as follows:

14

Sr.

No.

Criteria Indicative

Weightages

1. Past Experience of The Consultant/Consultancy concern

• Number of years experience

• Past Experience of completed studies of similar nature/ studies in

related sectors..

• Past experience in carrying out studies in other sectors

• Past track record of time bound completion of Consultancy

contract.

60%

20%

50%

20%

10%

2. Experience of Key Personnel.

• No. of Key Personnel employed with Consultant

• Qualifications

• Relevant Experience

25%

30%

30%

40%

3. Financial Strength of the Consultant.

• Turnover figure for Last three Years.

• Networth of the Consultant for Last three Years

15%

50%

50%

Alternatively, the system of weightage range may be followed. The indicative weightage may be as follows:

Consultant's specific experience 0 to 10 points

Methodology 20 to 50 points

Key personnel 30 to 60 points

Transfer of knowledge 0 to 10 points

Participation by nationals 01 to 10 points

Total 100 points

It is relevant to mention here that the weightages mentioned above are indicative only and stipulation of specific

weightages would depend upon the specific nature of the appointment.

3. The Employer shall shortlist all the consultants on the basis of above evaluation criteria. The minimum qualifying

requirement shall be 50% weightage or as specified in the EOI document.

4. Alternatively, the employer may specify in the EOI document minimum qualifying requirement for each of the

criteria i.e. minimum years of experience, minimum number of assignments executed, minimum turnover etc.

Under such circumstances, the employer shall evaluate and short list all the consultants who meet the minimum

requirement as specified.

5. The short lists shall normally comprise at least three Consultants/Consultancy concern. If the number of shortlisted

consultants is less than three, further action for final selection of one among them may be taken by the CEC after

recording adequate reasons. If a single consultant is shortlisted then before assigning him the project it should be

examined whether re-bidding process is to be adopted or not and also to be seen whether the amount asked by the

consultant for the job is reasonable or not. There must be some criteria to assess the eligibility. It would also be

mandatory to take the approval of the Cabinet in such cases.

6. The Administrative Department / Department of Infrastrustructure Development will have the option to

invite RFPs (Request for Proposals) including Technical and Financial Bids from the empanelled

Consultants / Advisors of the relevant Ministry of Govt. of India or of GoUP. The list of empanelled

Consultants by the concerned Ministry/ Department of GoI / GoUP shall be treated as equivalent to

shortlist of Consultants prepared subsequent to EOI/ RFQ for these purposes and accordingly only

the second stage i.e. RFP Submission would be needed. Evaluation in such cases would be as per limited

QCBS / QBS method as given in Chapter -III.

Once the short listing of consultants is completed, the employer shall start the process of final selection of the

consultant.

15

Steps for Selection Process:

The selection process generally includes the following steps:

(a) preparation of Terms of Reference (TOR);

(b) preparation of cost estimate and the budget;

(c) preparation and issuance of the Request for Proposals (RFP);

(d) pre-bid meeting;

(e) receipt of proposals;

(f) evaluation of technical proposals: consideration of quality;

(g) public opening of financial proposals;

(h) evaluation of financial proposal;

(i) selection of the winning proposal;

(j) award of the contract to the selected Consultant/Consultancy concern.

The prequalification criteria, performance criteria and evaluation criteria shall be incorporated in the documents

in clear and unambiguous terms to evaluate bids in transparent manner. The Bid security and Performance security

required for bidders must be specified in the documents. The RFP document shall be finalised by CEC.

Terms of reference 1. The Employer shall be responsible for preparing the TOR for the assignment. TOR shall be prepared by those who

have sufficient knowledge and experience in the area of the assignment. If the required experience is not available in-house,

the task of preparation of the TOR can also be assigned to experienced

consultants.

The TOR shall include:

i) Purpose/ objective of the assignment;

ii) Detailed scope of work;

iii) Expected input of key professionals (number of experts, kind of expertise required);

iv) Proposed schedule for completing the assignment;

v) Reports/deliverables required from the consultant.

vi) Background material, records of previous surveys etc. available and to be provided, if any, to the

consultant

vii) Facilities such as local conveyance, office space, secretarial assistance etc., which can be provided to the

consultant

viii) Procedure for review of the work of Consultants/Consultancy concern after award of contract.

2. The scope of the services described in the TOR shall be compatible with the available budget. TOR shall define

clearly the objectives, goals, and scope of the assignment and provide background information (including a list of

existing relevant studies and basic data) to facilitate the consultants’ preparation of their proposals. If transfer of

knowledge or training is also an objective, it should be specifically outlined along with details of number of staff to

be trained, and so forth, to enable consultants to estimate the required resources. TOR shall list the services and

surveys necessary to carry out the assignment and the expected outputs (for example, reports, data, maps, surveys).

However, TOR should not be too detailed and inflexible, so that competing consultants may propose their own

methodology and staffing. Consultant/Consultancy concerns shall be encouraged to comment on the TOR in their

proposals. The employer’s and consultants’ respective responsibilities should be clearly defined in the TOR.

Cost Estimate (Budget)

1. Preparation of a well-thought-through cost estimate is essential if realistic budgetary resources are to be earmarked.

The cost estimate shall be based on the employer’s assessment of the resources needed to carry out the assignment:

staff time, logistical support, and physical inputs (for example, vehicles, laboratory equipment). Costs shall be

divided into two broad categories:

(a) fee or remuneration (according to the type of contract used) and

16

(b) reimbursable, and further divided into foreign (if applicable) and local currency payments. The cost of

staff time shall be estimated on a realistic basis for the personnel, as applicable, by ascertaining the

prevalent market conditions and consulting other organizations engaged in similar activities.

Preparation and Issuance of the Request for Proposals (RFP)

1. Request For Proposal (RFP) is the bidding document in which the technical and financial proposals from the

consultants are obtained. It contains the following:

(i) A letter of invitation (LOI)

(ii) Instructions to consultants (ITC)

(iii) Terms of Reference (TOR)

(iv) List of key positions / professionals required for the assignment

(v) Requirement of qualification and experience of the Consultant/Consultancy concern and of the key

professional staff

(vi) Criteria of bid evaluation and selection procedure

(vii) Standard formats for technical proposal

(viii) Standard formats for financial proposal

(ix) Proposed form of contract

2. The employer shall use the applicable standard RFP with minimal changes as necessary to address project-specific

issues. The employer may use an electronic system to distribute the RFP. If the RFP is distributed electronically,

the electronic system shall be secured to avoid modifications to the RFP and shall not restrict the access of short

listed consultants to the RFP. The RFP will be sent only to the short listed consultants.

3. Other key provisions in the RFP document should be as per the details given in Annexure - 1.

Letter of Invitation (LOI) The LOI shall state the intention of the employer to enter into a contract for the provision of consulting services,

the details of the employer and the date, time, and address for submission of proposals.

Instructions to Consultants (ITC) 1. The ITC shall consist of two parts,

(a) Standard information, and

(b) Assignment specific information.

The assignment specific information is added through “data sheet”. The ITC, therefore, contains all necessary

information that would help the consultants prepare responsive proposals, and shall bring as much transparency as

possible to the selection procedure by providing information on the evaluation process and by indicating the

evaluation criteria and factors and their respective weights and the minimum passing quality score. The standard

information include clauses relating to the procedure of bid submission, the procedure relating to pre-bid meeting,

procedure for seeking clarifications etc. The assignment / job specific information will be prepared separately and

it will include the date and time of bid submission, contact address, the qualification criteria, the method of

selection, the evaluation process, the factors of evaluation and their respective weights etc.

2. The ITC shall not indicate the budget (since cost is a selection criterion), but shall indicate the expected input of

key professionals (staff time). Consultants, however, shall be free to prepare their own estimates of staff time

necessary to carry out the assignment. The ITC shall specify the proposal validity period (normally 90-120 days).

Standard formats for technical and financial proposals

1. The standard formats for technical proposal include:

(i) Format for Letter of Proposal submission

(ii) Format for Consultant’s organization and experience

17

(iii) Format for Comments and suggestions on TOR

(iv) Format for Approach and methodology

(v) Format for Team Composition

(vi) Format for Curriculum Vitae of key professionals

(vii) Format for Staffing Schedule

(viii) Format for Work Schedule

(ix) Format for Comments / modifications suggested on draft contract.

(x) Format for information regarding any conflicting activities and declaration thereof.

2. The standard formats for financial proposal include:

(i) A summary sheet of the cost estimate to be quoted by the consultant.

(ii) Remuneration payable.

(iii) Reimbursables.

Proposed form of contract

1. The contract includes accepted TOR methodology, general and specific conditions of contract, etc. wherever

possible, the employer shall use the Standard Form of Contract.

2. The general conditions of contract shall include all such conditions which are common in nature and not project

specific. Such conditions include clauses pertaining to sub contracting, methods of payment, termination and

extension of contracts, arbitration, variation in quantities, indemnity and insurance, force majeure, conflict of

interest, compliance to local laws and taxes and duties etc.

3. The project specific conditions include clauses relating to the assignment in question. These clauses should be

carefully developed to protect the interest of the employer.

Pre-bid meeting

In all cases of large value or complex assignments, a pre-bid meeting may be prescribed in the RFP. The date and

time for such a meeting should normally be after 15 to 30 days of issue of RFP and should be specified in the RFP itself.

During this meeting, the scope of assignment, responsibilities of either parties or other details should be clearly explained to

the prospective bidders so that there is no ambiguity later on at the time of submission of technical/financial bids. Where

some significant changes are made in the terms/scope of RFP as a result of pre bid meeting or otherwise considered

necessary by the employer, a formal Corrigendum to RFP may be issued, to all short listed consultants. In such cases, it

should be ensured that after issue of Corrigendum, reasonable time (not less than 15 days) is available to the bidders to

prepare/submit their bid. If required, the time for preparation and submission of bids may be extended, suitably.

Receipt of proposal

1. The employer should allow enough time to the short listed consultants to prepare their proposals. The time

allowed shall depend on the assignment, but normally shall not be less than two weeks and more than three

months. In cases, where participation of international consultants is contemplated, a period of not less than

four weeks should normally be allowed. If necessary, the employer shall extend the deadline for submission of

proposals. The technical and financial proposals shall be submitted at the same time. To safeguard the integrity of

the process, the technical and financial proposals shall be submitted in separate sealed envelopes. The technical

bids will be opened immediately after closing of receipt of technical bids by the Consultancy Evaluation

Committee (CEC). The financial proposals shall remain sealed and shall be opened publicly only of those

Consultant/Consultancy concerns who have qualified technically. Any proposal received after the closing time for

submission of proposals shall be returned unopened. 2. The Employer may also use electronic systems permitting consultants to submit proposals by electronic means,

provided the Employer is satisfied with the adequacy of the system, including, inter alia, that the system is secure,

maintains the confidentiality and authenticity of the proposals submitted, uses an electronic signature system or

18

equivalent to keep consultants bound to their proposals and only allows proposals to be opened with due

simultaneous electronic authorization of the consultant and the Employer.

3. Late Bids: Late bids that is bids received after the specified date and time of receipt shall

not be considered and shall be returned unopened.

Evaluation of Proposals: Consideration of responsiveness

The evaluation of the proposals shall be carried out by CEC in two stages:

Evaluation of Technical Proposal:

At the first stage evaluation of technical proposals is taken up. Proposals without earnest money (bid security), bid

processing fees, if specified, unsigned and incomplete ( i.e. when the required bid formats have not been submitted), not

responding to the TOR fully and properly and those with lesser validity than that prescribed in the RFP will be summarily

rejected as being non-responsive, before taking up the appraisal of the technical proposal for evaluation of quality.

Evaluators of technical proposals shall not have access to the financial proposals until the technical evaluation is concluded.

The envelope containing the financial proposal is not opened till the technical evaluation is complete. The financial proposal

of only such bidders will be opened which obtain minimum qualifying marks / standards prescribed for the technical

proposal. The evaluation shall be carried out in full conformity with the provisions of the RFP.

Evaluation of the Quality

The Employer shall evaluate each technical proposal (using the evaluation committee report), taking into account

criteria as prescribed in the RFP:

(a) the consultant’s relevant experience for the assignment,

(b) the quality of the methodology proposed,

(c) the qualifications of the key staff proposed and

(d) capability for transfer of knowledge.

Each of the responsive technical proposal will be evaluated for the criteria prescribed in the RFP by awarding

marks so as to make total maximum technical score as 100. The criteria and weightage to each criteria or sub-criteria would

depend on the requirements of each case and may be fixed objectively. A model scheme of maximum marks is, however,

proposed as under:

Details Max. Marks

Experience of the

Consultant/Consultancy concern

20

Methodology, work plan and

understanding of TOR

25

Suitability of the Key personnel

for the assignment

45

Capability for Transfer of knowledge/

training*

10

TOTAL 100

* If this criteria is not required, the marks can be adjusted against some other criteria. Alternatively, the weightage

range may be stipulated for different parameters.

It is relevant to mention here that the weightages mentioned above are indicative only and stipulation of

specific weightages would depend upon the specific nature of the appointment.

19

The weight given to the Consultant/Consultancy concern’s experience can be relatively modest, since this criterion

has already been taken into account when shortlisting the consultant. More weight shall be given to the methodology in the

case of more complex assignments (for example, multidisciplinary feasibility or management studies).

2. For evaluation of the technical bids with the simplified and detailed methods of evaluation, suggested

formats have been given at Appendix I & II respectively of this manual. They can be referred to for guidance. Suitable

modifications can be made based on the requirements of the evaluation criteria.

3. The CEC shall normally divide the above criteria mentioned above into sub criteria. For example, sub

criteria under methodology, work plan and understanding of TOR can be divided into (i) understanding of TOR, (ii)

acceptability and detailing of methodology and work plan (iii) innovation, if it is important. However, the number of sub

criteria should be kept to the minimum that is considered essential.

The sub criteria for suitability of the key professionals for the assignment can also be divided into: (i) Educational

qualifications (20% weight), (ii) professional experience in the required area of assignment (80% weight).

It is relevant to mention here that the weightages mentioned above are indicative only and stipulation of

specific weightages would depend upon the specific nature of the appointment.

4. Evaluation of only the key personnel is recommended. Since key personnel ultimately determine the

quality of performance, more weight shall be assigned to this criterion if the proposed assignment is complex. The CEC

shall review the qualifications and experience of proposed key personnel in their curricula vitae, which must be accurate,

complete, and signed by an authorized official of the consultant and the individual proposed. When the assignment depends

critically on the performance of key staff, such as a Project Manager in a large team of specified individuals, it may be

desirable to conduct interviews.

5. At the end of the technical evaluation process, the CEC shall prepare a technical evaluation report of the

“quality” of the proposals and take competent authority’s approval. The report shall substantiate the results of the evaluation

and describe the relative strengths and weaknesses of the proposals. All records relating to the evaluation, such as individual

mark sheets, shall be retained until completion of the project and its audit.

6. Minimum qualifying marks or relative qualifying method for quality of the technical proposal will be

prescribed and indicated in the RFP. The consultants who are qualifying as per the technical evaluation criteria will only be

considered as eligible.

7. All the Consultant/Consultancy concerns which meet the minimum qualifying standards / criteria so

prescribed will stand technically qualified for consideration of their financial bids. No ranking of Consultant/Consultancy

concerns among the qualifying Consultant/Consultancy concerns will be required.

Evaluation of Cost

After evaluation of quality has been completed, the employer shall notify those Consultants/Consultancy concern

whose proposals did not meet the minimum qualifying standard or were considered non-responsive to the RFP and/or TOR,

indicating that their financial proposals will be returned unopened.

Evaluation of Financial Proposals

The financial proposals shall be opened publicly by CEC in presence of the representatives of the technically

qualified Consultants/Consultancy concern who choose to attend. The name of the Consultants/Consultancy concern, the

quality scores, and the proposed prices shall be read aloud and recorded when the financial proposals are opened. The

Employer shall prepare the minutes of the public opening.

2. The CEC will then examine if there are any arithmetical errors to be corrected. For the purpose of

comparing proposals, the costs shall be converted to Indian Rupees as stated in the RFP. The CEC shall make this

conversion by using the selling exchange rates for those currencies as per exchange rate quoted by an official source e.g.

20

State Bank of India. The RFP shall specify the source of the exchange rate to be used and the date of exchange rate to be

taken for comparison of the costs. This date shall be the date of opening of financial bids.

3. For the purpose of evaluation, the total cost shall include all taxes and duties for which the employer

makes payments to the consultant and other reimbursable expenses, such as travel, translation, report printing, or secretarial

expenses.

4. If there are conditions attached to any financial proposal, which shall have bearing on the total costs as

indicated in the proposal, the CEC shall reject any such proposals as non-responsive financial proposal. However, if the

CEC feels it necessary to seek clarification on any financial proposals regarding taxes, duties or any such matter, the CEC

may do so by inviting responses in writing.

Selection of the winning consultant

The financial proposals will be ranked in terms of their total evaluated cost. The least cost proposal will be ranked

as L-1 and the next higher and so on will be ranked as L-2, L-3 etc. The least cost proposal (L-1) will be considered for

award of contract. The CEC will put up a report on financial evaluation of the technically qualified Consultants/Consultancy

concern to the competent authority along with the recommendation that the least cost proposal (L-1) can be

approved/invited for negotiation and for final award of contract.

Negotiations

Negotiations are not an essential part of the selection process. However, many times, with the objective of optimal

cost reduction in the interest of the State, it is felt necessary to conduct negotiations with the selected consultant (L-1).

Negotiations shall include discussions of the TOR, the methodology, staffing, Government Ministry/ Department’s inputs,

and special conditions of the contract. These discussions shall not substantially alter the original TOR or the terms of the

contract, test the quality of the final product, its cost, and the relevance of the initial evaluation be affected. The final TOR

and the agreed methodology shall be incorporated in “Description of Services,” which shall form part of the contract.

Financial negotiations shall only be carried out if due to negotiations as mentioned above, there is any change in

scope of work which has any financial bearing on the final prices or of the costs/cost elements quoted are not found to be

reasonable. In such negotiations, the selected firm may also be asked to justify and demonstrate that the prices proposed in

the contract are not out of line with the rates being charged by the consultant for other similar assignments. However, in no

case such financial negotiation should result into increase in the financial cost as originally quoted by the consultant and on

which basis the consultant has been called for the negotiations.

If the negotiations with the selected consultant fail, the employer shall cancel the bidding procedure and re-invite

the bids.

Negotiations can be recommended in exceptional circumstances only after due application of mind and recording

valid, logical reasons justifying negotiations. In case of inability to obtain the desired results by way of reduction in rates

and negotiations prove infructuous, satisfactory explanations are required to be recorded by the Committee who

recommended the negotiations. The Committee shall be responsible for lack of application of mind in case its negotiations

have only unnecessarily delayed the award of work/contract.

Award of Contract The Name of the successful bidder along with details of cost etc. shall be posted on the departmental website after

the award to the successful bidder has been made and communicated to him in writing.

Time Frame The model time frame for according such approval to completion of the entire process of Award of contract should

not exceed one month from the date of submission of recommendations by CEC. Under any circumstances, the overall time

frame should be within the validity period of the contract.

21

Posting of details on award of contracts on websites The details of awarded contracts covering more than 60% value of transactions every month must be uploaded in

time on Employer's official website and must be kept updated every month.

Rejection of All Proposals, and re-invitation The Employer will have the right to reject all proposals. However, such rejections should be well considered and normally

be in cases where all the bids are either substantially in deviation to the TOR or considered unreasonably high in cost. If it is

decided to reinvite the bids, the terms of reference should be critically reviewed/modified so as to address the reasons of not

getting any acceptable bid in the earlier Invitation for Bids. Confidentiality

Information relating to evaluation of proposals and recommendations concerning awards shall not be disclosed to

the consultants who submitted the proposals or to other persons not officially concerned with the process, until the award of

contract is notified to the successful Consultant/Consultancy concern.

22

CHAPTER - III

METHODS OF SELECTION OF CONSULTANTS

The process of selection shall be through either of the following modes of evaluation:

1. Quality and Cost Based Selection (QCBS) The QCBS uses a competitive process among shortlisted Consultants/Consultancy concern that takes into account

a quality of the proposal and the cost of the services in the selection of successful bidder. Cost as a factor of selection shall

be used judiciously. The relative weight to be given to the quality and cost shall be determine for each case depending on

the nature of the assignment.

QCBS system may be following:

1. Open QCBS

2. Limited QCBS

As regards Limited QCBS, only those Consultants may be eligible for consideration of selection who have already

been empanelled by reputed organizations of GOI or who have already been empanelled by Govt. of U.P. organizations. In

such cases, the empanelled consultants may be considered as equivalent to shortlisted consultants after normal EOI process.

2. Quality Based Selections (QBS)

QBS system may be adopted for highly specialised assignments for which it is difficult to define precise TOR,

assignment that have high domestic impact and in which the objective to have the best experts and assignment that can be

carried out substantially different ways, such that proposals will not be comparable. (for example Sector Studies, Country

Economy Analysis, Multi-Sectoral Feasibility Study, design of a hazardous waste, remediation plant, financial sector

reforms, design of major infrastructure, management advise and policy studies in which the value of the services depends on

the quality of the analysis).

QBS system may be following :

1. Open QBS

2. Limited QBS

As regards Limited QBS, only those Consultants may be eligible for consideration of selection who have already

been empanelled by reputed organizations of GOI or who have already been empanelled by Govt. of U.P. organizations. In

such cases, the empanelled consultants may be considered as equivalent to shortlisted consultants after normal EOI process.

Cost Evaluation under Quality Cum Cost Based System (QCBS)

Under QCBS, the technical proposals will be allotted weightage of 70% while the financial proposals will be

allotted weightages of 30%.

Proposal with the lowest cost may be given a financial score of 100 and other proposals given financial scores that

are inversely proportional to their prices.

The total score, both technical and financial, shall be obtained by weighing the quality and cost scores and adding

them up. The proposed weightages for quality and cost shall be specified in the RFP.

Highest points basis: On the basis of the combined weighted score for quality and cost, the consultant shall be ranked in terms of the total score obtained. The proposal obtaining the highest total combined score in evaluation of quality

and cost will be ranked as H-1 followed by the proposals securing lesser marks as H-2, H-3

etc. The proposal securing the highest combined marks and ranked H-1 will be invited for negotiations, if required and shall

be recommended for award of contract.

23

As an example, the following procedure can be followed. In a particular case of selection of consultant, It was

decided to have minimum qualifying marks for technical qualifications as 75 and the weightage of the technical bids and

financial bids was kept as 70 : 30. In response to the RFP, 3 proposals, A,B & C were received. The technical evaluation

committee awarded them 75, 80 and

90 marks respectively. The minimum qualifying marks were 75. All the 3 proposals were, therefore, found technically

suitable and their financial proposals were opened after notifying the date and time of bid opening to the successful

participants. The price evaluation committee examined the financial proposals and evaluated the quoted prices as under:

Proposal Evaluated cost

A Rs.120.

B Rs.100.

C Rs.110.

Using the formula LEC / EC, where LEC stands for lowest evaluated cost and EC stands for evaluated cost, the

committee gave them the following points for financial proposals:

A : 100 / 120 = 83 points

B : 100 / 100 = 100 points

C : 100 / 110 = 91 points

In the combined evaluation, thereafter, the evaluation committee calculated the combined technical and financial

score as under:

Proposal A: 75x0.70 + 83x0.30 = 77.4 points.

Proposal B: 80x0.70 + 100x0.30 = 86 points

Proposal C : 90x0.70 + 91x0.30 = 90.3 points.

The three proposals in the combined technical and financial evaluation were ranked as under:

Proposal A: 77.4 points : H3

Proposal B: 86 points : H2

Proposal C: 90.3 points : H1

Proposal C at the evaluated cost of Rs.110 was, therefore, declared as winner and recommended for

negotiations/approval, to the competent authority.

Cost Evaluation Under QBS Method

Under QBS method, the consultant who has secured first rank in technical evaluation shall be called for further

negotiation after opening and evaluation of its financial proposals.

Other Methods of Selection

Selection of Individual Consultants

1. Individual consultants are normally employed on assignments for which (a) teams of personnel is not

required, (b) no additional outside professional support is required, and (c) the experience and qualifications of the

individual are the paramount requirement.

2. Selection of Individual consultants shall be carried out by advertising the requirement in at least one

national newspaper of repute. Selection shall be based on their qualifications for the assignment. They shall be selected

through comparison of qualifications of at least three candidates among those who have expressed interest in the assignment

or have been approached directly by the Employer. Individuals employed by Employer shall meet all relevant qualifications

and shall be fully capable of carrying out the assignment. Capability is judged on the basis of academic background,

24

experience, and, as appropriate, knowledge of the local conditions, such as local language, culture, administrative system,

and government organization.

3. Selection will be carried out by the CEC, which will award marks for the educational qualifications and

experience and select the most suitable candidate for the assignment. The CEC may also interview the candidates and award

marks for their performance in the interview and recommend the remuneration to be paid.

4. From time to time, permanent staff or associates of a Consultant/Consultancy concern may be available as

individual consultants. In such cases, the conflict of interest provisions described in these Guidelines shall apply to the

parent Consultant/Consultancy concern.

5. Individual consultants may be selected on a direct negotiation basis with due justification in exceptional

cases such as: (a) tasks that are a continuation of previous work that the consultant has carried out and for which the

consultant was selected competitively; (b) assignments lasting less than six months; (c) emergency situations resulting from

natural disasters; and (d) when the individual is the only consultant qualified for the assignment.

3. Cost Based Selection (CBS) :-

This method of selection may be used for the assignments of following nature :

(i) assignment where any experienced consultant can deliver the services without requirement of specific expertise.

Examples are traffic surveys, market surveys etc. and

(ii) cost of which shall not exceed Rs. 10 lakh.

4. Selection of consultancy concerns by Direct Negotiation :

Selection by this method may be carried out with due justification in expectional cases such as :

(a) tasks that are a continuation of previous work that the consultant has carried out and for which the consultant

was selected competitively;

(b) emergency situations resulting from natural disasters; and

(c) when the consultancy concern is the only concern qualified for the assignment. Such selection normally be

restricted to the financial ceiling of Rs. 10 lakh, consultancies through this method beyond this ceiling should

be awarded only after due deliberation and justifications to be recorded. In cases of selection of consultants by

direct negotiations having financial implications of more than Rs. 10 lakh, the CEC shall negotiate with the

consultant on technical and financial aspects.

In above cases the following procedures shall be adopted :-

4.1. Selection of consultants through direct negotiations does not provide the benefits of competition in regards to quality

and cost, lacks transparency in selection and could encourage unacceptable practices. Therefore, single-source

selection shall be used only in exceptional cases.

4.2. This method of selection may be adopted only if it presents a clear advantage over competition and under circumstances

as mentioned in para 4 above.

4.3. When continuity for downstream work is essential, the initial RFP shall outline this prospect and if practical, the

factors used for the selection of the consultant should take the likelihood of continuation into account. Continuity in

the technical approach, experience acquired and continued professional liability of the same consultant may make

continuation with the initial consultant preferable to a new competition subject to satisfactory performance in the

initial assignment. For such downstream assignments, the Ministry or Department shall ask the initially selected

consultant to prepare technical and financial proposals on the basis of TOR furnished by the Ministry or Department,

which shall then be negotiated.

4.4. If the initial assignment was not awarded on a competitive basis or was awarded under tied financing or reserved

procurement or if the downstream assignment is substantially larger in value, a competitive process shall normally be

followed in which the consultant carrying out the initial work is not excluded from consideration if it expresses

interest.

25

4.5. For selecting a consultant under this method, the employer should prepare a full justification and take the approval of

the due authority, which normally should not be below the rank of a head of department.

4.6. While selecting the consultant under this method, the employer shall ensure that the consultant has the requisite

qualification and experience to undertake the assignment. Normally the employer shall adopt the same short listing

criteria as applied to similar assignments while evaluating the EOI.

5. Transaction Advisors

Recently, Department of Economic Affairs, Ministry of Finance, Government of India has, subsequent to pre-qualifying,

short-listed a few agencies on the basis of International Competitive Bidding for better and smooth implementation of PPP

(Public Private Partnership) Projects for a duration of 2 years. To select a Consultant from this panel, only financial bid

shall have to be received and technical bid shall not be required. Accordingly it shall be possible to utilise the panel

stipulated by the Government of India from time-to-time by following the process specified by the Government of India

from time-to-time. A list of current Transaction Advisors is enclosed as Annexure – 3.

Selection of Service Providers :

Government Departments are also often engaging various service providers such as, for upkeep and maintenance

of office (other than Civil & Electrical Works etc.), transport services etc. In such cases, which are generally low value

contracts, it may not be necessary to take separate technical and financial proposals. In such case CBS method of selection

can be used, after stating the minimum qualifying criteria (such as past experiences etc.).

Financial Advisors

Investment and commercial banks, financial firms, and fund managers hired by the Govt. Department for the sale

of assets, issuance of financial instruments, and other corporate financial transactions, notably in the context of privatization

operations, shall be selected under two bid systems. The RFP shall specify selection criteria relevant to the activity—for

example, experience in similar assignments or network of potential purchasers—and the cost of the services. In addition to

the conventional remuneration (called a “retainer fee”), the compensation includes a “success fee”; this fee can be fixed, but

is usually expressed as a percentage of the value of the assets or other financial instruments to be sold. The RFP shall

indicate that the cost evaluation will take into account the success fee in combination with the retainer fee. The financial

scores shall be based on the retainer fee and success fee as a percentage of a predisclosed notional value of the assets. The

RFP shall specify clearly how proposals will be presented and how they will be compared.

Auditors

Auditors typically carry out auditing tasks under well defined TOR and professional standards. They shall be

selected according to two bid system, with cost as a selection factor.

26

Annexure - 1

Important Provisions in RFP / Contract for Consultants

Currency

Under normal circumstances, all the contracts should be based on Indian Rupees only. However, for exceptional

case, contracts in foreign currency may be permitted with prior approval of competent authority. RFPs shall clearly state

that Consultant/Consultancy concerns may express the price for their services, in the currency specified in RFP. If RFP

allows proposals in any other currency, the date and the exchange date for converting all the bid prices to Indian Rupees

shall be indicated in RFP.

Payment Provisions

Payment provisions, including amounts to be paid, schedule of payments, and payment procedures, shall be as

agreed upon and also indicated in the draft contract. Payments may be made at regular intervals (as under time-based

contracts) or for agreed outputs (as under lump sum contracts). Payments for advances if any should normally be backed by

Bank Guarantee. The limit for advance payment will be as prescribed by GFR. Normally, it should not exceed 10% of the

cost of the contract. Any advance payment should be backed by a bank guarantee.

Bid Securities and bid processing fees

The consultants submitting the proposals shall provide bid security along with their proposal. The amount, form

and mode of submission of bid security and the method of refund of the bid security shall be specified in the RFP document.

The employer may also charge an appropriate bid processing fees, which is not refundable. However, for smaller

assignment, the employer may waive the requirement of bid security.

Conflict of Interest

The consultant shall not receive any remuneration in connection with the assignment except as provided in the

contract. The consultant and its affiliates shall not engage in consulting activities that conflict with the interest of the client

under the contract and shall be excluded from downstream supply of goods or construction of works or purchase of any

asset or provision of any other service related to the assignment other than a continuation of the Services” under the ongoing

contract. It should be the requirement of the consultancy contract that the consultants should provide professional, objective

and impartial advice and at all times hold the client’s interests paramount, without any consideration for future work, and

that in providing advice they avoid conflicts with other assignments and their own corporate interests. Consultants shall not

be hired for any assignment that would be in conflict with their prior or current obligations to other clients, or that may

place them in a position of being unable to carry out the assignment in the best interest of the Employer. Without limitation

on the generality of the foregoing, consultants shall not be hired, under the circumstances set forth below:

a) Conflict between consulting activities and procurement of goods, works or services: A Consultant/Consultancy concern that has been engaged to provide goods, works, or services for a project,

and each of its affiliates, shall be disqualified from providing consulting services related to those goods,

works or services. Conversely, a Consultant/Consultancy concern hired to provide consulting services for

the preparation or implementation of a project, and each of its affiliates, shall be disqualified from

subsequently providing goods, works or services for such preparation or implementation. b) Conflict among consulting assignments: Neither consultants (including their personnel and sub-

consultants) nor any of their affiliates shall be hired for any assignment that, by its nature, may be in conflict

with another assignment of the consultants. As an example, consultants hired to prepare engineering design

for an infrastructure project shall not be engaged to prepare an independent environmental assessment for

the same project, and consultants assisting a client in the privatization on public assets shall neither purchase

nor advise purchasers of, such assets. Similarly, consultants hired to prepare Terms of Reference (TOR) for

an assignment shall not be hired for the assignment in question.

c) Relationship with Employer's staff: Consultants (including their personnel and sub-consultants) that have a business or family relationship with such member(s) of the Employer's staff or with the staff of the

project implementing agency, who are directly or indirectly involved in any part of ; (i) the preparation of

the TOR of the contract, (ii) the selection process for such contract, or (iii) supervision of such contract; may

not be awarded a contract unless it is established to the complete satisfaction of the employing authority, for

27

the reason to be recorded in writing, that such relationship would not affect the aspects of fairness and

transparency in the selection process and monitoring of consultant’s work.

Unfair Competitive Advantage

Fairness and transparency in the selection process require that consultants or their affiliates competing for a

specific assignment do not derive a competitive advantage from having provided consulting services related to the

assignment in question. To that end, the request for proposals and all information would be made available to all short listed

consultants together.

