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Reliance Capital Resolution: More challenges ahead

Although Reliance Capital’s (RCap) lenders succeeded in concluding the second auction with an improved offer, they will have to cross several hurdles before completing the sale of the Anil Ambani financial services company as part of the insolvency process.

Hinduja entity IndusInd International Holdings offered ₹9,650 crore, almost ₹1,000 crore more than the highest bid by Torrent Investments made in the first round in December. But that’s still below the ₹12,500-13,000 crore liquidation value, achieving which had been the primary purpose of the second auction. Torrent did not participate in the second auction, and nor did any other entity; IndusInd was the sole bidder. Before the second auction, India’s largest life insurer and lender to RCap, Life Insurance Corporation of India (LIC), had indicated that it would not vote on plans below the liquidation value.

Beginning next week, lenders will negotiate only with the highest bidder, the Hindujas, for an improved offer. They’re unlikely to significantly bridge the gap between the liquidation value and the offer. The financial services company has a cash balance of Rs 430 crore, which too will be distributed to lenders, thus taking the total of what they’ll get to Rs 10,080 crore, which equates to a 42.5% recovery.
The administrator has filed an avoidance transaction claim with the National Company Law Tribunal (NCLT), seeking to reverse transactions worth Rs 2,000 crore by Reliance Capital before being admitted for insolvency. These are loans given by Reliance Capital to its group companies. As per the terms of the request for resolution plan (RFRP), the successful bidder must share 80% of this recovery with lenders and can retain 20% for itself. That could boost the overall recovery for lenders.

The most challenging part of the resolution would be getting Reliance Capital bondholders to release the shares of Reliance General Insurance that had been pledged.

In 2018, Credit Suisse-led investors invested in bonds issued by Reliance Home Finance, a Reliance Capital unit. The home finance company failed to honour the payment on the due date. As part of the settlement, investors extended the tenure of the bonds but took additional security – a corporate guarantee from Reliance Capital and a 37% share pledge from Reliance General Insurance Co, another unit.

However, Reliance Home Finance again failed to meet payment obligations, following which IDBI Trusteeship invoked the share pledge. Unless a sweet deal is offered to these two investors, they will not agree to release the share pledge. Further, IDBI Trusteeship has filed a claim of Rs 1,800 crore. Of this, the administrator has admitted about ₹1,200 crore. This dispute on the claim amount between the bondholder and administrator will also need to be resolved before lenders start to vote on plans. Among the 20 subsidiaries that are up for sale, the general and life insurance businesses are the biggest attractions.

Reliance Capital owns 100% of Reliance General Insurance (RGI) and 51% of Reliance Nippon Life Insurance, with Nippon Life holding the balance 49%.

Insolvency experts say the distribution of proceeds from the sale of the company will also be a critical factor for lenders voting on the plan. Much will, therefore, depend on the view that LIC, employees’ provident fund organisation (EPFO) and JC Flowers Asset Reconstruction Company – the three largest debt holders – take on the Hinduja offer. JC Flowers ARC had acquired Reliance Capital’s debt from Yes Bank.

Although Torrent did not participate in the second round, its plan, if compliant with the IBC rules, will still be put to the vote along with the Hinduja plan.

While plan approval needs 66% of the vote, a sale can go through only after the winning bidder receives the assent of various regulators such as the Reserve Bank of India, Insurance Regulatory and Development Authority of India, Securities and Exchange Board of India, Pension Fund Regulatory and Development Authority of India and Competition Commission of India.

More importantly, a final nod from the Supreme Court will be crucial. The apex court in April allowed lenders to proceed with the second round of auction to maximise recovery, but it also added that it would hear the matter again in August.

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