Reliance Capital Insolvency Will Hurt Anil Ambani Less And LIC More
For LIC, the regulatory action against Reliance Capital is a double whammy.
In a curious twist of fate, the dramatic failure of an Anil Ambani-promoted company will hurt him less than another shareholder. None other than India's largest insurance company that's owned by the government.
Life Insurance Corp. of India owns 2.98% of Reliance Capital Ltd.'s equity making it the single largest institutional shareholder of the non-banking finance company as on Sept. 30.
Ambani and his family own just 1.51%, according to stock exchange filings.
Retail investors, each with less than Rs 2 lakh worth of shares, own 57.53% of the company, making them the largest shareholder category.
High net-worth investors own 27.42%. Of them, Ramakrishna Reddy Chinta alone has 2.16%. And a company he is director of, RKR Investments Services Pvt., owns another 1.43%. If counted together, that makes Chinta the largest shareholder of Reliance Capital with 3.59%.
On the evening of Nov. 29, Reserve Bank of India issued a statement saying it has superseded the Reliance Capital board, appointed an administrator and will initiate insolvency proceedings soon.
The regulatory action was prompted by "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".
The five-director company board is chaired by Anil Ambani and includes Chhaya Virani, Rahul Sarin and Thomas Mathew as independent directors; Chief Executive Officer Dhananjay Tiwari and Group President AN Sethuraman, according to information on its website.
Typically, an insolvent company's equity capital is worthless. Earlier this year, Dewan Housing Finance Corp. was a harsh reminder to shareholders of this basic tenet of business. The NBFC also underwent insolvency resolution, on RBI's direction, and was acquired by Piramal Group.
To be clear, a final view on Reliance Capital's equity value will be taken only during the resolution process.
This is the first time an Ambani-promoted company will face the ignominy of regulatory supersession and insolvency. The reputational hit though will outweigh the monetary impact on the family, as shareholders and lenders bear the bigger brunt.
For LIC it's a double whammy—it reportedly also holds the company's bonds.