Professional Liability

The consultant is expected to carry out its assignment with due diligence and in accordance with prevailing

standards of the profession. As the consultant’s liability to the employer will be governed by the applicable law, the contract

need not deal with this matter unless the parties wish to limit this liability. If they do so, they should ensure that (a) there

must be no such limitation in case of the consultant’s gross negligence or willful misconduct; (b) the consultant’s liability to

the employer may in no case be limited to less than the total payments expected to be made under the consultant’s contract,

or the proceeds the consultant is entitled to receive under its insurance, whichever is higher; and (c) any such limitation may

deal only with the consultant’s liability toward the employer and not with the consultant’s liability toward third parties.

Disclaimer clause

The Employer or any of its officers, employees, contractors, agents or advisers, subject to any law to the contrary,

shall not be liable for any loss or damage (whether foreseeable or not) suffered by any person acting on or refraining from

acting because of any information including forecasts, statements, estimates, or projections contained in this RFP document

or conduct ancillary to it whether or not the loss or damage arises in connection with any negligence, omission, default, lack

of care or misrepresentation on the part of Employer or any of its officers, employees, contractors, agents or advisers. Penalty clause

The EOI/RFP/contract documents should mention the suitable penalty clause in case of non-completion/delay in

completion of awarded contract.

Staff Substitution

During an assignment, if substitution is necessary (for example, because of ill health or because a staff member

proves to be unsuitable, or the member is no longer working with the consultant), the consultant shall propose other staff of

at least the same level of qualifications for approval by the Employer. The contract must specifically make provision for terms and conditions under which the staff can be replaced, about the remuneration to be paid etc.

Cost of Preparation of Proposal to be borne by Consultant

Cost of preparation of the proposal shall be borne by the Consultant/Consultancy concern regardless of the

outcome of the proposal. The proposal offered should contain all the work envisaged under the scope of work and those

proposals giving only part of the work will be rejected.

Training or Transfer of Knowledge

If the assignment includes an important component of training or transfer of knowledge to Government/Project

staff, the Terms of Reference (TOR) shall indicate the objectives, nature, scope, and goals of the training program, including

details on trainers and trainees, skills to be transferred, time frame, and monitoring and evaluation arrangements. The cost

for the training program shall be included in the consultant’s contract and in the budget for the assignment.

28

Standards of ethics

The Employer as well as consultants should observe the highest standard of ethics during the selection and

execution of such contracts.

(a) In pursuance of the above objective, this policy defines, the terms set forth below as follows: “corrupt

practice” means the offering, giving, receiving, or soliciting of any thing of value to influence the action of a public official

in the selection process or in contract execution; and “fraudulent practice” means a misrepresentation or omission of facts in

order to influence a selection process or the execution of a contract, “Collusive practice” means a scheme or arrangement

between two or more consultants, with or without the knowledge of the employer, designed to establish prices at artificial

noncompetitive levels. “Coercive practice’ means harming or threatening to harm, directly or indirectly, persons or their

property to influence their participation in a procurement process, or affect the execution of a contract.

(b) It is further provided that :-

(i) Employer will reject a proposal for award if it determines that the consultant recommended for award has

engaged in corrupt or fraudulent activities in competing for the contract in question;

(ii) The Government will declare a consultant ineligible, either indefinitely or for a stated period of time, to be

awarded a Government contract if it at any time determines that the consultant has engaged in corrupt or fraudulent

practices in competing for, or in executing, a contract; and The employer has the right to require that, in contracts, a

provision be included requiring consultants to permit the employer to inspect their accounts and records relating to the

performance of the contract and to have them audited by auditors appointed by the employer.

Applicable Law and Settlement of Disputes

The contract shall include provisions dealing with the applicable law, which should be the law applicable in India

and the forum for the settlement of disputes. The provision for appointment of arbitrator for adjudicating disputes, if any,

may be preferred.

Monitoring of the Contract:

The Employer awarding the consultancy contract should be involved throughout in monitoring the progress of the

assignment. Suitable provision for this should be made in the contracts which should also take care of the need to terminate

/ penalize the contractor or to suspend payments till satisfactory progress has not been achieved. CMC shall be formed by

the employer to monitor the progress.

29

Annexure - 2

Types of Contracts

Lump Sum (Firm Fixed Price) Contract :

Lump sum consultancy contracts are used mainly for assignments in which the content and the duration of the

services and the required output of the consultants are clearly defined. They are widely used for simple planning and

feasibility studies, environmental studies, detailed design of standard or common structures, preparation of data processing

systems, and so forth. Payments are linked to outputs (deliverables), such as reports, drawings, bills of quantities, bidding

documents, and software programs. While lump sum consultancy contracts are easy to administer because payments are due

on clearly specified outputs, it is essential that the terms of payments for these consultancy contracts are linked with the

output and the time frame within which each of the defined activities are to be completed. This type of contracts shall

normally be used by the Employers for hiring services of the consultants under this guideline.

Time-Based Contract :

This type of contract is appropriate when it is difficult to define the scope and the length of services, either because

the services are related to activities by others for which the completion period may vary, or because the input of the

consultants required to attain the objectives of the assignment is difficult to assess. This type of contract is widely used for

complex studies, supervision of construction, advisory services, etc. Payments are based on agreed hourly, daily, weekly, or

monthly rates for staff (who are normally named in the contract) and on

reimbursable items using actual expenses and/or agreed unit prices. The rates for staff include salary, social costs, overhead,

fee (or profit), and, where appropriate, special allowances. This type of contract shall include a maximum amount of total

payments to be made to the consultants. This ceiling amount should include a contingency allowance for unforeseen work

and duration, and provision for price adjustments, where appropriate. Time-based contracts need to be closely monitored

and administered by the Employer to ensure that the assignment is progressing satisfactorily and that payments claimed by

the consultants are appropriate.

Retainer and/or Contingency (Success) Fee Contract.

Retainer and contingency fee contracts are widely used when consultants (banks or financial firms) are preparing

companies for sales or mergers of firms, notably in privatization operations. The remuneration of the consultant includes a

retainer and a success fee, the latter being normally expressed as a percentage of the sale price of the assets.

Percentage Contract

These contracts are commonly used for architectural services. They may be also used for procurement and

inspection agents. Percentage contracts directly relate the fees paid to the consultant to the estimated or actual project

construction cost, or the cost of the goods procured or inspected. The selection is made based on two stage bidding. The

final selection is made among the technically qualified consultants who has quoted the lowest percentage while the notional

value of assets is fixed. It should be borne in mind that in the case of architectural or engineering services, percentage

contracts implicitly lack incentive or economic design and are hence discouraged. Therefore, the use of such a contract for

architectural services is recommended only if it is based on a fixed target cost and covers precisely defined services.

Indefinite Delivery Contract (Price Agreement)

These contracts are used when the Employer need to have “on call” specialized services to provide advice on a

particular activity, the extent and timing of which cannot be defined in advance. These are commonly used to retain

“advisers” for implementation of complex projects (for example, dam panel), expert adjudicators for dispute resolution

panels, institutional reforms, procurement advice, technical troubleshooting, and so forth, normally for a period of a year or

more. The Employer and the Consultant/Consultancy concern agree on the unit rates to be paid for the experts, and

payments are made on the basis of the time actually used. The consultant shall be selected based on the unit rate quoted by

them for providing the services.

30

Process of Project Development Special Purpose Vehicle (PDSPV):

(i) The process for constituting a 'SPV' with the consultant for project formulation can be adopted. This SPV

may be constituted only for projects, which are based on new concept and where success is not guaranteed

i.e. SPV may be constituted for such projects where risk is perceived about the successful selection of a

developer by a consultant.

(ii) Under the system of Project Development Special Purpose Vehicle (PDSPV), a "SPV Company" is

constituted with the Consultant selected on the basis of competition with a nominal share-capital (say

Rs.5.00 lacs) wherein the nodal agency nominated by the State and the Consultants have equal share-

capital and a 'Project Development Fund' is constituted for the project development, in which Consultant

and State Nodal Agency contribute. The ratio of the contribution by Consultant and State Nodal Agency is

according to the bid invited for selection of Consultant. The amount of 'Project Development Fund' is also

determined on the basis of the Bid. The reimbursement of the accruing expenditure and dues from PDF

and the 'Success Fee' payable is done by the Developer selected. In case the State Government stops the

project development mid-way, then there is also a provision for the payment of 'Drop Dead Fees' to the

Consultant. The Consultants selection-process followed for the constitution of PDSPV shall be as per the

guidelines, however, for selection of the Consultant for PDSPV, at the time of receiving the financial

proposal through RFP (Request for Proposal) under the final selection process the PDF contribution,

Success Fee etc. mentioned above, may be made bid variable-basis of financial selection. Necessary

provisions shall be made in the bidding document for the recovery of joint expenditure done by the

consultant agency and the State Nodal Agency concerned.

(ii) a) PDSPV shall execute the work of project development under the consultancy services but the

project shall not be implemented by it. A private developer shall be selected independently as

per rules, for implementation of the project. Sanctions required at different levels during the

project preparation/development, shall initially be taken in the name of SPV and may be

transferred to the selected Private Developer/Investor in due course of time, as and when

required.

(iii) The 'Broad Scope of Work' provided to the Consultant in the beginning shall have an option to

additionally include other similar projects in the scope of work after approval of 'Consultancy Evaluation

Committee'. As per above, if the expenditure on additional work exceeds the pre-decided PDF, then the

selected Consultant shall contribute the additional amount in full. Approval of Consultant Evaluation

Committee (CMC) shall be taken for loading this additional amount on the project but following

precautions shall be observed in this procedure:

(iii) a) Generally, the 'scope of work' of a project should be specified prior to the award of

Consultancy and no modifications should be required later on. However, under unavoidable

circumstances a few amendments may be made in the original consultancy but amendments

should not alter the basic nature of the consultancy. Transparent standards should also be

available for increasing the Consultant's fee and in any case this increase should not be more

than 25% of the original consultancy.

(iii) b) Exemption in the repeated selection of Consultants for similar kinds of projects, shall be

appropriate only when it is possible to determine the fee prior to awarding the project to the

old Consultant. This may generally be used for small projects only, where consultant fee is not

substantial.

31

Annexure-3

List of Firms/ Consortia Empanelled as Transaction Advisers

S.

No. Name of the Transaction

Adviser Address Contact Nos./

e-mail Contact person

1. Abacus Legal Group, India

Consortium partner:

Clayton Utz., Australia

B-226, 1st Floor, Greater

Kailash- 1, New Delhi-110 048 (011) 2923 4030/ 2923

4092/ 2923 6522

abacus@del2.vsnl.net.in

Shri Akshoy Rekhi

98110 43477

2. CRISIL Infrastructure Advisory,

India;

Consortium partners:

Verulam Consultants Private

Limited, India; Amarchand &

Mangaldas and Suresh A. Shroff

& Co., India and Devesh K Shah

& Co., India

CRISIL Limited, 121-122,

CRISIL House, Andheri-Kurla

Road, Andheri (East),

Mumbai-400093

(011) 52405194 Mr. Sameer Gupta,

Head- CRISIL

Infrastructure Advisory

91 9350491051

3. Deloitte Touche Tohmatsu India

Private Limited, India;

Consortium partners:

Deloitte & Touche LLP, UK and

Hemant Sahai Associates, India

Hansalya, Barakhamba Road,

New Delhi-110 001

011 2331 5256

2331 3543

2331 5437 kamleshmittal@deloitte .com

Mr. Kamlesh Mittal

09811156820

4. Ernst & Young Private Limited,

India

Consortium partners:

Amarchand & Mangaldas and

Suresh A. Shroff & Co

U&I, Plot No.47, Sector 32

Institutional Area,

Gurgaon 122001

Regd. Office: 22,Camac Street,

Block C, 3rd Floor,

Kolkatta-700016

0124 4644175

0124 4644050

Kuljit.Singh@in.ey.com

Mr. Kuljit Singh, Partner,

Lead

Advisory Services,

Ernst & Young Private

Limited,

98104 01207

5. Feedback Ventures Private

Limited, India;

Consortium partners:

Delhi Metro Rail Corporation

(DMRC), India and

Bankworld Inc., USA and

Hemant Sahai Associates, India

Feedback House, 7, Local

Shopping Centre, Panchsheel

Park, New Delhi-110 017

(011) 42007508

akhileshwar@feedbackvent

ures.com

Mr. Akhileshwar Sahay,

President, Government &

Multilateral Advisory

Services

(GMAS)

32

S.

No. Name of the Transaction

Adviser Address Contact Nos./

e-mail Contact person

6. Grant Thornton UK LLP,

London,

Consortium partners:

U.K. Grant Thornton India

Private Limited, India and

Amarchand Mangaldas &

Suresh A Shroff & Co., India.

Grant Thornton House, Melton

Street, Euston Square, London,

NW1 2EP, United Kingdom

0044(0)870 324 2282

(Telefax)

Glenn.stone@gtuk.com

Mr. Glenn Stone

0870 324 2282

7. Infrastructure Development

Finance Company (IDFC)

Limited, India;

Consortium partners:

Infrastructure Development

Corporation (Karnataka)

Limited (iDeCK), India and

Singhania & Partners, India

ITC Centre, 3rd Floor, 760, Anna

Salai, Chennai-600 002

044 2855 9440

044 2854 7597(F)

info@idfc.com

cherian@idfc.com

Mr. Cherian Thomas,

Senior

Director – Advisory

Services

(011) 46006111

8. Infrastructure Leasing and

Financial Services (IL&FS),

India; Consortium partners:

IL&FS Infrastructure

Development Corporation,

India; IL&FS Education and

Technology Services, India;

Amarchand and Mangaldas &

Suresh A. Shroff & Co. and

Junnarkar & Associates, India

Infrastructure Leasing and

Financial Services Limited,

Regd Office: IL&FS Financial

Centre, C-22, G Block, Bandra

Kurla Complex, Bandra East,

Mumbai-400051

011 4130 6726/27 prasanna.srinivasan@ilfsindia.com

Mr. Prasanna Srinivasan,

Sr. Vice

President,

98110 66728

9. International Finance

Corporation

50M, Niti Marg (Gate No.3)

Chankyapuri,

New Delhi-110021

(011) 4111 1018/ 1000

011) 4111 1001/ 02 (Fax)

vbhagat@ifc.org

Mr. Vipul Bhagat,

Manager,

Infrastructure Advisory,

South

Asia

33

S.

No. Name of the Transaction

Adviser Address Contact Nos./

e-mail Contact person

10. Pricewaterhouse Coopers

Private Limited, India;

Consortium partners:

A.Y.Chitale & Associates, India

and Singhania & Partners, India

Pricewaterhouse Coopers

Private Limited, Building 8, 7th

& 8th Floor, Tower B, DLF

Cybercity, Gurgaon-122 002.

Regd office: Plot No.Y-14,

Block

EP, Sector V, Salt Lake

Electronics Complex,

Bidhannagar, Kolkata-700 091

0124 4620557

01244620000 (Board)

0124 4620620 (fax) vishwas.udgirkar@in.pwc.com

Mr. Vishwas Udgirkar,

Associate

Director

11. RITES Limited, India

Consortium partner: Suri &

Company Law Firm, India

Regd Office: New Delhi House,

27, Barakhama Road, New

Delhi

Corporate Office: Plot No.1,

Sector 29, Gurgaon 122001

0124 2571666/ 0124

2818170

0124 2571630 /

0124 2571660 (F)

skseth@rites.co.in

info@rites.co.in

Mr. S.K. Seth, Group

General

Manager (Privatisation

and Concession)

NOTE:

1. There may be potential conflict of interest in case of panel members such as IL&FS and IDFC Limited are selected as the Transaction

Adviser for a project for which they could be potential bidders. It is, therefore, recommended that the state governments/ local

governments appointing the transaction advisors should take an undertaking from the selected consortia that they/ their affiliates will not

bid for the same projects.

2. There may be potential conflict of interest in case the agencies with CRISIL consortia are selected as the Transaction Adviser for a project, where CRISIL is also required to rate the proposed PPP project.

34

Appendix I

Format for Simplified evaluation of quality.

Name of the consultancy firm: Sr. No. Item Required response

1. Has the consultant paid the RFP document fees Yes

2. Has the consultant submitted the requisite bid

processing fee and bid security

Yes

3. Have all the pages required to be signed by the

authorized representative of the consultant been

signed

Yes

4. Has the power of attorney been submitted in the

name of authorized representative.

Yes

5. In the case of JV/consortium, whether the MOU has

been submitted

Yes

6. Has the consultant submitted all the required forms of the

technical proposal.

Yes

7. Does the technical proposal contain any financial

information

No

8. Is financial proposal submitted separately in a sealed cover Yes

2. Evaluation of proposal.

Sr. No. Item Required response

1. Does the consultancy firm have the required

experience.

Yes

2. Does the proposed methodology of work fulfill the objectives of

the assignment / job till the last detail of the TOR.

Yes

3. Does the methodology, work plan and staffing

schedule provide coverage of the entire scope of

work as described in TOR

Yes

4. Does the team leader fulfill the minimum educational

qualification and experience criteria.

Yes

5. Has the consultant provided for all the professionals for

requisite expertise

Yes

6. Does the key professional (indicate the position) fulfill the

minimum educational qualification and experience criteria.

[Evaluate for all the proposed key personnel]

Yes

7. Does the staffing schedule including the key

professionals proposed, the responsibility assigned to them and

the support staff together is adequate for performing the entire

scope of work indicated in the TOR.

Yes

Note: If the answer is yes, in all the cases, the consultancy firm is considered technically qualified for the assignment.

35

Appendix II

Format for Detailed evaluation of quality.

Summary Sheet

(Compiled from II-A, II-B, II-C, II-D)

(Only for proposals considered as responsive)

S.

No.

Name of the

Consultant

Firm’s

Experience

(Max.

Marks)

Methodology

& Work

schedule

(Max.

Marks)

Qualifications

of Key

Professionals

(Max. Marks)

Total

Marks.

( Max.

Marks

100)

II-A

Responsiveness

Name of the Consultancy Firm

Sr.

No.

Item Required response

1. Has the consultant paid the RFP document fees Yes

2. Has the consultant submitted the requisite bid

processing fees and bid security.

Yes

3. Have all the pages required to be signed by the

authorized representative of the consultant been

signed.

Yes

4. Has the power of attorney been submitted in the

name of authorized representative

Yes

5. In the case of JV/consortium, whether the MOU/

Contract Agreement has been submitted.

Yes

6. Has the consultant submitted all the required

forms of the technical proposal.

Yes

7. Has the consultant provided all the professionals

for the requisite expertise.

Yes

8. Does the technical proposal contains any

financial information

No

9. Is the financial proposal submitted separately in a

sealed cover.

Yes

36

II-B

Evaluation of Consultancy Firm’s Experience

Sr.No. Name of the

Consultancy

Firm

Number of

Projects

of similar nature

Marks Awarded

(Max. Marks)

II-C

Evaluation of Methodology & Work Schedule

S.No. Name of the

Consultancy

Firm

Understanding

of TOR

(Max. Marks)

Work Plan

&

Methodology

(Max.

Marks)

Organization

and Staffing

for the

proposed

assignment

(Max.

Marks)

Total

II-D

Evaluation of the Consultants Key Professionals

Name of the Consultancy Firm : Sr.

No.

Name of the

Key

Professionals

Educational

Qualification

Max.

Marks

No. of

Projects

of

similar

nature

Max.

Marks

Experience

of the

region (No.

of Projects

in the

region)

Max.

Marks

Total

Marks

(4+6+8)

1. 2. 3. 4. 5. 6. 7. 8. 9.

37

PART - II

Policy Framework for

Participation by Persons (Developers)

Other Than The State Government

And Government Agencies

in

Financing, Construction, Maintenance and

Operation

of

Infrastructure Projects

in

Uttar Pradesh

38

Executive Summary

1. The purpose of this guidelines to define the broad Policies and Procedures of Govt. of

Uttar Pradesh for selection, contracting and monitoring of Private Developers for PPP

Projects in the State.

2. These Guidelines are applicable for selection of Private Developers for PPP Projects

by any Ministry / Department/ Organization of the GoUP where the costs of the

project are funded through PPP and/ or partially by GoUP.

3. These Guidelines unlike the guidelines on Consultant Selection, specifically apply to

those types of services in which the physical aspect of the activity predominates (for

e.g. construction of works, manufacture of goods, operation and maintenance of

facilities or plant).

4. The Administrative Department of the State Govt. / the Department of Infrastructure

Development/ Specified Govt. Agency (Employer) may identify the project(s) to be

taken up through PPPs.

5. The Employer shall prepare a brief note on the proposed project(s), circulate it to the

Departments concerned for their views, record its views thereupon and thereafter put

up the concept of the project for the initial In principle approval of the Competent

Authority on the draft concept as well as the broad TORs for detailed studies on the

proposed PPP Project. However the concurrence of Department of Infrastructure

Development shall be sufficient, i.e. in principle approval of competent authority will

not be required except in cases i. where Department of Infrastructure Development

disagree with proposal of Admn. Deptt. or ii. PPP proposed, is likely to have statewide

impact or iii. disinvestment process is proposed.

6. The Administrative Department shall thereafter initiate the process of Selection of

Consultant(s) either on its own or may request the department of Infrasstructure

Development / its Specified Govt. Agency ( Nodal Agency) to select a suitable

Consultant on its behalf. Selection of the Consultant shall be done as per the

provision of the Guidelines on Selection of Consultant(s) enumerated in Part-I of

this manual. The Department of Infrastructure Development may appoint one or more

organizations as the specified Agency/ Nodal Agency for these purposes with the

approval of Industrial Development Commissioner.

7. The selected Consultant shall undertake Pre-feasibility and Feasibility Studies; same

consultant or separate consultants may be entrusted with studies related to

Environmental Impact Assessment and Social Impact Assessment as provided.

8. The TEFRs and Studies on EIA / SIA shall be put up by the Employer before the

Competent Authority for final In principle approval for Selection of Developer for the

PPP Project.

9. The Consultant selected for Feasibility Studies / TEFRs may also be entrusted the task

of preparing the RFP Documents containing mainly the Detailed Project Report

(DPR), Bid Document (including Biding procedure and bid parameter(s)), Draft

Concession Agreement etc. Accordingly the Consultancy awarded for PPP Projects

may be a two stage Consultancy with the Second Stage of preparation of RFP

Documents etc. being conditional upon In principle approval of the TEFR by the

Competent Authority.

10. Selection of Developer may be done through a two stage bidding process:

39

Stage - I : Shortlisting of Developer through EOIs in the form of Request for Qualification

(RFQs).

Stage -II : Selection of Developer from shortlisted Developer on the basis of Request

for Proposal (RFPs) submitted by them containing two stage bids i.e.

Technical and Financial Bids

11. Selection of Developer for PPP Projects shall only be done through Competitive

Bidding Method.

12. The key to the success of the PPP Project is designing of an appropriate and effective

Concession Agreement. The various types of Concession agreement are enumerated

in Schedule-II. The essential ingredients of a Concession Agreement, applicable to

any of these, are outlined in Annexure – II.

13. Time Frames : The Employer shall normally allow 21 days for EOIs in the form of

RFQs for Pre-qualification / shortlisting of Developers. The shortlisted Developers

shall be normally invited to submit RFPs within 28 days of advertisement but in no

case shall be allowed less than 21 days from the date of first notice for RFP. The time allowed shall depend on the assignment, but normally shall not be more than three

months. In cases, where participation of international Developers is contemplated, a

period of not less than four weeks should be allowed.

14. Flow Chart for Selection of Developer :

The selection process shall normally include the following steps:-

Identification of Project by Administrative Department

Preparation of TOR

Proposal to be put up before Competent Authority/DID for initial in principle approval/consent

Preparation of TEFR by Consultant

Proposal to be put up before Competent Authority for Final in principle approval

Preparation of DPR by Consultant

Proposal to be processed for inviting EOI in accordance with the in principle approval of

Competent Authority/Consent of DID

Advertisement for RFP

Shortlisting of Developers

Preparation and issuance of RFP (which should include the Letter of Invitation (LOI);

Instructions to Developers (ITD); the TOR and the proposed draft contract)

Receipt of proposals

Evaluation of technical proposals: consideration of quality

40

Public opening of financial proposals

Evaluation of financial proposals.

Final evaluation of quality and cost; and

Negotiations as may be necessary in order to ensure optimal economy and award of the

contract to the selected Developer/Developer concern

Proposal to be put up to the Competent Authority for final approval

15. Viability Gap Funding : The PPP Project may be forwarded by the State Govt. of U.P.

to the Govt. of India for upfront Financial Assistance upto 20% of the Project Cost as

laid down by the GOI if the PPP Project after final evaluation of Bids and finalization

of Concession Agreement is eligible for VGF as per GOI norms.

16. PPP Bid Evaluation Committee : There shall be a PPP Bid Evaluation Committee

chaired by the Industrial Development Commissioner and consisting of Principal

Secretaries / Secretaries of Law, Finance, Administrative Department (of PPP

Project), Infrastructure Development with an option to coopt one or more relevant

Departments. The PEC shall have the power to examine all aspects and stages of the

Developer selection i.e. issuance of EOI, evaluation of EOI, short-listing of

Developers, deciding Terms of Reference, issuance of RFP, evaluation of

technical and financial proposals, negotiations and final selection of the Developer.

The PPPEC shall also finally evaluate all PPP Projects estimated to cost upto Rs.100

crores and shall recommend the final selection of Bidder / Developer in such cases to

the Comptent Authority.

17. Empowered Committee : There shall be a Empowered Committee chaired by the

Chief Secretary, GoUP to finally evaluate all Bids for PPP Projects estimated to cost

beyond Rs.100 Crores and it shall recommend the Final Selection of Bidder /

Developer to the Competent Authority.

18. Final Approval of the Developer for PPP Project shall be granted by the Competent

Authority.

19. The Competent Authority shall be the Hon'ble Cabinet of Ministers of GoUP for

purposes mentioned under these guidelines.

20. Implementation of PPP Project : Once a Developer has been selected by the

Employer, the Concession Agreement shall be signed between the Developer and the

concerned Administrative Department. The Concerned Administrative Department

shall be responsible for the implementation of the PPP Project by the Selected

Developer.

21. PPP Monitoring Committee : There shall be a PPP Monitoring Committee consisting

of all or any of the Members of the PPPEC. The Department of Infrastructure

Development, Administrative Department of PPP Project, Finance shall necessarily be

Members of PPPMC.The PMC shall be responsible to monitor the progress of the

project, to oversee that the project is carried out as per agreed TOR and contractual

conditions, to assess the quality of the deliverables, to accept / reject any part of

assignment, to levy appropriate liquidated damages or penalty if the project is not

carried out as per the agreement and for any such deficiency related to the completion

of the project.

41

22. The PPP Monitoring Committee may utilize the services of the Escort Consultant as

per the provisions of Part - I of these Guidelines for monitoring the implementation of

PPP Project ; accordingly escort consultant shall be called Monitoring Consultant.

The PPPMC shall also have the option to engage a separate and specialized

Monitoring Consultant for Monitoring of execution of various PPP Projects being

facilitated by the Department of Infrastructure Development . Such Monitoring

Consultant shall be engaged as per the provisions of Consultant Selection in Part - I

of these Guidelines.

23. Alternatively the PPPMC may permit the Original Consultant for the PPP Project to

undertake monitoring of execution of PPP Project after award of contract and signing

of Concession Agreement with the Developer. This would provide the benefit of

experience of the same Consultant responsible for TEFRs, the Bidding Process and

designing of Concession Agreement to the Govt. in monitoring of execution of the

project. Hence the Consultancies for PPP Projects could be designed to be

implemented in three stages as above.

42

CHAPTER 1

Steps, Procedures & Documents for PPP

1. Project identification

The State Government, Government agency, Department of Infrastructure

Development or specified Government agency, may submit a proposal and proposed

concession agreement for direct negotiation to the State Government, Government

agency will identify the projects to be taken up through PPPs and undertake

preparation of feasibility studies, project agreements etc. with the assistance of legal,

financial and/or technical experts as necessary, to be selected through procedure in

Policy note for engagement of Consultants.

2. Inter-Departmental consultations

The Administrative Department/Department of Infrastructure Development may, if

deemed necessary, discuss the details of the project and the terms of concession

agreement in an inter-departmental consultative committee and comments, if any, may

be incorporated or annexed to the proposal for consideration of competent authority.

There could be projects, which involve more than one department. While considering

such projects, competent authority may seek participation of such departments.

3. ‘Initial In principle’ approval of Competent Authority/Consent of Dept. of Infra. Dev.

The Administrative Department of State Government / Department of Infrastructure

Development in consultation with the Administrative Department, may identify the

PPP project. Accordingly, the Administrative Department of State Government would

prepare a brief note for the purpose which would be placed before the Competent

Authority for initial in-principle approval on the proposal alongwith approval of broad

outline of TOR for the studies relating to the proposed PPP project. However the

concurrence of Department of Infrastructure Development shall be sufficient, i.e. in

principle approval of competent authority will not be required except in following

cases -

i. where Department of Infrastructure Development disagree with proposal of Admn.

Deptt. or

ii. where PPP proposed, is likely to have statewide impact or

iii. where disinvestment process is proposed.

The Administrative Department shall, thereafter, initiate the process for selection of

PPP Developer from its level in accordance with the in-principle approval obtained by

it from the Competent Authority/Department of Infrastructure Development.

Alternatively, after obtaining the initial in-principle approval of the Competent

Authority/Department of Infrastructure Development, the Administrative Department

may send the proposal for selection of PPP Developer alongwith broad outlines of

TOR as approved by the Competent Authority/Department of Infrastructure

Development to the Department of Infrastructure Development to select the PPP

Developer on its behalf.

On receiving such request, the department of infrastructure development shall use the

specified Govt. Agency/ Nodal Agency to engage consultant/advisor as per policy for

engagement of consultants in Part - I of these guidelines. The Consultant so selected

shall be entrusted with preparation of pre feasibility/feasibility (TEFR). The same or

different consultant may be entrusted with the studies relating to Environment Impact

43

Assessment (EIA) and Social Impact Assessment (SIA), depending upon the complexicity of the project and the importance of these studies for project execution.

The Department of Infrastructure Development shall designate one or more

organizations as the Specified Govt. Agency (Agencies)/ Nodal Agency fo these

purposes with the approval of the Industrial Development Commissioner.

4. 'Final In principle’ approval of Competent Authority

While seeking Final ‘in principle’ clearance of Competent Authority, the

Administrative Department or the Department of Infrastructure Development shall

submit its proposal to the Competent Authority in the format specified at Annexure-

II and accompanied by the pre-feasibility/ feasibility report and a term-sheet

containing the salient features of the proposed project agreements.

The Administrative Department/Department of Infrastructure Development

will circulate the copies of proposed Cabinet Note including the TEFRs and

associated documents including EIA, SIA to all concerned and thereafter shall put up

the proposal for Final In principle Approval of the Competent Authority.

5. Expression of Interest

Following the Final ‘in principle’ clearance of Competent Authority, The

Administrative Department/Department of Industrial Development through the

specified Govt. Nodal Agency may invite expressions of interest in the form of

Request for Qualification (RFQ) to be followed by short-listing of pre-qualified

bidders. Simultaneously as per Annexure - IV the Department/ Agency may also

undertake preparation / formulation of Project documents for shortlisted Bidders.

6. Formulation of project documents

The Consultant selected for Feasibility Studies / TEFRs may also be entrusted the task

of preparing the RFP Documents containing mainly the Detailed Project Report

(DPR), Bid Document (including Biding procedure and bid parameter(s)), Draft

Concession Agreement etc. Accordingly the Consultancy awarded for PPP Projects

may be a two stage Consultancy with the Second Stage of preparation of RFP

Documents etc. being conditional upon In principle approval of the TEFR by the

Competent Authority so nominated by the Employer.

The documents that would need to be prepared after TEFR approval would, inter-alia,

include the Project Report (DPR) and various agreements to be entered into with the

concessionaire detailing the terms of the concession and the rights and obligations of

the various parties. These project documents would vary depending on the sector and

type of project. Typically, a PPP will involve the concession agreement that will

specify the terms of the concession granted to the private party and will include the

rights and obligations of all parties. There could be associated agreements based on

specific requirements. These documents specially the Draft Concession Agreement

would be approved by a Designated Authority so authorized by the State

Government/Department of Infrastructure Development.

7. Procedure for selection of Developer

(a) Selection of Developer

The steps as laid down in the Policy for Engagement of Consultants in Part - I, shall

be adopted, in so far as not inconsistent for the purpose, for selection of Developer

with the modification that the criteria for shortlisting the Developers through EOI and

thereafter the criteria for evaluation of Technical & Financial Bids shall be different

from those used for Selection of the Consultants. The criteria for Developer Selection

44

would depend upon the nature of the PPP Project. Further the evaluation of bids shall be done by PPP Evaluation Committee and monitoring of the project shall be done by PPP

Monitoring Committee. The flow Chart for the steps for selection of Private

Developer has been outlined below. Many of the activities listed can be carried out

simultaneously and in parallel; an indicative Bar Chart showing possible timelines for

such activities is also given as Annexure - IV.

45

The selection process shall normally include the following steps:-

Identification of Project by Administrative Department

Preparation of TOR

Proposal to be put up before Competent Authority/DID for initial in principle approval/consent

Preparation of TEFR by Consultant

Proposal to be put up before Competent Authority for Final in principle approval

Preparation of DPR by Consultant

Proposal to be processed for inviting EOI in accordance with the in principle approval of

Competent Authority/Consent of DID

Advertisement for RFP

Shortlisting of Developers

Preparation and issuance of RFP (which should include the Letter of Invitation (LOI);

Instructions to Developers (ITD); the DPR, Bid Dcoument, the proposed draft contract)

Receipt of proposals

Evaluation of technical proposals: consideration of quality

Public opening of financial proposals

Evaluation of financial proposals.

Final evaluation of quality and cost; and

Negotiations as may be necessary in order to ensure optimal economy and award of the

contract to the selected Developer/Developer concern

Proposal to be put up to the Competent Authority for final approval

(b) Selection through Competitive Bidding : Selection of the Developer for PPP Projects

shall be only through Competitive Bidding Process in steps as laid down above. The

detailed procedure for such competitive bidding process is laid down in Chapter - II.

