# RELIANCE ENERGY LIMITED & ANR v. MAHARASHTRA ST ATE ROAD DEVELOPMENT CORPORATION LTD. & ORS

- **Citation:** [2007] 9 S.C.R. 853
- **Court:** Supreme Court of India
- **Decided:** 2007-09-11
- **Case number:** Civil Appeal No. 3526 of2007
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/reliance-energy-limited-anr-v-maharashtra-st-ate-road-development-corporation-23334
- **Pages:** 37

## Headnote

RELIANCE ENERGY LIMITED & ANR.
v.
MAHARASHTRA ST ATE ROAD DEVELOPMENT
CORPORATION LTD. & ORS.
SEPTEMBER 11, 2007
lDR. ARIJIT PASAY AT AND S.H. KAP ADIA,JJ.]
A
B
Tender-Global tender-Consortium of two companies applied for the
tender-Excluded from second stage of bidding-On the ground that one of C
the companies did not have net cash profit of Rs. 200 crores, as per Pre
Qualification terms, which would have negative impact on future cash flows
on account of provisioning for doubtful debts of Financial Year 2001Propriety of the exclusion-Held: The exclusion of the consortium was
arbitrary whimsical and unreasonable-An important method of 'Cash flow
reporting' i.e. 'reconciliation method' was kept out of consideration-The D
decision-making process stood vitiated.
Constitution of India, 1950-Articles 14, 19(1)(g) and 21Applicability of-To Government tenders-Held: Vagueness and subjectivity
in terms and conditions of tenders regarding norms and bench marks would
result in discriminatory treatment-Decisions resulting in unequal treatment E
would violate doctrine of 'level playing field' embodied in Article 19(/)
(g)-Principle of equality embodied in Article 14 has to be read in conjunction
with Article 21 and not in isolation-Any Government policy, even -in
contractual matters, if fails to satisfY the test of 'reasonableness', would be
unconstitutional.
Judicial Review--Applicability-1n contractual matters-Held: Judicial
review is applicable even in contractual matters-Object of the same is to
prevent arbitrariness-It must be exercised in larger public interestStandards applied by courts in judicial review must be justified by
constitutional principles.
Doctrine-Doctrine of 'level playing field'-Applicability of
Words and Phrases- 'globalization', 'provisioning' and 'write ojf'-
Meaning of
853
F
G
H
854
SUPREME COURT REPORTS
[2007] 9 S.C.R.
A
State of Maharashtra through respondent No. 1-Compnay (MSRDC)
floated a global t~nder, for completion of Mumbai Trans Harbour Link
(MTHL). Appellant-Companies (REL and HDEC) formed a Consortium and
applied for the tender. Under Pre Qualification (PQ) document, the bidders
were required to submit financial statements of three financial years subject
to the condition that the latest should not be earlier than the financial year
B ending 31.12.2002. As per clause 7.2.2 of PQ required a consortium to have
net cash profit of Rs. 200 crores. The bidders were also required to submit
their Request for Qualification (RFQ) for the project on or before 10.1.2005.
The consortium submitted three audited accounts for the Financial Years
ending 31.12.2001, 31.12.2002 and 31.12.2003.
c
D
E
One of the companies ofthe consortium namely HDEC was not having
Net Cash Profit of Rs. 200 crores for the financial years. However, the
company according to its chartered accountant had net income of Rs. 200
crores after adjusting 'non-cash expenses' incurred during the Financial
Years.
•
MSRDC kept the offer of the consortium open by extending Yalidity of
the offer from time to time till 6.10.2005. Consortium by a letter dated
18.8.2005 submitted audited accounts ofHDEC for Financial Year ending
31.12.2004, thus complying with the condition of supplying account of the
Financial Years latter than the Financial Year 20()1.
Consultants of MSRDC excluded the consortium from the second stage
of the bidding process. A committee constituted by MSRDC to review the draft
eYaluation report submitted by the consultants, opined that the exclusion of
the consortium was bad. The consultants did not agree with the report of the
Committee and the consortium stood disqualified haying failed to meet the
F qualification criteria.
Writ Petition challenging the disqualification was dismissed by High
Court upholding the disqualification. High Court also held that it had no
jurisdiction under Article 226 of the Constitution to interfere with the decision
of MSRDC, particularly when there were two different opinions regarding
G adjustment of net

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RELIANCE ENERGY LIMITED & ANR.
v.
MAHARASHTRA ST ATE ROAD DEVELOPMENT
CORPORATION LTD. & ORS.
SEPTEMBER 11, 2007
lDR. ARIJIT PASAY AT AND S.H. KAP ADIA,JJ.]
A
B
Tender-Global tender-Consortium of two companies applied for the
tender-Excluded from second stage of bidding-On the ground that one of C
the companies did not have net cash profit of Rs. 200 crores, as per Pre
Qualification terms, which would have negative impact on future cash flows
on account of provisioning for doubtful debts of Financial Year 2001Propriety of the exclusion-Held: The exclusion of the consortium was
arbitrary whimsical and unreasonable-An important method of 'Cash flow
reporting' i.e. 'reconciliation method' was kept out of consideration-The D
decision-making process stood vitiated.
