Reliance Capital was classified as a major investment company- a holdco. ADAG Company has more than 20 financial services subsidiaries ranging from insurance to asset management as an asset reconstruction company in which Reliance Capital’s equity stake ranges from 100% to 49%. Most of its borrowings are in the form of secured (₹14,855 crore) and unsecured bonds (₹1,405 crore). Some of this is term loan (₹625 crore) axis Bank And HDFC, which both the lenders sold in recent months to Asset Care and Reconstruction Enterprise (ARSE), an ARC promoted by Ares SSG Capital.
In addition, the company has issued guarantees worth ₹3,092 crore to banks and financial institutions on behalf of third parties. The financial creditor’s claims may cross ₹20,000 crore, including overdue interest.
NCLT Way
As a practical matter, a company cannot be referred to the National Company Law Tribunal (NCLT) within weeks and months of the first default. Promoters should be given a fair chance to revive the company.
For example, Altico Capital, backed by Clearwater Capital Partners, Abu Dhabi Investment Council and Verde Partners, was resolved outside the Insolvency and Bankruptcy Code earlier this calendar year. Altico’s property, which mainly gave loans to real estate builders, was acquired by ACRE, which expressed hope that the NCLT route may not be the only option.
It was on November 18, 2019 that the government amended the IBC to allow resolution of finance companies through the NCLT route. In fact, it was felt that amendments to the IBC Rules were made to resolve the DHFL dispute through the NCLT route. And thus, DHFL was the first in the queue.
Perhaps the regulator wanted to test the waters with DHFL before accepting any other finance company.
The fact that Srei Equipment and Srei Infrastructure, both now referred to the NCLT, were financially stretched in December 2020, it seems beyond doubt that they were successful in getting a favorable High Court order , thereby preventing lenders from classifying the account as a non-performing loan. Forbidding rating agencies to downgrade it. Nevertheless, after Piramal Capital – The White Knight – made payments to DHFL creditors, the banking regulator superseded the boards of Kolkata-based finance companies.
Reliance Capital’s promoter ADAG also tried to revive the company on its part. He proposed several plans – about 8-10 a year – but none could be presented to the board for approval, a secured creditor pointed out. A steering committee of debenture holders was also formed in January 2021 to monetize the assets of the company. He appointed JM Financial as his investment banker and Trilegal as his legal advisor.
ADAG managed to obtain an interim order from the Delhi High Court in August 2020, restraining Bank of Baroda and Punjab National Bank from declaring two of its subsidiaries – Reliance Commercial and Reliance Home Finance – as willful defaulters. (Once tagged as ‘intentional’, it is impossible to attract bidders.) It even publicly criticized the rating agencies – CARE Ratings and ICRA – when they called the account “unfair”. and downgraded to junk as “inappropriate and a confusing review process”.
signs of trouble
But the signs of trouble in the group were visible from 2018 itself. Reliance Communications was declared bankrupt in May 2018. Reliance Infra was downgraded to ‘D’ by India Ratings in August 2018, and Reliance Naval & Engineering was given a Junk rating by Brickwork Ratings in September 2019. Now it has been admitted to IBC.
On September 20, 2019, CARE Ratings downgraded Reliance Capital’s debt facilities rating to CARE D – meaning it is in default. But the trouble started a few months ago. The company’s rating was downgraded almost every month since March 2019, when it was given a CARE A status.
In April 2020, Yes Bank wrote to reserve Bank of India Approval of the company to be included in NCLT was sought, but no response was received. Even the trustees of the bondholders had written several letters to the regulator, seeking a NCLT-driven solution. In the absence of regulatory support, the trustees of the bondholders eventually approached the Debt Recovery Tribunals (DRTs) and high courts.
One lender pointed out that the RBI itself once directed lenders to refer an account to the bankruptcy court within 180 days if they are unable to resolve it. This direction of February 12, 2018 did not go down well as the Supreme Court termed it ultra-wired and the RBI was forced to withdraw it.
Whatever the reason, delays could cost bondholders and lenders dearly. Around 25-30 cents on a dollar is the best they can hope for, if the recent trade between banks and ACRE is an indicator of the extent of price recovery.
Lenders say that with Reliance Capital showing little progress on asset monetization, the RBI – now armed with the experience gained from DHFL’s resolution – may have felt it was the right time to act.
The regulatory action on Shrey and Reliance Capital over a two-month period should warn other defaulting finance companies that the RBI will not hesitate to take action against them if they do not settle their houses.