8. Viability Gap Funding

The viability gap funding, if any required, shall be considered by the Empowered

Committee on the proposal of PPPEC in accordance with the rules and limits as may

be framed by State Government and Government of India in this regard and the

proposal thereafter would be placed for approval of competent authority. As per GOI

Guidelines for VGF, Financial Assistance upto 20% of designated project cost would

be admissible to the Private Developer through the State Government.

46

9. The Guidelines for selection of consultants/advisors, for selection of PPP

Developers/ Investors and for selection of Private Partners for Disinvestment shall not

be mandatory for cases where the above selections are required to be done under the

procedures decided by the Govt. of India or where GoUP has agreed to follow

guidelines as per loan / credit / grant agreement with donor agencies.

10. In case where the procedures for selections of consultants / developers / private

partners etc. are already laid down by an Act of the State Govt., the provisions of the

Act shall take precedence over these guidelines. Subject to not being inconsistent with

the Act, the concerned department shall have the option to adopt these guidelines.

11. The Guidelines for selection of consultants / advisors, for selection of PPP

Developers/ Investors and for selection of Private Partners for Disinvestment shall

supercede any other guidelines or Govt. Orders which may have been issued from

time to time, before 29th June 2007.

12. The guidelines shall apply with prospective effect from 29th June 2007. In cases

where certain selection procedures have been initiated before the 29th June 2007, the

remaining steps after 29th June 2007 shall be taken in confirmity with the guidelines

to the best possible extent.

13. . Difficulty Removal Committee (DRC) : A Difficulty Removal Committee shall be

constituted under the Chairmanship of Infrastructure & Industrial Development

Commissioner to decide on matters necessary for removal of difficulties which may

arise out of the provisions of these guidelines. The Committee shall also be

empowered to examine and decide on cases where deviations in the guidelines are

being sought. The Committee shall also include Principal Secretary / Secretary

Finance, Law and may co-opt any other officer(s) as its member, as deemed fit.

47

CHAPTER II

Procedure for Selection & Contract with PPP Project Developer

1. The following procedures for selection and Contract with Developer of PPP Project(s)

are being laid down with a view to provide transparency and standardization in

procedures.

2. Participation in projects.- Any person may participate in financing, construction,

maintenance and operation of projects.

3. Concession agreement : “Concession” means grant of financial assistance or

conferment of right on Government property and public assets to a person other than

the State Government, Government agency or specified Government agency, as per

the terms specified in the concession agreement.

(1) A person may enter into a concession agreement of the nature specified in

Schedule II with the State Government, a Government agency or a specified

Government agency.

(2) Where the Competent Authority having regard to the nature of a project is

satisfied that, it is necessary so to do, it may permit combination of two or

more agreements of the nature specified in Schedule II into one agreement.

(3) No concession agreement shall normally provide for transfer of a project by a

developer to the State Government, a Government agency or a specified

Government agency later than thirty five years from the date of agreement.

However, if the State Government, Government agency or, as the case may be,

specified Government agency, is satisfied with the performance of the developer

during the concession period, it may by order, extend the concession period on such

terms and conditions as may be mutually agreed.

4 The State Government through the Department of Infrastructure Development may

add to, amend or omit therefrom any PPP Project in Schedule - I or at similarly in

relation to any other nature of agreement in Schedule II and on issue of such

notification, the Schedule shall be deemed to have been amended accordingly.

5. Consultant selection : The State Government, the Government Agency,

Department of Infrastructure Development or as the case may be, the Specified

Government Agency shall engage the Consultant for proposed PPP Project in

accordance with the Policy for Engagement of Consultants as approved by State

Government.

6. Assistance by State Government, Government agency or specified Government

agency

The State Government, a Government agency or a specified Government agency may

provide to a person assistance in the following manner, namely:-

a) participation in the equity of the project not exceeding forty-nine per cent of the

total equity.

b) financial assistance, either one time or in installments, not exceeding twenty

percent of the cost of the project ;”..

c) Senior or subordinate loans (wherein, “senior loan” means a loan in respect of

which a claim on assets is prior to the claim on the assets in respect of other loan

48

and which is specified as such in an agreement providing finance, and

“subordinate loan” means a loan in respect of which a claim on assets is

subsequent to the claim on the assets in respect of another loan and which is

specified as such in an agreement providing finance),

d) Guarantee by the State Government, a Government agency or a specified

Government agency in respect of liability of a Government agency arising out of

a concession agreement.

e) Opening and operation of escrow account

f) Conferment of a right to develop any land.

g) Incentives by the State Government in the form of exemption from the payment

of, or deferred payment of, any tax or fees levied by the State Government under

any law, or

h) In such other manner as deemed fit.

7. Procedure for concession agreement.

No concession agreement for undertaking a project shall be entered into with any

person unless the procedure specified in Clause 8 and 9 has been followed.

8. Procedure for selection of Developer

(a) A public notice inviting persons to participate in competitive public bidding

for undertaking the project.

(i) shall be published once in a week for two consecutive weeks in at least three

newspapers, two newspapers of national level having mass circulation and

one in circulation in the area in which the project is to be undertaken, and

(ii) may be published by any other means of mass communication.

(iii) The detailed invitation for Expression of Interest alongwith complete EOI

document shall be made available on website. It shall be ensured by the

Employer that the parties making use of this facility of website are not asked

to again obtain some other related documents from the department manually

for purpose of submitting EOI i.e. all documents upto date should remain

available and shall be equally legally valid for participation in the tender

process as manual documents obtained from the Employer through manual

process.

(iv) The State Government, the Government Agency, Department of

Infrastructure Development or as the case may be, the Specified Government

Agency, may adopt the following processes for appropriate Developer

selection:

Competitive Bidding Route as specified in Clause - 9

(v) For assessing technical capability, work experience of the developer in the

last 3-5 years, work experience in the area of desired PPP Project in the last

3-5 years may be considered. Besides, the experience regarding the operation

and maintenance of the related PPP Project in the preceding years should

also be considered.

(vi) For assessing financial capability, a fixed percentage of the proposed project

cost should be specified as net worth.

(vii) Abovementioned standards shall be indicative only and the standards for

selection shall be specified on a case-to-case basis by the PPP Bid Evaluation

Committee constituted in each instance, as before.

49

9. Competitive bidding :

(i) Competitive bidding will be adopted in all Projects initiated by the State

Government, the Government Agency, Department of Infrastructure

Development or as the case may be, the Specified Government Agency. The

notice inviting participation will be adequately publicised by the State

Government, the Government Agency, Department of Infrastructure

Development or as the case may be, the Specified Government Agency.

(ii) The bid process will be designed to assist and ascertain, technical, financial,

managerial and commercial, capabilities of the Developer.

(iii) The prequalification criteria, performance criteria and evaluation criteria

shall be incorporated in the documents in clear and unambiguous terms

to evaluate bids in transparent manner.

(iv) In case of the bid process being adopted for a Mega Infrastructure Project,

the State Government, the Government Agency, Department of Infrastructure

Development or as the case may be, the Specified Government Agency may

require all Bidders to obtain from their Prospective Lenders, financial terms,

expectations regarding State Support, comments on the Concession

Agreement and other project documents (hereinafter called “Deviations”).

(v) Any Deviations proposed shall be enclosed in a separate envelope and shall

not be part of the envelope containing the financial or the commercial offer

with regard to a Project. The procedure for determining the common set of

Deviations and the effect to be given to such common set of Deviations shall

be as may be Prescribed.

(vi) All proposals shall be opened and evaluated at a common platform in a free

and fair manner.

(vii) The Administrative Department / Department of Infrastructure Development

the Specified Government Agency (Employer) shall adopt a two stage

process for selection of Developer. In the first stage the prospective

Developers shall be shrotlisted as per evaluation criteria or pre qualification

criteria disclosed upfront. In the Second stage the shortlisted Developers are

invited through RFPs to submit detailed Technical and Financial Bids in

separate envelops. The Technical Bids so received shall be evaluated on pre

disclosed criteria and accordingly the Financial Bids of only the developers

who have been found suitable on the basis of their Technical Bids shall be

opened publically and such publically opened Financial Bids shall be

evaluated as per pre disclosed bid parameter. The RFP shall include the Bid

Document clearly laying out the Bidding procedure as well as the Bid

parameter. Normally there would be a Single Bid parameter, but where more

than one Bid parameters are considered necessary the relative weightages to

be assigned to such parameters shall be clearly specified and disclosed

upfront in the Bid document. The RFP shall also contain Project Report

(DPR) Draft Concession Agreement, Bid document etc.

(vii) (a) Developer selection through QCBS method : The QCBS method for selection

of consultants given in Part-I of these guidelines shall apply mutatis mutandis

for selection of Developers / Private investors for PPP Projects. This method

may be used for highly technical projects where weightage needs to be given

to highly technical standards while finalizing the prices.

(viii) The State Government, the Government Agency, Department of

Infrastructure Development or as the case may be, the Specified Government

Agency will periodically inform the PPPEC of the progress of all Projects

undertaken through a two stage bid process.

(ix) Information to be provided by Developer

50

(a) Any person who intends to participate in the competitive public

bidding to undertake the project in pursuance of a public notice published under clause (a)

shall provide information with regard to his legal, technical,

managerial and financial capacity to undertake the said project in

such form alongwith such particulars as may be specified by the

State Government, the Government agency or, as the case may be,

the specified Government agency.

(b) Examination of information for fulfillment of criteria

The State Government, the Government agency or, as the case may

be, the specified Government agency shall examine the information and

other particulars submitted by the person under sub-clause (i) and

decide as to whether such person fulfills the criteria for pre-qualification as

laid down by the State Government, the Government agency or, as the

case may be, the specified Government agency.

10. PPP Evaluation Committee (PPPEC)

PPP Bid Evaluation Committee : There shall be a PPP Bid Evaluation Committee

chaired by the Industrial Development Commissioner and consisting of Principal Secretaries /

Secretaries of Law, Finance, Administrative Department (of PPP Project),

Infrastructure Development with an option to coopt one or more relevant Departments. The

PEC shall have the power to examine all aspects and stages of the Developer selection i.e.

issuance of EOI, evaluation of EOI, short-listing of Developers, deciding Terms of Reference,

issuance of RFP, evaluation of technical and financial proposals, negotiations and final

selection of the Developer. The members of PEC will have to give an

undertaking/declaration that none of them has any personal interest, directly or indirectly, in

the individual Developer/Developer concern interested in the PPP Agreement in question

11. Empowered Committee : There shall be a Empowered Committee chaired by the

Chief Secretary, GoUP to finally evaluate all Bids for PPP Projects beyond Rs.100 Crores

and it shall recommend the Final Selection of Bidder / Developer to the Competent

Authority.

12. Final Approval of the Developer for PPP Project shall be granted by the Competent

Authority.

13. The Competent Authority shall be the Hon'ble Cabinet of Ministers of GoUP for

purposes mentioned under these guidelines.

14. Implementation of PPP Project : Once a Developer has been selected by the

Employer, the Concession Agreement shall be signed between the Developer and the

concerned Administrative Department. The Concerned Administrative Department shall be

responsible for the implementation of the PPP Project by the Selected Developer.

15. PPP Monitoring Committee : There shall be a PPP Monitoring Committee

consisting of all or any of the Members of the PPPEC. The Department of Infrastructure

Development, Administrative Department of PPP Project, Finance shall necessarily be

Members of PPPMC.The PMC shall be responsible to monitor the progress of the project, to

oversee that the project is carried out as per agreed TOR and contractual conditions, to assess

the quality of the deliverables, to accept / reject any part of assignment, to levy appropriate

liquidated damages or penalty if the project is not carried out as per the agreement and for any

such deficiency related to the completion of the project.

15.2. The PPP Monitoring Committee may utilize the services of the Escort Consultant as

per the provisions of Part - I of these Guidelines for monitoring the implementation of PPP

51

Project ; accordingly escort consultant shall be called Monitoring Consultant. The PPPMC shall also have the option to engage a separate and specialized Monitoring Consultant for

Monitoring of execution of various PPP Projects being facilitated by the Department of

Infrastructure Development . Such Monitoring Consultant shall be engaged as per the

provisions of Consultant Selection in Part - I of these Guidelines.

15.3. Alternatively the PPPMC may permit the Original Consultant for the PPP Project to

undertake monitoring of execution of PPP Project after award of contract and signing of

Concession Agreement with the Developer. This would provide the benefit of experience of

the same Consultant responsible for TEFRs, the Bidding Process and designing of Concession

Agreement to the Govt. in monitoring of execution of the project. Hence the Consultancies for

PPP Projects could be designed to be implemented in three stages as above.

16. Time frame

The Employer shall normally allow 21 days for EOIs in the form of RFQs for Pre-

qualification / shortlisting of Developers. The shortlisted Developers shall be normally

invited to submit RFPs within 28 days of advertisement but in no case shall be

allowed less than 21 days from the date of first notice for RFP. The time allowed shall depend on the assignment, but normally shall not be less than four weeks and

more than three months. In cases, where participation of international Developers is

contemplated, a period of not less than four weeks should be allowed.

The model time frame for according such approval to completion of the entire process

of Award of contract should not exceed one month from the date of submission of

recommendations by PPPEC for final selection of Developer. Under any

circumstances, the overall time frame should be within the validity period of the

contract.

17. Approval of contract principles :

The Department of Law would also be represented in the constitution of PPPEC and

PPPMC, as the concession agreements would require careful legal scrutiny. The

Department of Infrastructure Development/ Specified Government Agency shall

examine concession agreements from the financial angle, the guarantees to be

extended, and generally assess risk allocation from the investment and banking

perspectives. It would also ensure that projects are scrutinized from the perspective of

government expenditure. Where the prospective shortlisted Developers propose

deviations from the Draft Concession Agreement previously approved by the

Designated Authority so authorized by the Government, the PPPEC shall scrutinize

such deviations and put up its recommendations to the Designated Authority for its

approval.

Risk Allocation : As an underlined principle, risk shall be allocated to the parties that

are best suited to manage them. The Commercial and Technical risks relating to

construction, operation and maintenance shall be allocated to the Private Sector /

Concessionaire; similarly other commecial risks such as the rate of growth of traffic

etc. in the case of Road PPP Projects, shall also be allocated to the concessionaire. On

the other hand, all direct and indirect political risks shall be assigned to the

Government/ Administrative Department.

18. Treatment of sole bid :

In case of the competitive bidding process resulting into a Sole Bid, the State

Government, the Government Agency, Department of Infrastructure Development or

52

as the case may be, the Specified Government Agency shall in consultation with the PPPEC, either:

(i) Accept the Sole Bid OR

(ii) re-negotiate the financial offer OR

(iii) reject the Sole Bid;

19. Treatment of limited response:

In case the competitive bidding process does not generate sufficient response and if

even a Sole Bid is not received, then the State Government, the Government Agency,

Department of Infrastructure Development or as the case may be, the Specified

Government Agency shall in consultation with the PPPEC either;

(i) modify either the pre-qualification criteria and/or the risk sharing provisions

and restart the bid process; OR

(ii) may cancel the competitive bid process;

20. Treatment of bid submitted by a consortium:

(a) All proposals submitted by a Bidding Consortium shall enclose a

memorandum of understanding, executed by all consortium members setting

out the role of each of the consortium members and the proposed equity stake

of each of the consortium members with regard to a Project.

(b) The Lead Consortium Member of a pre-qualified consortium cannot be

replaced except with the prior permission of the Infrastructure Authority and

which permission will be considered only in case of acquisition or merger of

the Lead Consortium Member Company. Further, after a Bidding

Consortium is selected to implement any Project, the Lead Consortium

Member shall maintain a minimum equity stake of 26% for a period of time,

as specified in the Sector Policy or the Concession Agreement.

(c) Replacement of other consortium members may be permitted, provided the

same is not prejudicial to the original strength of consortium as determined in

course of the evaluation of original bid or proposal.

(d) Any change in the shareholding or composition of a consortium shall be with

the approval of the PPPEC.

21. Speculative bids :

The State Government, the Government Agency, Department of Infrastructure

Development or as the case may be, the Specified Government Agency will be

entitled to treat the speculative or unrealistic bids as non-responsive and reject the

same. By reason of any speculation or unrealistic bid or rejection of such bid, shall not

necessarily lead to termination of the bid process. The PPPEC will Prescribe the

norms for determining the speculative or unrealistic bids.

22. No negotiation on financial or commercial proposal:

Save as otherwise provided in the Guidelines, the State Government, the Government

Agency, Department of Infrastructure Development or as the case may be, the

Specified Government Agency will not negotiate with the Bidder on the financial or

commercial aspect of the proposal submitted by the Bidder.

53

23. Bid security :

(i) The Bidder will be required to submit a bid security along with the proposal

for undertaking the Infrastructure Project, the bid security amount will be

determined based on the Project cost by the, State Government, the

Government Agency, Department of Infrastructure Development or as the

case may be, the Specified Government Agency.

(ii) The procedure for refund of bid security will be specified in the request for

proposal. In any event, the bid security of unsuccessful Bidder would be

returned within 30 calendar days from the date of selection of the Developer.

24. Amount to be charged for providing goods and services

(1) Where, in pursuance of a concession agreement with the State Government, the

Government agency or as the case may be the specified Government agency:-

(a) the developer has constructed a project for providing goods or services,

and

(b) the project vests in the developer for a period specified in the concession

agreement and

(c) on expiry of such period , the project is to vest in the State Government,

the Government agency or the specified Government agency. The

developer may charge such amount as specified in the agreement, for

providing goods or services by the project so long as the project

continues to vest in him, or

(d) An existing project is vested to a person to renovate, operate and

maintain the developer may charge such amount as specified in the

agreement for providing goods or services by the project so long as the

project continues to vest in him.

(2) A concession agreement may provide that a developer may having regard to

the rate of inflation, variation in the rate of foreign exchange and such other

factors, as may be prescribed revise the amount of charges referred to in subs

Clause (1) in such manner as may be prescribed.

25. Financial security for maintenance of project

Where a provision is made in a concession agreement requiring the developer to

maintain the project constructed by him for a period specified in such agreement,-

(a) there shall be opened an escrow account by the developer, the money out of

which shall be expended for the maintenance of the project in accordance

with the provision made in the concession agreement or in any other

agreement with the State Government, the Government agency or, as the case

may be, the specified Government agency, or

(b) the developer shall execute a bond in the favour of the State Government, the

Government agency or, as the case may be, the specified Government agency

binding himself to make payment of such amount of money as specified in

the bond to the State Government, the Government agency or, as the case

may be, the specified Government agency in case he fails to maintain the

project in accordance with the provisions made in the concession agreement

or any other agreement with the State Government, the Government agency

or, as the case may be, the specified Government agency.

54

26. Training to employees

A developer shall provide at his expense, training to the employees of the State

Government, the Government agency or, as the case may be, the specified

Government agency in respect of maintenance or operation of the project in

accordance with the provisions made in the concession agreement or in any other

agreement with the State Government, the Government agency or, as the case may be,

the specified Government agency.

27. Transfer of certain rights

Where the project is transferred to the State Government, the Government or the

specific Government agency according to the provisions of the concession agreement,

all the rights of the developer in respect of the project shall stand transferred to the

State Government, the Government agency or, as the case may be, the specified

Government agency.

28. Termination of concession agreement-

(1) Where a concession agreement is terminated by the State Government, the

Government agency or, as the case may be, the specified Government agency with the

consent of the developer or in absence of any default of the developer, the developer

shall be entitled to such amount of compensation for such termination as specified in

the concession agreement.

(2) A concession agreement may provide that if a default specified therein is

committed by the developer, the State Government, the Government agency

or, as the case may be, the specified Government agency shall, after giving to

the developer an opportunity of being heard in such manner as may be

prescribed, be entitled to terminate the concession agreement and-

(a) take over the project without repaying the amount invested by the developer

in the equity and shall assume the liability of the developer towards loans

taken by him in respect of the project, or

(b) enter into a concession agreement with another person whose name is

recommended by the lenders of the developer and approved by the State

Government, the Government agency or, as the case may be, the specified

Government agency, on the same terms and conditions as are specified in the

concession agreement so terminated.

29. Abuser charges:

(1) The PPPMC shall be entitled to levy Abuser Charges for abuse, on the Developer, if

any Developer abuses the rights granted to the Developer under the Concession

Agreement.

Provided the PPPMC shall give an opportunity of not less than fifteen days from the

date of service of a notice to the Developer to show cause in writing, why such Abuser

Charges should not be levied on him, before passing the order under this section.

(2) The Concession Agreement will provide what will constitute abuse of rights granted

to the Developer. The Abuser Charges will be as Prescribed by the PPPMC from time

to time.

Provided that the Abuser charges levied under this clause shall be final and

conclusive.

55

30. Polluter charges :

(1) The PPPMC shall be entitled to levy Polluter Charges for pollution of the

environment on the Developer, if the Developer pollutes the environment

and/or does not adhere to the specified mitigation measures as provided in

the Concession Agreement.

(2) The PPPMC shall give an opportunity of not less than fifteen days from the

date of service of a notice to the Developer to show cause, in writing, why

such Polluter Charges should not be levied on the Developer, before passing

the order under this Clause.

(3) The Polluter Charges will be as Prescribed by the PPPMC; Provided that the

Polluter Charges levied under this Section shall be final and conclusive..

31. Applicable Law and Settlement of Disputes

The contract shall include provisions dealing with the applicable law, which should be

the law applicable in India and the forum for the settlement of disputes. The provision

for appointment of arbitrator for adjudicating disputes, if any, may be preferred. The

constitution of arbitrator shall comprise of one member nominated by Administrative

Department of the Government of U.P. and one member nominated by the Developer.

In case of difference of opinion between members, the matter shall be referred to the

third member to be nominated jointly by both the parties.

56

SCHEDULE I

Indicative list of Projects for which PPP Route may be considered

1. Power Generation, Transmission and Distribution Systems.

2. Expressways Roads, ROBs, Flyovers, Highway related Infrastructure, etc.

3. Urban Re-generation

4. Urban Transportation including Metro, Mono Rail etc.

5. Civil Aviation, Cargo Hub

6. Solid waste Management Water Storage & Supply and Sewerage System.

7. Industrial Estates including Industrial Parks.

8. Tourism Projects.

9. Solid Waste Management.

10. Modern Technology based Infrastructure including IT/ ITES, Bio-

Technology etc.

11. Education including World Class Medical, Technical & Higher

Education facilities.

12. Health Facilities. including multi specialty Hospitals

13..Tourism & Hospitality related Infrastructure

14. Post-harvest Facilities including Public Markets, Processing facilities etc.

15. Development of Communication Infrastructure

16. Gas and Gas Works.

57

SCHEDULE II

NATURE OF CONCESSION AGREEMENT

1. Build own Operate and Transfer Agreement :

An agreement whereby the developer undertakes to finance, construct, maintain and

operate a project and whereby such project is to vest in the developer for a specified

period. During the period of operation of the project by the developer, he may be

permitted to charge user charges as specified in an agreement. The developer is

required to transfer the project to the State Government, the Government agency or, as

the case may be, the specified Government agency after the expiry of the period of

operation.

2. Build Own Operate and Maintain Agreement:

An agreement whereby a developer undertakes to finance, construct, operate and

maintain a project and whereby such project is to vest in the developer for specified

period. During the period of operation of the project, he may be permitted to charge

user charges as specified in the agreement.

3. Build and Transfer Agreement :

An agreement whereby developer undertakes to finance and construct a project. After

the completion of the project, the developer is required to transfer the project to the

State Government, the Government agency or, as the case may be, the specified

Government agency. The developer shall be paid such amount as is fixed in

amortization schedule specified in the agreement.

4. Build Lease and Transfer Agreement :

An agreement whereby a developer undertakes to finance and construct the project.

On completion of the project, the developer hands it over to the State Government, the

Government agency or, as the case may be, the specified Government agency for

operation under a lease agreement for period specified in the agreement after the

expiry of which the project stands transferred to the State Government, the

Government agency or, as the case may be, the specified Government agency.

5. Build Transfer and Operate Agreement :

An agreement whereby the developer undertakes to finance and construct the project.

On completion of the project, the developer transfers the project to the State

Government, the Government agency or, as the case may be, a specified Government

agency which permits the developer to operate the project on its behalf for a period

specified in the agreement.

6. Design-Build-Finance-Operate (DBFO) Process

DBFO is regarded as an amended form of the pre-existing Build-Operate Transfer

process, but this DBFO process allows more freedom to the private developer in the

designing i.e. development of the project, which will make it possible to use latest

techniques. Under this process, the department/agency sponsoring the PPP project

does not provide a Detailed Project Report (DPR) but only Techno Economic

Feasibility Report (TEFR) and clearly defined project specifications along with

information regarding project is prepared and provided to the proposed bidder

developers in the form of bid documents.

7. Lease Management Agreement :

An agreement whereby the State Government, the Government agency or the

specified Government agency leases a project owned by the State Government, the

Government agency or, as the case may be, the specified Government agency to the

58

person who is permitted to operate and maintain the project for the period specified in the agreement and to charge user charges therefor.

8. Management Agreement :

An agreement whereby the State Government, the Government agency or the

specified Government agency entrusts the operation and management of a project to a

person for the period specified in the agreement on payment of specified

consideration. In such agreement the State Government, the Government agency or, as

the case may be, the specified Government agency may charge the user charges and

collect the same either itself or entrust the collection for consideration to any person

who shall after collecting the user charges pay the same to the State Government, the

Government agency or, as the case may be, the specified Government agency.

9. Rehabilitate Operate and Transfer agreement :

An agreement whereby an existing project is vested in a person to renovate,

operate and maintain for the period specified in the agreement after the expiry of

which the project is required to be transferred to the State Government, the

Government agency or, as the case may be, the specified Government agency. During

the period of operation of the project by the developer, he may be permitted to charge

user charges as specified in the agreement.

10. Rehabilitate own Operate and Maintain Agreement :

An agreement whereby an existing project is vested in a person to renovate, operate

and maintain. The developer shall be permitted to charge user charges as specified in

the agreement.

11. Service Contract Agreement :

An agreement whereby a person undertakes to provide services to the State

Government, the Government agency or the specified Government agency for a

specified period. The State Government, the Government agency or, as the case may

be, the specified Government agency shall pay him an amount according to the agreed

schedule.

12. Supply Operate and Transfer Agreement :

An agreement whereby a person supplies to the State Government, the Government

agency or the specified Government agency the equipment and machinery for a

project and undertakes to operate the project for a period and consideration specified

in the agreement. During the operation of the project, he shall undertake to train

employees of the State Government, the Government agency or, as the case may be,

the specified Government agency to operate the project.

13. Joint Venture Agreement :

An agreement whereby the State Government, the Government agency or the

specified Government agency enters into an agreement with a developer to jointly

finance, construct, operate and maintain a project for a period specified in the

agreement after the expiry of which the project is required to be transferred to the

State Government, the Government agency or, as the case may be, the specified

Government agency.

59

Memorandum for PPP Evaluation Committee

(for final ‘in principle’ approval)

Annexure I

1. General

1.1 Name of the Project

1.2 Type of PPP (BOT, BOOT, BOLT, OMT etc.)

1.3 Location (State/District/Town)

1.4 Administrative Ministry/Department

1.5 Name of Sponsoring Authority

1.6 Name of the Implementing Agency

2. Project Description

2.1 Brief description of the project

2.2 Justification for the project

2.3 Possible alternatives, if any

2.4 Estimated capital costs with break-up under major heads of expenditure. Also indicate

the basis of cost estimation.

2.5 Phasing of investment

2.6 Project Implementation Schedule (PIS)

3. Financing Arrangements

3.1 Sources of financing (equity, debt, mezzanine capital etc.)

3.2 Indicate the revenue streams of the Project (annual flows over project life). Also

indicate the underlying assumptions.

3.3 Indicate the NPV of revenue streams with 12% discounting

3.4 Who will fix the tariff/ user charges? Please specify in detail.

3.5 Have any FIs been approached? If yes, their response may be indicated

4. IRR

4.1 Economic IRR (if computed)

4.2 Financial IRR, indicating various assumptions (attach separate sheet if necessary)

5. Clearances

5.1 Status of environmental clearances

5.2 Clearance required from the State Government and other local bodies

5.3 Other support required from the State Government

6. Govt. Support

6.1 Viability Gap Funding, if required

6.2 GoUP guarantees being sought, if any

7. Concession Agreement

7.1 Term sheet of the proposed Concession Agreement (Attached at Appendix-A)

8. Criteria for short-listing

8.1 Indicate the criteria for short-listing (attach separate sheet if necessary)

9. Others

9.1 Remarks, if any

A. Sponsoring Ministry:

B. Name and location of the Project:

C. Legal Consultant:

D. Financial Consultant:

60

Term Sheet of the proposed Concession Agreement

Annexure II (Appendix A)

1. General

1.1 Scope of the Project (in about 200 words)

1.2 Nature of Concession to be granted

1.3 Period of Concession and justification for fixing the period

1.4 Estimated capital cost

1.5 Likely construction period

1.6 Conditions precedent, if any, for the concession to be effective

1.7 Status of land acquisition

2. Construction and O&M

2.1 Monitoring of construction; whether an independent agency/engineer is

contemplated

2.2 Minimum standards of Operation and Maintenance

2.3 Penalties for violation of prescribed O&M standards

2.4 Safety related provisions

2.5 Environment related provisions

3. Financial

3.1 Maximum period for achieving financial close

3.2 Nature and extent of capital grant/ subsidy contemplated

3.3 Bidding parameter (capital subsidy or other parameter)

3.4 Provisions for change of scope and the financial burden thereof

3.5 Concession fee, if any, payable by the Concessionaire

3.6 User charges/ fee to be collected by the Concessionaire

3.7 Indicate how the user fee is to be determined; the legal provisions in support

of user fee (attach the relevant rules/ notification); and the extent and nature

of indexation for inflation

3.8 Provisions, if any, for mitigating the risk of lower revenue collection

3.9 Provisions relating to escrow account, if any

3.10 Provisions relating to insurance

3.11 Provisions relating to audit and certification of claims

3.12 Provisions relating to assignment/ substitution rights relating to lenders

3.13 Provisions relating to change in law

3.14 Provisions, if any for compulsory buy-back of assets upon termination/

expiry

3.15 Contingent liabilities of the government

(a) Maximum Termination Payment for Government/ Authority Default

(b) Maximum Termination Payment for Concessionaire Default

(c) Specify any other penalty, compensation or

payment contemplated under the agreement

4. Others

4.1 Provisions relating to competing facilities, if any

4.2 Specify the proposed Dispute Resolution Mechanism

4.3 Specify the proposed governing law and jurisdiction

4.4 Other remarks, if any

61

Memorandum for PPP Evaluation Committee

(for final approval of Selected Developer)

Annexure III

1. General

1.1 Name of the Project

1.2 Type of PPP (BOT, BOOT, BOLT, OMT etc.)

1.3 Location (State/District/Town)

1.4 Administrative Ministry/ Department

1.5 Name of Sponsoring Authority

1.6 Name of the Implementing Agency

2. Project Description

2.1 Brief description of the project

2.2 Justification for the project

2.3 Possible alternatives, if any

2.4 Estimated Capital costs with break-up under major heads of expenditure.

Also indicate the basis of cost estimation.

2.5 Phasing of investment

2.6 Project Implementation Schedule (PIS)

3. Financing Arrangements

3.1 Sources of financing (equity, debt, mezzanine capital etc.)

3.2 Indicate the revenue streams of the Project (annual flows over project life).

Also indicate the underlying assumptions.

3.3 Indicate the NPV of revenue streams with 12% discounting

3.4 Who will fix the tariff/ user charges? Please specify in detail.

3.5 Have any FIs been approached? If yes, their response may be indicated

4. IRR

4.1 Economic IRR (if computed)

4.2 Financial IRR, indicating various assumptions (attach separate sheet if

necessary)

5. Clearances

5.1 Status of environmental clearances

5.2 Clearance required from the State Government and other local bodies

5.3 Other support required from the State Government

6. Govt. Support

6.1 Viability Gap Funding, if required

6.2 GoUP guarantees being sought, if any

7. Concession Agreement

7.1 Is the Concession Agreement based on MCA? If yes, indicate the variations,

if any, in a detailed note (to be attached)

7.2 Details of Concession Agreement (Attached at Appendix-A)

8. Criteria for short-listing

8.1 Indicate the criteria for short-listing (attach separate sheet if necessary)

9. Others

9.1 Remarks, if any

A. Sponsoring Ministry:

B. Name and location of the Project:

C. Legal Consultant:

D. Financial Consultant:

62

Annexure-IV

Indicative Bar Chart/ Activity Chart of Developer Selection Timelines

Days Sl.

No.

Activity (days)

15 30 45 60 75 90 105 120 135 150 165 180

1. Identification of Project and preparation of TOR by Admin. Dept.(15)

2. Initial in principle approval of Competent Authority (")

3. Advt. for EOI for selection of Consultant (2)

4. Receiving EOIs (15)

5. Preparation of RFP (15)

6. Shortlisting of Consultant and sending RFPs (approval & sending) (3)

7. Receiving detailed proposals (15)

8. Technical evaluation & approval (3)

9. Financial Bid opening (1)

10. Combined evaluation (1)

11. Appointment of Consultant (3)

12. Preparation of TEFR by Consultant (30)

13. Preparation of DPR + DCA by Consultant (45)

14. Final in principle approval of Competent Auth. for concessions & DPR

15. Advertisement for inviting EOI for Developer

16. Shortlisting of Developers (3)

17. Preparation and issuance of RFP (DPR & DCA as approved)

18. Receipt of detailed Technical & Financial proposals (15)

19. Evaluation of technical proposals: consideration of quality (7)

20. Public opening of financial proposals (3)

21. Evaluation of financial proposals (1)

22. Final evaluation of quality and cost (1)

23. Negotiations, if any (1)

24. Final approval of Competent Authority for selected Developer (2)

63

PART - III

POLICIES & PROCEDURES

FOR

DISINVESTMENT OF STATE PUBLIC

SECTOR UNDERTAKINGS

64

Executive Summary

1. The procedure to be followed by Government of Uttar Pradesh for disinvestment

seeks to promote administrative simplicity and speed of decision - making without

compromising on transparency and fair play.