Constitution of India, 1950-Articles 14, 19(1)(g) and 21Applicability of-To Government tenders-Held: Vagueness and subjectivity
in terms and conditions of tenders regarding norms and bench marks would
result in discriminatory treatment-Decisions resulting in unequal treatment E
would violate doctrine of 'level playing field' embodied in Article 19(/)
(g)-Principle of equality embodied in Article 14 has to be read in conjunction
with Article 21 and not in isolation-Any Government policy, even -in
contractual matters, if fails to satisfY the test of 'reasonableness', would be
unconstitutional.
Judicial Review--Applicability-1n contractual matters-Held: Judicial
review is applicable even in contractual matters-Object of the same is to
prevent arbitrariness-It must be exercised in larger public interestStandards applied by courts in judicial review must be justified by
constitutional principles.
Doctrine-Doctrine of 'level playing field'-Applicability of
Words and Phrases- 'globalization', 'provisioning' and 'write ojf'-
Meaning of
853
F
G
H
854
SUPREME COURT REPORTS
[2007] 9 S.C.R.
A
State of Maharashtra through respondent No. 1-Compnay (MSRDC)
floated a global t~nder, for completion of Mumbai Trans Harbour Link
(MTHL). Appellant-Companies (REL and HDEC) formed a Consortium and
applied for the tender. Under Pre Qualification (PQ) document, the bidders
were required to submit financial statements of three financial years subject
to the condition that the latest should not be earlier than the financial year
B ending 31.12.2002. As per clause 7.2.2 of PQ required a consortium to have
net cash profit of Rs. 200 crores. The bidders were also required to submit
their Request for Qualification (RFQ) for the project on or before 10.1.2005.
The consortium submitted three audited accounts for the Financial Years
ending 31.12.2001, 31.12.2002 and 31.12.2003.
c
D
E
One of the companies ofthe consortium namely HDEC was not having
Net Cash Profit of Rs. 200 crores for the financial years. However, the
company according to its chartered accountant had net income of Rs. 200
crores after adjusting 'non-cash expenses' incurred during the Financial
Years.
•
MSRDC kept the offer of the consortium open by extending Yalidity of
the offer from time to time till 6.10.2005. Consortium by a letter dated
18.8.2005 submitted audited accounts ofHDEC for Financial Year ending
31.12.2004, thus complying with the condition of supplying account of the
Financial Years latter than the Financial Year 20()1.
Consultants of MSRDC excluded the consortium from the second stage
of the bidding process. A committee constituted by MSRDC to review the draft
eYaluation report submitted by the consultants, opined that the exclusion of
the consortium was bad. The consultants did not agree with the report of the
Committee and the consortium stood disqualified haying failed to meet the
F qualification criteria.
Writ Petition challenging the disqualification was dismissed by High
Court upholding the disqualification. High Court also held that it had no
jurisdiction under Article 226 of the Constitution to interfere with the decision
of MSRDC, particularly when there were two different opinions regarding
G adjustment of net income. Hence the present appeal.
H
Allowing the appeal, the Court
HELD: I.I. Standards applied by courts in judicial review must be
justified by constitutional principles which govern the proper exercise of
public power in a democracy. Article 14 of the Constitution embodies the
principle of "non-discrimination". However, it is not a free-standing provision.
) ..
>-
REL. ENERGY LTD. v. STATE ROAD DEVE. CORP.LTD.
855
It has to be read in conjunction with rights conferred by other Articles like A
Article 21 of the Constitution. Article 21 refers to "right to life". It includes
"opportunity". Article 21/14 is the heart of the chapter on fundamental rights.
It covers various aspects of life. "Level playing field" is an important concept
while construing Article 19(l)(g) of the Constitution. It is this doctrine which
is invoked by REUHDEC in the present case. When Article 19(1)(g) confers B
fundamental right to carry on business to a company, it is entitled to invoke
the said doctrine of "level playing field". This doctrine is, however, subject to
public interest. (Para 22) (875-B-El
I.R. Coelho v. State of Tamil Nadu, 120071 2 SCC 1, followed.
1.2. Decisions or acts which results in unequal and discriminatory C
treatment, would violate the doctrine of "level playing field" embodied in
Article 19(1)(g). Article 14 which refers to the principle of"equality" should
not be read as a stand alone item but it should be read in conjunction with
Article 21 which embodies several aspects of life. There is one more aspect
which needs to be mentioned in the matter of implementation of the aforestated D
doctrine of "level playing field". (Para 2211875-F, GI
1.3. Commitment to "rule of law" is the heart of parliamentary
democracy. One of the important elements of the "rule of law" is legal
certainty. Article 14 applies to government policies and ifthe policy or act of
the government, even in contractual matters, fails to satisfy the test of E
"reasonableness", then such an act or decision would be unconstitutional.
(Para 22) (875-G; 876-AI
Union of India and Anr. v. International Trading Co. and Anr., (2003) 5
sec 437, relied on.
1.4. When tenders are invited, the terms and conditions must indicate
with legal certainty, norms and benchmarks. This "legal certainty" is an
important aspect of the rule of law. If there is vagueness or subjectivity in the
said norms it may result in unequal and discriminatory treatment It may violate
doctrine of "level playing field". (Para 241 (876-F, G)
1.5. In matters of judicial review the basic test is to see whether there
is any infirmity in the decision-making process and not in the decision itself.
