The Reserve Bank of India’s decision to seek a resolution of the Anil Dhirubhai Ambani Group (ADAG) promoted two years after it defaulted on payments has led to experts asking what triggered this move at this point in time. Critics have been quick, and rightly so, in pointing out that the lenders will have to pay a price for this delay.

Reliance Capital was classified as a core investment company- a holdco. The ADAG company has over 20 financial services subsidiaries, from insurance to asset management to an asset reconstruction company with Reliance Capital’s equity stake ranging from 100% to 49%. A majority of its borrowings is in the form of secured (₹14,855 crore) and unsecured bonds ( ₹1,405 crore). It has some term loans (₹625 crore) from Axis Bank and HDFC, which both lenders sold to Assets Care & Reconstruction Enterprise (ARCE), an ARC promoted by Ares SSG Capital in recent months.

Over and above this, the company has issued ₹3,092 crore of guarantees to banks and financial institutions on behalf of a third party. Including interest overdue, financial creditor claims could cross ₹20,000 crore.

NCLT Route

As a practical matter, a company can’t be referred to the National Company Law Tribunal (NCLT) within weeks and months of a first default. The promoters should be given a fair chance to revive the company.

For instance, Altico Capital, backed by Clearwater Capital Partners, Abu Dhabi Investment Council and Varde Partners, was resolved outside of the Insolvency and Bankruptcy Code early this calendar year. The assets of Altico, which gave loans mainly to real estate builders, was acquired by ACRE, which gave rise to hopes that the NCLT route may not be the only option.

It was only 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 the amendment in the IBC rules was done to resolve the DHFL imbroglio through the NCLT route. And thus, DHFL was the first in the queue.

Probably the regulator wanted to test the waters with DHFL before admitting any other finance company.

The fact that both Srei Equipment and Srei Infrastructure, now referred to NCLT, were financially stretched in December 2020 itself seems beyond doubt given that they succeeded in getting a favourable high court order preventing the lenders from classifying the account as a non-performing loan and forbidding rating agencies from downgrading it. Yet, it was only after Piramal Capital – the white knight – made payments to DHFL creditors, that the banking regulator superseded the boards of the Kolkata-based finance companies.

Reliance Capital promoter ADAG too on its part made attempts to revive the company. They proposed several plans – nearly 8-10 over a year – but none could be even presented to the board for approval, one of the secured creditors pointed out. A steering committee of debenture holders in January 2021 was also formed to monetise assets of the company. They appointed JM Financial as their investment banker and Trilegal as their legal counsel.

ADAG managed to secure an interim order from the Delhi High Court in August 2020 preventing Bank of Baroda and Punjab National Bank from declaring two of its subsidiaries – Reliance Commercial and Reliance Home Finance – as wilful defaulters. (Once tagged as ‘wilful’, it is impossible to attract bidders.) It even publicly criticised rating agencies – Care Rating and ICRA – when they downgraded the account to junk as “unjustified and unwarranted and with an illusory review process.”

Signs of Trouble

But signs of trouble brewing in the group were visible since 2018 itself. Reliance Communications was admitted to bankruptcy in May 2018. Reliance Infra was downgraded to ‘D’ in August 2018 by IndiaRatings, and Reliance Naval and Engineering was assigned a junk rating by Brickwork Ratings in September 2019. It is now admitted to the IBC.

On September 20, 2019, Care Ratings lowered the rating of Reliance Capital’s debt facilities to Care D – implying it is in default. But trouble had started a few months ago. The company’s rating was lowered almost every month since March 2019 when it was rated as Care A.

In April 2020, Yes Bank wrote to the RBI seeking approval to admit the company into NCLT, but there was no response. Even the trustee to the bondholders had written several letters to the regulator seeking NCLT-driven resolution. In absence of support from the regulator, the trustees of the bondholders eventually knocked on the doors of the Debt Recovery Tribunal (DRT) and high courts.

One lender pointed out that the RBI itself had once directed lenders to refer an account to the bankruptcy court within 180 days of default if they are unable to resolve it. This directive dated February 12, 2018, no longer holds good since the Supreme Court struck it down as ultra-vires and the RBI was forced to withdraw it.

Whatever the reasons, the delay could cost bondholders and lenders dearly.About 25-30 cents on a dollar is the best that they can hope for, if the pricing of a recent trade between banks and ACRE is an indicator of the extent of recovery.

With little progress visible on asset monetisation of Reliance Capital, the RBI – now armed with the experience gained from the resolution of DHFL – may have felt it was the right time to act, lenders say.

Action by the regulator on Srei and Reliance Capital in a span of two months should send out a warning to other erring finance companies that the RBI will not hesitate to act against them if they don’t put their houses in order.