2. For decision-making and implementation of disinvestment there will be a two-tier

mechanism in :

1. Cabinet or a Cabinet Committee for the purpose (CCD)

2. Core Group of Secretaries on Disinvestment (CGD)

3. Cabinet /Cabinet Committee on Disinvestment

The Hon'ble Cabinet of Ministers shall normally decide all the important issues

relating to Disinvestment. The Cabinet may alternatively or in addition form a

Cabinet Committee on Disinvestment. The Cabinet Committee on Disinvestment

(CCD) shall be chaired by the Chief Ministerand of Minister of Power, Minister of

Law & Justice, Minister of Industry, Minister of Finance, Vice Chairman of State

Planning Commission, and the Minister concerned with the PSU under disinvestment.

The Committee can also co-opt other Members as and when felt necessary.

The suggested functions of the Committee are as follows:

1. To consider the advice of the Core Group of Secretaries regarding policy issues

relating to the disinvestment programme.

2. To decide the price band for the sale of Government shares through

international/domestic capital market route prior to the book building exercise, and to

decide the final price of sale in all cases.

3. To decide the final pricing of the transaction and the strategic partner in case of

strategic sales.

4. To approve the three-year rolling plan and the annual programme of disinvestment

every year.

4. Core Group of Secretaries on Disinvestment

The Core Group of Secretaries is headed by the Chief Secretary and comprises

Industrial Development Commissioner, Secretaries from Departments of Finance,

Industry, Planning and Administrative Department and any other Department as may

be required, like Departments of Legal Affairs etc. The Group can also co-opt other

Members as and when felt necessary. The functions of the Core Group are as

follows:

1. The Core Group directly supervises the implementation of the decisions of

all strategic sales.

65

2. The Core Group monitors the progress of implementation of the Cabinet /

CCD decisions.

3. The Core Group makes recommendations to the Cabinet/ CCD on

disinvestment policy matters.

5. The process for Disinvestment proposed to be followed, is as follows:

a. Proposals for disinvestments in any PSU, are placed for consideration of the Cabinet

or Cabinet Committee on Disinvestment (CCD).

b. After Cabinet or CCD, as the case may be, gives initial In-principal approval to the

disinvestment proposal, selection of the Advisor is done through a competitive

bidding process.

c. Selection of Advisor would be done either by Administrative Department of

concerned PSU or by department for Infrastructure Development and Disinvestment

after seeking in principle consent from CCD on broad TOR for study by the Advisor.

d. The disinvestment process will be carried out by Administrative Department /

Department of Infrastructure Development through the specified Government Nodal

Agency, The Department of Infrastructure Development for infrastructure

development may designate one or more Government Agencies as the specified Nodal

Agency, with the approval of Industrial Development Commissioner, for these

purposes. The entire Disinvestment process will be carried out with the assistance of

an Global Advisor (known as Lead Advisor ). They could be Merchant Bankers or

Consultancy / Advisory firms, but in addition Legal Advisors, Chartered Accountants,

Asset Valuers and other valuers are also required for specific services. However,

Multi - disciplinary Lead Advisor could also be engaged. But valuer would

necessarily be an independent valuer.

e. After receipt of the Expression of Interest (EOI), in pursuance of Advertisement in

newspapers / website, Lead Advisors are shortlisted based on objective screening in

the light of announced criteria / requirements. Thereafter selection is made as per the

procedure laid down in Part-I of these guidelines.

f. Legal Advisors, Chartered Accountants and Asset Valuers are selected on the basis of

their work experience through a process of limited competitive bidding by an inter

department Committee, from a panel suggested / recommended by Advisors, and are

paid a lump sum amount as fees.

g. In the first step, the Advisor would make a detailed study on the feasibility of

Disinvestment of the referred PSU and on various alternatives available. Thereafter

the Department of Infrastructure Development and disinvestment or the

Administrative department of the concerned PSU would seek final In-principle

consent of Cabinet on (i) the disinvestment proposal and (ii) the route/ method to be

chosen. Thereafter the three-stage disinvestment process would be followed.

h. Bidders are invited through advertisement in newspapers / website to submit their

Expression of Interest. On receiving EOI from bidders, the advisors, after due

diligence of the PSU, prepare the detailed Confidential Information Memorandum

(CIM) in consultation with the concerned PSU. This is given to the short listed

prospective bidders who have entered into a confidentiality agreement. The list of

bidders is prepared after scrutiny of EOIs and those are shortlisted, who meet the

prescribed qualification criteria.

i. The draft share purchase agreement and the shareholder agreement are also prepared

by the Advisor with the help of the legal Advisors, and the final draft is prepared after

detailed consultation with the bidders, in consultation with the Core Group .

66

j. The prospective bidders undertake due diligence of the PSU and hold discussions with

the Advisor/ the Government/ the representatives of the PSU for any clarifications.

k. Concurrently, the task of valuation of the PSU is undertaken by two independent,

reputed valuers in accordance with the standard national and international practices as

being followed by the Government of India.

l. Based on the feedback received from the prospective bidders, the Share Purchase

Agreement (SPA) and Shareholders Agreement (SHA) are finalised by Core Group of

Secretaries. After getting them vetted by the Department of Law, they are approved by

the Government ( Cabinet or CCD). Thereafter, they are sent to the prospective

bidders for inviting their final binding financial bids.

m. The material for finalising upset price is taken from the advisors after receipt of

financial bids. The bids are not opened at this stage and are sealed after receipt, in

presence of bidders. ‘Upset price’ determination exercise is thereafter completed by

Core Group of Secretaries. The sealed bids are then opened by Core Group of

Secretaries in presence of bidders. The ‘Upset Price.’ is then compared by the Core

Group.

n. After examination, analysis and evaluation, the recommendations of the Core Group

of Secretaries are placed before the Cabinet for a final decision regarding selection of

the strategic partner, signing of the Share Purchase Agreement and Shareholders

Agreement, and other related issues.

o. In case the disinvested PSU's shares are listed on the Stock Exchange, an open offer

could be required to be made by the bidder before closing the transaction, as per SEBI

guidelines: Takeover Code.

p. Disinvestment / Privatisation Monitoring Committee shall be formed under the

Chairmanship of Industrial Development Commissioner to monitor implementation of

above decision of the Cabinet. The Committee may take the assistance of a separate

Escort/ Monitoring Consultant as per Part - I or use the Original Lead Advisor of the

matter in hand for all these purposes.

q. Timeframe : The timeframes for selection of the Global advisor shall be similar to

those for selection of consultant in Part-I. the timeframe for selection of the Private

Partner for Disinvestment process may be similar to those for selection of developer

for PPP projects in Part-II.

r. The Guidelines for selection of consultants/advisors, for selection of PPP

Developers/Investors and for selection of Private Partners for Disinvestment shall not

be mandatory for cases where the above selections are required to be done under the

procedures decided by the Govt. of India or where GoUP has agreed to follow

guidelines as per loan / credit / grant agreement with donor agencies.

s. In case where the procedures for selections of consultants / developers / private

partners etc. are already laid down by an Act of the State Govt., the provisions of the

Act shall take precedence over these guidelines. Subject to not being inconsistent with

the Act, the concerned department shall have the option to adopt these guidelines.

t. The Guidelines for selection of consultants / advisors, for selection of PPP

Developers/ Investors and for selection of Private Partners for Disinvestment shall

supercede any other guidelines or Govt. Orders which may have been issued from

time to time, before 29th June 2007.

u. The guidelines shall apply with prospective effect from 29th June 2007. In cases

where certain selection procedures have been initiated before the 29th June 2007, the

67

remaining steps after 29th June 2007 shall be taken in confirmity with the guidelines

to the best possible extent.

v. Difficulty Removal Committee (DRC) : A Difficulty Removal Committee shall be

constituted under the Chairmanship of Infrastructure & Industrial Development

Commissioner to decide on matters necessary for removal of difficulties which may

arise out of the provisions of these guidelines. The Committee shall also be

empowered to examine and decide on cases where deviations in the guidelines are

being sought. The Committee shall also include Principal Secretary / Secretary

Finance, Law and may co-opt any other officer(s) as its member, as deemed fit.

The process flow chart on the next page shows the various stages of a typical

privatisation transaction through strategic sale route.

s.

68

Disinvestment – Process Flow Chart

Disinvestment Commission/other Recommendations

Administrative Ministry's Comments

Consideration by Core Group of Secretaries

Initial In-principal approval of Cabinet /CCD to disinvestment proposal

Advertisement for appointment of Advisors

Receipt of Expressions of Interest (EoI) from Advisors

Presentations by Adviosrs

Selection of Advisor

Appointment of Advisor

Appointment of Legal Advisor/Fixed Asset Valuers/other advisers

Feasibility study and advisor & approval ofCabinet / CCD to disinvestment proposal

& route/ method of disinvestment

Advertisement for inviting expressions of interest from bidders

(This is sometimes done after approval of CCD along with EoI for advisors)

Receiving EoI from bidders

Short-listing of bidders on the basis of prescribed / announced qualification criteria

& signing of confidentiality undertaking

Finalisation & Distribution of information package etc.

Data Room visits/Due diligence, etc., by short-listed bidders

Approval of CCD to broad TOR & Methodology for selection of Advisor

69

Financial / capital / business restructuring etc.

Finalization of shareholders'/ share purchase / other agreements etc. in consultation

with the Bidders

Receipt of final bids and resealing of bids in presence of bidders & receipt of

evaluation papers from advisors

Finalisation of upset price by evaluation committee/CGD

Reopening of financial bids in presence of bidders and their comparison with upset

price by CGD

CGD/CCD Approvals (and other regulatory approvals, as needed)

Execution of legal documents and inflow of funds [Public offer announcement by

the Strategic Partner, as per SEBI Takeover Code, wherever applicable]

70

CHAPTER- I

SYSTEMS AND PROCEDURES OF DISINVESTMENT

For decision-making and implementation of disinvestment there will be a two-tier

mechanism in :

1. Cabinet or a Cabinet Committee for the purpose (CCD)

2. Core Group of Secretaries on Disinvestment (CGD)

2. Cabinet /Cabinet Committee on Disinvestment

The Hon'ble Cabinet of Ministers shall normally decide all the important issues

relating to Disinvestment. The Cabinet may alternatively or in addition form a

Cabinet Committee on Disinvestment. The Cabinet Committee on Disinvestment

(CCD) shall be chaired by the Chief Ministerand of Minister of Power, Minister of

Law & Justice, Minister of Industry, Minister of Finance, Vice Chairman of State

Planning Commission, and the Minister concerned with the PSU under disinvestment.

The Committee can also co-opt other Members as and when felt necessary.

The suggested functions of the Committee are as follows:

1. To consider the advice of the Core Group of Secretaries regarding policy issues

relating to the disinvestment programme.

2. To decide the price band for the sale of Government shares through

international/domestic capital market route prior to the book building exercise, and to

decide the final price of sale in all cases.

3. To decide the final pricing of the transaction and the strategic partner in case of

strategic sales.

4. To approve the three-year rolling plan and the annual programme of disinvestment

every year.

3. Core Group of Secretaries on Disinvestment

The Core Group of Secretaries is headed by the Chief Secretary and comprises

Industrial Development Commissioner, Secretaries from Departments of Finance,

Industry, Planning and Administrative Department and any other Department as may

be required, like Departments of Legal Affairs etc. The Group can also co-opt other

Members as and when felt necessary. The functions of the Core Group are as

follows:

1. The Core Group directly supervises the implementation of the decisions of all

strategic sales.

2. The Core Group monitors the progress of implementation of the Cabinet / CCD

decisions.

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3. The Core Group makes recommendations to the Cabinet/ CCD on disinvestment

policy matters.

4. The entire process is carried out by the Administrative Department/ Department of

Infrastructure Development with the assistance of specified Government Nodal Agency. The

Department of Infrastructure Development may, with the approval of Industrial Development

Commissioner designate one or more Government Agencies such specified Nodal Agency for

these purposes. In the above process, State Govt. is assisted by Advisors for different

purposes.

Normally the disinvestment process is carried out with the assistance of an Advisor

(known as Lead Advisor ). They could be Merchant Bankers or Consultancy / Advisory firms,

but in addition legal advisors, chartered accounts, asset valuers and other valuers are also

required for specific services. However, Multi - disciplinary Lead Advisor could also be

engaged. But valuer would necessarily be an independent valuer.

4.1 Lead Advisor

Advisors assist Government in all aspects of privatisation transactions. In addition to

implementing the basic steps mentioned earlier, advisors also counsel Government on the

strategic options open to it for privatisation. The responsibilities of the Advisor, would inter-

alia, cover rendering of advice and assisting government in the disinvestment of the PSU,

suggesting measures to enhance sale value, preparing a detailed information memorandum,

marketing of the offer, inviting and evaluating the bids, assisting during negotiations with

prospective buyers, drawing up the sale/other agreements and advising on post-sale matters.

Advisors are appointed by a competitive bidding procedure. The Department of

Infrastructure Development and Disinvestment or the Administrative Department of concerned

PSU, in consultation with the PSU and Administrative Ministry concerned, prepares broad

Terms of Reference (TOR) for the Advisors, seeks in principle consent of CCD on TOR and

methodology to be followed, and invites expression of interest from them to submit proposals.

The Advisors offering the best technical and financial terms are hired to implement the

privatisation transaction. Procedure and steps for selection of advisors would be as that for

selection of consultants as per Part - I of these Guidelines to the extent they are not inconsistent

with the following provisions. Particularly the parameters for selection of Advisors shall be as

follows:-

A. Strategic sale.

S.No Criteria

1. Strategic sale experience

2. Sector expertise and experience

3. Local presence and level of commitment to India

4. Understanding of the PSE

5. Deal team and manpower commitment

6. Research capability

B. Public offer

S.No Criteria

1. Experience and capabilities in handling similar transactions as Advisors/Global

72

Coordinators

2. Sector expertise and experience

3. Understanding of the PSE

4. Deal team qualification and Manpower commitment to the Deal

5. Marketing strategy & after market support

6. Local presence and commitment to India

7. Global presence and distribution capabilities

8. Research capabilities

A typical letter of mandate to be signed between the Advisor and the Government is

enclosed at Annexure – I. This may require some modifications depending on the nature of

transaction.

Government of India has also issued guidelines for qualifications of Advisors as

enclosed at Annexure – II which are to be followed in the State as well.

For strategic sale the fees payable to the Advisors is generally of two types. The first

type is called 'success fee' which is a fixed percentage of the gross proceeds to be received by

the Government from the disinvestment. Since it is directly linked with the amount of money

realizable from disinvestment, it serves as an incentive to the Advisor to get the best price from

disinvestment.

The other type of fee is called 'drop dead fee' which is a lump sum amount payable to

the Advisor only in the event of the transaction being called off by the Government.

The fees for specific transactions vary from transaction to transaction depending on

various factors like mode of disinvestment, total realizable value, quantum of work required to

complete the transaction, degree of difficulty and chances of success of the transaction etc.

Consultants appointed for disinvestment in certain cases are also given flat / fixed / lump sum

fee / asset valuation fee / out of pocket expenditure depending on different criteria.

4.2 Legal Advisor

For each privatisation, it is considered necessary to involve legal advisors who look into the

legal issues and advise the government with respect to documentation etc. on contractual terms.

They are invited on the basis of their work experience and are selected through a process of

limited competitive bidding by an Inter-department Committee, from a panel suggested /

recommended by the Advisors, and are paid a lump sum amount as fees. They help the

Government in drafting and finalising various agreements.

Legal advisors examine the following documents and advise the Government on:

1. Material contracts and agreements.

2. Loan and lease agreements to ensure that there are no unduly onerous conditions.

Title deeds to ensure that there are no defects of title or onerous conditions.

4. The adequacy of insurance cover and compliance with any legal or other

requirement.

4.3 Accounting Advisors

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The Accounting Advisors review the financial, accounting, reporting and planning systems.

They help the government in analysing the balance sheet of the company, its assets and

liabilities and contingent liabilities.

The Accounting Advisors are required to re-cast the final Accounts of the PSU as per the

Accounting standards acceptable to the bidding parties, if necessary.

The Accounting Advisors pay particular attention to the way the following items have been

treated:

1. Extraordinary and exceptional items

2. Amortisation and depreciation

3. Capitalisation of expenditure

4. Recognition of revenue and expenditure items

5. Basis of consolidation of subsidiaries, if any

6. Deferred taxation, and

7. Revaluation of assets.

The task includes:

• Strategic evaluation of operating capability finances and post privatisation

prospects of the state enterprise.

• Evaluation of capital structure

• A calculation of the impact of taxation on the privatised enterprise.

The accounting advisor is appointed through a process of limited competitive bidding and is

paid a lump sum fees.

4.4 Asset Valuer

The asset valuation is conducted by well-established government-approved valuers. Normally,

the valuer is selected by an inter-departmental committee, consisting of representatives from

the Ministry of Disinvestment / administrative Ministry and the CMD of the company, from

out of a panel suggested / recommended by the Advisor.

While assessing the fair value of the property, the valuer takes into consideration the following:

1. The status of the title of the company over land and building.

2. Any restrictive covenants incorporated in the title documents imposing

limitations on the use or transfer of the property or any other restrictions.

3. Any restrictions pertaining to the use or transferability of the property or other

restrictions arising from any civic regulations or Master Plan or other

reasons.

4. The values at which transactions have taken place in the recent past for properties

of comparable nature, in terms of use, size, location and other parameters.

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5. Valuation parameters currently in use by Authorities for determination of stamp

duty and other taxes.

6. Assessment of demand and supply of comparable properties at given locations.

7. The state of maintenance and depreciation of the property, and evaluation of

expenditure, if any, required repairing and renovating the property to suit the

intended use.

8. Terms and conditions of the proposed new lease agreements to be entered into with the

lessors for the purpose of disinvestment.

The valuation of the property is done by the asset valuation methodology taking into

consideration the above factors.

Valuation is done for:

• Plant and Machinery

• Land and Building

• Mines, if any.

• Intangibles, if required.

• Other assets.

Environmental Auditors and Public Relations firms can also be appointed for some PSUs under

divestment.

75

CHAPTER - II

VARIOUS METHODOLOGIES FOR DISINVESTMENT

The various methodologies include:

1. STRATEGIC SALE

2. CAPITAL MARKET

a. Offer for sale to public at a fixed price

b. Offer for sale to public through book building

c. Secondary market operation

d. International offering

e. Private placement

f. Auction

3. WAREHOUSING

4. REDUCTION IN EQUITY

a. Buy-back of equity

b. Conversion of equity into debt exchangeable into capital market

instruments

5. TRADE SALE

6. ASSET SALE / WINDING UP

7. MANAGEMENT / EMPLOYEE BUY OUT (M/EBO)

8. CROSS SALE

9. SALE THROUGH DEMERGER / SPINNING OFF

2.1 Strategic Sale

• Pricing: Optimisation / maximisation through competitive tension and

control premium

• Target investor set: Investors with strategic fit - techno-commercial

credentials

• Transaction costs: Low

• Time involved: 6-10 months

• Regulation: Companies Act, SEBI Take-over code, Stock Exchange, RBI

regulations, FIPB clearance (for foreign investors).

• Suitability

- Non-strategic Companies

- Companies where Government is willing to give significant

management control

• Precedents: MFIL, BALCO, CMC, HTL, VSNL, IBP, HZL, PPL, IPCL

etc.

• Methodology: Structuring the transaction in terms of:

- Extent of stake to be divested

- Extent of management rights

- Decisions on pre qualification criteria, bid evaluation criteria and

bidding process

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- Preparation and circulation of information memorandum to pre-

qualified buyers

- Due diligence and preparation of transaction documents

- Valuation of Assets/shares

- Receiving of bids

- Evaluation of bids

- Signing of Sale Agreement

• Advantages

- Maximises price because of transfer of management rights

- Brings technical / marketing / financial / managerial expertise of

the buyer to the company

- Increased value of residual Govt. shareholding

- Low cost and less regulation

• Disadvantages

- Time consuming

- Issues relating to management, land and labour etc. to be

resolved

2.2 Capital Market

(a) Offer For Sale To Public At Fixed Price

• Pricing: Decided before the transaction; at a discount to market to ensure success

and immediate capital appreciation for investors

• Target investor set: Mix of retail and wholesale, with some reservation for small

investors

• Transaction costs: High, in the range of 2-5% depending on issue size

• Time involved: 3 - 4 months

• Regulation: SEBI guidelines, Stock Exchange requirements

• Suitability

- Companies for which small investor interest is expected to be substantial

- Profit making companies with good future prospects

- Companies not in need of significant technical, managerial and marketing

inputs

• Precedents: Offer of 1 million shares of VSNL @ Rs.750 per share.

• Methodology: Offer for sale

- An issue of Equity Shares held by the Government to the public at large at a

pre-determined price

- Through an Offer Document

- Equity Shares can be accompanied by sweeteners such as warrants

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- Issue amount is thus automatically obtained (No. of securities multiplied by

price)

- Issue underwritten by the Syndicate Members (may or may not be)

• Advantages

- Ensures broad-based shareholding

- Sets valuation benchmarks for further fund raising / offer for sale

- Relatively quick method

- Transparent method

• Disadvantages

- Dependent on capital market conditions

- Price at a discount to market/ intrinsic price to ensure good response

- Process expensive - cost approx. 2 – 5 %

- Regulatory compliances: SEBI and Stock Exchanges

b) Offer For Sale To Public Through Book Building

• Pricing: Optimised, since price is discovered through a bidding process

• Target investor set: Essentially wholesale but small investor also

• Transaction costs: High, in the range of 2 - 5% depending on issue size

• Time involved: 3-4 months

• Regulation: SEBI guidelines, Stock Exchange requirements

• Suitability:

- Companies for which institutional interest is expected to be substantial

- Profit making companies with good intrinsic value and future prospects

- Companies not in need of significant technical, managerial, marketing

inputs

• Precedents: none among PSEs - Hughes Software Ltd., HCL Technologies Ltd.

and Bharati Televentures in the private sector.

• Methodology: Offer for sale

P- Issue of Equity Shares to the public at large

- Number of securities to be pre-determined and disclosed

- Price discovery through bidding by interested investors

- Issue amount is thus automatically obtained (No. of securities multiplied

by price)

- Issue underwritten by the Syndicate Members (may or may not be)

- Offer made through an Offer Document

•••• Advantages

- Optimises price

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- Ensures broad based shareholding

- Sets valuation benchmarks for further fund raising / offer for sale for

IPOs

- Relatively quick method - Transparent method

•••• Disadvantages

- Expensive - with cost of 2 - 5%

- Regulatory compliances – SEBI Regulations & Stock Exchange

(c) Secondary Market Operation

• Pricing: at market prices

• Target investor set: Essentially wholesale could be retail investor

also

• Transaction costs: Low, in terms of brokerage

• Time involved: spot transactions

• Regulation: Stock Exchange requirements

• Suitability:

- Companies which have a sizeable floating stock with good intrinsic value and

good future prospects

- Companies not in need of significant technical, managerial, marketing inputs

etc.

• Precedents: none

• Methodology: sale through market operations

- A secondary market sale of Equity Shares.

- Through brokers

- To interested buyers - institutional and retail

- At trading market prices

•••• Advantages

- Low costs - only brokerage to be paid

•••• Disadvantages - Unsuitable for Companies with low floating stock

- Interest may be low

- Price dependent on day to day market conditions

- Amount of proceeds uncertain - Possibility of price rigging

- Highly dependent on the day-to-day demand for the shares

- Method may not be considered transparent

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(d) International Offering [Global Depository Receipts (GDR) /

American Depository Receipts (ADR)]

• Pricing: valuation by International Qualified Institutional Buyers (QIBs) (through

book building) and related to domestic market prices

• Target investor set: Essentially foreign institutional investors, (retail investor also

for ADR)

• Transaction costs: High, in the range of 2-5% depending on issue size (cost

of ADR is higher)

• Time involved: 3-5 months

• Regulation: Disclosure requirements by Securities Exchange Commission (SEC)

and accounting in accordance with US Generally Accepted Accounting Practices

(GAAP) (for ADRs), NASDAQ / NYSE/ LSE listing requirements

• Suitability

- Companies which have stocks listed in the international markets or companies

with actively traded stock in domestic markets

- Companies with good intrinsic value, good future prospects and of

international repute

• Precedents: VSNL, MTNL, GAIL

• Methodology: offer for sale in the international markets

- An offer to international investors through issue of Depository Receipts,

which represent underlying shares (ADRs in the USA market and GDRs in

markets other than the USA)

- Recasting of accounts as per US GAAP for issue of ADRs and consolidation

of accounts for issue of GDRs

- Preparation of red herring (Offer Document) and road shows

- Price discovery through bidding and allocations made at cut-off price (Dutch

Auction) or at bid price (French Auction)

- The issue is usually fully underwritten

- Offer through an offering document

•••• Advantages

- Access to deeper international markets and capital, sometimes at better price.

- Creates price tension between the overseas and home market

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- Enhances visibility

•••• Disadvantages

- Time consuming process

- Stringent regulatory requirements

- Accounting norms and disclosures and regular reporting to SEC in case of

ADRs

- High cost about 4-5% for ADRs and about 3% for GDRs

(e) Private Placement of Equity

• Pricing: valuation by merchant banker and feedback from institutional investors

or price discovered through book building

• Target investor set: Essentially institutional including multilateral agencies,

private equity funds

• Transaction costs: low

• Time involved: 1-2 months

• Regulation: Foreign investment guidelines in case of overseas investors, SEBI

guidelines in case of domestic listed companies

• Suitability

- Unlisted companies

- Listed companies with low floating stock and low volumes

- Companies with good intrinsic value and good future prospects

• Precedents: CONCOR, GAIL (Domestic issue with FIIs participation)

• Methodology: placement of equity

- To a set of institutional investors

- At a negotiated price arrived at through valuation or price discovery through

book building

- With issues of management rights and exit option resolved

- Through an information memorandum circulated among institutional

investors and due-diligence

- In case of listed companies as placement of less than 15% equity to investors

does not trigger Take-over code (as per SEBI guidelines)

•••• Advantages

- Less time consuming

- No regulatory compliance requirements, except in case of foreign investment

- Low transaction cost

•••• Disadvantages

- Does not ensure widespread shareholding

- May not be considered transparent

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(f) Auction

• Pricing: optimised through bidding. In case of Dutch Auction, allotments made at

single price. In case of French Auction, allotments made at bid price

• Target investor set: Essentially institutional

• Transaction costs: Low

• Time involved: 1-2 months

• Regulation: SEBI Take-over code

•••• Suitability

• Companies with good intrinsic value

• Unlisted companies

• Listed companies with low floating stock

• Precedents: Initial rounds of disinvestment in CPSUs.

• Methodology: Auction through the Dutch / French Auction

- To a set of institutional investors

- At a price discovered through the bidding process

- For a pre-determined number of Equity Shares

- Allocations made

� At a cut-off price to all investors above the cut-off price in case of Dutch

Auction

� At the bid price in case of French Auction

- Marketing through Analysts' meet and one-on-one discussions

- In case of listed companies, placement of less than 15% equity to each investor

to avoid trigger of Take-over code (or as per SEBI guidelines)

•••• Advantages

- Optimises receipts to the GoI (amount higher in case of French Auction)

- Transparent mechanism

- Less time consuming with no regulatory compliance requirements

- Low transaction cost

•••• Disadvantages

- Does not ensure broad based shareholding

2.3 Warehousing

• Pricing: Market determined price, after building in returns to the warehouser.

Profit on sale, net of selling expenses by warehouser shared in pre-determined

ratio

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• Target investor set: Essentially institutional

• Transaction costs: Fixed return to warehouser less cost of funds for GoI

• Time involved: within 1 month

• Regulation: RBI restrictions on bank investments

• Suitability :

- Listed companies with adequate liquidity

- Potential for growth in market prices

• Precedents: None

•••• Disadvantages

- Who will buy shares from the GoI

- At a discount to the market price

- To sell the shares at a later date in the market, within a specified time

frame

2.4 Reduction in Equity

(a) Buy Back Of Shares

• Pricing: In accordance with SEBI Buyback regulations

• Target investor set: Shares bought back by the company

• Transaction cost: Low

• Time involved: Within three months

• Regulations: Companies Act, SEBI Buyback regulations

• Suitability:

- Cash rich companies with no immediate capex plans

- Low geared companies with good intrinsic value, which is not reflected

in accretion to shareholder value and market price

• Precedents: None in Public sector, Indian Rayon, Reliance Industries Limited

in private sector

• Methodology: Offer by company to buy-back its shares from others

- Through tender route

� Buy-back at fixed price

� In case of over subscription, acceptance on proportionate basis

- Through book building

� Buy-back through Dutch Auction route- price discovery through bidding

by interested investors- and allocations made at cut-off-price

- Valuation to factor in future loss of dividend to the sellers.

83

•••• Advantages

- Reduces capital and thus improves EPS, Book Value & RoE of the

Company post buy-back

- Low cost transaction

- Relatively quick method

•••• Disadvantages

- Regulatory requirements

- Post buy-back debt equity ratio not to exceed 2: 1

- Maximum number of Equity Shares to be bought back should not exceed

25% of the existing paid-up capital

- The maximum amount that can be expected on a buy-back should not exceed

25% of the Company's paid- up capital and free reserves

• Reduces cash surplus with the company

(b) Conversion of Equity Into Another Instrument

• Pricing: Book value / market price based

• Target investor set: Wholesale

• Transaction costs: Low - Placement costs

• Time involved: Up to 3 months

• Regulation: Companies Act

Suitability :

- Cash rich companies with no immediate capex plans

- Low geared companies with good intrinsic value which is not

reflected in accretion to shareholder value and market price

• Precedents: NALCO

• Methodology

- Conversion of equity into an attractive and suitable capital market

instrument, plain vanilla bonds, deep discount bonds, fully /

partially convertible bonds, bonds with warrants attached, preference shares

with / without warrants

- Preparation and circulation of an information memorandum (IM)

among institutional investors

- Placement of the instrument

•••• Advantages

- Results in improvement in the capital structure of the Company combined with

funds inflow to seller

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- Reduces capital & thus improves EPS, Book Value & RoE of the Company

- Low cost of transaction

- Relatively quick method

- No reduction in cash surplus with the Company

•••• Disadvantages

- More regulatory compliance requirements for listed companies

2.5 Trade Sale

Trade Sale means sale of a business or a division or a non-core activity. In addition to price, the

auction to take into account factors such as capital investment to which the bidder is willing to

commit and guarantees the bidder makes to employees and customers.

Though the total amount offered is an important factor in the auction, there is also a trade-off

for the seller between

(1) obtaining the maximum amount of sale proceeds and

(2) ensuring that charges to the customers remain at affordable prices.

For this reason, the seller generally develops a number of selection criteria e.g.

• Indicative bids

• Strengths and capabilities of prospective operators

• Financial strength and credentials of bidders

• Any special conditions/assumptions attached to the bids such as spelling out in advance

the extent to which rate increase will be permitted over a transition period.

A Trade Sale is generally regarded as a quicker option to execute. Public offerings make more

sense when the company to be sold has a reasonable strong skill base and capital markets are

liquid. In UK, Trade sales have generally been used with smaller industries or enterprises.

2.6 Asset Sale and Winding up

This is normally resorted to in companies that are either sick or facing closure. The Asset Sale

is normally done either by open auction or by tender method. Sick companies under SICA are

wound up on the findings of BIFR and orders of the concerned High Court and handed over to

the official liquidator for realisation of dues through liquidation.

2.7 Management/Employees Buyout (M/EBO)

For smaller companies, particularly those that are highly dependent on their personnel,

management/employee buyouts may be suitable privatisation techniques. Although most

buyouts are led by management, active participation by the workforce is a pre-requisite for

success. The workforces are to be necessarily taken along, contributing some of their own

money towards the enterprise. London's Bus service was reorganized into companies, which

were purchased by their managers and employees. Other than National Freight Corporation of

UK, which is often cited as the classic case of 100% employee buyout, there are not well-

85

known examples of such cases in large companies with huge manpower. Perhaps such option

is suitable in highly profit–making, low asset based companies with small and highly motivated

manpower.

2.8 Cross Sale

Cross sale is not an option for privatisation. However, Governments seeking to sell enterprises

via Trade Sales should decide at the outset what their policy would be with regard to bids from

Government owned enterprises and spell out such policies in their initial request for

qualifications from potential bidders.

2.9 Sale Through Demerger/Spinning off

Sections 391-394 of the Companies Act 1956 govern demerger. The basic concept of

demerger requires transfer of an undertaking from an existing company ("Transferor

Company") to another existing company (Transferee Company"). The demerged companies

have a shadow shareholding as that of the Transferor Company. For a government Company,

the scheme of demerger has to be approved by Department of Company Affairs. To minimize

time, new transferee companies can be incorporated as shell companies in which the properties

of transferor company can be hived off i.e. demerged. Such new companies remain as "shell"

companies until the properties are transferred to them as per the order of DCA. These new

companies continue as Government Companies under Section 617 of the Companies Act and

are formed for the limited purpose of facilitating the demerger on transfer of shares to

successful bidders, whereupon they cease to be Government Companies. Successful sale of a

few hotels of ITDC and HCI (a subsidiary of Indian Airlines) has taken place through this

method.

