Fragmented debt, asking for bids based on the value of the company’s subsidiaries even in 2022
Fragmented debt, asking for bids based on the value of the company’s subsidiaries
That day, the National Company Law Tribunal (NCLT) agreed to start bankruptcy proceedings against Reliance Capital, run by the Reserve Bank of India. This was the start of another high-profile insolvency resolution.
RBI had removed the board of Reliance Capital a month earlier, citing debts and poor governance. The company owes more than INR23,666 crore to its creditors. Most of the money comes from bonds held by the trustee, Vistra ITCL India.
Many twists and turns have led Reliance Capital to today, but the original script was very different from what it is now.
During the first shareholder meeting of Anil Ambani, who took over the financial business from his father, Mukesh Ambani, he said Reliance Capital had become India’s third-largest financial company after HDFC ICICI, making it the third-largest company in the country behind HDFC and ICICI.
Everyone who ran businesses, from insurance to lending and mutual fund (MF) to broking, was told to become leaders in their field. When Reliance Capital’s stock rose to a high of INR2,925 on January 10, 2008, the company was worth INR70,392 crore, or $70,392 million.
This was a lot more than the value of HDFC Bank, which was worth INR61,791 crore on the day that it was. But then, the 2008 global financial crisis happened, and it wiped out all the gains in the share price that had been made since 2005.
Nippon Life, a latecomer to the Indian market, bought a 26 per cent stake in the life venture for $680 million in March 2011. This valued the company at INR11,500 billion, or about $680 million in today’s money. Soon after, it bought another 26% of the MF business for INR1,450 crore, making it worth about INR5,600 crore. We saw some good news again. The annual report for FY12 said they were considering whether to start a bank.
It wasn’t just the financial sector that Anil Ambani wanted to participate in. He was also growing in power, telecom, media, and infrastructure simultaneously. Companies like Reliance Power, Reliance Communications, and Reliance Infrastructure, making money until FY16, started to lose money in the following years.
There was a net loss of INR23,839 crore for Reliance Communications in FY18, which had total debt of INR47,234 crore. This year, its sales were down 42% from last year, according to data from ETIG.
After the rise, the fall
But while this was going on, it looked like Reliance Capital might be the group’s leading player. The company made a net profit of INR1,353 crore in FY16. It had reserves of INR1,3890 crore at the end of that time. On August 23, 2016, the next generation, Jai Anmol Ambani, was added to the board of Reliance Capital.
The stock briefly rose but then fell back down again quickly. It grew 40% by September 27 of the same year. He called this the “Anmol effect” when it is an annual meeting. ETIG data shows that on August 1, 2018, Reliance Capital had become the most valuable company in the group. INR10,315 crore was its market value.
That was less than the value of Reliance Infrastructure, which had a value of INR10,075 crore, and the importance of Reliance Power, which had a value of INR9,060 crore. Reliance Naval and Infrastructure had a value of INR1,051 crore.
Reliance Capital lost its triple-A rating in March 2017 when the company split off its lending business and reclassified itself as a core investment company. In July of that year, it came to light that Reliance Capital had loaned a lot of money to Reliance Communications, which was in trouble. In September 2018, IL&FS and Dewan Housing Finance Corporation Ltd (DHFL) went under. This made things even worse for non-bank finance companies because it cut off their funds.
When PwC didn’t sign the balance sheet for Reliance Capital and its subsidiary, Reliance Home Finance, in FY19, it made things even worse. In April 2019, PwC resigned as an auditor, which caused lenders to be a little wary. When the rating agency CARE said Reliance Capital would be insolvent in December 2019, it was even worse news for people who own the company. To be clear: By March 2020, the company will no longer be owned by anyone because the promoters’ shareholding dropped from 47.48 per cent to 1.5 per cent.
When people saw this, they thought it was terrible. To get back their money and classify Reliance Capital group companies as wilful defaulters, they tried to get a court to let them do that, and they didn’t get that permission in August 2020. It was only last November that the Reserve Bank of India took over the board of Reliance Capital because of debts and poor governance.
What is left inside company?