This means that 01e decision-maker must understand correctly the law that
regulates his decision-making power and he must give effect to it otherwise
F
G
it may result in illegality. The principle of "judicial review" cannot be denied H
856
SUPREME COURT REPORTS
[2007] 9 S.C.R.
A even in contractual matters or matters in which the Government exercises
its contractual powers, but judicial review is intended to prevent arbitrariness
and it must be exercised in larger public interest Expression of different views
and opinions in exercise of contractual powers may be there, however, such
difference of opinion must be based on specified norms. Those norms may be
legal norms or accounting norms. As long as the norms are clear and properly
B understood by the decision-maker and the bidders and other stakeholders,
uncertainty and thereby breach of rule of law will not arise. The grounds upon
which administrative action is subjected to control by judicial review are
classifiable broadly under three heads, namely, illegality, irrationality and
procedural impropriety. "Certainty" is an important aspect of rule of
C law. [Para 251 [877-A-DJ
Reliance Airport Developers (P) Ltd. v. Airports Authority of India,
(2006) 10 sec 1, relied on.
2.1. "Provisioning" is a matter of estimation. Accounting Standards
· (ASs) are policy documents. Accounting interpretation depends on application
D of several ASs simultaneously. The concept of "amortization" is not restricted
only to AS 26. Similarly, the concept of"cash flow analysis" is not restricted
to AS 3. Therefore, different methods are prescribed for estimating net profits
and/or net cash profits. There are no two views on this point. Provisioning
for doubtful debts cannot be equated to "write-oft''. In the case of provisioning
E there is no "cash outflow". This proposition is undisputed. Acceptance of plea
that once there is 'provisioning', the 'write-off' does not get routed through
the P & L Account and, therefore, there will be cash impact in future, would
be obliterating the difference between "provisioning" and "write-offs". The
question of "cash impact" in future is a separate question. It has to be
answered in terms of"cash flow reporting" which falls in AS 3 which has
p
been invoked by the chartered accountants of REL/HD EC.
G
!Para 29) (878-B-E[
Commissioner of Income-tax and Excess Profits Tax, Central, Bombay
v. Jwala Prasad Tiwari, (1953) 24 ITR 537 and Metal Box Company of India
Ltd. v. Their Workmen, (1969) 73 ITR 53, relied on.
2.2. The chartered accountants for REUHDEC has invoked the principle
of "cash flow reporting" which also finds place in AS 3. According to the
said principle of"cash flow reporting", when P&L Accounts and balancesheets are prepared on accrual basis, revenues and expenses are recognized
on accrual basis, i.e., when the transaction or event occurs. However, timing
H of cash flow is not reckoned in such system of accounting. Similarly, in cases
J
./.
REL. ENERGY LTD. v. STA TE ROAD DEVE. CORP. LTD.
857
where accounts are based on accrual system of accounting, recognition of A
assets and liabilities is not dependent on the actual timing of cash spent on
capital expenditure and cash inflow on account of capital receipt. Thus the
financial statements prepared on accrual basis do not reflect the timing of
the cash flow and amount of cash flow. The object of the cash flow statement
is to assess the company's ability to generate the cash flow in future and to
assess reasons for difference between "net profit" and "net cash flow" from
operations. !Para 32) 1880-B-D)
B
2.3 There are two methods of "cash flow reporting" i.e. direct and
indirect. Both give identical results in the matter of the final total. They differ
only in presentation of the data. They differ only in presentation of the data
contained in the cash flows from operational activities. No reas<m has been C
given by the Consultants of MSRDC for rejecting the indirect method invoked
by KPMG, Chartered Accountants ofREUHDEC. The said method is known
as "reconciliation method". In this case, the only reason given by the
Consultants of MSRDC to exclude REUHDEC was the negative impact on the
future cash flows on account of the provisioning for doubtful debts in the D
accounts of HDEC for the FY 2001. If future cash impact was the basis to
exclude RELJHDEC, then the Consultants for MSRDC should have considered
cash flow reporting methods, which includes Reconciliation Method. There
is no question of difference of opinion or different views as far as the
application of cash flow reporting, which also falls in AS 3. There is nothing
to show whether indirect method has at all been considered by Crisil, E
particularly when KPMG had invoked that method. There is no reason given
for rejecting it. Lastly, in the PQ document, the referral years were three
years. The criteria was that there should be NCP of not less than Rs.200
crores. However, the opinion of the Consultants proceeds on the basis that if
"add back" is allowed it may have future cash impact. Jn the evaluation process, F
the Consultants were entitled to take into account future cash impact but in
order to do so they had to say why the indirect method of"cash flow reporting"
should not be accepted and if at all the impact of the provisioning was to be
seen then there was no reason for not examining the audited accounts of2004.
There is a mix-up of two concepts here. The concept of non-compliance of
financial criteria and the impact in future years on cash flow. The very G
purpose of"cash flow reporting" is to find out the ability ofHDEC to generate
cash flow in future and if an important method of cash flow reporting is kept
out, without any reason, then the decision to exclude RELJHDEC, is arbitrary,
whimsical and unreasonable. For non-consideration of the Reconciliation
Method, under cash flow reporting system, the impugned decision-making H
858.