86

CHAPTER - III

STRATEGIC SALE

The various stages of a strategic sale have been spelt out below.

In the first step, the Advisor would make a detailed study on the feasibility of Disinvestment of

the referred PSU and on various alternatives available. Thereafter the Department of

Infrastructure Development and disinvestment or the Administrative department of the

concerned PSU would seek in-principle approval of CCD on disinvestment proposal and route

/ method to be chosen. Thereafter the following three-stage strategic sale process as given here

under, would be followed:

3.1 Stage I : Inviting Expression of Interest and Qualification of Bidders

3.1.1 Issue of Advertisement inviting Expression of Interest (EoI)

A public announcement of a privatisation transaction assures the people of the transparency of

the transaction. A typical advertisement in this category provides a short profile of the

enterprise being privatised, the bidding procedure, deadline for submission of expression of

interest or bids, and the address for further information. Advertisement is normally given in

three major national newspapers and one international newspaper besides an industry/trade

journal to which the enterprise being disinvested belongs, if necessary. A copy of the

advertisement along with details of EOI, and PIM are placed on the websites of the PSU and

administrative ministry.

Submission of Preliminary Information Memorandum (PIM) & Supporting Documents

to interested parties.

Preliminary Information Memorandum (PIM)

Before submitting their expression of interest, the prospective investors would be interested in

knowing details about the company. The purpose of Preliminary Information Memorandum is

to assist the investors in deciding whether they should proceed with the proposed

disinvestment.

Structure Of PIM

A typical Preliminary Information Memorandum includes the following information:

a. Introduction

This gives a brief of the government decision regarding disinvestment in the company, the

extent of equity held by the Government, the extent of equity to be the disinvested, the contact

person, the relevant telephone numbers and fax nos. and email addresses.

b. Information About The Company

This contains information about the company, its history, its activities, the location,

management, human resources, quality control, markets and marketing arrangements, capital

structure, various assets and other details about the company. It also gives the strengths and

opportunities of the company.

87

c. Financial Details

The Preliminary Information Memorandum gives the profit and loss account and balance sheet

of the company for the last five year.

3.1.2 Submission of Expression of Interest

Any company / consortium, participating in a privatisation transaction has to submit an

Expression of Interest. It is normally submitted along with a statement of legal capacity and a

litigation impact statement. It is the responsibility of the applicant to ensure that EOI is

delivered at the prescribed address by the stated deadline. The covering envelope of all EOIs

submitted should be clearly marked "Private and Confidential - Expression of Interest for

the Strategic Sale". Responses received after the deadline or not accompanied by the required

documentation are not considered. A company /consortium may be disqualified for any

misrepresentation, failure to provide the required information or if any member has already

submitted a separate EoI.

Formats

The preliminary information memorandum contains the conditions for (a) qualification of

bidders and (b) formats for submitting (i) Expression of Interest (ii) statement of legal capacity

and (iii) Request for Qualification (RFQ). Standard formats used for the purpose are enclosed

at Annexure II, III, IV and V.

Detailed contents of EOIs

All EOIs generally include the following information:

1. Executive Summary

This provides a brief description of the company and (where appropriate) of each member in

the consortium, containing details like ownership structure, write up on business history and

growth, business areas / activities, respective revenue details, etc. It includes a brief

commentary on the capability of the company / consortium, as demonstrated, inter alia, in its

past track record, to run its own business.

2. Background Information

a) The Applicant

The full name, address, telephone and facsimile numbers, e-mail address of the company or of

each member of the consortium and the names and the titles of the persons who are the

principal points of contact.

b) Basic Information

This contains the details of the place of incorporation, registered office, current directors, key

management personnel and principal shareholders of the company / companies in the

consortium. It also contains a copy of its current Memorandum and Articles of Association and

copies of audited accounts for the last three years of the company / companies in the

consortium.

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3. Management Organization

i) An overview of the applicant's senior management and organisation structure and in the case

of a consortium, that of each member; and

ii) Summaries of the roles and responsibilities of the directors, key management personnel of

the applicant and, in case of a consortium, those of each member.

4.International Operations / Joint Ventures / Alliances

Brief write up of the company's or, in the case of a consortium, of the members, of their

international operations, joint ventures / alliances (whether international or domestic), nature

and size of such operations, equity ownership, if applicable, copies of the audited accounts for

the last one year of such companies.

5. Professional Advisors

The names and addresses of those companies and the professional firms, if any, who are (or

will be) advising the applicant/consortium, together with the names of the principal individual

advisors at those companies and firms.

6.Legal Capacity of the Company / Accuracy of Information

Every company and each member of a consortium must provide with the EOI a representation,

duly executed by its authorised official/ representative that it has the requisite corporate

authorisation to submit the EOI and that all information provided in the EOI is complete and

accurate in all material respects to the best of their knowledge. If, at a subsequent date, it is

discovered that the company or any consortium member did not either possess the requisite

authorisation or that any part of the information provided in the EOI was not complete or

accurate in any material respect, the Government reserves the right to disqualify such company

or consortium or member of the consortium from the process.

7. Outstanding Litigation

Each company, and each member of a consortium must provide with the EOI a statement of

pending litigation.

3.1.3 Guidelines for Appointment of Bidders

On the basis of the criteria decided for the qualification of bidders for acquiring stakes in any

Public Sector Undertaking slated for disinvestment, any company, in private or public sector,

can take part in a competitive bidding process. However, depending on the unique features of

a case, and taking into consideration all relevant factors, Government can always impose

reasonable restrictions in specific cases, in public interest and in the interest of privatisation of

“non-strategic” PSUs.

The Ministry of Disinvestment, Govt. of India has laid down guidelines for qualification of

bidders seeking to acquire stakes in Public Sector Enterprises through the process of

disinvestment which are to be followed in the State as well. The prospective Bidders have to

give an undertaking at this stage of submission of EOI that they are eligible as per the criteria

fixed by the said guidelines and that they have not been facing proceedings by any Regulatory

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Authority against any “Grave Offence” or “fraud” or have not been convicted by any Court of

law. It had been clarified vide O.M. NO.4/20/2001-DD II dated 9 January 2002 that an offence

will be treated as grave when “grave offence” is:

a. Only those orders of SEBI are to be treated as coming under the category of “grave

offences” which directly relate to “fraud” as defined in the SEBI Act and / or

regulations.

b. Only those orders of SEBI that cast a doubt on the ability of the bidder to manage

the public sector unit when it is disinvested, are to be treated as adverse.

c. Any conviction by Court of Law.

d. In cases in which SEBI also passes a prosecution order, disqualification of the

bidder should arise only on conviction by the Court of Law.

A detailed book on “Guidelines on Qualification for Bidders” has also been published by

the Ministry of Disinvestment for reference of prospective bidders that is enclosed as Annexure

VI. These can also be accessed from the website of the Ministry of Govt. of India.

On receiving the details through the above process, the interested parties are requested to

submit their EOI to the Advisors/ concerned Ministry by a fixed time and date.

3.1.4 Qualification of Companies/Consortia

Based on the information submitted in EOIs, the Ministry and the advisors will carry out an

evaluation of the qualifications of the companies / consortia and subsequently notify in writing

those companies / consortia which qualify to participate in the next stage of the process.

3.2 Stage II : Request for Proposal (RFP) & Submission of Bids

3.2.1 Request for Proposal & Bid Process

The proposed Strategic Sale process, consequent to the submission of EOI, involves a detailed

due diligence exercise to be undertaken by the Bidder followed by submission of a Financial

Bid.

The due diligence phase involves providing a Bid Pack containing various documents to the

Bidder. Besides, visits to the Data Room, including site visits to the units of the company form

a part of the due diligence phase. At the end of this phase, the Bidder is expected to submit his

Financial Bid. Details of form and content of the Bids and the proposed due diligence process

are given in RFP.

Notification to qualified / short listed parties & issue of Bid Packs

A Bid Pack containing the following documents is made available to the qualified / shortlisted

bidders, along with RFP after getting a confidentiality undertaking signed by them:

i) Confidential Information Memorandum (CIM)

ii) Previous 3 years' audited annual accounts of the company, and

iii) Data Room Rules.

The following documents (which may or may not form a part of the Bid Pack) are also made

available to the qualified / shortlisted bidders in due course:

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i) Draft Share Purchase Agreement;

ii) Draft Shareholders' Agreement, and

iii) Provisional results for the current Financial year

Where the EOI has been submitted by a Consortium, it is expected that there shall not be any

changes in the Members of the Consortium consequent to the submission of EOI.

However, if a change is desired by some or all the Members prior to the submission of the

Financial Bid, such change shall have to be approved by State Govt. Similarly, consequent to

the submission of EOI, if the Bidder desires to form a Consortium by inducting new

Member(s), it shall have to seek an approval from State Govt.

Where the Bidder is a Consortium, the stake in the ordinary share capital of the company can

be acquired and held either through an investment vehicle ("Consortium Vehicle") or through

direct holding in the company by each Member or through any Group Company (ies).

3.2.2 Confidentiality Undertaking

The CIM being a much more detailed document, it is customary to send it only to those who

have given a Confidentiality Undertaking. Typically, this undertaking requires that the

potential bidders do not misuse this wealth of information. It is not uncommon for competitors

to send a bogus team to discover the trade secrets of the other parties.

It is an undertaking made by the bidder in favour of Hon'ble Governor of the State (acting

through Secretary of the administrative ministry), the company and advisors to treat all the

confidential information in Confidence and not to disclose to any person, the fact that he has

been provided the Confidential information or has inspected any confidential documents or the

discussion/negotiation regarding the transaction.

Confidential information means all information, concerning the business, operations, prospects,

finances, or other affairs of the company. It includes documents delivered in connection with a

due diligence investigation, information concerning business activities, products,

specifications, data know-how, compositions, designs, sketches, photographs, graphs,

drawings, research and development, marketing or distribution methods and processes,

customer lists, customer requirements, price lists, market studies, computer software and

programs, database technologies, systems structures and architectures, historical financial

projects and budgets, historical and projected sales, capital spending budgets and plans, current

or prospective financing sources, the names and background of personnel, personnel training

techniques and materials.

It also includes information memorandum, request for proposal, draft of shareholders and share

purchase agreements or other materials prepared in connection with the transaction.

Confidentiality undertaking also provides that the bidder shall not deal with any officer,

Director or employee of the Govt. or Company, regarding the business, operations, prospects

or financing of the company without advisor's express written consent.

The confidentiality undertaking contains an indemnity clause, whereby the bidder agrees to

indemnify the advisor, the Govt. and the company any damages, loss, cost or liability arising

out of any unauthorised use or disclosure by the bidder.

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Request For Proposals (RFP) :

A typical RFP consists of the following three main sections:

1. Background and General Information:

This section describes the goals of the privatisation transaction and provides information on the

company that is being privatised.

2. Conditions of Agreement:

In this section of the RFP, a summary of contractual obligations is provided in simple, non-

legalistic language.

3. Proposals and Selection Process:

This section describes the entire privatisation procedure including the process of evaluation of

bids.

3.2.3 Confidential Information Memorandum (CIM)

As mentioned earlier, after obtaining the confidentiality undertaking, Advisors send out a

Confidential Information Memorandum (CIM) along with the RFP. The Confidential

Information Memorandum (CIM) Memorandum is a much more in-depth description of the

company to be privatised than provided in the PIM.

This reduces the cost of preliminary due diligence for all potential bidders, thereby increasing

the chances of attracting quality players who are in great demand.

A typical confidential information memorandum usually has the following sections:

1. Executive Summary: This is a brief chapter containing introduction of the company,

investment considerations, business overview, objectives of Government of India and the role

of the strategic partner. Business overview will include information on business activities,

infrastructure, marketing and distribution, land and summary financial performance.

2. General Information on India includes introduction about India, its institutional

framework, demography, language and literacy, international relations, economic and financial

indicators, foreign trade, balance of payments, economic indicators and PSU reforms, if

relevant for that particular PSU.

3. Sector Scenario generally contains an overview of the industry, its segmentation, regulatory

environment governing the sector in India, and policy initiatives in the sector. Industry

segmentation would include various segments of the industry in India. Regulatory environment

governing the sector in India would include compulsory legislation, voluntary standards, policy

relating to small scale undertakings, policy related to foreign investments in the sector and laws

pertaining to employer - employee relations. Policy initiatives would include regulation and

control, fiscal policy and taxation.

4. Business Review contains introduction of the company, chronology of its growth, overview

of its business, its operations. Operations include facilities, land, marketing and distribution,

manufacturing plants and process, raw materials and research and development (R & D).

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5. Structure, Responsibilities and Systems contains structure of the company, structure of the

manufacturing units and financial and management information systems. Structure of the

company means finance, marketing, operations, human resources development and

administration. Financial and management information systems contains financial accounting,

management accounting and budgeting.

6. Directors, Management and Employees contain description of the Directors, Senior

Management and Employees. It contains information on the remuneration, employee

entitlements, recruitment, retirement and dismissal, training and development, pension and

welfare obligations and industrial relations. Employee entitlements generally means basic

salary, dearness allowance (DA), residential accommodation / house rent allowance (HRA),

conveyance, provident fund (PF) and gratuity, bonus, productivity linked scheme, overtime,

annual increments, accident insurance, medical reimbursement scheme, health scheme, loans /

advances, other benefits and perquisites, leave, holidays and leave travel concession benefits.

7. Financial Statements of the company include profit and loss data, balance sheet data and

operational results normally for the last 5 years.

3.2.4 Share Purchase Agreement

The bidders put in their bid based on the last audited balance sheet information made available

to them. However, the company is transferred to them at a later stage. There could be either an

increase or decrease in working capital and debt during this period. Share Purchase Agreement

fixes the closing date on which the company is handed over to the buyer so that the difference

between the closing date and the date of last audited balance sheet can be arrived at and

accounted for. It describes the purchase price, the mode of payment and the actions at closing

time. It also lays down representations and warranties given by both the parties.

Share Purchase Agreement is entered into among the Hon'ble Governor of the State (acting

through the Secretary of the Administrative Department), the company, the strategic partner

and other principals as applicable.

It contains the following sections:

1. Definitions and principles of interpretation: This section deals with the definitions

contained in the agreement, certain rules of implementation and the summary of the entire

agreement along with the schedules.

2. Purchase and sale: It describes the actions at closing time, other actions and the place of

closing along with other documents relevant for the above transaction.

3. Purchase price: It describes the purchase price and the mode of payment.

4. Representations and Warranties of the Government: It describes the right to sell, due

authorization, enforceability of obligations, regulatory approvals, incorporation, due

authorization, enforceability of obligations, absence of conflicting agreements, litigation,

regulatory approvals, foreign participation, strategic partner review; access to information,

investment intent, source of funds, technical proposals and shareholding structure.

5. Agreements on Representations and Warranties: It describes the various representations

and warranties given by both the parties.

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6. Covenants of the parties: It describes the actions to satisfy closing conditions, the

requirements of preservation of records and of making public announcements.

7. Conditions precedent: It lays down that the representations at the closing time be true and

accurate. It also lays down the performance of obligations, receipt of closing documentation,

consents, authorisations and registrations.

8. Indemnification: It lays down the conditions for the indemnification by the strategic

partner.

9. Termination: It lays down the conditions for termination of the contract and effect of this

termination.

10. Waiver/Survival: The waiver/survival clause is added at the end of the agreement.

11. General: The general section includes the various provisions regarding expenses, notices,

assignment, further assurances, dispute resolution/submission to jurisdiction, amendments,

governing law, appointment of agent and severability.

3.2.5 Shareholders' Agreement

Shareholders' Agreement is a very important agreement. It defines the rights and obligations of

both the parties. Concerns of Government on protection of employees' rights, future investment

/ business plans and the precautions against assets stripping are generally reflected in it. It lays

down the survival period after which the claims become time barred and the indemnification

limit to which a purchaser can be indemnified. It also lays down the terms and conditions of

indemnification for any disputed tax liabilities, litigation liabilities and environmental

liabilities. It lays down the procedure for management of the company after disinvestment. It

also includes various representations and warranties given by both the parties. It lays down the

dispute resolution mechanism for both the parties.

Shareholders' Agreement is entered into among the Hon'ble Governor of the State (acting

through the Secretary of the Administrative Department), the company, the strategic partner

and other principals as applicable.

It contains the following sections:

1. Definitions and principles of interpretation: It contains the various definitions and

rules of interpretation given in the agreement.

2. Purpose and scope: It defines the purpose and the scope of the agreement. It also lays

down the conditions for compliance with the agreement.

3. Equity participation, financial support: It lays down the conditions for equity

participation, additional capital and dilution of Government Equity Interest.

4. Management of the company: It describes the constitution of the Board of Directors,

procedure for removal and replacement of nominees, procedure for calling meetings

of Board, quorum, procedure for approval of matters, deemed consent, casual

vacancies and filling the post of alternate Director and Managing Director.

5. Shareholder meetings: It describes the procedure for general meeting of shareholders,

notice of shareholder meetings, quorum and voting requirements.

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6. Transfer of equity shares: It lays down the conditions for general restriction on

transfer, rights of first refusal, change in control, event of default, government's right

to sell, Strategic Partner's right to buy, determination of fair market value, procedure

for call and put options, permitted transfers and compliance with legal requirements.

7. Representations and Warranties: It describes the various representations and

warranties given by the company, the strategic partner and the government. It also

includes a survival clause.

8. Indemnification and confidentiality: It lays down the various indemnifications given

by all the parties in case of breach of contract. It also includes a confidentiality clause.

It lays down the various equitable remedies and costs in the event of a breach of

contract.

9. Miscellaneous: It includes clauses on arbitration, application of this agreement,

assurances, benefit of the agreement, amendments and waivers, assignment,

severability, notices, governing law and expenses.

The Ministry has placed on its website ‘Sample Transaction Document’ which can be a

useful guide for preparing SHA and SPA.

3.2.6 Due Diligence

The purpose of the due diligence programme is to provide the Bidder an overview of the

Strategic Sale programme and a detailed information on the company's businesses. In order to

enable the Bidder to obtain the required information, the programme provides data room visit.

The data room is created by the Company containing all information required by the

prospective bidder followed by site visit.

The following is a summarised, indicative list of types of documents and information required.

• Financial Documents

o All annual reports.

o Quarterly reports.

o All accountant and auditor's reports and opinions.

o Management financial reports, capital expenditure budgets, projections and reports for

last five years.

o Operating budgets, projections, and reports for last five years.

o Any financial information presented to GoI in last five years.

o Operating revenue accounts for last five years.

o Operations and maintenance accounts for last five years.

• Accounts and Investments

o List of all bank accounts and investments, including account balances and value of

investments.

• Loan Documents

o A chart setting forth loan amortisation and interest payments (with the company both

as borrower and, if applicable, lender).

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o A chart showing other debt-like obligations of the company (letter of

credit repayment obligations, instalment sales obligations, capitalised

lease obligations).

o All loan agreement in which the company is a borrower (together with related

promissory notes, security documents, and ancillary agreements).

o All loan agreements in which the company is a lender (together with related

promissory note, security documents and ancillary agreements).

o All documents relating to debt-like obligations of the company (letter of credit

repayment obligations, installment sales obligations, capitalised lease obligations).

• Equity Documents

o A chart setting forth all capital contributions of the company and share issuances by the

company; share issuance and transfer ledger.

o All equity subscription agreements, option agreements, etc.

• Corporate Documents

o Memorandum and articles of association.

o Bylaws.

o Minutes of shareholder and board meetings for last five years.

• Licenses and Permits

o List of all required licenses and permits.

o All licenses/permits.

o All correspondence relating to revocation, modification, or non-issuance of any license

or permit.

o All laws and regulations applicable to the company (including any laws relating to

environmental and safety matters).

o All environmental and safety permits.

o All tariffs applicable to the company in last five years.

o All environmental and safety reports prepared in last five years.

• Litigation

o Status report of all litigation, disputes, etc., pending or concluded in last five years.

o Litigation files relating to pending matters.

• Employee Matters

o List of all employees indicating name, years of service, position, and salary (employees

below a particular grade could be classified in groups).

o List of all welfare, pension, and health plans, together with a brief description of each

and a financial summary relating to each (i.e., the company's assets and liabilities).

o List of unionised workers and unions. All unions and collective bargaining agreements.

o Employment agreements.

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o Description of bonus and profit sharing arrangements, together with any related

documents.

• Tax Matters (including income tax, sales tax, excise duty, and other taxes)

o List of tax liabilities and payments during last five years.

o Tax filings and notices for last five years.

o All disputes relating to tax matters.

• Real Estate

o List of all owned and leased real property, together with schedule of annual lease

payments and lease expiry dates.

o Title documents relating to owned real property.

o Leases relating to leased real property.

• Property, Plant and Equipment

o List of all owned/ leased tangible property (if appropriate by class) and inventory,

together with schedule of annual lease payments and lease expiry dates.

o All purchase and services contracts under which equipment and services are to be

provided to the company.

o Plant accounts.

• Intellectual Property

o List of all intellectual property owned or used by the company.

o All intellectual property ownership, license, royalty and similar documents.

o Description of computer systems and hardware.

• Customer Documents

o Standard forms, if any, of customer contracts, billing documents, etc.

o Customer service policies and records of service.

o Copies of material customer complaints.

o Customer statistics for each class of customer.

• Technical Data

o System maps.

o Technical assessments and reports prepared in last five years.

3.2.7 Negotiations & Finalisation Of Contractual Documents

During the course of due diligence, and thereafter, the qualified bidders are also invited to offer

their comments on the contracted documents (i.e. the draft Share Purchase and the

Shareholders Agreement) provided to them, with a view to finalising those and making terms

and conditions thereof uniform, so that the bids are submitted by all bidders on same terms and

conditions.

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3.2.8 Submission of final bid

Details of Financial Bids

Form and Content of the Financial Bid

The Financial Bid must be: -

(i). In the form to be provided by GoI;

(ii) Expressed in Indian Rupees;

(iii) Made on the basis of the terms of the revised final drafts of the Contractual

Documentation as may be circulated to the Bidder

(iv) Unconditional and open for acceptance for a period of 180 days from the stipulated

deadline;

(v) Must be signed by the Bidder or, where the Bidder is a Consortium by all the

Members of the Consortium, and

(vi) Submitted to the State Govt. on or prior to the stipulated deadline.

The Bidder submits to State Govt. one copy of its Financial Bid, contained in a separate sealed

package. The covering envelope on the package containing the Financial Bid must be clearly

marked 'Private and Confidential - Financial Bid for Strategic Sale' and include on the envelope

the name of the contact person and address of the Bidder (to whom any unopened Financial

Bid should be returned).

3.2.9 Earnest Money Guarantee

The Bidder or in the case of Consortium any of the Members of that Consortium, singly or

jointly, shall be required to enter into an Earnest Money Guarantee agreement for a stipulated

amount. The draft of the Earnest Money Guarantee agreement is also provided to the Bidder at

the time of providing all other draft documents.

All the bids have to be submitted before a stipulated deadline.

The selection of Purchaser is based on an evaluation of the Financial Bid.

3.2.10 BIDDING PROCEDURE TO BE FOLLOWED FOR STRATEGIC SALE IN

PSUs

Ministry of Disinvestment, with a view to maintaining absolute transparency and

ensuring a foolproof process removing all possibilities of tampering, has evolved a bidding

procedure, which is explained below. The criteria that need to be satisfied are: -

1. Reserve Price should not be fixed by the Government before the bidders

submit their financial bids, so that there is no chance of the bidders knowing

the Reserve Price fixed by Government.

2. The Government, while fixing the Reserve Price, should not have knowledge

of the price bids submitted so that the fixing of the Reserve Price is not

influenced by such knowledge.

3. The Advisors do not finalise Reserve Price, as a conflict of interest may arise

with them trying to keep a low Reserve Price.

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4. The bidders are provided full comfort that their bids, once submitted, can in

no way be tampered with by any agency.

5. Asset valuation is to be carried out by two independent, reputed valuers.

It would be noticed that the bidding procedure, which has now been adopted by the

Ministry of Disinvestment and which is explained below, satisfies all the foregoing criteria.

Activity I- Receiving the bids and Valuation Reports

Bids are received in two separate sealed envelopes from the bidders on a

specified date, time and venue.

1. One envelope contains only the price bids (first envelope)

2. The other envelope (second envelope) contains other documents: -

• Bank Guarantee by the bidder

• Board Authorisations

• Section 108A(Companies Act) application, if required

• FIPB / SIA application, if required

• Copy of the SHA / SPA authenticated by the bidder, based on which

the bid has been made

• Other documents, if necessary, on a case-to-case basis.

Secretary, Department of Disinvestment and Secretary of the Administrative Department

receive the bids. The Global Advisors and Legal Advisors are present.

• The second envelope is opened and the Global Advisors and the Legal

Advisors scrutinise these documents and certify that they are in order.

• Both the Secretaries then authenticate each financial bid envelope without

opening it by signing on the envelopes. Thereafter the signature of each

bidder is also obtained on these envelopes. Any bidder, who has come to

attend this meeting but does not submit a financial bid, is also permitted to be

present and his signature may also be obtained on these envelopes.

• The sealed envelopes containing the financial bids thus authenticated by the

Secretaries and the bidders are then put in a third envelope, sealed and

authentication of both the Secretaries and all the bidders obtained on the third

envelope, thus ensuring that no tampering can take place. (In case of hotel

properties of ITDC/HCI, since there are common bidders in several hotels, in

order that the bank guarantee of the losing bidders could be immediately

returned to them, the Secretaries open the financial bid envelopes at this

stage itself and announce the highest bidder to all but the highest bid

amount is not disclosed at this stage. Signature of Secretaries and the

bidders are obtained on the reverse of the price bids and these are then kept

in a separate sealed envelope.)

• In the same meeting the Global Advisors submit in a sealed cover the business

valuation report prepared by them and the asset valuers report. Secretary

(Disinvestment) authenticates these envelopes by putting his signature on the

sealed envelopes.

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• These sealed envelopes containing the business valuation report and asset

valuers report are then handed over to the Chairman of the Evaluation

Committee.

Activity-II- Proceedings of the Evaluation Committee

1. The Evaluation Committee typically commences business immediately after Activity-

I and the envelope containing the business valuation report and asset valuers report

are opened by the Chairman of the Committee.

2. The Global Advisors make a detailed presentation before the Evaluation Committee

on the business valuation and the asset valuation as also their recommendation of

what should be the reserve price.

3. At this stage, the Global Advisors withdraw from the meeting and the Evaluation

Committee thereafter deliberates on the issue, if necessary in more than one session

sometimes spreading over more than one day, and recommends a reserve price.

4. The Global Advisors are not involved in the process of making the final

recommendation of the reserve price by the Evaluation Committee. Their

contribution is only to provide the business valuation/asset valuation report, making a

presentation and furnishing any further details/clarification that the Evaluation

Committee may seek. Thus, the Global Advisors are not a member of the Evaluation

Committee but attend its meetings as special invitees.

Activity-III- Meeting of the Core Group of Secretaries on Disinvestment (CGD) to

consider Reserve Price and Bids.

1. At the meeting of the CGD, the CGD first deliberates on the report of the Evaluation

Committee and the Reserve Price recommended by the Evaluation Committee. In

this process the Global Advisors also make a presentation before the CGD.

2. At this stage the Global Advisors withdraw and the CGD then recommends a Reserve

Price, which could be different from that recommended by the Evaluation

Committee. In case of a difference of opinion, detailed reasons are recorded in the

minutes.

3. After the Reserve Price is decided upon by the CGD, the third envelope containing the

sealed envelopes containing price bids (on which signatures of both the Secretaries

and the bidders had been obtained during Activity-I) is scrutinised by both the

Secretaries and the bidders (the Global Advisors and the bidders are invited to be

present at this point of time) to ensure that they have not been tampered with.

4. The third envelope is then opened and the sealed envelopes containing price bids are

scrutinised by both the Secretaries and the bidders to ensure that they have not been

tampered with.

5. Then the sealed envelopes containing the price bids (on which signatures of both the

Secretaries and the bidders had been obtained during Activity-I) are opened and

signature of the Secretaries and the bidders obtained on the reverse of the price bids.

The signatures of the bidders are obtained to give comfort to the bidders that no

tampering could take place even after this stage in the bids submitted by them. Their

signatures are obtained on the reverse to ensure that none of the bidders come to

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know what bid the others have submitted. (The above procedure in Activity III is

different in the case of ITDC/HCI hotels. In those cases, after the Reserve Price is

decided by the IMG, the sealed envelopes containing the authenticated price bids of

the bidders are opened by the Secretaries.)

6. Thereafter, the bidders and Global Advisors withdraw from the meeting and the CGD

makes its recommendations on whether or not to accept the highest bid in view of the

Reserve Price.

Note : For all purposes of these Guidelines, the Evaluation Committee shall be the Core

Group of Secretaries on Disinvestment (CGD). Hence Activities II and III shall be

undertaken by the same Committee i.e. CGD.

Activity-IV Consideration and Approval of the bid by the Cabinet Committee on

Disinvestment or the Cabinet.

Recommendations of the CGD are thereafter placed before the CCD/ Cabinet for final

approval.

Note: - Time frame for Activity-I to Activity-V is about a week to ten days.

3.3 Stage III : Completion

a) Govt. approval /regulatory approvals.

The necessary approvals from RBI, Department of Company Affairs, FIPB (wherever

necessary) are applied for and obtained at this stage.

b) Signing of contractual documents

The Share Purchase Agreement is signed and on receipt of the bid money from the purchaser

i.e. strategic partner, the Share Holders Agreement is also signed.

c) Completion/closure of strategic sale

In case a listed PSU is being sold to a strategic partner (SP) and if the acquiring company is

purchasing more than 15% of share of the PSU the SP is required to make an open offer to buy

back 20% of the shares from the floating stock of the PSU as per SEBI guidelines under the

Takeover Code. This offer is to be made within 4 working days of the date of signing of Share

Purchase Agreement (SPA) and only then will the transaction be deemed to be closed.

The other conditions precedent to Closing are also spelt out in the SPA.

3.4 Post Closure

3.4.1 Post Closing Adjustments

The bidder submits his bid based on information supplied to him in the data room. This

information is the last audited balance sheet. However, from the date of the last audited balance

sheet, till the date of handing over (called the closing date), there may be accretion or depletion

in the current assets, current liabilities resulting in the change in Net working Capital and the

debt position. The difference between these figures between the date of the last audited balance

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sheet and the closing date is called post closing adjustment and depending on whether there is

an accretion or depletion of the current assets and debts, this amount is paid by the

government/purchaser to the other party, if decided as per the Share Purchase Agreement.

Within 90 days following the closing date, an accounting firm is jointly selected by the

Government and the purchaser, from the CAG's approved panel or otherwise as mutually

agreed. The firm finalises the "Closing Date Net working Capital Amount" and the "Closing

Date Debt Amount". These computations are final and binding on both the parties.

If there is accretion in the Net working capital on the closing date, the purchaser would pay the

differences to the government. Conversely, if the working capital decreases on the closing date,

the government would pay the difference to the purchaser.

Similarly if the closing date debt amount exceeds the amount given in the last balance sheet

(which was the basis of the bid), then the government would pay the difference to the

purchaser. Conversely if the closing date debt amount is less than the debt amount given in the

last balance sheet, the purchaser would pay the difference to the government.

All payments are normally settled within 45 days of the date of handing over the closing date

accounts by the auditors.

No provision of post-closing adjustment is made for listed companies.

3.4.2 Indemnification by the Government

The Government indemnifies the purchaser from any actual losses, liabilities, damages,

judgments, settlements and expenses arising out of any breach by the government of any

representations and warranties contained in the agreement.

For calculations of Purchase Losses in individual events, a figure (say Rs.1 lakh or Rs.10 lakh

in each incident) is agreed to, which is called De-Minimis Purchaser loss. All individual

amounts less than this De-Minimis figure are ignored in calculating the purchaser loss. This

mutually decided threshold is normally 3-4% of the total Purchase Price. If the losses are more

than this threshold level, and arise out of some breach or violation by the government, then the

purchaser is indemnified these losses by the government. A cumulative aggregate amount of

losses (called the Aggregate Liability threshold) is also decided. This total amount indemnified

by the government is limited to an agreed limiting percentage of the purchase price. Normally,

irrespective of the loss, the indemnified amount would be around 50-70% of the total purchase

price. All the claims of indemnity are to be preferred within the survival period (normally 24 or

36 months) after which they become time-barred. In certain cases, complete indemnity is

provided against environmental liability. However, these details vary from case to case, and

depend, inter alia, upon the nature of the company being disinvested.

3.4.3 Tax-liabilities

If there is any liability of sales tax, income tax or excise duty at closing time, which is

disputed, the company pays that under protest. If that dispute is resolved unfavourably against

the company, the government would indemnify that amount to the company, provided the

purchaser has informed the government within the stipulated period and provided that the

purchaser has not been compensated for this liability earlier.

3.4.4 Litigation

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If there are certain litigations, which are listed in the schedule of agreement, the government

may retain all or some liabilities in their respect, subject to the clauses of the agreement and

would make all efforts to resolve them. Also, subject to the conditions of agreement the

government would indemnify all or some liabilities arising out of these litigations to the

purchaser.

3.4.5 Environmental Liabilities

If there are any claims regarding environmental damages arising out of the acts of

commission/omission on the part of government during the period prior to disinvestment, and

the claim has been preferred during the survival period, then subject to the clauses of the

agreement, the government would indemnity the liabilities arising out of these claims to the

purchaser. It is advisable to have an environmental audit done prior to the disinvestment to

benchmark the extent of such liabilities. An environmental due diligence/audit was conducted

by an international agency prior to the strategic sale of Bharat Aluminium and Co. (BALCO)

and Hindustan Zinc Ltd. which facilitated their smooth sale and good price to the Government.

