RBI’s plea for bankruptcy proceedings against Reliance Capital

There are various firms which are facing bankruptcy proceedings recently. Some of these firms include DHFL, SREI Group Firms etc. Reliance Capital is also one of such big firms facing bankruptcy proceedings.

On December 6, 2021, the Mumbai bench of the National Company Law Tribunal (NLCT) granted the Reserve Bank of India’s (RBI) petition to commence bankruptcy proceedings against Reliance Capital. These bankruptcy proceedings against Reliance Capital are initiated under Section 227 of the Insolvency and Bankruptcy Code, also known as IBC.

Following the petition’s admission, the RBI said that “the three-member Committee shall remain as the Advisory Committee” under the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019. Sanjeev Nautiyal (ex-DMD, State Bank of India), Srinivasan Varadarajan (ex-DMD, Axis Bank), and Praveen P Kadle are members of the advisory council (ex-MD and CEO, Tata Capital Limited).

The bankruptcy panel has also affirmed the nomination of Y Nageswar Rao who is former executive director of Bank of Maharashtra, as the company’s administrator. Earlier in the day, after hearing the case, the bench headed by Pradeep Narhari Deshmukh and Kapal Kumar Vohra reserved their decision.

The RBI had requested that the Mumbai bench of the NCLT commence bankruptcy proceedings against Reliance Capital last week. The company’s business includes loans to small and medium enterprises (SME) through Reliance Money and also to home buyers via Reliance Home Finance. This is the third Anil Ambani-group firm to be under the bankruptcy process.The other two includes Reliance Communications (RCom) and Reliance Naval and Engineering (Reliance Naval). This request by RBI came after it had overridden the company’s board of directors last month, alleging defaults and governance difficulties.

The bonds issued by Reliance Capital have a weighted average duration of 3.36 years and a weighted average fixed yield of 9.37 percent. Reliance Capital has a debt of Rs 27,100 crore. The net worth was a negative Rs 8,195 crore on an individual basis and a negative Rs 13,700 crore on a combined basis. In the first half of the fiscal year, Reliance Capital recorded a combined net loss of Rs 2,162 crore.

Anil Ambani was formerly considered one of the world’s richest persons. He had enterprises ranging from telecommunications to entertainment to defense. However, his and his brother Mukesh’s business interests diverged once they split their father’s Reliance company in 2005.

While Mukesh has become Asia’s wealthiest man, with a fortune of more than $90 billion, Anil told a British court in 2020 that his net worth had sunk to zero. This has happened due to a string of business failures.Anil Ambani’s debt-laden telecoms business Reliance Communications was dragged through court processes by its Chinese creditorswhen the declaration of poverty was issued.These Chinese creditors are Industrial and Commercial Bank of China.

Last year, the High Court in London ordered Anil Ambani to return $717 million in debts to Chinese banks, which are still seeking the funds.Anil faced three months in prison in 2019. It was bdue to when the Supreme Court of India declared him guilty of contempt of court for delaying a $77 million payment to RCom creditor Ericsson. Ericsson is a Swedish telecoms giant.

However, he escaped incarceration, He could avoid the jail because the money was finally made by his elder brother Mukesh Ambani. Anil Ambani had publicly feuded years before but now Mukesh Ambani’s ventures into telecom and retail had proven considerably more lucrative. The success of Jio in telecom sector and Ajio in retail sector is unmeasurable. The RBI’s unexpected action at Reliance Capital is an attempt by central bank to clear a pile of bad debt. These bad debts have affected India’s financial sectors significantly as these ‘business tycoons’ easily tapped money from states as well as private lenders on the basis of their ‘high profile’ and then flee away, ultimately causing loss to the country and general public.

During November 2021, it was held that “In light of RCL’s (Reliance Capital Ltd) failures in meeting different payment commitments to its creditors and major governance problems that the board has not been able to address effectively,” the central bank superseded the board.

This is the third time in recent years that the central bank has taken over boards of directors and begun bankruptcy procedures for what were formerly considered systemically significant NBFCs. In November 2019, the central bank replaced the board of directors of DHFL, followed by two NBFCs of SREI Group in October of this year.

Senior lawyer Ravi Kadam is representing RBI in this case. Ravi Kadam while arguing on behalf on RBI stated that under Section 227 of the Insolvency and Bankruptcy Code, only the regulator has the authority to begin bankruptcy proceedings against a financial services firm.

Ravi Kadam argued that on October 30, 2017, private sector lender YES Bank subscribed to Rs 987 crore worth of non-convertible debentures. These non convertible debentures were issued by Reliance Capital. The firm then defaulted on its payments to the bank around the same time in 2019. This default by the firm triggered the accelerated redemption clause. It essentially permits a lender to force a borrower to return the whole amount of an outstanding loan if specific conditions are not satisfied.

Darius Jehangir Kakalia, standing for Reliance Capital’s promoter, informed the court that they support the banking regulator’s appeal. Reliance Capital stated that it supports the RBI’s move to submit RCAP to the NCLT under Section 227 of Insolvency and Bankruptcy Code for a fast-track decision. He also said that the firm looks forward to fast debt resolution and continuance as a well-capitalized going concern through the IBC process, in the overall interests of all its stakeholders, including lenders, customers, workers, and shareholders.

The central bank is enacting far harsher requirements for NBFCs. These harsh rules are an attempt to bring them on line with bank standards. The move against Reliance Capital, however, may not have a big impact on the industry because the company to which it belongs has been in problems for a long time and has often failed to fulfil its loan to lenders or bondholders. The most recent instance of same was on November 27. February 21, 2022 is decided for next hearing regarding the bankruptcy proceedings,

In nutshell, the latest development in these bankruptcy proceedings against Anil Ambani’s Reliance Capital can be summarized in fivepoints:

  1. RBI supersedes board of Reliance capital.
  2. This step is taken citing defaults and governance issue.
  3. Nageswar Rao Y is appointed as the administrator of Reliance Capitals.
  4. The regulator moved NCLT against RCap on December 2, 2021.
  5. This matter will be next heard on February 21, 2022 i.e. Monday.

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