SUPREME COURT REPORTS
[2007] 9 S.C.R
A process stood vitiated. REUHDEC (Consortium) was erroneously excluded
from the second stage of bidding process.
(Paras 35 and 36] (888-C-G; 889-A, BJ
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3526 of2007.
B
From the Judgment and Order dated 4.6.2007 of the High Court of
c
Judicature at Bombay in Writ Petition No. 39 of 2007.
K.K. Venugopal, Dr. A.M. Singhvi, Mukul Rohtagi and S. Ganesh, D.J.
Kakalia, Syed Naqvi, Smieeta Inna, Gaurav Bhatia and Rajesh Kumar for the
Appellants.
Altaf Ahmed, Prashant Chavan, Varun Thakur and A.S. Bhasme for the
Respondents.
The Judgment of the Court was delivered by
KAPADIA, J. 1. State of Maharashtra through Maharashtra State Road
D Development Corporation Ltd. (for short, "MSRDC") floated Global Tender
for completing Mumbai Trans Harbour Link ("MTHL") between Mumbai and
Navi Mumbai on BOT basis.
2. Reliance Energy Limited is a company registered underthe Companies
E Act, 1956. It is engaged in generation, transmission and disbursement of
power in Maharashtra, Delhi etc.
3. Hyundai Engineering and Construction Company Ltd. (for short,
"HDEC") is a company incorporated in Korea. It is specialized in construction
of bridges.
F
4. At this stage, it may be noted that the above Project is to be at the
cost of Rs. 26000 million (Rs. 2600 crores). The bidders were rt;quired to
submit RFQ Document by 10.1.2005. Under the PQ Document, M/s Jean
Muller, France was appointed as consultant by MSRDC. Under the PQ
Document, the bidders were required to submit financial statements of three
G financial years subject to the condition that the latest should not be earlier
than the financial year ending 31.12.2002. REL/HDEC fonned a consortium. As
a consortium they were required to comply with clause 7.2.2 which stipulated
net cash profit at Rs. 200 crores. The said consortium has been excluded from
the second stage of bidding on the ground that it has not fulfilled the said
criteria mentioned in clause 7.2.2. The consortium had submitted their RFQ
H Document on 9.1.2005. The said consonium had submitted three audited
\
-L
REL. ENERGY LTD. v. STA TE ROAD DEVE. CORP. LTD. [KAPADIA, J.] 859
accounts for the financial years ending 31.12.2001, 31.12.2002 & 31.12.2003. At A
this stage it may be noted that the financial year for REL ended on 31st March
whereas the financial year for HDEC, Korea ended on 3 lst December.
5. At this stage, we may quote the relevant provisions of the PQ
Document which read as under:
"Section 5. I in the PQ document -
The objective of the Pre-Qualification is to qualify the appli1.:ants that
have the necessary experience and financial and technical capabilities
to undertake the work for which the Request for Proposal is to be
invited.
Section 5.3. 7 of the PQ document inter alia, provides:
B
c
No change in, or supplementary infonnation to.an application shall be
accepted after its submission. However, MSRDC reserves a right to
seek additional information from the applicants, if found necessary D
during the course of evaluation of the applicants.
Section 7.2.2 For Application by a Consortium
In case of a Consortium, the entity declared as the Lead Member ·
would be required to
E
*hold a minimum of26% of paid up and subscribed equity capital in
the Project Company (MSRDC is of the view that a minimum paid up
and subscribed capital of Rs.5000 million may be required for
implementing the project.) until completion of construction and
thereafter for a period of two years from the date of commencement
of operations and
F
* meet the financial eligibility criteria of Lead Member as detailed
below
In case of a Consortium, the following members taken together shall
commit to hold majority (minimum of 51 %) of the total paid up and G
subscribed equity capital in the Project Company until completion of
construction and thereafter for a period of two years from the date of
commencement of operations.
* Lead Member of the consortium committing to hold a minimum of
H
860
A
SUPREME COURT REPORTS
[2007] 9 S.C.R.
26% of the paid up and subscribed equity capital of the Project
Company, until completion of construction and thereafter for a period
of two years from the date of commencement of operations and meet
the financial eligibility criteria of Lead Member as given below.
* Those members of the Consortium committing to hold a minimum
B
of 5% of the paid up and subscribed equity capital of the Project
Company until completion of construction and thereafter for a period
of two years from the date of commencement of operations.
c
D
E
F
G
I.
H
The aggregate (taken as the arithmetic sum) of Net Cash Profit and
Net Worth as explained above) of all subsidiary companies in which
the respective entities hold a minimum of 5 I% of total paid up and
subscribed equity capital would also taken into consideration. In the
case of financials of subsidiary companies being considered as above,
the dividend paid by these subsidiary companies to the parent company
will be deducted from the Net Profit of.the parent company for the
purpose of evaluation. The financial evaluation crit~ria to be satisfied
by a Consortium are detailed below.
