The fall of Reliance Capital

The Synopsis

"It has always been our desire to develop a world-class bank," declared Anil Ambani, chairman of the Reliance Group, in 2010.

In November 2021, India's banking regulator, the Reserve Bank of India (RBI), has seized control of Reliance Capital, the group's non-banking financing arm, and has submitted it to the bankruptcy courts.

Even the non-banking component of the company could not survive. But how did Reliance Capital find itself in such a precarious position?

The narrative starts in 2005, when the Ambani brothers decided to separate the family firm. Anil Ambani took over the telecom and financial services businesses. He was banking on what he saw to be India's "future." But just getting a foot in the door isn't enough; you also need to know how to operate it effectively. And, well, let's just say the execution wasn't quite flawless. Anil Ambani continued to make greater and bolder (maybe riskier?) ventures in the entertainment, infrastructure, and power sectors.

"His judgments were not based on a well-thought-out plan; they were motivated by ambition," a stock market expert who did not want to be identified claims.

Another observer states, "It was trendy to compete for large projects that were funded by public sector banks (PSBs) at the urging of politicians."

Debt! Debt! Debt!

In order to develop at any costs, the Reliance Group's companies took on massive sums of debt. Anil Ambani's economic empire came falling down like a pack of dominos in 2017 when one of his companies, Reliance Communications, went bankrupt.

And what about the last piece to fall? Reliance Capital is a private equity firm based in New York. Asset management, life insurance, wealth management, commercial financing, and home finance were all areas of expertise for this financial services firm.

At first glance, the diversified group of firms seemed to have a lot of promise. However, issues started to surface shortly after.

Take, for example, Reliance Home Finance. You'd imagine that a home financing firm offers money to ordinary people who want to purchase their dream houses. Reliance Home Finance, on the other hand, lent to other businesses in excess of 50% of the time. Infrastructure and real estate development companies. As you can expect, cash flow concerns afflict these industries, particularly as the economic cycle shifts. But things grow considerably worse when you lend to firms in your own group that are having financial difficulties. Consider the loans made by Reliance Home Finance to Reliance Infra and Reliance Power. If those businesses are mishandled and fail, you will be pulled down with them.

You can picture the state of things in the Commercial Finance subsidiary if the Home Finance subsidiary was in this "inter-corporate lending" quagmire (whose job is to lend to corporates). They were all in the same boat, financing even more money to the Reliance Group's businesses.

Finally, when companies like Reliance Communications and Reliance Power began to collapse and default on their debts, a chain reaction ensued. Reliance Capital was unable to pay its own debts. It barely has Rs 11 crores in cash in March 2019. PwC, the company's auditor, had departed by June. The auditor expressed dissatisfaction with Reliance Capital's reaction to financial concerns raised by the auditor. Reliance Capital's debt have been downgraded to default status by Care Ratings by September 2019.

Do you see how this kind of incestuous loan arrangement is problematic?

Sure, we might claim that the business climate had a role in some of it. Consider the NBFC crisis of 2018, when infrastructure lender IL&FS declared bankruptcy. No one was willing to lend money to NBFCs like Reliance Capital any more. As a result, their money dried up. And, in order to stay afloat, Reliance Capital started selling its holdings in firms that were genuinely performing well. Like its mutual fund firm, which was formerly the country's sixth biggest. Reliance Capital still has $9 billion in assets to cover its $2.9 billion debt.

However, the RBI had had enough of the corporate governance difficulties and decided to take things into its own hands. What will the outcome of Reliance Capital's bankruptcy be? Let's take a look at what occurred to another NBFC, DHFL, which had a similar experience. After a bidding procedure, the Piramal Group took over the firm, setting a precedent for subsequent bankruptcy cases. Lenders, including banks, were able to recover 30–40% of the loan amount. Shareholders, on the other hand, were wiped out. The stock markets discontinued trading DHFL's shares on June 11, 2021. Small stockholders kept 3.8 lakh shares in the hope of gaining some profit throughout the delisting process. They were instead left with nothing.

We may also anticipate a similar conclusion for Reliance Capital. While Anil Ambani's shareholding in the company has been reduced from 52 percent in December 2018 to 2 percent by March 2020, retail investors have been flocking to the stock in the hopes of making a fast profit anytime there is positive news. They currently have a 57 percent stake in the business. If a DHFL-like event occurs, these investors might lose their whole investment.

And those who gave money to Reliance Capital, including banks, are expecting 30 cents back for every dollar they lent.

Is there a silver lining to this? As Bloomberg's Andy Mukherjee pointed out, there is a group of individuals who were not harmed. "Depositors" who could be interested. Consider what would have happened if the RBI had permitted corporations to establish banks. In 2010, Reliance Capital would have leapt at the chance. And it's possible that the people on the short end of the stick currently are regular fixed deposit holders. The stock market aficionados, on the other hand.

So, maybe that's one silver lining to this disaster. But, in general, it's a terrible series of events.