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On November 29, the Reserve Bank of India took over the Board of Directors of Reliance Capital Ltd. (RCL), operating under the parent company the ‘Reliance Anil Dhirubhai Ambani (ADA) Group,’ and appointed Mr. Nageswar Rao Y, the former Executive Director of the Bank of Maharashtra, as the administrator of the company. This action was initiated “in view of the defaults by RCL in meeting the various payment obligations to its creditors and serious governance concerns which the board has not been able to address effectively.”
Following this move, on November 30, the RBI set up an advisory committee comprising:
Sanjeev Nautiyal, ex-DMD, State Bank of India,
Srinivasan Varadarajan, ex-DMD, Axis Bank, and
Praveen P Kadle, ex-MD & CEO, Tata Capital Limited - to guide and support the administrator.
Further, on December 2, our banking regulator also filed an application with the Mumbai bench of the National Company Law Tribunal (NCLT) for initiating bankruptcy proceedings against RCL. However, before we understand what went wrong, let’s look at a quick overview of the company.
Reliance Capital Limited: Overview
Reliance Capital got licensed as a non-banking finance company (NBFC) in December 1998. However, as per its annual report 2020-21, it is registered as an NBFC-CIC (Core Investment Company). A majority of its revenue flows in from the operating subsidiaries that it holds stakes in, mainly present in the financial services and insurance segment. The company’s annual report lists 20 subsidiaries in which RCL holds majority stakes and four other companies with minority stakes. The report also mentions five associate companies, of which one is an overseas entity.
Source: RCL Annual Report
RCL Subsidiaries with % stake.
In a nutshell, RCL has five major revenue contributing subsidiaries- Nippon Life AMC, Reliance Home Finance, Reliance Nippon Life Insurance, Reliance General Insurance, and Reliance Commercial Finance- of which the first two are listed companies.
What went wrong?
Initially, the diverse set of businesses under the RCL and ADA Group combined seemed to have a lot of potential. RCL had always been a holding company until a few years back. In a bid to grow at any price, the companies procured enormous amounts of debt, inviting an inevitable downfall. At the end of March 2021, RCL’s consolidated debt was estimated to be ₹26,887 crores, while its consolidated revenues stood at ₹19,308 crores, with a net loss of ₹9,287 crores.
RCL has been under the spotlight ever since the IL&FS crisis of 2018. The government and RBI superseded the board of IL&FS in September 2018 and undertook similar actions in the case of the Dewan Housing Finance Ltd (DHFL), Punjab and Maharashtra Cooperative (PMC) Bank, and the two SREI companies. However, despite numerous red flags, no actions were initiated against RCL until now. Following are the most evident chronological events that suggest something was wrong with the company for quite some time:
Just after the RBI superseded the IL&FS board, media reported that Anil Ambani had started to dilute his stake in RCL from 52% - down to 2% of the capital- as of March 2020, making the Life Insurance Corporation of India (LIC) the single largest shareholder with a stake of 2.98%.
By the end of April 2019, credit rating agencies had downgraded ratings of the two companies- Reliance Commercial Finance and Reliance Home Finance, to the default category.
Following the deteriorated ratings, in June 2019, Price Waterhouse & Co (PWC) resigned as the statutory auditor of Reliance Capital as well as Reliance Home Finance, by citing ‘unsatisfactory response’ to certain observations. The management disagreed with PWC’s findings and consequently responded with aggression.
PWC Resignation Letters Point to Suspicion Of Fraud
Three Chinese lenders had lent US$700 million to Reliance Communications against personal guarantees by Anil Ambani. However, in 2019, in a court in London, Anil Ambani declared himself bankrupt. Such a bankruptcy declaration violates the ‘fit and proper’ criteria, required for the chairmen under IRDAI or even RBI companies. However, no action was taken in this case.
In September 2020, an Indian Bank classified its loan exposure to Reliance Home Finance as fraud.
These are just a few among the various other red-flag moments which the regulators like RBI, SEBI, and IRDAI ignored over time.
Finally, the action was undertaken when on October 4, the bondholders of RCL urged RBI to consider referring the company for insolvency resolution, citing challenges faced in the asset monetization process and non-cooperation from the company.
A report in Business Standard opines that the RBI waited till RCL had a negative net worth of ₹7,610 crores, and a negative capital ratio of 45% (at the end of 31 March 2021) before gathering the courage to act.
The entire scandal raises numerous questions against the smooth and honest functioning of the regulators. The downfall of RCL shall have a domino effect on not only its subsidiaries but also cause extensive losses to its investors and lenders - something that has remained consistent throughout the history of financial downfalls in our country!
