Steep valuation stumps prospective IPL team bidders

The Indian Premier League (IPL) has toughened the rules of the game for prospective bidders in race to buy the two new teams. So much so that the whole process could witness a 2300% increase in overall valuation of the new franchise.

Such a hike in percentage is most likely to increase the overall valuation of the existing teams like Rajasthan Royals, Kings XI Punjab and Knight Riders which were among the cheapest in the first auction.

The tender document for the new teams is a summary of such excessive monetary demands on part of IPL. A couple of interested parties who bought it are already reeling under the mindboggling rise.

Here’s why. Section 7.1 of the IPL’s tender document, which is related to ‘requirement of tender bid performance guarantee’, says “a bank guarantee valid until April 6, 2010 in the amount of Rs 460 crore ($10m; bid performance guarantee)” will be required with the bid.

Supposing the bid is successful, the bidder will have to further produce a bank guarantee which includes the approximate amount bid for the franchise. Section 4.4 of the tender document emphasises it saying, “The winning bidder needs to produce a bank guarantee or other non-monetary security or undertaking that IPL considers to be appropriate for any amount up to and including the total bid.”

Interestingly, within 48 hours of having procured a franchise, the bidder will have to shell out the bank guarantee. In case, he/she fails, the bid performance guarantee money of Rs 460 crore will be forfeited. “Failure to supply such a bank guarantee within 48 hours will result in the bid being terminated.”

The floor price of the new teams is $225m (approx Rs 1200 crore). The new bidders expect the final amount to be in excess of $300m (approx Rs 1500 cr) at which the teams will be finally bought. This means, according to the terms set by the IPL, a bank guarantee amount is likely to be nothing less than $250m (Rs 1300 cr).

Compare this to the first auction held in 2007-08, when the floor price to bid for the franchise was $50m and successful bidders were asked to submit a demand draft of Rs 20 crore as bid performance guarantee (see section 7.1 above). After the franchise was allotted, the bidder was required to pay 10% of bidding amount – equivalent of one year’s installment – as an annual rolling bank guarantee. According to sources, the entire process is being evaluated at around 2300% more than last time.

Bidders further believe that if IPL chooses to ask for a bank guarantee of the total winning bid amount, the money will be blocked for 10 years.

It seems only those with very deep pockets can be in fray here. When asked for reactions, a senior IPL official said. “We have taken everything into account while doing the valuations of the two new teams,” he said and added that the tender is not being documented to suit any particular bidder.

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