3.5 Monitoring

There shall be a Interdepartmental Disinvestment/ Privatization Monitoring Committee chaired

by the Industrial Development Commissioner for monitoring implementation of the process as

per the above decision of the Cabinet/ CCD. The Administrative Department shall responsible

for implementation of the process. The Monitoring Committee may for its assistance engage a

separate Escort Consultant/ Monitoring Consultant as provided in Part -I. of these guidelines or

which may use the original Lead Advisor for these purposes.

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CHAPTER -IV

VALUATION

In any sale process, the sale will materialise only when the seller is satisfied that the price

given by the buyer is not less than the value of the object being sold. Determination of that

threshold amount, which the seller considers adequate, therefore, is the first pre-requisite for

conducting any sale. This threshold amount is called the Reserve Price. Thus Reserve Price is

the threshold amount below which the seller generally perceives any offer or bid inadequate.

Reserve Price in case of sale of a company is determined by carrying out valuation of the

company. In companies that are listed on the Stock Exchanges, market price of the shares

serves as a good benchmark for assessing the fair value of the company, though the market

price is usually characterized with significant short-term variance due to investor sentiments

being influenced by short-term events and environmental aspects. More importantly, most of

the PSUs are either not listed on the Stock Exchanges or command extremely limited traded

float. They are, therefore, not correctly valued. Thus, deciding the worth of a PSU is indeed a

challenging task.

Valuation of a PSU is different from establishing the price for which it can be sold. While the

fair value of an asset is based on the assessment of intrinsic value accruing from fundamentals

on a stand-alone basis, varying return expectation and underlying strategic aspects for different

bidders could influence the price. A purchase and sale would be possible only when two parties

while forming different views as to the value of an asset, are eventually able to reach

agreement on the same price. It would be better appreciated by recognition of the fact that

Government can only realise what a buyer is willing to pay for the PSU, as the purchase price

ultimately agreed reflects its value to the buyer.

Another notable point is that valuation is a subjective figure arrived at by the bidder by

leveraging his strengths with the potential of the company. Depending on the level of business

synergy with the target company, perception of specific value realization and varying

assessment regarding productivity, capex, etc., this figure may vary from bidder to bidder.

The valuation of assets to be carried out by two independent, reputed valuers shall be done as

per Govt. of India guidelines placed at Annexure VII.

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CHAPTER - V

EMPLOYEES' ISSUES

A general fear among the employees at the time of disinvestment is that they may be

retrenched or their pay scales and services conditions may be adversely affected. Global

experience shows that if the privatised companies grow rapidly, labour restructuring may not

be required. A number of protections are available to the employees under various labour laws.

These labour laws are applicable to the company irrespective of whether it is in the Public

Sector or in the Private Sector. Besides this, employee protection is ensured by incorporating

suitable clauses in the Shareholders' Agreement.

5.1 Applicability of Industrial Disputes Act 1947

The provisions of Industrial Disputes Act, 1947 are applicable to the company even after

disinvestment. Under the Industrial Disputes Act, "Industrial establishment or undertaking" has

been defined under Section 2(Ka). The Section reads as follows:

2(Ka) "Industrial establishment or undertaking" means an establishment or undertaking in

which any industry is carried on:

Provided that where several activities are carried on in an establishment or undertaking and

only one or some of such activities is or are an industry or industries, then,

a) if any unit of such establishment or undertaking carrying on any activity, being an

industry, is severable from the other unit or units of such establishment or undertaking

such, unit shall be deemed to be a separate industrial establishment or undertaking;

b) if the predominant activity or each of the predominant activity carried on in such

establishment or undertaking or any unit thereof is an industry and the other activity or

each of the other activities carried on in such establishment or undertaking or unit

thereof is not severable from and is, for the purpose of carrying on, or aiding the

carrying on of, such predominant activity or activities, the entire establishment or

undertaking or, as the case may be, unit thereof shall be deemed to be an industrial

establishment or undertaking.

In view of the above definition the company will remain an industrial establishment even after

the disinvestment and all the provisions of Industrial Disputes Act will automatically apply to

the company. The trade unions may have an apprehension that workers of a PSU enjoy more

protection under the law of the land than those in the private sector. As a matter of fact, as long

as venture is "industrial establishment", the provisions of Industrial Disputes Act are applicable

to that venture, irrespective of it being in public sector or private sector.

5.2 Provisions governing service conditions

The companies normally have "Certified Standing Orders" for their workmen. The Standing

Orders have been certified under the Industrial Employment (Standing Orders) Act, 1946. The

service conditions of the workmen of the company are normally governed by the said

"Certified Standing Orders". If, after disinvestment, the prospective buyer proposes to make

any change in the service conditions applicable to the workmen, he has to give a notice in the

prescribed manner under Section 9-A of the Industrial Disputes Act which reads as follow:

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SECTION 9-A

NOTICE OF CHANGE

No employer, who proposes to affect any change in the conditions of service applicable to any

workman in respect of any matter specified in the Fourth Schedule, shall affect such change-

(a) without giving to the workmen likely to be affected by such change a notice

in the prescribed manner of the nature of change proposed to be affected; or

(b) within twenty-one days of giving such notice

Provided that no notice shall be required for affecting any such change-

(a) where the change is affected in pursuance of any settlement or award; or

(b) where the workmen likely to be affected by the change are persons to whom the

Fundamental and supplementary Rules, Civil Services (Classification, Control and

Appeal) Rules, Civil Service (Temporary Service) Rules, Revised Leave Rules, Civil

Service Regulations, Civilians in Defence Services (Classification, Control and

Appeal) Rules, or the Indian Railway Establishment Code or any other rules or

regulations that may be notified in this behalf by the appropriate Government in the

official Gazette, apply.

The Fourth Schedule as mentioned in the above definition is being reproduced below: -

THE FOURTH SCHEDULE (See Section 9-A)

Condition Of Service For Change Of Which Notice Is Given

1. Wages, including the period and mode of payment;

2. Contribution paid, or payable, by the employer to any provident fund or pension fund or

for the benefit of the workmen under any law for the time being in force;

3. Compensatory and other allowance;

4. Hours of work and rest intervals;

5. Leave with wages and holidays;

6. Starting, alteration or discontinuance of shift working otherwise than in accordance with

standing orders;

7. Classification by grades;

8. Withdrawal of any customary concession or privilege or change in usage;

9. Introduction of new rules of discipline, or alteration in existing rules, except in so far as

they are provided in standing orders;

10. Rationalisation, standardisation or improvement of plant or technique, which is likely to

lead to retrenchment of workmen;

11. Any increase or reduction (other than casual) in the number of persons employed or to be

employed in any occupation or processes or department of shift (not occasioned by

circumstances over which the employer has no control).

Thus under the provisions of Industrial Disputes Act, 1947, read with the provisions of

Industrial Employment (Standing Orders) Act, 1946, any change in the service conditions of

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the workmen will be governed by the provisions of the law of the land as applicable in the

company prior to the disinvestment. This is not to say that Certified Standing Orders cannot be

changed even prior to the disinvestment by the company management. But as law prescribes, a

notice has to be given by the management to the workmen which does not necessarily mean

that just by giving a notice, service conditions may be changed in a manner detrimental to the

interest of the workers. If the workers find that notice envisages change in working conditions

detrimental to their interests, they can immediately raise an "Industrial Dispute" before the

Appropriate Authorities defined under the Act. The "Industrial Dispute" has been defined

under Section 2K of the Industrial Disputes Act, which reads as follows:

"Industrial Dispute" means any dispute or difference between employers and employees, or

between employers and workmen, or between workmen and workmen, which is connected

with the employment or non-employment or the terms of employment or with the conditions of

labour of any person;"

Chapter II of the Industrial Disputes Act deals with Authorities under the Act and subsequent

chapters lay down procedures etc. with regard to the redressal of Industrial Disputes. Hence,

under the existing provisions of Industrial Disputes Act, 1947, the interests of the workmen

will remain protected as much as these are protected now under the present dispensation.

In an organised sector, the issues of job security, wage structure, perks, welfare facilities, etc.

of the workers are governed by bipartite/tripartite agreements. These agreements are in the

nature of "settlement" as defined under Section 2p and as protected under various provisions of

the Act. Even after the disinvestment, the company management will be required to enter into

bipartite/tripartite agreements with the workmen through Unions, and the terms and conditions

in the agreement would be always governed by the practices and procedures applicable under

collective bargaining. It is a fact that any agreement between two or more parties is based on

the principles of mutual consent. Hence, the consent of the management to better service

conditions, etc. would certainly depend on the achievement of the productivity and production

targets by the workers from time to time.

5.3 Protection against arbitrary closure of an undertaking

Regarding protection against arbitrary closure of any establishment of the Company, it is to be

noted that the "Closure" of an Industrial Establishment is governed by Section 25(O) of the

Industrial Dispute Act. Section 25(O) reads as follows:

1. An employer who intends to close down an undertaking of an industrial establishment to

which this chapter applies shall, in the prescribed manner, apply, for prior permission at least

ninety days before the date on which the intended closure is to become effective, to the

appropriate Government, stating clearly the reasons for the intended closure of the undertaking

and a copy of such application shall also be served simultaneously on the representatives of the

workmen in the prescribed manner:

provided that nothing in this sub-section shall apply to an undertaking set up for the

construction of buildings, bridges, roads, canals, dams or for other construction work.

2. Where an application for permission has been made under sub-section (1), the appropriate

Government, after making such enquiry as it thinks fit and after giving a reasonable

opportunity of being heard, to the employer, the workmen and the person interested in

such closure may, having regard to the genuineness and adequacy of the reasons stated by

the employer, the interests of the general public and all other relevant factors, by order and

for reasons to be recorded in writing, grant or refuse to grant such permission and a copy

of such other order shall be communicated to the employer and the workmen.

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3. Where an application has been made under sub-section (1) and the appropriate

Government does not communicate the order granting or refusing to grant permission

to the employer within a period of sixty days from the date on which such application is

made, the permission applied for, shall be deemed to have been granted on the expiration

of the said period of sixty days.

4. An order of the appropriate Government granting or refusing to grant permission shall,

subject to the provision of sub-section (5), be final and binding on all the parties and shall

remain in force for one year from the date of such order.

5. The appropriate Government may, either on its own motion or on the application made by

the employer, or any workman, review its order granting or refusing to grant permission

under sub-section (2) or refer the matter to a Tribunal for adjudication: Provided that

where a reference has been made to a Tribunal under this sub-section, it shall pass an

award within a period of thirty days from the date of such reference.

6. Where no application for permission under sub-section(1) is made within a period

specified therein, or where the permission for closure has been refused, the closure of the

undertaking shall be deemed to be illegal from the date of closure and the workmen shall

be entitled to all the benefits under any law for the time being in force as if the

undertaking had not been closed down.

7. Notwithstanding anything contained in the foregoing provisions of this section, the

appropriate Government may, if it is satisfied that owing to such exceptional circumstances as

accident in the undertaking or death of the employer or the like, it is necessary so to do, by

order, direct that the provisions of sub-section (1) shall not apply in relation to such

undertaking for such period as may be specified in the order.

8. Where an undertaking is permitted to be closed down under sub section(2) or where

permission for closure is deemed to be granted under sub-section(3) every workman who is

employed in that undertaking immediately before the date of application for permission under

this section, shall be entitled to receive compensation which shall be equivalent to fifteen days'

average pay for every completed year of continuous service or any part thereof in excess of six

months.

From the above definition it is clear that the company management before or after

disinvestment is not free to close down any part of the company at their sweet will. The closure

is governed by the law of land and as far as the existing provisions of Industrial Disputes Act

are concerned, "genuineness and adequacy of the reasons stated by the employer" and "the

interests of the general public and all other relevant factors", have to be examined by the

appropriate Government and for doing that the Government has to give a reasonable

opportunity of hearing to the employer and workmen and the persons interested in such

closure. It means that unless and until the appropriate Government grants permission, the

company management will not be competent to close down any undertaking of the company

even after disinvestment. So there are protections available under the Act against arbitrary

closure of any undertaking of the company after disinvestment.

At times, some trade unions demand assurances regarding peripheral development after the

disinvestment of the company, which are being enjoyed by the villages adjoining the plant.

Contract labourers also demand regularisation of their jobs before the disinvestment. Under the

law, no employer can be forced to make investment in the peripheral development. However,

as a prudent management practice, bigger companies invest substantially in the development of

the areas around them. It is expected that the successor management will consider this issue

favourably. So far the regularisation of contract labour is concerned, PSU or no PSU, an

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industrial undertaking in this regard is governed by the provisions of Contract Labour

(Regulation and Prohibition) Act, 1970 and Rules made thereunder. Hence, the contract labour

and unions representing their interest may take recourse to the said Act and Rules after

disinvestment and may pursue the matter in furtherance of their demands.

5.4 Functional Directors

Regarding functional Directors, it is required that they resign along with the complete Board

as per requirements of Closing of the transaction of Strategic Sale. These whole-time Directors

may, however be renominated by the Strategic Partner and such provisions are made in the

Share Purchase Agreement. However, if any whole-time director(s), whose resignation is

accepted at the Closing Board Meeting, is not nominated to the Board by the Purchaser or is

not re-employed by the Company on terms and conditions mutually acceptable to the Purchaser

and such whole time director(s), which are no less favourable than the terms and conditions of

employment of such whole time director(s) before the closing date, then such whole-time

director(s) shall be entitled to compensation from the company that is the equivalent to

amounts that are the higher of:

(i) remuneration for the balance period remaining of their term of employment under their

respective employment contract(s) with the Company; or

(ii) remuneration as provided under their respective employment contract(s) for a period of six

months.

In any case, functional Directors are contractual appointees and after termination of the

contract, they are entitled to terminal benefits, leave encashment, gratuity etc. as per the rules

of the company.

5.5 Provisions in the Shareholders' Agreement

Protection of Employees interest forms an integral part of the disinvestment Process. The

Government is committed to protect the interests of all the workers, including those belonging

to the Scheduled Castes and Scheduled Tribes. Transaction Agreements entered into by the

Government with the Strategic Partner (SP), at the time of strategic sale, state that the SP

recognizes that the Government follows certain employment principles for the benefit of the

members of the Scheduled Caste/Scheduled Tribes, physically handicapped persons and other

socially disadvantaged sections of the society and that the strategic partner shall use its best

efforts to cause the Company to provide adequate job opportunities for such persons. Further,

in the event of any reduction in the strength of the employees of the Company, the SP shall use

its best efforts to ensure that the physically handicapped persons, Scheduled Castes / Scheduled

Tribes are retrenched at the end. A specimen copy of the typical provisions related to

employees’ interest incorporated in the Shareholders Agreement is given below:

Recitals:

• Subject to the substantives clauses in this regard, the Parties envision that all Employees of

the Company on the date hereof will continue in the employment of the Company.

• The SP recognises that the government in relation to its employment policies follows

certain principles for the benefit of the members of the Scheduled Caste / Scheduled

Tribes, physically handicapped persons and other socially disadvantages categories of

society. The SP shall use its best efforts to cause the Company to provide adequate job

opportunities for such persons. Further, in the event of any reduction in the strength of the

employees of the Company, the SP shall use its best efforts to ensure that the physically

handicapped persons, Scheduled Castes/Scheduled Tribes are retrenched at the end.

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Substantive Clauses:

• Notwithstanding anything to the contrary in this Article __, the Government, shall at any

time and at its sole discretion, have the option of selling shares from its shareholding in the

company, representing not more than __ of the share capital of the company existing as of

date of this Agreement, to the employees of the Company (“employees sell share”). In the

event that the Government exercises its option to sell part of its shares to the employees,

the employees shall be issued fresh share certificates for the shares transferred to the

employees. The Shareholders agree that, upon the completion of transfer, the shares

transferred to the employees pursuant to this sub-clause shall not be subject to any

restrictions in this Agreement, whether by way of a voting arrangement or a right of first

refusal.

• The SP covenants with the Government that

(a) notwithstanding anything to the contrary in this Agreement, it shall not retrench

any of the Employees of the Company for a period of 1 (one) year from the

Closing Date other than any dismissal or termination of Employees of the

Company from their employment in accordance with the applicable staff

regulations and standing orders of the Company or applicable Laws;

(b) notwithstanding anything to the contrary in this Agreement, but subject to Sub-

Clause (a) above, any restructuring of the labour force of the Company shall be

implemented in the manner recommended by the Board and in accordance with all

applicable Laws;

(c) notwithstanding anything to the contrary in this Agreement, but subject to Sub-

Clause (a) above, in the event of any reduction of the strength of the Company’s

Employees, the SP shall ensure that the Company offers its Employees an option to

voluntarily retire on terms that are not, in any manner, less favourable than the

VRS applicable before disinvestment.

5.6 Labour Related Issues In PSUs Under Disinvestment:

A Cell will be created either in the Department of concerned PSU or in Department of

Infrastructure Development and Disinvestment to look into labour related issues and will act as

a focal point for the Public Sector Undertakings slated for disinvestment. Minister and the

Secretary of MODI meet the representatives of the workers’ Unions of the PSUs where

disinvestment process is underway and explain the policy of the Government in this regard and

solicit their cooperation, whenever needed. Similarly, the administrative Ministries and the

management of the companies discuss labour-related issues with the trade-union

representatives and other leaders to clarify the Government’s position and allay misgivings, if

any.

Films have also been made by Ministry of Disinvestment and certain States, which depict

how labour has fared post-disinvestment. They have encouraging experiences to share.

However, employees of some companies which have not been privatised but have fallen on bad

days, can be seen to be lamenting at the idle state of their once very well managed and profit

making company. As a consequence, these employees also have to bear uncertainties like non-

payment of wages for months together, doubts on continuation of employment etc. The

employees in these companies feel that if they had been privatised before their company came

to this state, they would also have had better pay packets and working conditions that they see

in privatised companies.

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List of Annexure

1.

2.

3.

4.

5.

6.

7.

8.

Agreement for Advisory Services

Guidelines for Advisors and Bidders

Expression of Interest

Statement of legal capacity

Request for Qualification

Qualification for Bidders

Valuation Methodologies

Salient Points about Disinvestment

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Annexure-I

Agreement For Advisory Services

THIS AGREEMENT is made (on this day of ____________, 2002) BY AND BETWEEN

THE HON'BLE GOVERNOR OF UTTAR PRADESH acting through the Secretary,

Administrative Department of PSU concerned, Government of Uttar Pradesh (hereinafter

referred to as “GoUP”, which expression shall mean and include its successors and assigns) of

the ONE PART and (ADVISOR NAME--------------------), a company incorporated under the

Companies Act, 1956 and registered as a Category I Merchant Banker with the Securities and

Exchange Board of India, having its registered office at (ADDRESS OF ADVISOR-------------

-------------------) (hereinafter referred to as “(ADVISOR NAME)” which expression shall

mean and include its successors and permitted assigns and liquidators) acting through Shri -----

-----------, Director & Head of Corporate Finance & Advisory and Shri ---------, Associate

Director duly appointed and authorised on its behalf of the OTHER PART.

WHEREAS

A) (CO. NAME-----------------) (hereinafter referred to as “(CO. NAME)” or the

“Company”) is a public sector company, controlled by the Government of India and is

predominantly a (NATURE AND DESCRIPTION OF BUSINESS-----------------------------

-------------------);

B) Government of Uttar Pradesh wishes to identify and conclude a contract with an

appropriate strategic partner (hereinafter referred to as “Strategic Partner”) involving

disinvestment of ------% (out of -----%) of the paid-up equity of (CO. NAME) held by

GoUP at the best possible price;

C) (ADVISOR NAME) submitted an Expression of Interest dated -----------------------------to

Director (Finance) (CO. NAME---------------------place) in accordance with the instructions

as contained in the advertisement dated ----------------------------------------issued by the

Government of Uttar Pradesh

D) Further to the Expression of Interest, (ADVISOR NAME) made presentations to the Inter

Ministerial Group (hereinafter referred to as “IMG”) constituted by the Government of

Uttar Pradesh to appoint the advisor and submitted a fee bid by letter dated ------------------

------------------ addressed to the Director (Finance), (CO. NAME) Co. Limited proposing a

fee structure for (ADVISOR NAME) to act as advisor;

E) Pursuant to the fee bid made by (ADVISOR NAME) and other investment bankers, the

GoUP appointed (ADVISOR NAME) as advisor in relation to the Transaction (as defined

in Recital F below) and communicated its decision to (ADVISOR NAME) by letter dated -

----------------------------------------- as issued by the Ministry of Disinvestment and the

Parties are desirous of recording the detailed terms of the appointment of (ADVISOR

NAME) as advisor.

F) It is considered appropriate and desirable by the Parties hereto to formalise the terms on

which (ADVISOR NAME) has been engaged as the exclusive advisor (the

“Engagement”) in relation to the proposed sale by the Hon'ble Governor, Uttar Pradesh,

acting through Secretary, Administrative Department of PSU concerned, Government of

Uttar Pradesh, of -------% shareholding along with management control (the “Stake”) to a

Strategic Partner in (CO. NAME) Co. Limited (the “Transaction”).

112

NOW, THEREFORE, IN CONSIDERATION OF THE PREMISES AFORESAID, THE

PARTIES HEREBY AGREE AS FOLLOWS:

1. Role of (ADVISOR NAME)

(ADVISOR NAME) shall, in accordance with all applicable laws, provide the following

financial advice and assistance together with any additional assistance agreed in writing

between (ADVISOR NAME) and the GoUP:

A To carry out the valuation and assist in the sale of ------% shareholding of the GoUP

in (CO. NAME);

B. (i) To carry out the valuation of (SUBSIDIARIES , IF ANY);

(ii) To advise on the modalities for transfer of (CO. NAME)’s stake in

(SUBSIDIARIES , IF ANY);

For the avoidance of doubt, the duties and responsibilities of (ADVISOR NAME)

shall not include other than as set out above. In particular, (ADVISOR NAME) is

not responsible for:

a) Giving tax, legal, regulatory, accountancy or other specialist or technical advice or

services; or

b) Giving general financial or other advice that is not related to the Transaction; or

c) Valuation of assets and other intangibles of the Company

The valuation advice which (ADVISOR NAME) provides will be given on the understanding

that unless otherwise expressly agreed in writing, (ADVISOR NAME) shall not be responsible

for the accounting or other data and commercial assumptions on which such a valuation is

based, the assessment and evaluation of which shall remain the Company’s responsibility.

In this Agreement, where any obligation is imposed on the Company, the GoUP agrees that it

will ensure the Company complies with such obligation.

2. Fees and Expenses

The GoUP has agreed with (ADVISOR NAME) the following fee(s);

i. Success Fee

If the Transaction is completed, a fee inclusive of all applicable taxes (the “Success Fee”),

equal to ----- percentage of the total amount of the Consideration that is paid or is payable by

the Strategic Partner to acquire the Stake from the GoUP in connection with the Transaction,

whether by way of cash, equity, debt or in kind or by way of any waiver, release or assignment

of any rights or obligations (the “Consideration”). The Success Fee will be payable 15 days

from the date of full payment by the Strategic Partner (the “Closing Date”).

ii. If, for any reason, GoUP decides to terminate this Agreement and the Engagement in

accordance with clause 5 prior to completion of the Transaction or in case the GoUP

decides not to go ahead with the Transaction for any reason whatsoever, then (ADVISOR

113

NAME) will be paid a drop-dead fee (“Drop Dead Fee”) of Rs -------------- (Rupees -------

-------only).

iii. For the purposes of calculating the Success Fee, the Consideration will be translated, if

necessary, into Indian Rupees at the State Bank of India’s buying spot rate at the close of

business on the day prior to the Closing Date.

iv. No payments, other than those made by the GoUP for and on behalf of (ADVISOR

NAME) in pursuance of orders / judgement of a court, to third parties other than persons

belonging to (ADVISOR NAME), shall be reduced from amounts owed by the GoUP to

(ADVISOR NAME) pursuant to this Agreement.

v. The GoUP will be responsible for its own legal fees and the costs of accountants

(including the cost of audit and accounting reports) and other advisors, including technical

advisors. (ADVISOR NAME) will be responsible for its own travel and all other out-of-

pocket expenses in connection with the Engagement.

vi. All fees and payments to (ADVISOR NAME) shall be subject to deductions as per

applicable laws of India.

3. Compliance

The GoUP will comply with all applicable legal and regulatory provisions (including Stock

Exchange requirements).

4. Information and Announcements

i. The State Govt. will:

a) provide (ADVISOR NAME) and its advisors with such access to the directors and

management of, and the auditors and advisors to the Company and its subsidiaries, if

any, for the purpose of the Transaction/Engagement as (ADVISOR NAME) may

reasonably require; and

b) provide (ADVISOR NAME) with, and/or give access to, all information which is

relevant for the purposes of the Transaction/Engagement and will ensure that, in so

doing, GoUP will not breach any confidentiality obligation and that the information so

supplied is and remains complete, true and accurate in all material respects and not

misleading, whether by omission or otherwise. The GoUP will immediately notify

(ADVISOR NAME) if it subsequently discovers that any information provided by it is

incomplete, untrue, inaccurate or misleading.

ii. The GoUP will ensure that all announcements and documents published or statements

made by the GoUP/Company or on their behalf in the course of, and relevant to, the

Transaction/Engagement will only be made or published after consultation with (ADVISOR

NAME) and will be true and accurate and not misleading and, where appropriate, will contain

all information necessary for legal or regulatory purposes (including the Stock Exchange

requirements).

iii. The GoUP undertakes that it will at all times keep (ADVISOR NAME) fully informed

of all strategies, developments and discussions relevant to the Transaction and that no

initiatives relevant to the Transaction/Engagement will be taken without prior consultation with

(ADVISOR NAME).

114

iv. (ADVISOR NAME) represents many other companies, individuals, and other entities. At

present, there is no conflict of interest resulting from the (ADVISOR NAME)’s representation

of GoUP for the disinvestment of (CO. NAME) and (ADVISOR NAME)’s representation of its

other clients. It is possible, however, that during (ADVISOR NAME)’s representation of

GoUP in connection with the disinvestment of (CO. NAME), some of (ADVISOR NAME)’s

present or future clients may have disputes or transactions with GoUP/(CO. NAME). GoUP

agrees that (ADVISOR NAME) may represent those clients (present or future) in any matter

that is not directly related to (ADVISOR NAME)’s work for GoUP described here.

(ADVISOR NAME) agrees however, that GoUP’s prospective consent to the above shall not

apply in any instance where, as a result of (ADVISOR NAME)’s representation of GoUP for

the (CO. NAME) disinvestment, (ADVISOR NAME) has obtained any proprietary or

confidential information that, if known to such other client, could be used in any such matter

by such client to GoUP’s material disadvantage. It needs to be understood that, in similar

engagement letters with many of their clients, (ADVISOR NAME) is requesting similar

agreements to preserve the ability of (ADVISOR NAME) to represent other enterprises that are

or become clients of (ADVISOR NAME) in comparable situations.

v. (ADVISOR NAME) and each of its directors, officers, employees and agents will

ensure that all information, whether written or oral, acquired from the GoUP or (CO. NAME)

and their respective agents and advisors in connection with the Transaction is kept strictly

confidential and used solely and exclusively for the purposes expressly specified in this

Agreement. This obligation of confidentiality shall not apply to any information already in the

public domain at the time of disclosure other than as a result of breach of this clause by

(ADVISOR NAME) or which (ADVISOR NAME), is required to disclose by law, regulation

or court order, provided that before making such disclosure (ADVISOR NAME) will, to the

extent permitted by law, in writing advise GoUP and consult with GoUP about any information

that (ADVISOR NAME) proposes to disclose pursuant to this exception.

vi. Advice (including any opinion or report) whether written or oral by (ADVISOR NAME)

to the GoUP /Company, or any communications between (ADVISOR NAME) and the

GoUP/Company in connection with the Transaction may only be used and relied upon by the

GoUP and may not be used or relied upon by any third party and may not be disclosed to any

third party without the prior written approval of (ADVISOR NAME).

5. Termination

This Agreement and the Engagement may be terminated with or without cause by the GoUP

or by (ADVISOR NAME) by written notice at any time and without continuing obligation.

(i) In case the GoUP terminates the Agreement and the Engagement without cause the

following shall survive any termination and remain in full force and effect:

a) Success Fee provision (Clause 2 (i) – for Success Fee earned by (ADVISOR

NAME) but not yet paid by the GoUP as at the date of termination (if at the date

of the termination, the Transaction has already been completed);

b) Drop Dead Fee provision (Clause 2 (ii), if at the date of the termination, the

Transaction has not yet been completed); and

c) The conflicts of interest and indemnity provisions of this Agreement.

(ii) In case the GoUP terminates the Agreement and the Engagement with cause the

following shall survive any termination and remain in full force and effect:

115

a) The conflicts of interest and indemnity provisions of this Agreement

(iii) Notwithstanding the foregoing, it is hereby clarified that if:

a) any order is made by any competent court or any resolution is passed for the

dissolution or winding-up of (ADVISOR NAME) or for the appointment of a

liquidator, receiver, administrator or manager of (ADVISOR NAME) or all or a

substantial part of its assets or anything analogous occurs in any other jurisdiction

to (ADVISOR NAME), other than in connection with a solvent reorganisation,

reconstruction, amalgamation or merger which does not adversely affect the

interest of (CO. NAME) or GoUP; or

b) (ADVISOR NAME) is found guilty of any criminal offence in any jurisdiction

that materially adversely affects its ability to carry out the Engagement; or

c) (ADVISOR NAME) fails to comply with any final decision reached as a result of

arbitration proceedings pursuant to para (b) and Schedule II of this agreement; or

d) (ADVISOR NAME) is in breach of its obligation under this agreement and has

not remedied the same within 30 days (or such longer period as the other party

may have subsequently approved in writing) following the receipt by (ADVISOR

NAME) of a notice from GoUP specifying the breach; or

e) In the event of a conflict of interest during the engagement that materially

adversely affects the ability of (ADVISOR NAME) to carry out the engagement

and not remedied within 15 days of arising due to handling of the transaction by

(ADVISOR NAME) as Advisor to the GoUP for disinvestment in (CO. NAME)

the GoUP shall have the right to immediately terminate this Agreement and such

termination shall be deemed to be a termination for cause.

6. Conflicts of Interest

(ADVISOR NAME) Group is involved in a wide range of commercial banking,

investment banking and other activities (including investment management, corporate

finance, securities trading, research and private equity) out of which conflicting interests or

duties may arise. GoUP acknowledges and accepts that (ADVISOR NAME) Group (other

than (ADVISOR NAME)) may have interests or duties which conflict with GoUP’s

interests and which would or might otherwise conflict with the duties owed by (ADVISOR

NAME) to GoUP. GoUP further accepts that any other entity in the (ADVISOR NAME)

Group or any other division of (ADVISOR NAME) will not restrict its activities in any

way nor have any obligation to advice GoUP of any conflict of interest, which exists or

may arise. In relation to the Engagement, information which is held elsewhere within

(ADVISOR NAME)/ (ADVISOR NAME) Group but of which none of the individual

executives in the Corporate Finance & Advisory division of (ADVISOR NAME) having

the conduct of the Engagement could reasonably have access to shall not for any purpose

be taken into account in determining (ADVISOR NAME)’s responsibilities to the GoUP

or the Company and such responsibilities shall be entirely determined by the regulatory

rules and principles and the contractual terms applicable to the Engagement.

(ADVISOR NAME)/(ADVISOR NAME) Group shall not have any duty to disclose to

the GoUP /Company or utilise for the GoUP /Company’s benefit any non-public

information acquired in the course of carrying on any business for, or in connection with

the provision of services to any other person.

116

7. Indemnity

The indemnity provision in connection with this Engagement are set out in the attached

Schedule I (the “Indemnity”) and forms a part of this Agreement

8. Disqualification

If subsequent event(s) makes (ADVISOR NAME) liable for disqualification from

engagement, then a notice of 15 days may be given by GoUP to (ADVISOR NAME) to

cure the disqualification and/or eliminate the conflicts of interest and if after the expiry of

15 days notice, the said disqualification is not cured, then GoUP may, at its option,

terminate this Agreement with cost if (ADVISOR NAME) fails to withdraw from the

transaction.

9. Severability

Each provision of this Agreement and the Indemnity is severable and, if any provision is or

becomes invalid or unenforceable or contravenes any applicable regulations or law, the

remaining provisions will not be affected.

10. Amendments and Modifications

This Agreement constitutes the entire understanding between both parties relating to the

Transaction and it shall not be amended or modified except as agreed in writing by both

the GoUP and (ADVISOR NAME).

11. Notice

Any notice or other communication required to be given pursuant to this Agreement shall

be in writing and shall be sufficiently given or served if delivered by hand or by courier

with acknowledgement or faxed at the numbers given below or sent by registered post to

the respective persons at the addresses given below:

Director & Head of Corporate Finance & Advisory

(ADVISOR NAME) ------------------------------------

Secretary

Department of _____________(Administrative Department of Concerned PSU)

Sachivalaya,

Lucknow.

12. Dispute Resolution

Any controversy or dispute which arises between the parties to this Agreement concerning

its construction or application, or the rights, duties or obligations of any party hereunder

shall be referred to arbitration subject to procedures set out in Schedule II attached hereto

which forms integral part of this engagement Agreement.

117

13. Governing Law

This Agreement shall be governed by and construed in accordance with the laws of the

Republic of India. Neither the GoUP nor (ADVISOR NAME) shall have the right to

transfer or assign their responsibilities resulting from the acceptance of this Agreement.

IN WITNESS WHEREOF THE PARTIES HAVE EXECUTED AND DELIVERED

THIS AGREEMENT AS OF THE DAY AND YEAR FIRST ABOVE WRITTEN

For and on behalf of the Governor of Uttar Pradesh

by the Secretary- Administrative Department of concerned PSU

Witnesses:

(___________________) 1

2.

For and on behalf of

(ADVISOR NAME) Witnesses:

1.

(--------------------------------------------- 2.