Criteria
To be satisfied
Amount
by
Net worth' (as per
Lead Member (Holding
Rs. 2,000 million (or
the latest audited
a minimum of26%
equivalent foreign
balance sheet - not
equity in the project
currency) Rs.10,000
earlier than the FY
company) Total
million (or equivalent
ended December 3 I,
Consortium (to be
foreign currency)
2002)
satisfied together by the
Lead member and
those Consortium
members committing to
hold a minimum of 5%
equity in the project
company)
AND
Net Worth means the sum total of the paid up share capital and reserves as reduced by
accumulated losses, revaluation reserves and deferred revenue expenditure to the extent
not written off, if any. In the case of Bank's/Financ:al Institution's/Non-Banking
Finance Companies, Tier II Capital as defined by the Reserve Bank of India. In the
prudential norms on Capital Adequacy would also be considered as a part of the Net
Worth.
REL. ENERGY LTD. v. STATE ROAD DEVE. CORP. LTD. [KAPADIA,J.] 861
A
Criteria
To be satisfied
Amount
by
Net cash profit2 (simple
Lead Member (Holding
Rs. 500 million (or
average of the audited
a minimum of26%
equivalent foreign
financial figures over
equity in the project
currency) Rs. 2,000
the last 3 financial years company) Total
million (or equivalent
B
of 2 calendar months
Consortium (to be
foreign currency)
each, with the latest not satisfied jointly by the
earlier than the FY
Lead member and those
ended December 3 I,
Consortium members
2002, will be considered
committing to hold a
c
for this assessment).
minimum of 5% equity
in the project company)
All figures quoted in a currency other than Indian National Rupees
(INR) would be converted into Indian National Rupees (INR) at an
exchange rate, which is the Telegraphic Transfer (ASSESSEE- D
COMPANY) buying rate of State Bank of India as on the Due Date.
In the event of non-availability of exchange rate for any currency from
the above source, MSRDC reserves t!ie right to use available from any
other source.
7.4 Basis of Evaluation
The information to be provided by the Applicant must be in
conformation with the following:
*
The information pnvided by the applicant should be based on
E
the latest availabie audited accounting statements.
F
*
*
The latest audited accounting statements should not be dated
earlier than 31st December, 2002.
The Request for Qualification (RFQ) must be accompanied by
the last three audited annual reports/accounts statements of the G
applicant and should include the financial statements of all
2.
Net cash profit means the profit after tax as stated in audited financial statements plus
depreciation and amortization not in the form of a cash transaction.
H
862
A
B
c
D
E
F
*
SUPREME COURT REPORTS
[2007] 9 S.C.R.
subsidiary companies of the Applicant for the last three financial
years. In case of a Consortium audited annual reports/account
statements of each member of the Consortium for the last three
financial years should be provided and should include the
financial statement of all subsidiary companies of the entities
funning the Consortium.
The applicant (all members of Consortium) must submit
infonnation on all pending litigations or proceeding regarding
liquidation, winding up, court receivership or other similar
proceedings that should have been initiated or pending against
the Applicant (or any member of Consortium). In addition to the
above, information must also be provided of all pending
litigations against the Applicant (or any member of Consortium)
in which the maximum value of liability that may arise in the
event of adverse judgment exceeds Rs. I 00 million (or equivalent
foreign currency). A consistent history of litigation/arbitration
awards against the applicant or any member of the consortium"
(emphasis supplied)
6. Briefly the criteria and conditions were as follows:
"(a) In a consortium, the entity declared as "lead member" was required
to hold the minimum of 26 per cent of paid-up and subscribed equity
capital in the project company until completion of construction.
(b) The aggregate of net cash profit and net worth of the consortium
was to be considered for evaluation of financial criteria of the
consortium.
( c) Two cr~teria were required to be satisfied by the lead member (REL)
as also the total consortium (REL/HDEC), namely, net worth and net
cash profit.
(d) Net worth is defined as total paid-up share capital + reserves -
G
accumulated losses, revaluation of reserves and deferred revenue
expenditure only to the extent of it being not written-off. Net worth
was to be calculated as per the latest audited balance sheet not earlier
than F.Y. ending 3 lst December, 2002.
H
.i
REL. ENERGY LTD. v. STA TE ROAD DEVE. CORP.LTD. [KAPADIA, J.] 863
(e) The leading member (REL) was required to have a net worth of A
Rs.200 crores and the total of Consortium (REL/HD EC) was required
to have a net worth of Rs.1,000 crores. At this stage, we may clarify
that this last criterion stands satisfied.
(f) As stated above, net cash profit of the lead member under the PQ
document was stipulated at Rs.50 crores whereas for the Consortium B
it was Rs. 200 crores.
(g) For the sake of convenience we quote the definition ofNCP given
in the PQ document which reads as follows:
"NCP = PAT (profit after tax) +depreciation+ amortization, not in the C
form of cash transaction"
7. Therefore, the bidding process for selecting the BOT Concessionaire
was in two stages. In the first stage MSRDC had to issue the Pre-Qualification
(PQ) document with an invitation to prospective Applicants to submit their
Request for Qualification (RFQ) for the Project. The prospective Applicants D
were required to submit their RFQ document on or before 10.1.2005. It was
to be evaluated on technical and financial capability. Under clause 7.2.2 one
of the criteria laid down was that the Consortium should have net cash profit
(NCP) of Rs. 2,000 million (Rs.200 crores). As per tender condition 7.2.2 the
bidders were required to submit financial statement of three financial years
subject to the condition that the latest should not be earlier than the financial E
year ending 31.12.2002. The choice of three years was left to the bidders. REL/
HDEC exercised their option by submitting the financial statements of HDEC
for three years, namely, 2001, 2002 and 2003.
