Reliance Capital Insolvency And The Domino Effect On Its Subsidiaries

The Reserve Bank of India's decision to supersede the board of Reliance Capital Ltd. and refer it for insolvency proceedings will lead to a cascading impact across its nearly 20 subsidiaries.

Reliance Capital, which got a licence as a non-bank finance company in December 1998, is now registered as an NBFC-CIC or core investment company, according to its annual report for 2020-21. As such most of its earnings come from operating businesses that it holds stake in.

The annual report lists 20 subsidiaries where Reliance Capital has majority stake. It also lists four companies in which it has minority stake and another five associate companies, of which one is a foreign entity.

According to a banker directly familiar with the matter, the administrator will essentially assume control at the top and a committee of creditors will be set up. From there on, you resolve everything piece by piece, this banker said on the condition of anonymity.

This banker said as creditors they aren't expecting anything more than 5-10%, adding that in a number of cases Reliance Capital's equity in subsidiaries is pledged to global lenders.

In a statement to the exchanges, Reliance Capital said it intends to fully cooperate with the administrator. The group owns profitable and valuable operating businesses, with 100% stake in Reliance General Insurance and 51% stake in Reliance Nippon Life Insurance, besides other financial investments, said the statement, adding that pending cases have delayed attempts at resolution so far.

Lenders have already been trying to finalise a resolution plan for two large non-bank lenders under Reliance Capital's umbrella—Reliance Commercial Finance and Reliance Home Finance.

A second person familiar with the matter said various asset sales being attempted to recover dues were delayed because decision making was stuck at the level of the major shareholder. For the last 6-7 months, multiple deals have been in final stages, pending shareholder approval. The induction of an administrator will help in clearing this backlog, this person said on the condition of anonymity, adding that any litigation by various parties will need to be watched.

Abizer Diwanji, partner and head of financial services at EY India, said the platform can be sold as a whole or piecemeal.

Unlike other insolvency proceedings, where creditors need to regularise operations, here they can just proceed directly with the sale, said Diwanji. To resolve a core investment company, selling it as a platform is the best option, he said.

If that option isn't on the table, the creditor may need to proceed with sale of individual assets.

"The best way to do it would be to hit the end of the CIRP (corporate insolvency resolution process), start the liquidation process (for Reliance Capital) and then liquidate each of the investments," Diwanji told BloombergQuint in an interview.

The decision to sell the company as a platform or individual companies, will be taken by the committee of creditors through a vote. Approval of the National Company Law Tribunal may also be needed, said a third person closely involved with the process, who spoke on condition of anonymity.

The assessment of valuation by the administrator and a process advisor will be key in deciding the direction for Reliance Capital, the third person cited earlier said. Till such a process is concluded, it's difficult to say whether a consolidated sale would be better than individual sale of equity in subsidiaries, this person said.

The committee of creditors for Reliance Capital will be driven mostly by debenture holders, rather than banks. Debt securities accounted for Rs 16,260 crore, out of Reliance Capital's standalone financial liabilities of Rs 22,664 crore, as of Sept. 30.

In its statement, Reliance Capital said that 95% of its debt came through debentures, while it had no borrowings from banks.

Typically, in cases where debenture holders are part of the financial creditors, institutional players get a seat in the creditors' committee to discuss proposals. However, when it comes to voting on proposals, the debenture trustees take charge.

The third person cited earlier said once the administrator has created a list of all financial creditors, it will become clearer if institutional debenture holders have the highest exposures. In case the committee of creditors comprises a number of smaller debenture holders, it may cause undue delays in the proceedings, this person said.

The benefit of resolving Reliance Capital through an insolvency process would be that it would help put any inter-creditor issues on hold, Diwanji said. It will also ensure that creditors representing 66% of the votes will decide the fate of Reliance Capital, he said.