Director & Head of Corporate Finance & Advisory

1.

(----------------------) 2.

Associate Director

118

Schedule I: INDEMINITY

1. GoUP hereby agrees to indemnify and hold harmless each of the Indemnified Persons as

defined below from and against any and all expenses (including the fees and expenses of

its counsel), losses, claims, actions, suits, damages, of liabilities, joint or several (including

the aggregate amount paid in settlement of any action, suit proceeding or claim that may

be made against any Indemnified Person) that any Indemnified person suffers or incurs

which are determined by a judgement of a court or an arbitration of competent jurisdiction

to have resulted from any dishonest, illegal or fraudulent act or the wilful default or

negligence on the part of any GoUP indemnified Party as defined below. Subject to the

foregoing, the (ADVISOR NAME) agrees that no GoUP Indemnified party shall have any

liability whatsoever (Whether in contract, tort, otherwise) to the (ADVISOR NAME) for

or in connection with things done or omitted to be done pursuant to the Engagement.

2.

(a) Each of (ADVISOR NAME) and the Indemnified Persons agree that promptly after

receiving a notice of an action, suit, proceeding or claim against any of the Indemnified

Person or receipt of a notice of the commencement of any investigation which is based,

directly or indirectly, upon any matter in respect of which indemnification may be sought

from the GoUP, (ADVISOR NAME) or Indemnified Party will notify the GoUP in

writing of the particulars thereof and, will provide copies of all relevant documentation of

the GoUP and, unless the GoUP assumes the defence thereof, will keep the GoUP

informed of the progress thereof and will discuss all significant actions proposed. The

omission so to notify the GoUP shall not relieve the GoUP of any liability which the

GoUP may have to (ADVISOR NAME) or any Indemnified Person except only to the

extent that any such delay in or failure to give notice as herein required prejudices the

defence of such action, suit, proceeding, have under this indemnity had (ADVISOR

NAME) or any other Indemnified Persons not so delayed in or failed to give the notice

required hereunder.

(b) the GoUP shall be entitled, at its own expense, to participate in and, to the extent it may

wish to do so, assume the defence of such action, suit, proceeding, claim or investigation,

provided such defence is conducted by experienced and competent counsel. Upon the

GoUP notifying (ADVISOR NAME) or any Indemnified Person in writing of its election

to assume the defence and retaining counsel, the GoUP shall not be liable to (ADVISOR

NAME) or any other Indemnified Person for any legal expenses subsequently incurred by

them in connection with such defence. If such defence is assumed by the GoUP, the

GoUP throughout the course of thereof will provide copies of all relevant documentation

to (ADVISOR NAME), will keep (ADVISOR NAME) advised of the progress thereof and

will discuss with (ADVISOR NAME) all significant actions proposed.

(c ) No Indemnified Person shall admit any liability or settle any action, writ proceeding,

claim or investigation without the prior written consent of the GoUP, which shall not be

unreasonably withheld. The GoUP will not be liable for any settlement of any action, suit,

proceeding, claim or investigation that any Indemnified Person makes without the written

consent of the GoUP.

(d) The GoUP’s right to assume the defence set out above shall be subject to the following

conditions:

i No admission of liability or compromise whatsoever in connection with the claim or action

may take place without (ADVISOR NAME)’s prior written consent; which shall not be

unreasonably withheld.

119

ii Notwithstanding the foregoing, the Indemnified Person shall have the right to employ its

or their own counsel in any such case, but the fees and expenses of such counsel shall

be at the expense of such Indemnified person unless (a) the employment of such counsel

shall have been authorised in writing by the GoUP in connection with the defence of such

action, and (b) the GoUP have not employed counsel to take charge of the defence of

such action, within a reasonable time after notice of commencement of the action.

3. (ADVISOR NAME) hereby assumes full and absolute responsibility for each and every

act or omission of all its directors, officers, employees and agents. Subject to the foregoing

and without prejudice to any claim the GoUP may have against (ADVISOR NAME), no

proceedings may be taken against any director, officer, employee or agent of (ADVISOR

NAME) in respect of any claim the GoUP may have against (ADVISOR NAME).

3. (ADVISOR NAME) hereby agrees to indemnify and hold harmless each of the Company,

the GoUP, their directors, officers and employees (collectively the “GoUP Indemnified

Parties”) and (individually, a “GoUP Indemnified Party”) from and against any and all

expenses (including the fees and expenses of its counsel), losses, claims, actions, suits,

damages, or liabilities, joint or several (including the aggregate amount paid in settlement

of any action, suit, proceeding or claim that may be made against any GoUP Indemnified

Party) that any GoUP Indemnified Party suffers or incurs which are determined by a

judgement of a court or an arbitration of competent jurisdiction to have resulted from any

dishonest, illegal or fraudulent act or the wilful default or negligence on the part of any

Indemnified Person. Subject to the foregoing, the GoUP agrees that no Indemnified Person

shall have any liability whatsoever (whether in contract, tort, or otherwise) to the GoUP

for or in connection with things done or omitted to be done pursuant to the Engagement.

5. The GoUP will notify (ADVISOR NAME) if the GoUP becomes aware of any claim,

which may give rise to a liability pursuant to this indemnity.

6. “Indemnified Persons” means (ADVISOR NAME) and all directors, officers, employees

of (ADVISOR NAME).

120

Schedule II

a) Dispute Resolution

Any and all claims, disputes, questions or controversies involving the parties or any two or

more of them and arising out of or in connection with this Agreement or the execution,

interpretation, validity, performance, breach or termination hereof (including, without

limitation, the provisions of this Schedule (collectively, hereinafter referred to as “ Disputes”)

which cannot be finally resolved by such parties within sixty (60) calendar days of the arising

of a Dispute by amicable negotiation and conciliation shall first be submitted for settlement by

informal arbitration to an arbitral panel consisting of one nominee of each of such party as

applicable. If any such panel, negotiating in good faith is unable to resolve and settle the

Dispute within sixty (60) calendar days after the Dispute is first submitted to it, then any party

shall be entitled to cause the Dispute to be submitted for arbitration pursuant to the terms of

paragraph (b) hereof.

(b) Arbitration

Any dispute which is not settled after an attempt by the parties to the Dispute at amicable

negotiations and conciliation under paragraph (a) hereof, shall be finally resolved by final and

binding arbitration under the provisions of the Arbitration and Conciliation Act, 1996 as

modified from time to time and rules framed thereunder, the arbitration rules of Indian Council

of Arbitration and by three arbitrators appointed in accordance with the said rules. The

Arbitration shall be held in Lucknow and all arbitration proceedings shall be conducted in

English.

In connection with the arbitration proceedings, the parties to the Dispute hereby agree to co

operate in good faith with each other and the arbitral tribunal and to use their respective best

efforts to respond promptly to any reasonable discovery demand made by such party and the

arbitral tribunal.

Except as otherwise required by law or any applicable stock exchange rules and regulations,

the arbitral proceedings and the arbitral award ( the “Award”) shall not be made public without

the joint consent of the parties to the Dispute and, if not a party, (ADVISOR NAME) and each

such party shall maintain the confidentiality of such proceedings or the Award, unless

otherwise permitted by other such party in writing . The costs of the arbitration shall be borne

by the parties to the Dispute in accordance with the provisions of the Arbitration and

Conciliation Act 1996 as modified from time to time and rules framed there under and

applicable provisions of the arbitration rules of Indian Council of Arbitration. The Award may

include interest from the date of any breach or other violation of this Agreement and rate of

such interest, if any, shall be specified by the arbitral tribunal and shall be calculated from the

date of any such breach or other violation to the date when the Award is paid in full.

Each of the parties expressly understands and agrees that the Award shall be the sole,

exclusive, final and binding remedy between them regarding any and all Disputes presented to

the arbitral tribunal. Application shall be made to any court with jurisdiction over the party ( or

its assets) against whom the Award is rendered for a judicial acceptance of the Award and an

order of enforcement.

121

Annexure-II

Guidelines for Advisors and Bidders

No. 6/4/2001-DD-II

Government of India

Ministry of Disinvestment

Block 14, CGO Complex

New Delhi.

Dated 13th July, 2001.

OFFICE MEMORANDUM

Sub: Guidelines for qualification of Advisors and Bidders seeking to acquire stakes in

Public Sector Enterprises through the process of disinvestment

Government has examined the issue of framing comprehensive and transparent guidelines

defining the criteria for bidders interested in PSE-disinvestment so that the parties selected

through competitive bidding could inspire public confidence. Earlier, criteria like net worth,

experience etc. used to be prescribed. Based on experience and in consultation with concerned

departments, Government has decided to prescribe the following additional criteria for the

qualification / disqualification of the parties seeking to acquire stakes in public sector

enterprises through disinvestment:

(a) In regard to matters other than the security and integrity of the country, any conviction

by a Court of Law or indictment / adverse order by a regulatory authority that casts a doubt on

the ability of the bidder to manage the public sector unit when it is disinvested, or which relates

to a grave offence would constitute disqualification. Grave offence is defined to be of such a

nature that it outrages the moral sense of the community. The decision in regard to the nature

of the offence would be taken on case-to-case basis after considering the facts of the case and

relevant legal principles, by the Government.

(b) In regard to matters relating to the security and integrity of the country, any charge-

sheet by an agency of the Government / conviction by a Court of Law for an offence

committed by the bidding party or by any sister concern of the bidding party would result in

disqualification. The decision in regard to the relationship between the sister concerns would

be taken based on the relevant facts and after examining whether the two concerns are

substantially controlled by the same person/persons.

(c) In both (a) and (b), disqualification shall continue for a period that Government deems

appropriate.

(d) Any entity, which is disqualified from participating in the disinvestment process,

would not be allowed to remain associated with it or get associated merely because it has

preferred an appeal against the order based on which it has been disqualified. The mere

pendency of appeal will have no effect on the disqualification.

(e) The disqualification criteria would come into effect immediately and would apply to all

bidders for various disinvestment transactions, which have not been completed as yet.

122

(f) Before disqualifying a concern, a Show Cause Notice why it should not be disqualified

would be issued to it and it would be given an opportunity to explain its position.

(g) Henceforth, these criteria will be prescribed in the advertisements seeking Expression

of Interest (EOI) from the interested parties. The interested parties would be required to

provide the information on the above criteria, along with their Expressions of Interest (EOI).

The bidders shall be required to provide with their EOI an undertaking to the effect that no

investigation by a regulatory authority is pending against them. In case any investigation is

pending against the concern or its sister concern or against its CEO or any of its

Directors/Managers/employees, full details of such investigation including the name of the

investigating agency, the charge/offence for which the investigation has been launched, name

and designation of persons against whom the investigation has been launched and other

relevant information should be disclosed, to the satisfaction of the Government. For other

criteria also, a similar undertaking shall be obtained along with EOI.

-sd/-

(A.K. Tewari)

Under Secretary to the Government of India.

123

Annexure-III

EXPRESSION OF INTEREST

(To be forwarded on the letterhead of the interested party/lead

bidder/member of the consortium submitting the EOI)

Reference No.______________ Date ___________

To,

ADVISOR NAME

Sub: GLOBAL INVITATION OF EXPRESSIONS OF INTEREST

FOR DISINVESTMENT OF ____% STAKE IN (CO. NAME)

Sir,

This is with reference to the advertisement dated ________ inviting Expression of Interest for

(CO. NAME)

As specified in the advertisement, we have read and understood the contents of the

Preliminary Information Memorandum (PIM) and are desirous of participating in the above

disinvestment process, and for this purpose:

We propose to submit our EOI in individual capacity as __________________ (insert name

of party)

OR

We have formed/propose to form a consortium comprising of ____members as follows:

1. ____________________________ (Insert name)

2. ____________________________ (Insert name)

3. ____________________________ (Insert name)

We understand that ____% equity stake of (CO. NAME) is proposed to be divested and we are

interested in bidding for the same. We believe that we/our consortium/proposed consortium

satisfies the eligibility criteria set out in relevant sections of the PIM including the guidelines

for qualification of bidders seeking to acquire stakes in Public Sector Enterprises through the

process of disinvestment issued by the Government of India vide Department of Disinvestment

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OM No.6/4/2001-DD-II dated 13th July 2001 and subsequent amendments/clarifications

thereto.

We certify that in regard to matters other than security and integrity of the country, we have

not been convicted by a Court of law or indicted or adverse orders passed by a regulatory

authority which would cast a doubt on our ability to manage the public sector unit when it is

disinvested or which relates to a grave offence that outrages the moral sense of the community.

We further certify that in regard to matters relating to security and integrity of the country, we

have not been charge-sheeted by any agency of the Government or convicted by a Court of

Law for any offence committed by us or by any of our sister concerns.

We further certify that no investigation by a regulatory authority is pending either against us

or against our sister concerns or against our CEO or any of our Directors/Managers/

employees.

We undertake that in case due to any change in facts or circumstances during the pendency of

the disinvestment process, we are attracted by the provisions of disqualification in terms of the

subject guidelines, we would intimate the GOUP of the same immediately.

The Statement of Legal Capacity and Request for Qualification as per formats indicated

hereinafter, duly signed by us/respective members, who jointly satisfy the eligibility criteria,

are enclosed.

We shall be glad to receive further communication on the subject.

Enclosure:

Yours faithfully,

1. Statement of Legal Capacity

2. Request for Qualification

Authorised Signatory

For and on behalf of the party/consortium

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Annexure-IV

Statement Of Legal Capacity

(To be forwarded on the letterhead of the interested party / each member of the consortium

submitting the EOI).

Reference No.______________ Date ___________

To,

Senior Vice President & Head Regional Office

ADVISOR NAME

Sub: GLOBAL INVITATION OF EXPRESSIONS OF INTEREST

FOR DISINVESTMENT OF ____% STAKE IN

(CO. NAME) Sir,

This is with reference to the advertisement dated ________ inviting Expression of Interest for

(CO. NAME)

We have read and understood the contents of the PIM and the advertisement and pursuant to

this hereby confirm that:

We satisfy the eligibility criteria laid out in the PIM and the advertisement.

We are a member of the consortium (constitution of which has been described in the

Expression of Interest), which jointly satisfies the eligibility criteria as detailed in the PIM.*

We have agreed that ________(insert member’s name) will act as the lead member of our

Consortium.*

We have agreed that ______________(insert individual’s name) will act as our representative

on our behalf and has been duly authorized to submit the EOI. Further, the authorized signatory

is vested with requisite powers to furnish such letter and Request for Qualification and

authenticate the same.*

We have agreed that (insert the name of the individual) chosen as representative of our

consortium and on our behalf and has been duly authorized to submit the EOI. Further, the

authorized signatory is vested with requisite powers to furnish such letter and Request for

Qualification and authenticate the same.*

Yours faithfully,

Authorised Signatory

For and on behalf of (party/member)

*Strike off whichever clause is not applicable

126

Annexure-V

Request For Qualification

(To be submitted in respect of interested party/each member of the consortium)

Name of the interested Party(ies)/Member(s) ___________________________

1. Constitution (Tick, wherever applicable)

i) Public Limited Company

ii) Private Limited Company

iii) Others, if any (Please specify)

§ If the interested party is a foreign company/ OCB, specify list of statutory approvals

from GoUP/ RBI/ FIPB applied for/ obtained/ awaiting:

2. Sector (Tick, wherever applicable)

i) Public Sector

ii) Joint Sector

iii) Others, If any (Please specify)

3. Details of Shareholding

4. Role/ Interest of each Member in the Consortium (if

applicable)

5. Nature of business/products dealt with

:

6. Date & Place of incorporation

:

7. Date of commencement of business

:

8. Full address including phone No./fax No.

:

i) Registered Office

:

ii) Head Office

:

9. Address for correspondence

:

127

10. Salient features of financial performance for the last

three years

:

11. Basis of eligibility for participation in the process (Please mention details of your

eligibility) as under:

Please attach most recent Audited Statement of Accounts/Annual Report. Additionally, please

provide a chartered account/auditor certificate certifying the Turnover and Net Worth as

defined in the Eligibility criteria.

12. Please provide details of all contingent liabilities that, if materialised, that have or would

reasonably be expected to have a material adverse affect on the business, operations (or

results of operations), assets, liabilities and/or financial condition of the Company, or other

similar business combination or transaction.

13. Contact Person(s):

i) Name:

ii) Designation:

iii) Phone No.:

iv) Mobile No.:

v) Fax No.:

vi) Email:

Yours faithfully,

Authorised Signatory

For and on behalf of the (party/member)

Authorised Signatory

For and on behalf of the consortium

Place :

Date :

Note: Please follow the order adopted in the Format provided. If the interested party is

unable to respond to a particular question/ request, the relevant number must be nonetheless be

set out with the words “ No response given” against it.

128

Annexure-VI

QUALIFICATION FOR BIDDERS

1. Introduction

1.1 In a strategic sale, apart from Government’s interest in receiving a good return or price

for its companies, the Government is also concerned that the company, which is taken

over, should function well after disinvestment. The strategic buyer should be able to

bring in more capital and improved technology, wherever needed, introduce better

management practices and should be in a position to take proper care of the work force.

In short, the strategic partner is expected to have a good track record of performance so

that the Government can be satisfied that its assets are being passed on to capable hands.

1.2 In order to achieve this objective, it is important that the Government evolves a selection

procedure that ensures that only those entities get selected as strategic partners who

possess:

· The requisite managerial and financial strength.

· A proven track record of following good corporate practices.

· A good reputation as regards integrity.

1.3 To address these considerations and to ensure greater transparency of the process, the

Ministry has taken the step to publish these “Guidelines on qualifications for Bidders” to

enable the bidders to understand the requirements expected of them.

1.4 While any company, domestic or foreign, in private or public sector, can take part in a

strategic sale process, depending on the unique features of a case, and taking into

consideration all relevant factors including monopoly issues, Government can

always impose reasonable restrictions, in specific cases, in public interest.

1.5 The bidders are selected through a competitive bidding process but, for Government

companies to pass into private hands, there are some critical areas which government

has to ensure that the bidder is capable of complying with. These critical areas are: -

· Financial capabilities of the bidder

· Technical and Legal capacity of the bidder

· FDI restrictions

· Integrity of the bidder

· Security considerations

1.6 The qualification/eligibility criteria for the bidders arise at two stages of the bidding

process:

· At the time of submission of Expression of Interest (EoI).

· At the time of submission of the financial bid which comes much

later and at the end of the process.

2. Financial Capacity

2.1 Since the bidder has to buy a block of shares typically involving a substantial financial

outlay, it has to be ensured that, companies which are financially sound and capable vis-

à-vis the size and business of the CPSUs being disinvested, are only allowed to bid. The

‘open offer’ requirement of SEBI and ‘Put/Call’ option add further to the financial

strength/capacity required. Therefore, while issuing an advertisement in the newspaper

and website for inviting bidders to take part in the disinvestment process through

submission of EOI (financial bids come much later at the end of the process) the

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qualifying minimum networth criteria and/or minimum turnover required of the bidding

company is specified. This gives a fair idea of the size and financial strength of the

bidding company. Besides, relevant financial and performance details are also sought

for. For example, while seeking EOI from bidders in MECON Ltd., the minimum

annual turnover stipulation was Rs. 150 crore and networth Rs. 50 crore, whereas in

VSNL minimum networth was specified as Rs. 2500 crore as VSNL was a much bigger

company. In case of consortium bids, Government may insist on each consortium

member satisfying individually a minimum networth/turnover criteria to be included as a

member of the consortium. In the case of VSNL, each consortium member had to

satisfy the minimum networth criteria of 10% i.e. Rs. 250 crore. In some cases, in

addition to this or in lieu thereof, Government may require majority networth

contribution from the lead bidder. For example, in the case of Shipping Corporation of

India, the networth criteria is Rs. 800 crore but it has been specified that the lead

member of the consortium must have a networth of at least Rs. 408 crore (i.e. 51%). At

this stage, those of the bidders who satisfy these criteria, get shortlisted and get on to the

next stage.

2.2 At the stage of submission of the financial bids, the prospective bidders are required to

furnish a bank guarantee which is retained only in the case of the highest bidder. This is

meant to bind him to fulfil his commitments till the successful closing of the transaction.

2.3 Before accepting the financial bid of any party, a certificate is required either from the

banker or from an independent Chartered Accountant that the bidder has got enough

funds to complete the transaction. In addition to that the bidder gives an undertaking

that he has not been prohibited by any agreements with others from acquiring the equity

stake from government.

2.4 These prerequisites are also a deterrent to bidders who may be having unhealthy balance

sheets. The bank guarantee is a further proof of their financial standing and reputation

in the financial world.

3. Technical and Legal capacity

3.1 Every company must provide along with the EOI a representation, duly executed by its

authorised official/ representative that it has the requisite corporate authorization to

submit the EOI and that all information provided in the EOI is complete and accurate in

all material respects to the best of their knowledge. If, at a subsequent date, it is

discovered that the company or any consortium member did not either possess the

requisite authorization or that any part of the information provided in the EOI was not

complete or accurate in any material respect, the Government reserves the right to

disqualify such company or consortium or member of the consortium from the process.

3.2 To access the technical capabilities of the prospective bidder, the Government may ask

them to provide a business plan so that the Government is assured of continued services

to the satisfaction of the user. In case of Air India, the business plan was sought in

advance. In certain cases, Government may even require the bidders to satisfy a criteria

of minimum experience in a particular business/sector, say manufacturing.

3.3 The bidder is required to submit enough information in the EOI for Government to

assess the bidding entity’s managerial, financial and technical capability. Typically,

the EOI would contain the following details:

(i) Executive Summary: This provides a brief description of the bidding company

and (where appropriate) of each member in the consortium, containing details like

ownership structure, write up on business history and growth, business areas /

activities, respective revenue details, etc. It includes a brief commentary on the

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capability of the company / consortium, as demonstrated, inter alia, in its past track

record, to run its own business.

(ii) The Applicant: The full name, address, telephone and facsimile numbers,

e-mail address of the company or of each member of the consortium and the names

and the titles of the persons who are the principal points of contact.

(iii)Basic Information: This contains the details of the place of incorporation,

registered office, current directors, key management personnel and principal

shareholders of the company/companies in the consortium. It also contains a copy

of its current Memorandum and Articles of Association and copies of audited

accounts for the last three years of the company / companies in the consortium. (The

latter details help in evaluating financial capabilities as well).

(iv) Management Organization: An overview of the applicant's senior

management and organization structure and in the case of a consortium, that of each

member; summaries of the roles and responsibilities of the directors, key

management personnel of the applicant and, in case of a consortium, those of each

member.

(v) International Operations / Joint Ventures / Alliances: Brief write up of

the company's or, in the case of a consortium, of the members, of their international

operations, joint ventures / alliances (whether international or domestic), nature and

size of such operations, equity ownership, if applicable, copies of the audited

accounts for the last one year of such companies.

(vi) Professional Advisors: The names and addresses of those companies and the

professional firms, if any, who are (or will be) advising the applicant/consortium,

together with the names of the principal individual advisors at those companies and

firms.

(vii) Outstanding Litigation: Each company, and each member of a consortium

must provide with the EOI a statement of pending litigation.

4. Foreign Direct Investment (FDI) Restrictions

4.1 In case of foreign bidders, the prospective buyer has to comply with the sectoral Foreign

Direct Investment (FDI) caps determined by Government of India and revised from time

to time. In some cases of disinvestment, the FDI restrictions on the bidder are more

onerous than the sectoral restrictions. These could be typically those PSUs, which are

into businesses, which are sensitive to national security. For example, in the case of Air

India, Government decision is to sell 40% stake but a restriction of maximum 26%

foreign holding was incorporated. In the case of Shipping Corporation of India, foreign

holding has been restricted to 25% though there is no FDI restriction for the shipping

sector.

5. Integrity of the bidder

5.1 The Ministry of Disinvestment has laid down specific guidelines vide letter

no.6/4/2001/DD-II dated 13th July 2001 (Annexure – II) for qualification in terms of

integrity of bidders seeking to acquire stakes in Public Sector Enterprises through the

process of disinvestment. The prospective bidders have to give an undertaking at the

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stage of submission of Expression of Interest (EOI) that they are eligible as per the

criteria fixed by the said guidelines and the bidders also have to make disclosures

regarding pending proceedings/investigations as per para (g) of these guidelines.

6. Security Considerations

6.1 As PSUs, the companies were wholly or substantially owned by the Government and

were operated and managed by the Board of the company under the administrative

control of the Ministry concerned. In this arrangement, security consideration, if any,

were taken care of. At the time of transfer of these companies to private players, the

Government has to ensure that the security of the country is not jeopardized through use

/ abuse of these companies.

6.2 Government has excluded the “strategic areas” from disinvestment, (strategic areas

being defence related, atomic energy with few exceptions and railway transport).

However, sectors like Airlines, Telecommunication etc. could also be called upon to

provide strategic services in times of war or otherwise. In such cases, Government may

require a separate security clearance for each bidder. In addition, to protect the security

of the country, provisions are made in the transaction documents to deter the purchaser

from misuse of the company. In addition, there are covenants in the Agreements, which

oblige the new management to provide emergency services to the Government in times

of need. In such cases the strategic partner may be asked to disclose his source of funds

and give an undertaking that he would ensure that no prohibited person (‘prohibited

person’ being a person who constitutes a threat to the security requirements of the

nation) gets control of the company. If needed, restrictions in foreign shareholding can

also be imposed. For example, as referred to earlier, in the disinvestment of Shipping

Corporation of India, bidders are allowed to form Joint Venture Companies along with a

foreign partner but with a cap of 25% of foreign partners’ holding.

6.3 Further, the companies which have been charge-sheeted or convicted on matters relating

to “national security or integrity” under the provision of the Indian Penal Code or

Official Secrets Act or other relevant legislation, are disqualified from the bidding

process. (See para (b) Annexure II)

7. Confidentiality Undertaking

7.1 On being found suitable after submitting the EOI, the Qualified Interested Parties are

required to enter into a Confidentiality Undertaking with the Government. Only then

are they allowed to participate in the disinvestment process.

7.2 Typically, this undertaking requires that the potential bidders do not misuse this

wealth of information. It is not uncommon for competitors to send a bogus team to

discover the trade secrets of the other parties. The undertaking is made by the bidder in

favour of President of India (acting through Joint Secretary of the administrative

ministry), the company and advisors to treat all the confidential information in

confidence and not to disclose to any person, the fact that he has been provided the

‘Confidential Information’ or has inspected any confidential documents or the

discussion/negotiation regarding the transaction.

7.3 ‘Confidential Information’ means all information, concerning the business, operations,

prospects, finances, or other affairs of the company. It includes, but is not limited to,

documents delivered in connection with a due diligence investigation, information

concerning business activities, products, specifications, data, know-how, compositions,

designs, sketches, photographs, graphs, drawings, research and development, marketing

or distribution methods and processes, customer lists, customer requirements, price lists,

market studies, computer software and programs, database technologies, systems

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structures and architectures, historical financial projects and budgets, historical and

projected sales, capital spending budgets and plans, current or prospective financing

sources, the names and background of personnel, personnel training techniques and

materials.

7.4 Confidentiality undertaking also provides that the bidder shall not deal with any officer,

Director or employee of the Govt. or Company, regarding the business, operations, and

prospects or financing of the company without advisor's express written consent.

7.5 The confidentiality undertaking contains an indemnity clause, whereby the bidder agrees

to indemnify the advisor, the Govt. and the company against any damages, loss, cost or

liability arising out of any unauthorized use or disclosure by the bidder.

7.6 The undertaking stipulates that the Strategic Partner will use the Confidential

Information only to assist the Strategic Partner in the evaluation of the Transaction and

determine whether or not to proceed with the Transaction and the Strategic Partner

will not use the Confidential Information for any purpose other than the Transaction or

in any other manner whatsoever and shall particularly ensure that the interests of the

Company/Advisors/Government are not adversely affected in any manner whatsoever.

7.7 The undertaking stipulates that in case the Bidder or any Consortium Member decides

not to proceed with the Transaction or if the Advisors or the Government notifies the

Bidder or any Consortium Member that the Government does not wish the Bidder or any

such Consortium Member to consider the Transaction any further, the terms of the

Undertaking survive the date of receipt of notification of such decision by the relevant

party.

7.8 The Bidder agrees through the undertaking that after termination of access of the bidder

by the Government, all documents or other materials furnished by such

Company/Advisors/Government to the Strategic Partner, including those constituting

Confidential Information, together with all copies and summaries thereof in the

possession or under the control of the Strategic Partner, will be destroyed.

7.9 The language of the Undertakings may vary depending on the case, based on legal

advice.

8. Qualification of Companies/Consortia

8.1 The advertisement for the transaction indicates the broad qualifications of the

prospective bidders. Based on the information submitted in EOIs, the Ministry and the

advisors carry out an evaluation of the qualifications of the companies/consortia and

subsequently notify in writing those companies / consortia which qualify to participate

in the next stage of the process.

8.2 However, where a Consortium has submitted the EOI, it is generally expected that there

shall not be any changes in the Members of the Consortium consequent to the

submission of EOI.

8.3 If a Consortium bidder desires a change in the Consortium by inclusion/exclusion of

members or if a non-Consortium bidder desires to form a Consortium by inducting new

Member(s), it shall have to seek an approval from GoUP for such change. Such requests

would be entertained only before the financial bids are received by Government.

8.4 Where the Bidder is a Consortium, the stake in the ordinary share capital of the

company can be acquired and held either through an investment vehicle ("Special

Purpose Vehicle") or through direct holding in the company by each Member or through

any Group Company (ies).

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9. Additional Information

9.1 Government reserves the right to seek any additional indemnities, warranties,

representations or performance obligations from the bidders or any of their group

companies to Government’s sole satisfaction.

10. Reasons for Disqualification

10.1 Notwithstanding anything to the contrary contained in the Request for Proposal

document and without prejudice to any of the rights or remedies of Government,

Government shall be entitled in its sole discretion to determine that a Bidder is to be

disqualified at any stage of the process and its participation in the Strategic Sale process

and/or its Technical Proposal and/or Financial Bid dropped from further consideration

for any of the reasons including without limitation those listed below:

(i) if a misrepresentation/false statement is made by the bidder/Member, at any

stage in the Strategic Sale process, whether in the Technical Proposal, the

Financial Bid, supporting documentation or otherwise and whether written or

oral;

(ii) if the Technical Proposal submitted by the bidder is in any respect

inconsistent with, or demonstrate any failure to comply with, the provisions

of the Request for Proposal ;

(ii) if the Financial Bids submitted by the bidder is inconsistent with the

requirements of the Request for Proposal in any respect, including not being

accompanied by an Ernest Money Guarantee of the specified amount or the

Financial Bid being conditional in any respect;

(iv) failure to comply with any other material requirement of this Request for

Proposal;

(v) Government is not satisfied with sources of funds/ownership structure of the

bidder.

(vi) failure to comply with the reasonable requests of Government in relation to

the Strategic Sale process.

(vii) Breach of Confidentiality Undertaking executed by the bidder.

(viii) if it is discovered at any time that a bidder is subject matter of winding

up/insolvency or other proceedings of a similar nature;

(ix) any information regarding the bidder which becomes known to

Government/Company/Advisor and which is detrimental to Strategic Sale

process and/or the interests of the Company.

(x) initiation or existence of any legal proceedings, by or against the bidder in

respect of Company, which proceeding may be prejudiced by the

participation of the bidder in the selection process or the transaction, e.g.

inspection by a bidder of case files of the Company of matters filed against

that bidder; and

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(xi) the bidder or if the bidder is a Consortium then any member of such

Consortium not being qualified to participate in the process pursuant to the

Government of India office memorandum No. 6/4/2001-DDII dated July 13,

2001 as amended from time to time.

10.2 If information becomes known after the bidder has been qualified, at any stage, to

proceed with the Strategic Sale process, which would have entitled Government to reject

or disqualify the relevant bidder/Consortium, Government reserves the right to reject or

disqualify the relevant bidder/Consortium at the time, or at any time, such information

becomes known to Government. Where such party is a Consortium, Government may

disqualify the entire consortium, even if it applied to only one member of the

Consortium.

10.3. Government determination that one or more of the events specified under paragraph 10

has occurred shall be final and conclusive.

11. Formats for submitting EOIs by interested parties

11.1 The formats for submitting Expression of Interest, statement of Legal Capacity and

Request For Qualification (RFQ) are enclosed as Annexure III, IV, and V.

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Annexure - VII

VALUATION METHODOLOGIES

1 Disinvestment Commission's Recommendations

Keeping in view the above problems regarding valuation specific to a PSU, the issue was

discussed in detail by the Disinvestment Commission in its First Report. Underlining the

importance of valuation, the Commission felt that the valuation of equity of a firm gains

importance in case of disinvestment of companies which are not listed or in cases where capital

markets may not fully reflect the intrinsic worth of a share disinvested earlier.

Disinvestment Commission, in its Discussion Paper while emphasizing that valuation should

be independent, transparent and free from bias, has discussed three methods of valuation:

(i) The 'Discounted cash flow' (DCF) approach relates the value of an asset to the present

value of expected future cash flows of the asset.

(ii) The 'Relative valuation' approach is used to estimate the value of an asset by looking at the

pricing of comparable assets relative to a common variable like earnings, cash flows, book

value or sales.

(iii) The 'Net asset value' approach provides another basis for valuation.