8. HDEC had undertaken construction contracts in Iraq. On account of F
war in Iraq their annual report for the year 2001 showed negative income.
However, the said Company achieved net profit of US$ 16 million in 2002, US$
66 million in 2003 and US$ 164 million 2004. These figures have been taken
from the letter of KPMG, Korea, dated 12.8.200.S. giving a schedule of net
income after adjusting expenses and income not in form of cash transaction.
We quote hereinbelow the entire letter dated 12.8.2005 along with the schedule G
of net income which reads as under:
H
864
A
SUPREME COURT REPORTS
"10th floor, Star Tower,
737 Yeoksam-dong
Gangnam-gu, Seoul 135-984
Republic of Korea
[2007] 9 S.C.R.
Tel +82 (2) 21120100
Fax +82(2) 21120101
www.kr.kpmg.com
B
The Board of Directors and Management
Hyundai Engineering & Construction Co.,Ltd.
140-2 Kye-dong, Chongro-gu
c
D
E
F
Seoul, 1 JO-793, Korea
August 12, 2005
Dear Sir,
We have perfonned the procedures described below, which were agreed
by Hyundai Engineering & Construction Co., Ltd. (the 'Company').
The sufficiency of the procedures is solely the responsibility of the
Company. Consequently, we make no representation regarding the
sufficiency of the procedures described below either for the purpose
for which this report has been requested or for any other purpose.
The procedures that we perfonned are as follows:
We compared the statements of cash flows for years ended December
31, 200 I, 2002, 2003 and 200~ prepared by the Company to the
accompanying schedule of net income after adjusting expenses and
income not in fonn of cash transaction which the company prepared
according to the Pre-Qualification criteria for Mumbai Trans Harbour
Link(MTHL) project in India. The financial statements of the company
for years ended December 31, 200 I, 2002, 2003 and 2004 were audited
by us and we expressed an opinion that the financial statements of
the Company for years ended December 31, 200 I, 2002, 2003 and 2004
were presented fairly, in all material respects, in confonnity with
accounting standards generally accepted in the Republic of Korea.
G
We audited the statements of cash flows for years ended December
31, 200 l, 2002, 2003 and 2004 that under the indirect method of
presenting the statements of cash flows, net income is adjusted to
) ..
arrive at net cash flows from operating activities. The adjustments to
..Jnet income I performed by removing the effects on net income of all
H
items that included in net income that do not affect cash receipts and
REL. ENERGY LTD. v. STATE ROAD DEVE. CORP. LTD. [KAPADIA, J.] 865
~
disbursements. (e.g., those that should be omitted altogether or A
categorized as investing or financing activities, such as adding
depreciation and amortization).
We found no exceptions as a result of the above agreed-upon
procedures.
We were not engaged to, and did not perform an audit, the objective B
of which would be the expression of an opinion on the specified
,,,
elements, accounts, or items. Accordingly, we do not express such an
opinion. Had we performed additional procedures, other matters might
have come to our attention that would have been reported to you. c
Accounting principles and auditing standards and their application in
practice vary among countries. The financial statements are not
intended to present the financial position, results of operations and
cash flows in accordance with accounting principles and practices
generally accepted in countries other than the Republic of Korea. In
addition, the procedures and practices utilized in the Republic of D
Korea to audit such fmancial statements may differ from those generally
accepted and applied in other countries. Accordingly, this report and
the accompanying financial statements are for use by those
knowledgeable about Korean accounting procedures and auditing
standards and their application in practice.
E
This report is intended solely for the use of the Board of Directors
and Management of Hyundai Engineering & Construction Co., Ltd.,
and should not be used by those who have not agreed to the
procedures and taken responsibility- for the sufficiency of the
procedures for their purposes.
F
Very truly yours
Sd/-
S.H. Goo,.
Partner
(Attached: Cash flows from operating activities)
G
(Attached)
-4,
Schedule of net income after adjusting expenses and income not in
form of cash transaction.
H
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Description
Dec
Dec
31st, 2001
31st, 2002
(I) Net Income
(610,507)
15,963
(2) Expenses not in form of a cash transaction
686,310
200,753
- Provision for retirement and severance benefit
27,009
39,173
- Depreciation
49,475
36,221
- Stock compensation expense
-
89
- Bad debt expense
183,192
7;357
- Other bad debts expense
19<J,186
-
- Interest expense
48,803
23,89<)
- Loss on v~luation of foreign currence
107
1,986
- Loss on disposal of trade note and accounts
2,770
17,772
receivables
- Loss on valuation of inventories
39,762
20,485
- Loss on disposal of Investment securities
42
-
- Loss on investment securities impairment
61,104
29,900
- Loss on disposal of investment in affiliates using
-
-
equity method
- Loss on disposal of investment ·assets
9,120
1,248
- Loss on valuation of investment in affiliates using
5,805
-
equity method (*)
r
_..._
r
t.tJ
Dec
31st, 2003
65,546
19<J,084
32,706
31,279
107
8,480
39,147
20,683
3
' 10,844
5;364
309
12,845
1,286
-
-
i
>
Dec
31st, 2004
164,248
285,039
39,541
27,69<)
30
-
171,080
18,723
69<)
-
20;308
43
2;348
-
-
-
,._.