A unique thing about this resolution is that Reliance Capital has no value, so it is not worth anything. We still have a stake in 20 subsidiaries and five associates that belong to Reliance Capital: Reliance Nippon Life Insurance and Reliance General Insurance are the two companies that makeup 95% of the value. Reliance Capital owns 51% of Reliance Nippon Life Insurance. Then there is Reliance Asset Reconstruction Company and Reliance Securities, a brokerage firm for people who want to buy and sell stocks for a small amount. Even though Reliance Home Finance and Reliance Commercial both have balance sheets that aren’t too small, bad loans have wiped out their net worth, and they still owe money to other people.
Unlike DHFL, which the Piramal Group bought for INR34,000 crore in September last year, Reliance Capital doesn’t have many loans to work with. As much as INR7,972 crore worth of loans were not paid back, according to the company’s most recent annual report.
DHFL lost a lot of money after forensic auditors said that many big loans went into a black hole and never came back. BDO India, a global accounting and consulting firm, is auditing Reliance Capital in the same way. The audit results could make it more difficult to get value out of things.
Unlocking value can be challenging.
There isn’t yet a set of rules for a group to follow. A company that is being liquidated can be sold piece by piece, but the Insolvency and Bankruptcy Code (IBC) 2016 allows the company to be sold as a whole.
Lenders say that asking for bids for Reliance Capital based on the value of its subsidiaries has its own set of problems. The broking business isn’t for everyone. The other option is to ask for bids for each subsidiary and the holding company individually, rather than all at once. For each unit, the RP needs approval from both lenders and the NCLT to sell it. It will be hard to sell some of the loss-making companies like Reliance Money Solutions and Reliance Wealth Management on their own, and they will have to be sold together as a portfolio.
The RP has hired an actuarial firm called Wills Tower Watson to value the life- and general insurance business units that the RP runs. RBSA Advisors and Duff & Phelps have been hired to liquidate and appreciate each of the remaining subsidiaries and provide a consolidated value for the company.
Reliance Home Finance and Reliance Commercial Finance were already sold to Authum Investment and Infrastructure even before the company was declared insolvent. Creditors had already agreed to the sale. It isn’t clear what the NCLT will think about this out-of-court deal for the subsidiary while the parent’s fate is still up in the air.
To keep the group companies from losing customers and employees over time, they need to find a solution quickly. People who buy insurance are very concerned about their trust because it is based on the promise to pay. Report: The fair value of investment subsidiaries was INR10,831 crore in FY21, which is less than the value of INR13329 crore last year. Lenders think the matter would have dropped even more after they said they were in debt. A value of INR10,831 crore would still leave them with less than 45% of their obligations.
Recovery is more complicated than it looks, but it is possible.
Another problem for the administrator is how the debt is broken up. Around 96% of the debt (INR23,666 crore) is in widely held bonds. At least 66% of these creditors by value must vote in favour of any resolution for it to go through. If even Life Insurance Corporation of India, which has a debt of INR3,485 crore, which is 14.7 per cent of the total debt, tried to move the needle, it wouldn’t be able to do it.
The value some lenders have sold their loans for shows that they are expecting a minimal return. A company owned by Ares SSG Capital bought INR624 million worth of loans and bonds from HDFC and Axis Bank for 27 to 28 paise on the rupee. This could set a standard for how much money lenders can expect to get back from debtors.
Reliance Capital is the seventh ADAG company that is going through bankruptcy. So far, lenders haven’t been able to get their money back from any of them. The other six companies are Reliance Communications, Reliance Telecom, Reliance Infratel, Reliance Communications Infrastructure, Reliance Naval & Engineering, and E Complex, which are all part of the same group.
In December 2020, bondholders tried to sell off the Reliance Capital subsidiaries. According to the company’s most recent annual report, 90 people said they were interested. Reliance Capital “refused to cooperate on all points,” Vistra ITCL, the trustee for bondholders, wrote in a letter dated June 23, 2021. This caused the sale process to be slowed down.
Because the administrator will be in charge with the help of the RBI, there is hope that things will turn out much better.