Regarding the application of Valuation Methods, Disinvestment Commission felt that the use

of a particular method of valuation will depend on the health of the company being evaluated,

the nature of industry in which it operates and the company's intrinsic strengths. The depth of

capital markets will also have an impact on the valuation. For example, in the United Kingdom,

the London Stock Exchange has helped in creating markets by enabling credible price

discovery for the shares of privatised companies listed on the exchange. Although valuation

methods will indicate a range of valuations, Disinvestment Commission felt that some

discounts might need to be applied for arriving at the final value depending on the liquidity of

the stock and the extent of disinvestment:

a) ‘Lack of marketability' discount takes into account the degree of marketability (or the lack

of it) of the stocks being valued. This is applicable especially to cases, which had been

disinvested earlier and have been referred for disinvestment again. Discount on this

consideration stems from the fact that an investor will probably pay more for a liquid stock

than for a less liquid one. However, the concern of an overhang of supply may adversely

affect valuation even for liquid stocks.

b) Disinvestment Commission felt that the extent of disinvestment in core, non-strategic &

non-core PSUs would have a bearing on the valuation process. The transfer of a

controlling block may help to reduce the discount that has to be applied, as the prospective

investor would be willing to pay a certain 'control premium' towards enhanced

management participation, board control and majority shareholder rights.

c) If all the businesses of a PSU are not equally profitable, it may be necessary to restructure

the business before disinvestment. However, if this is not possible, a minority discount

may have to be applied.

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Disinvestment Commission also sought to correct some erroneous perceptions about valuation.

There is a general perception that since valuation models are quantitative, valuation is

objective. The Commission felt that though it is true that valuation does make use of

quantitative models, the assumptions made as inputs to the model leave plenty of room for

subjective judgments. At the same time, there may be no such thing as a precise estimate of a

value. Even at the end of the most careful and detailed valuation of a company, there could be

uncertainty about the final numbers, as they are shaped by assumptions about the future of the

company's operations.

Another wrong perception sought to be corrected by the Commission was the relationship

attributed between valuation and market price. The benchmark for most valuations remains the

market price (either its own price, if it is listed or that of a comparable company). When the

value from a valuation analysis is significantly different from the market price, the two

possibilities are that either one of the valuations could be incorrect. The Commission felt that

the valuation done before listing takes into account anticipated factors, whereas market price

reflects realized events that are influenced by unanticipated factors. However, a specific

valuation itself may not be valid over a period of time. It is a function of the competitive

position of the company, the nature of market in which it operates and Government policies.

Therefore, it may be appropriate to update or revise valuations.

In cases where strategic sale is done with transfer of management control, the Commission felt

that asset valuation should also be done. The views of the Commission in this regard are as

follows:

"Strategic sale implies sale of a substantial block of Government holdings to a single party

which would not only acquire substantial equity holdings of upto 50% but also bring in the

necessary technology for making the PSU viable and competitive in the global market. It

should be noted that the valuation of the share would depend on the extent of disinvestment

and the nature of shareholder interest in the management of the company. Where Government

continues to hold 51% or more of the share holding, the valuation will relate mainly to

the shares of the companies and not to the assets of the company. On the other hand, where

shares are sold through strategic sale and management is transferred to the strategic partner, the

valuation of the enterprise would be different, as the strategic partner will have control of the

management. In such cases, the valuation of land and other physical assets should also be

computed at current market values in order to fix the reserve price for the strategic sale.

To get best value through strategic sales, it would be necessary to have a transparent and

competitive procedure and encourage enough competition among viable parties."

2 Valuation Methodologies being followed

Making a valuation requires an examination of several aspects of a company's activities, such

as analysing its historical performance, analysing its competitive positioning in the industry,

analysing inherent strengths/weaknesses of the business and the opportunities/threats presented

by the environment, forecasting operating performance, estimating the cost of capital,

estimating the continuing value, calculating and interpreting results, analysing the impact of

prevailing regulatory frame work, the global industry outlook, impact of technology and

several other environmental factors.

Based on the recommendations of the Disinvestment Commission and in keeping with the best

market practices the following four methodologies are being used for valuation of PSUs: -

a) Discounted Cash Flow (DCF) Method.

b) Balance Sheet Method.

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c) Transaction Multiple Method.

d) Asset Valuation Method.

While the first three are business valuation methodologies generally used for valuation of a

going concern, the last methodology would be relevant only for valuation of assets in case of

liquidation of a company. In addition, in case of listed companies, the market value of shares

during the last six months is also used as an indicator. However, most PSU stocks suffer from

low liquidity and the price determination may not be always efficient. Moreover, there could

be increased trading activity after announcement of the disinvestment, which could be on

account of high market expectation of the bid price and even based on malafide intent. This

could lead to the price being traded up to unsustainable levels, which is not desirable.

2.1 Discounted Cash Flow (DCF) method

The Discounted Cash Flow (DCF) methodology expresses the present value of a business as a

function of its future cash earnings capacity. This methodology works on the premise that the

value of a business is measured in terms of future cash flow streams, discounted to the present

time at an appropriate discount rate.

This method is used to determine the present value of a business on a going concern

assumption. It recognises that money has a time value by discounting future cash flows at an

appropriate discount factor. The DCF methodology depends on the projection of the future

cash flows and the selection of an appropriate discount factor.

When valuing a business on a DCF basis, the objective is to determine a net present value of

the free cash flows ("FCF") arising from the business over a future period of time (say 5 years),

which period is called the explicit forecast period. Free cash flows are defined to include all

inflows and outflows associated with the project prior to debt service, such as taxes, amount

invested in working capital and capital expenditure. Under the DCF methodology, value must

be placed both on the explicit cash flows as stated above, and the ongoing cash flows a

company will generate after the explicit forecast period. The latter value, also known as

terminal value, is also to be estimated.

The further the cash flows can be projected, the less sensitive the valuation is to inaccuracies in

the assumed terminal value. Therefore, the longer the period covered by the projection, the

less reliable the projections are likely to be. For this reason, the approach is used to value

businesses, where the future cash flows can be projected with a reasonable degree of reliability.

For example, in a fast changing market like telecom or even automobile, the explicit period

typically cannot be more than at least 5 years. Any projection beyond that would be mostly

speculation.

The discount rate applied to estimate the present value of explicit forecast period free cash

flows as also continuing value, is taken at the "Weighted Average Cost of Capital" (WACC).

One of the advantages of the DCF approach is that it permits the various elements that make up

the discount factor to be considered separately, and thus, the effect of the variations in the

assumptions can be modelled more easily. The principal elements of WACC are cost of equity

(which is the desired rate of return for an equity investor given the risk profile of the company

and associated cash flows), the post-tax cost of debt and the target capital structure of the

company (a function of debt to equity ratio). In turn, cost of equity is derived, on the basis of

capital asset pricing model (CAPM), as a function of risk-free rate, Beta (an estimate of risk

profile of the company relative to equity market) and equity risk premium assigned to the

subject equity market.

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For example, the following profit and loss account shows the computation of the Profit Before

Depreciation, Interest and Tax (PBDIT) of Company X for the first year of business

projections:

Figure 1: Profit and loss account of Company X Rs million

Revenue

Sales receipts 500

Expenses

Consumption of material 300

Other overheads 50

Total expenses 350

PBDIT 150

Computation of Free Cash Flow to Firm (‘FCF’): Free cash flow (FCF) for a year is derived

by deducting the total of annual tax outflow inclusive of tax shield enjoyed on account of debt

service, incremental amount invested in working capital and capital expenditure from the

respective year’s profit before depreciation interest and tax (“PBDIT”) for the explicit period.

Therefore, for Company X, the computation of FCF would look like the following:

Figure 2: FCF computation for Company X Rs million

Year 1 Year 2 Year 3 Year 4 Year 5

PBDIT of Company X * 150 200 300 400 500

Less: Income tax (assumed) -20 -40 -60 -80 -100

Less: Capital expenditure (assumed) -50 -50 -50 -50 -50

Less: Incremental working capital (assumed) -25 -50 -75 -100 -125

FCF 55 60 115 170 225

* Notice that a growth has been assumed in the PBDIT

Weighted Average Cost of Capital (‘WACC’)

The FCF is then discounted at a discount rate, which represents the WACC. The computation

of the WACC is set out below:

Figure 3: WACC parameters

Cost of equity Assumption

Risk Free Rate Yield to maturity on Government of India Securities based on current

traded value (preferably these should be of a long-term tenor beyond the

forecast period i.e. minimum 10 years)

Beta For the purpose of analysis, average unlevered beta of listed industry

comparables is computed, which is then levered to the Company’s own

target debt equity ratio

The levered (equity) Beta of a scrip is a measure of relative risk to

market, arithmetically computed as covariance of equity and market

return divided by variance of market return (over a long historical data

run) followed with certain adjustments

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Equity Risk Premium = Beta * (Market Risk Premium)

Market Risk Premium is equal to the difference of average market return

and risk free rate #

Cost of Equity =Risk Free Rate + (Equity Risk Premium*Beta)

Cost of debt

Estimated Corporate

Tax Rate

Current corporate tax rate in India

Comp’s Pre-Tax Cost

of Debt

Cost of debt provided by the Management

Comp’s After-Tax

Cost of Debt

Pre-Tax Cost of Debt*(1-Tax Rate) @

Target Debt equity

ratio

Average debt equity ratio of the Company

WACC (Debt/Total Capital)*(After-Tax Cost of Debt)+(Equity/Total

Capital)*(Cost of Equity)

@ This is the tax shield referred to earlier.

# Higher the beta means more riskier the stock, beta = 1 means the stock of the

company is in perfect synchronise with the sensex (average market return). Higher than

one means the stock is more volatile (and hence more risky) than the sensex and lower

than one means the stock is less volatile (and hence less risky).

To illustrate, for Company X, the computation of WACC typically could be as follows:

Figure4: WACC calculation for Company X

Cost of Equity Assumptions

Risk Free Rate 9.00% 10-year Treasury GoI Bond Yield

Beta 1.50 Unlevered beta of industry comparables, levered to Company X

debt equity ratio (high risk stock!)

Equity Risk Premium 9.00% Total Stock Returns less Treasury Bond Total Returns. Market

Risk Premium is equal to the difference of average market

return and risk free rate. Average market return has been

assumed to be 18% and beta has been assumed to be 1.5.

Cost of Equity 22.50% = Risk Free Rate + (Equity Risk Premium*Beta)

Cost of Debt

Estimated Corporate Tax

Rate

35.70% Current corporate tax rate in India

Comp’s Pre-Tax Cost of

Debt

16.50% Cost of debt provided by the Management

Comp’s After-Tax Cost

of Debt 10.61% Pre-Tax Cost of Debt*(1-Tax Rate)

Target Debt equity ratio 1.00 Average debt equity ratio of Company X for past five years

WACC 16.55% (Debt/Total Capital)*(After-Tax Cost of Debt)+(Equity/Total

Capital)*(Cost of Equity)

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Based on the WACC, arrived as above, the FCF of each year is discounted to the present

period. This factor is known as the discounting factor.

Discount factor = Discount factor of previous year

(1 + WACC)

In year 1, the discount factor is equal to 1. Thus, the discount factor of Company X for the first

year will be as follows:

Discount factor for year 1 = 1 / (1 + 0.1655) = 0.858

Discount factor for year 2 = 1 / (1 + 0.1655)2 = 0.736, and so on for year 3 etc.

Therefore, for Company X, the computation of discounted cash flow (DCF) is as follows:

Figure 5: DCF computation for Company X Rs million

Year 1 Year 2 Year 3 Year 4 Year 5

FCF 55 60 115 170 225

Discounting factor based on WACC 0.858 0.736 0.632 0.542 0.465

Discounted cash flows 47 44 73 92 105

The value arrived through the submission of the DCF of the explicit period is known as the

primary value. The primary value of the business of Company X as computed above is Rs

361 million.

Terminal Value

This value reflects the average business conditions of the Company that are expected to prevail

over the long term in perpetuity i.e. beyond the explicit period. The DCF approach assumes

that by the terminal date, the business will have achieved a steady state and will be growing at

a constant rate.

At the end of the explicit period the terminal value is calculated as follows:

Terminal Value = Terminal Cash flow (for last year of explicit period) * (1 + g)

Discount Factor - g

Where; Discount Factor = Weighted Average Cost of Capital, and;

g = Estimate of average long term growth

rate of cash flows in perpetuity assumed to be 5%

Therefore, for Company X, the computation of terminal value is as follows:

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Terminal Value = 105 * (1 + 0.05) / (0.1655 - 0.05) = Rs. 951 million

This is further discounted to the valuation date to provide the contribution of continuing cash

flows in the total net present value. This net present value is commonly known as the

"Enterprise Value" (EV) which is the sum of value of debt as well as equity. To arrive at the

Equity value, the outstanding net debt as on the valuation date is deducted from the Enterprise

value.

Figure 6: Valuation of Company X based on DCF methodology Rs million

Rs million

Primary value 361

Terminal value 951

Enterprise value 1,311

Add: Value of surplus land outside factory area (assumed)@ 200

Less: debt (assumed) -600

Equity value of Company X 911

@ This is being shown to illustrate that DCF captures only cash flows from core

business. Therefore, the non-core asset value should be added to arrive at EV.

The DCF methodology is the most appropriate methodology in the following cases:

• Where the business is being transferred / acquired on a going concern basis;

• Where the business possesses substantial intangibles like brand, goodwill, marketing and

distribution network, etc;

• Where the business is not being valued for the substantial undisclosed assets it possesses.

The DCF methodology is considered to be the best methodology for valuation the world over

because it takes into account all the factors relevant for valuation. It takes into consideration all

the cash flows available to stakeholders of a firm and the necessary outflows, as estimated for

the future. Further, the net present value takes into account the cost of debt, cost of equity and

target capital structure. It also takes into account the risks to which the enterprise is

exposed. The discount rate (i.e. the average expected return on capital employed) is based on

the overall risk perception of the business. It also takes into account the value of the non-core

assets of the company. Any business has two kinds of assets - core assets that are a part of the

business and non-core assets that are not directly utilized as part of core operations and hence

can be treated as surplus assets. The asset value of core assets is reflected in the cash flows of

the company and, therefore, should not be added separately to it. However non-core assets are

not reflected in the cash flows. Therefore, asset valuation of non-core assets should be done

separately and should be added to DCF valuation.

Being fundamentally driven by future business plan of the company and associated cash flows,

a prudent DCF valuation should be able to capture the capital costs for renovation and

modernization of plant and machinery. The age and condition of assets like plant and

machinery and their replacement value would be relevant for estimating expenditure on their

replacement whenever necessary. This expenditure will reduce cash flows and DCF value.

Valuation of plant and machinery would be a relevant item that would influence the DCF

valuation. For example, a person acquiring a company operating a fleet of taxis would examine

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the conditions of vehicles for valuation of the company. If the vehicles need replacement of a

low cost item like hub caps, the impact on DCF will be less than if they need to replace gear

boxes in a high proportion of vehicles. The person would also calculate DCF with reference to

the demand for taxis, the average mileage, cost of maintenance etc. Valuation of plant and

machinery is not a simple addition to DCF, but a factor to be taken into account while

calculating DCF. In such calculation, plant and machinery may be a net negative factor in the

DCF if replacement costs are high. Where surplus land would be sold this would be a positive

factor. If the sale of land can cover the cost of plant replacement the net effect would be neutral

on DCF.

For a going concern, various intangibles like brand equity, market share, competition, etc have

a significant bearing on the valuation of the company. One cannot place a money value for

these factors. They have no financial value of their own that can be measured in money terms.

Hence, there is no way of evaluating them in any other methodology. DCF is the only

methodology, which takes into account these factors by incorporating them intrinsically in

estimated cash flows. In calculating DCF, different assumptions will be made of market share,

competition from imports etc, which are translated into financial terms. Sensitivity analysis can

also be made for different assumptions. The Financial Advisor and the Seller should exercise

the judgment on the most likely financial impact of the intangible assets the company

possesses, on cash flows and also on the discount rate to be applied while arriving at the

optimum DCF value, as strong intangible assets would help reduce the overall risk perception

of the company.

In a strategic sale, the bidders take into account not only DCF valuation, but also a premium

for management control. Premium for management control would be a subjective item for each

bidder and will be reflected in the competitive bids. Therefore, the seller, while calculating the

Reserve Price, should not incorporate this premium in the valuation amount separately. Since

there is no scientific method to quantify the control premium, it may be arbitrary to add control

premium while arriving at the Reserve Price. In the book, “Corporate Valuation: Tools for

Effective Appraisal and Decision Making” by Bradford Cornell, it is stated “Without knowing

why premiums are paid it is impossible to determine whether it is reasonable to apply a

premium (or the associated discount) to the appraiser target. In this respect both research and

common sense support the proposition that a buyer is willing to pay more than the market price

for a controlling interest in a company only when the buyer believes that the future cash flow

of the company, and thereby the value of the company, can be increased once it is under his/her

control.” Further, it states, “…if the appraiser cannot identify what a buyer of the appraiser

target would change to increase cash flow, then there is no reason to assume that a control

premium exists.”

In the broad conclusions, of the Proceedings of the Seminar on Disinvestment in Public

Sector held by Comptroller and Auditor General of India in New Delhi on 11th/12

th

October, 2001, it was clearly indicted that “Reserve Price should not include Control

Premium.” The following conclusions were made:

• There were considerable discussions on issues relating to valuation and the fixation of

reserve price. Valuation was an essential exercise for the Vendor and the Purchaser but a

firm or fixed price was impossible to get. Two independent valuations often gave widely

different values. Valuation was more an art than a science. Regarding Reserve Price, it was

generally felt that a Reserve Price should be fixed, as it is essential that any seller

established a benchmark value for the company to be sold. In any case it should be more

than the liquidation value.

• It was widely accepted that the most effective method of obtaining the best price possible

would be to have bids from a large fleet of competitors rather than pegging reserve price at

artificially inflated levels.

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• It was also recognized that valuation would be quite subjective and that it was possible that

different valuations could yield widely varying figures.

2.2 Balance Sheet method

The Balance sheet or the Net Asset Value (NAV) methodology values a business on the basis

of the value of its underlying assets. This is relevant where the value of the business is fairly

represented by its underlying assets. The NAV method is normally used to determine the

minimum price a seller would be willing to accept and, thus serves to establish the floor for the

value of the business. This method is pertinent where:

• The value of intangibles is not significant;

• The business has been recently set up.

This method takes into account the net value of the assets of a business or the capital employed

as represented in the financial statements. Hence, this method takes into account the amount

that is historically spent and earned from the business. This method does not, however,

consider the earnings potential of the assets and is, therefore, seldom used for valuing a going

concern. The above method is not considered appropriate, particularly in the following cases:

• When the financial statement sheets do not reflect the true value of assets, being either too

high on account of possible losses not reflected in the balance sheet or too low because of

initial losses which may not continue in future;

• Where intangibles such as brand, goodwill, marketing infrastructure, and product

development capabilities, etc., form a major part of the value of the company;

• Where due to the changes in industry, market or business environment, the assets of the

company have become redundant and their ability to create net positive cash flows in

future is limited.

2.3 Market Multiple method

This method takes into account the traded or transaction value of comparable companies in the

industry and benchmarks it against certain parameters, like earnings, sales, etc. Two of such

commonly used parameters are:

• Earnings before Interest, Taxes, Depreciation & Amortisations (EBITDA).

• Sales

Although the Market Multiples method captures most value elements of a business, it is based

on the past/current transaction or traded values and does not reflect the possible changes in

future of the trend of cash flows being generated by a business, neither takes into account the

time value of money adequately. At the same time it is a reflection of the current view of the

market and hence is considered as a useful rule of thumb, providing reasonableness checks to

valuations arrived at from other approaches. Accordingly, one may have to review a series of

comparable transactions to determine a range of appropriate capitalisation factors to value a

company as per this methodology.

i) EBITDA multiple

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The EBITDA multiple or the earnings method is based on the premise that the value of a

business is directly related to the quantum of its gross profits. The net profits are adjusted to

reflect the operating recurring profits of the business on a standalone basis (i.e. after deducting

extraordinary or unusual items, or items of a non-recurring nature). Further, the profits are

adjusted for non-cash items (including depreciation and amortisation) and other factors, such as

interest and taxation (which vary from business to business) to derive EBITDA (Earnings

Before Interest, Taxation, Depreciation and Amortisations).

The EBITDA multiple method takes into account the value or consideration paid by acquirers

of similar businesses, and is computed by dividing the total consideration paid (after adjusting

for any debt assumed) by the EBITDA to derive a multiple, which can be applied to the

EBITDA figure of the business being valued. i.e. adjusted maintainable EBITDA are

capitalised by an appropriate factor ("capitalisation factor") to arrive at the business value.

EBITDA multiple = Enterprise Value / EBITDA

Where:

Enterprise Value (EV) = Market value of Equity + Market value of Debt

EBITDA = Earnings Before Interest, Tax, Depreciation and Amortization

To illustrate, if we are valuing Company X with EBITDA of Rs. 150 million and in a similar

transaction EV/EBIDTA has been 10 (EBIDTA multiple) then EV of Company X would be

worked out as Rs. 1500 million and then debt would be deducted to arrive at the equity value

of Company X.

ii) Sales multiple

The sales multiple techniques are based on a similar analysis of relevant acquisitions and are

the ratio of Enterprise Value to the current sales (net of excise duty, sales tax and non-recurring

extra-ordinary income). It is calculated as follows:

• Sales multiple = Enterprises Value / Net sales of the current year

To illustrate, if we are valuing Company X with sales of Rs. 500 million and in a similar

transaction EV/Sales has been 4 (Sales multiple) then EV of Company X would be worked out

as Rs. 2000 million. Then debt would be deducted to arrive at the equity value of Company X.

The Transaction Multiple methodology suffers from the following drawbacks:

• Actual money required to earn the maintainable profits / sales of the business as a going

concern (for instance, future capital expenditure) are not considered.

• This methodology does not take into account the time value of money.

Notwithstanding these limitations, these multiples are widely used by investors to arrive at

benchmark values for a company.

2.4 Asset Valuation Methodology

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The asset valuation methodology essentially estimates the cost of replacing the tangible assets

of the business. The replacement cost takes into account the market value of various assets or

the expenditure required to create the infrastructure exactly similar to that of a company being

valued. Since the replacement methodology assumes the value of business as if we were setting

a new business, this methodology may not be relevant in a going concern. Instead it will be

more realistic if asset valuation is done on the basis of the new book value of the assets. The

asset valuation is a good indicator of the entry barrier that exists in a business. Alternatively,

this methodology can also assume the amount which can be realized by liquidating the business

by selling off all the tangible assets of a company and paying off the liabilities.

The asset valuation methodology is useful in case of liquidation/closure of the business. In this

case certain adjustments may have to be made to the equity value arrived at by this method

including settlement of all borrowings on the company’s balance sheet on the date of valuation

and settlement of employee dues. These adjustments should include all the process related cost

involved in closure and liquidation. For example, in the case of the settlement of the employee

dues, the assumed severance packages may have to be calculated based on the latest available

VRS schemes for the PSU or other such modes that help in determining the most appropriate

amount of settlement that the employees will have to be paid in the event the PSU shuts down

its operations. The following example demonstrates the value of Company X based on asset

valuation methodology:

Asset Valuation of Company X Rs million

Part A: Immoveable assets (valued by Government approved valuer)

Value of buildings in factory area 100

Value of buildings at staff colony 50

Value of surplus land outside factory area 200

Part B: Moveable assets (valued by Government approved valuer)

All moveable assets 250

600

Add: Other assets as per latest balance sheet

Value of current assets as per last audited accounts 300

Cash balance as per last audited accounts 250

550

Less: Liabilities

Estimated Voluntary retirement scheme cost for all employees -250

Total outstanding borrowings including bank loans, government loans, current

liabilities (trade creditors, non trade creditors and statutory liabilities)

-650

-900

Equity value 250

In a strategic sale process, however, the proposal is normally to transfer management control of

a going concern to a strategic partner. These concerns may contain surplus assets as land and

building which may not form part of the core assets required for operations and hence their fair

value may not be captured if the valuation of subject entity is based on DCF or Market

Multiples approaches. To protect this, certain restrictions are imposed on the strategic partner

on usage and disposal of such surplus assets e.g. the land and property of the business cannot

be sold or put to alternate use by the strategic partner. However, certain economic benefits

from such assets would still accrue to an extent to the strategic partner as the owner of majority

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interest in the company. Accordingly, while the asset valuation method may not provide the

best estimate of the value of the enterprise, application of this approach to surplus assets would

help provide a better assessment of the Reserve Price. In practice, it has been used so far for

valuing the CPSUs under disinvestment because the Disinvestment Commission had

recommended that this method should also be followed for valuation in the case of strategic

sale.

The Asset Valuation approach suffers from certain very serious limitations. These are detailed

below:

(i) Practically, it is extremely difficult to determine the exact replacement cost of the assets

owned by a company. This is so on account of number of reasons, such as

(a) changes in technology over a period of time (resulting in certain products not being

produced at all or being produced with far more efficiencies than earlier)

(b) absence of a marketplace where such assets are or can be traded

(c) inability of the seller to be able to actually realise the value of assets in one go should

the company be liquidated

(d) changes in the duty structure (like excise, import duties, etc which may impact the

value of the asset over different periods of time) etc.

(ii) The Asset Valuation approach also does not take into account the very purpose for which a

company acquired the assets, i.e., for future economic benefits. Hence, the historical or

replacement cost of a particular asset may tend to convey a wrong picture of the value that

the buyer may perceive in the asset. These factors often tend to result in a higher value

being attributed to the assets and the companies, if the asset valuation approach is

followed. Assets are bought and sold for their future economic benefits, and for

established and running businesses; the economic benefits of owning the assets are far

more relevant than the historical cost or replacement cost of the assets.

(iii) The Asset Valuation approach also tends to overlook the intangible assets that a company,

over a period of its existence tends to build, such as goodwill, brands, distribution network,

customer relationships, etc, all of which are very important to determine its true intrinsic

value.

(iv) In the case of a majority of the PSUs it may be found that the replacement cost or

liquidation value is higher than the intrinsic value of the company, if determined on the

basis of the company's future profitability (cash flows). As against this, a company, which

has been generating very healthy returns and has built strong brand equity, goodwill etc.,

will tend to command a value that is far higher than the value of its tangible assets.

The abovementioned limitations of the asset valuation approach have been highlighted very

clearly in the valuation reports submitted by the Advisors in different cases of valuation so far.

In case of strategic sales, the Advisors have expressed that the Discounted Cash Flow approach

may be the most appropriate methodology to be relied upon for valuing businesses on a going

concern basis.

It should be noted that the DCF methodology expresses the present value of the business as a

function of its future cash earning capacity. This methodology works on the premise that the

value of a business is measured in terms of future cash flows, discounted to the present time at

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an appropriate discount rate. The methodology is able to capture the value of all the tangible

and intangible assets of the Company based on the possible future cash flows. The value of all

the intangibles of a company such as brand, marketing and distribution network and goodwill

get captured either in the form of higher sales or as higher profits of the company in

comparison to its competitors who may not have as strong or similar brand or distribution

network. Hence, the asset valuation approach may be useful only for a limited purpose of

valuing the non-core assets where it is felt that DCF approach (or market multiples or book

value/ balance sheet approach) is not able to capture the fair value of such assets.

3 Standardising The Valuation Approach & Methodologies

Although the aforesaid valuation methodologies being followed are broadly based on the

Discussion Paper of the Disinvestment Commission and the best market practices, it is

necessary to standardize the valuation methodology for all PSU disinvestments so that there are

no variations from case to case. Therefore, all the four methodologies for valuation should

be followed for all PSU disinvestments, with further improvements in respect of DCF

Method and Asset Valuation Method as detailed below, for arriving at a range of valuation

figures, to arrive at the indicative Benchmark or Reserve Price.

DCF Method

In the DCF method, while computing the cash flows, cash out flows for renovation and

modernization of plant and machinery should also be discounted for arriving at realistic

figures. Since non-core assets are not reflected in the cash flows, the Asset Valuation Method

should separately value the non-core assets and they should invariably be added to the

valuation figure arrived at by the DCF method.

Asset Valuation

In general, the approach should be used primarily to value the non-core or surplus fixed assets,

whose value are not appropriately accounted for in the valuation by DCF or other approaches.

However, in cases, where the entity has significant non-core assets and where the application

of Asset Valuation approach to the enterprise is deemed necessary, following should be noted:

P The Asset Valuation would be more realistic, if we compute the value of only the

realizable amount, after discounting the non-realizable portions. The realizable market value of

all real estate assets, either owned by the company as freehold properties or on a lease/rental

basis will be determined, assuming a non-distress sale scenario. The value would be assessed

after taking into account any defects/restrictions/encumbrances on the use/lease/sublease/sale

etc. of the properties or in the title deeds etc.

P Since Asset Valuation normally reflects the amount which may need to be spent to

create a similar infrastructure as that of a business to be valued or the value which may be

realised by liquidation of a company through the sale of all its tangible assets and repayment of

all liabilities, adjustments for an assumed capital gains tax consequent to the (hypothetical)

outright sale of these assets as also adjustments to reflect realization of working capital,

settlement of all liabilities including VRS to all the employees will have to be made.

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Annexure VIII

Some Salient Points about Disinvestment

1- Default in payment by the bidder to a financial institution : Ministry of Disinvestment is

guided by its guidelines dated 13.7.2001 as mentioned earlier. It would be seen from these

guidelines that if the bidding party or its consortium members are defaulting in payment of

dues to financial institutions, they are not automatically disqualified. This is mainly because if

the bidding parties have more than one business, there may be cases where some of the

businesses may be incurring losses due to which it may not be possible for the bidding party to

honour the commitment with regard to payment of interest/repayment of principal in that

particular unit. So, any default on account of poor performance of a unit cannot ipso facto

mean that the party who is controlling the business is incapable of running any other business.

What would be relevant here is whether there has been a wilful default on the part of the

bidding party, which could happen due to diversion of funds from one unit to another.

However, it may be difficult in such cases for Ministry of Disinvestment to determine whether

default by a particular party is a wilful one. Since the institutions, which have lent may claim

the bidder as a wilful defaulter, while the bidder may say that he is not a wilful defaulter and

that his default is due to reasons beyond his control. This is really the task of a regulator i.e.

RBI/SEBI to adjudicate on such matters who can decide whether the default was wilful or

whether the practice adopted by the bidder is unhealthy, unethical or unscrupulous. MODI

guidelines do cover such adverse orders by regulators.

2 - Disqualification of a consortium member : In case of a consortium bid, even on default

by a member of the consortium the Government reserves the right to disqualify all members of

the consortium. The other option that would be considered is that the bidder removes the

defaulting member from the consortium.

3 - Cases coming up against the bidder after EoI : In case there are no cases pending at the

stage of EOI against any bidder but this comes up later on, the bidder is supposed to disclose

all relevant material envisaged in the Guidelines dated 13/7/2001 to the Government whenever

it occurs or it comes to his notice and Government reserves the right to disqualify the bidder on

receipt of such information at any stage of the process.

4 - Chargesheet by agency such as CBI : A charge sheet by an agency such as the CBI does

not automatically disqualify a bidder. The charge sheet by an agency like CBI would result in

disqualification if the matter relates to the security and integrity of the country. In other cases,

there has to be a conviction by a court of law.

5 - Indictment/adverse order by a regulatory authority : An indictment /adverse order by a

regulatory authority will disqualify either:-

(a) If such order casts a doubt on the ability of the bidder to manage the public sector

unit when it is disinvested or

(b) If such an order relates to a grave offence where grave offence is defined to be an

offence of such a nature that outrage the moral sense of the community e.g. fraud.

It is clarified that the decision in regard to the nature of the offence would be

taken on a case-to-case basis after considering the facts of the case and relevant

legal principles by the Government.

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6 - Disqualification of a bidder by the Government : In case an order disqualifying a bidder

is passed by Government, the bidder does not necessarily remain disqualified for all times to

come. Government may decide on the period for which such disqualification shall continue.

7- Mminimum net worth requirement : The minimum net worth criteria is to ensure that the

bidder has enough financial muscle to run the PSU effectively post-disinvestment and to also

be in a position to raise enough resources in the future to enhance capacity, other capex

requirements etc. Though there is no direct proportionality between the minimum net worth

criteria fixed and the net worth of the company being disinvested, Government does keep in

mind the net worth/turnover/business potential/resource requirements of the company getting

disinvested while fixing the net worth criteria.

8 - Importance of Technical Proposal : It is a fact that selection of the successful bidder is

purely on the basis of the price bid. Normally, the bidder who bids the highest would be

selected. However, as clarified in every advertisement soliciting EOIs, Government reserves

the right always to make any changes in the procedure as laid down in the Request for

Proposal. Moreover, the Government would like to be satisfied that the bidder has a well

thought out plan on the future of the company once he takes over. Though this plan is not

legally binding on him after take over, it is expected that, since the bidders are very carefully

chosen and would be companies of repute, they would honour the commitment made by them

in their Technical Proposal.

9 - Requirement of GoUP approval for every consortium : In every case of disinvestment,

there are some prequalifying criteria stipulated as explained in the text. Therefore,

Government has to be certain that the consortium which finally gets selected satisfy these

eligibility criteria. Otherwise Bidder A, having satisfied the net worth criteria set by

Government, may get shortlisted. Thereafter, he may form a consortium with Bidder B, where

Bidder B may not be independently satisfying the net worth criteria. Bidder A+B will

obviously satisfy the criteria. Later, Bidder A may exit from this consortium and Bidder B

would be left in the fray, though originally it did not satisfy the eligibility criteria. Secondly,

since there are specific guidelines on integrity of bidders, it is necessary that at each stage of

addition of consortium members, Government satisfy itself that the new entity also satisfies the

eligibility criteria.

10 - Request for change in consortium : Normally, a request for a change in consortium is

entertained by Government before financial bids are received. No request is entertained once

the financial bids have been received. In certain specific cases, however, Government may

require a request for such change to be filed on a date earlier than the date financial bids are

received.

11 - Addition to the consortium of an entity which has not filed an EOI : Government

would entertain a request even for inclusion of a new entity as a member of the consortium by

the bidder (who was not one out of the entities who had filed EOIs) provided all the eligibility

criteria and qualification/disqualification criteria are satisfied. Of course, the decision of

whether or not to permit a change in the consortium would finally rest with the Government.