~
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~
~
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- Loss on disposal of property, plant and equipment (*)
7,888
4,121
- Loss on impairment of property, plant and equipment
-
-
- Miscellaneous losses
(including other extraordinary loss)
-
13,802
- Loss on prior year adjustment
42,047
4,700
(3) Income not in form of a cash transaction
337,982
76,284
- Interest income
64
2,860
- Gain on valuation of foreign currency
-
105
- Gain on disposal of investment assets
2,378
4,349
- Gain on disposal of property, plant and equipment (*)
27,846
47,589
- Gain on disposal of investment securities
498
-
- Reversal of loss on investment securities impairment
1,879
-
- Gain on valuation of investment in affiliates using
-
2,7)2
equity method (*)
- Gain on Debt exemption (*)
305,317
6,987
- Gain on redemption of debentures
-
1,933
- Miscellaneous gains (Including other extraordinary gain)
-
-
- Gain on prior year adjustment
-
9,739
( 4) Net income after adjusting expenses and income
(262,179)
140,432
not in form of cash transaction [(l) + (2) - (3)]
~
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"\
3,933
1,591
29,584
2,977
2,513
-
-
-
44,486
55,723
2,117
705
7
1,891
172
-
5,740
7,982
-
-
1,167
2,386
4,941
4,771
30,342
18,164
-
95
-
19,729
-
-
220,143
393,564
ttl
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•
868
SUPREME COURT REPORTS
[2007) 9 S.C.R.
A (*) Gain on Debt exemption, Loss(gain) on valuation of investment affiliates
using equity method. (Loss(gain) on disposal property, plant and equipment
are included for calculation of net income after adjusting expenses and
income not in form of cash transaction
B
c
(Note)
We translated Korean Won into U.S. dollars at the basic exchange rates on
December 31, 200 I, 2002, 2003 and 2004 to US$. The corresponding rates are
as follows:
Dec 3·1, 2001
Dec 31, 2002
Dec 31, 2003
Dec 31, 2004
W 1,326. I to US$ I
W 1,200.4 to US$ I
W 1,197.8 to US$ I W 1,043.8 to US$ I'
(emphasis supplied)
9. At this stage, we need to clarify that HDEC had undertaken
construction contracts in Iraq. That, large receivables had arisen prior to 1999
on account of war in Iraq. The Iraq contract receivables had nothing whatsoever
D to do with the three accounting years - 2001, 2002 and 2003, therefore, there
were no Iraq contract receivables nor was there any write-off as an-:l by way
of bad debt in any of the above three accounting years. Further, according
to REL/HDEC, HDEC had incurred "non-cash expenses" amounting to US$
686.310 million in 2001, US$ 200.753 million in 2002 and US$ 199.084 million
E in 2003 which did not involve direct cash outflow and, therefore, the said
"non-cash expenses'~ ought to have been added back to NCP and if so added
then tl1e Consortium had NCP of Rs.2,000 million (Rs.200 crores) as mentioned
in clause 7.2.2.
I 0. The aforestated contention advanced by the Consortium was rejected
F by Mis. Jean Muller Consultant of MSRDC in following words:
G
"In case of 'Provision' for bad debts even though they are just
'Provision' but not a 'write-off, the same is treated as cash expense
because once a 'Provision' has been made, the 'write-off does not
get routed through the profit and loss account. Moreover, the
'Provision' for bad debt relates to a revenue item that has already
be!;!n treated as cash inflow on accrual basis."
11. In view of the position taken by MSRDC's Consultants, REL/HDEC
stood excluded from the second stage of the bidding process.
H
12. To complete the chronology of events, by letter dated 22.6.2005,
•
--'·
REL. ENERGY LTD. v. STA TE ROAD DEVE. CORP. LTD. [KAPADIA, J.] 869
MSRDC informed REL/HDEC that their RFQ document was under scrutiny A
and accordingly REL/HDEC were requested to extend the validity of their
Offer up to 6.10.2005. By letter dated 24.6.2005, MSRDC requested REL/HD EC
to submit further details and clarifications and accordingly the Consortium of
REL/HD EC was once again requested to extend the validity of their Offer till
6.10.2005. Accordingly, by letter dated 18. 7.2005, REL/HD EC extended the B
validity of their Offer up to 6.10.2005 (90 days). By another letter dated
6.8.2005, MSRDC sought clarifications from REL/HD EC in respect of certain
financial aspects and the said Consortium was given time up to 19.8.2005 to
furnish such clarifications. By the said letter, MSRDC stated that there were
no queries in respect of REL, but there were queries in respect of HDEC. By
the said letter, MSRDC referred to the break-up of net cash profit submitted C
by REL/HDEC and asked for the basis for classifying certain heads of
expenditure under the heading "non-cash expenditure". By reply dated
18.8.2005, REL/HDEC submitted its clarification by pointing out that as on
10.1.2005 when RFQ document was submitted the audited accounts for FY
ending 31.12.2004 were not ready, so far as HDEC was concerned and, therefore,
it had submitted the audited accounts of HDEC for the years 200 l, 2002 and D
2003. By the said letter dated 18.8.2005, the REL/HDEC also submitted audited
accounts ofHDEC for FY ending 31.12.2004. In other words, by 18.8.2005 (i.e.
before 6.10.2005 which was date up to which REL/HDEC had kept its Offer
open) the said Consortium had submitted the audited accounts for the financial
years ending 31st December - 2002, 2003 and 2004. Therefore, according to E
REL/HDEC, they had also complied with the conditions mentioned in the PQ
document by supplying audited account for the reference years, namely, 2002,
2003 and 2004.
13. Since REL/HDEC did not submit audited accounts concerning HDEC
for the financial year ending 31.12.2004 by I 0.1.2005, the Consultants of F
MSRDC took the position that REL/HDEC were not entitled to bid in the
second stage of the bidding process. According to the said Consultants, the
audited accounts of HDEC for the FY 31.12.2004 constituted subsequent
information (i.e. information supplied after the cut-off date of I 0.1.2005) and,
therefore, REL/HDEC stood excluded from the second stage of the bidding G
process.
~,
14. On 22.8.2005, a committee by the name "Peer Committee" was
constituted by MSRDC to review the draft evaluation report submitted by the
consultants, M/s. Jean Muller Consortium, relating to pre-qualification of
bidders to suggest process of evaluation and to provide recommendations to H
870
SUPREME COURT REPORTS
[2007] 9 S.C.R.
A MSRDC. The said Committee met on 21.9.2005. The consultants M/s. Jean
) ....
Muller Consortium and M/s. Crisil were both called to give clarifications. The
said Committee was headed by Mr. Justice R.J. Kochar, Judge of Bombay
High Court (retired), Shri A.K. Banerjee (Technical Member) in NHAI, Mr. R.S.
Agarwal, Executive Director of IDBI (retired), Mr. V. Giriraj, Joint Managing
B Director of MSRDC etc. The Committee noted that pre-qualifications bids
were received only from six Applicants, one of them was RELIHDEC. The
Committee noted that while Indian companies could submit their audited
accounts up to 31.3 .2004 as their FY ended on 31st March the foreign
companies could submit their audited accounts only up to 31.12.2003 as their
FY ended on 31st December. The Committee further observed that although
C the cut-off date was l 0.1.2005, clarifications on break-up of non-cash expenses
were sought from REL/HDEC up to 22.8.2005 and since in the mean time
audited accounting statements were furnished by HDEC up to 31.12.2004, the
same could be considered for evaluation. The Peer Committee did not agree
with the opinion expressed by MSRDC's Consultants that the loss incurred
by HDEC for the financial year ending 3 l.12.2001 would have a cash impact
D in future. At this stage, we may reiterate that even according to the Consultants
of MSRDC, provision for bad debt may not involve cash outflow in the year
of incidence but it would have cash impact at a future date and, therefore,
out of abundant caution they decided to exclude REL/HDEC. However, the
Peer Committee did not concur with this accounting interpretation. According
E to the Peer Committee the major provision for bad debt was in the accounts
for the year 2001 and it related to receivables from their contract in Iraq
affected by war and since it was only a provision for bad debt and not a writeoff, the Committee came to the conclusion that there would be no cash impact
F
in future. The Committee took the view that even without taking into account .
the audited accounts for the year 2004, REL/HDEC fulfilled the financial
criteria in clause 7.2.2. Accordingly, the Peer Committee opined that REL/
HDEC should not be excluded from the second stage of the bidding process.
At this stage, it may be noted that after receipt of the said report, made by
the Peer Committee dated I. I 0.2005, MSRDC placed the report of the Peer
Committee before their Consultants. Needless to add that the Consultants of
G MSRDC retained their original position, namely, that since the audited accounts
for the year ending 31.12.2004 could not have been submitted after 10.1.2005,
the said accounts of HDEC could not have been taken into account as it
would violate the tender conditions and, therefore, REL/HDEC should be
excluded from the second stage of the bidding process.
H
15. By letter dated 28.9.2005, in view of the position taken by their
~.
REL. ENERGY LTD. v. STA TE ROAD DEVE. CORP.LTD. [KAPADIA, J.] 871
Consultants, MSRDC requested REL/HDEC to extend the validity of their A
Offer for further six months as they wanted to study the implications arising
from the audited accounts submitted by HDEC for the year ending 31.12.2004.
MSRDC basically wanted to know as to what would be cash impact of the
provision for bad debts in the accounts of HDEC for the year 200 I. Accordingly
by Jetter dated 6.10.2005, REL/HDEC extended the validity of their Offer up 0
to.6.4.2006. Ultimately, by letter dated 7.11.2006, MSRDC informed REL/HDEC P
that they stood disqualified as they had failed to meet the qualification
criteria.
16.