Contentious developments have surfaced as the Insurance Regulatory and Development Authority of India (IRDAI) scrutinizes the ambitious proposal of the Hinduja Group’s IndusInd International Holdings Ltd. (IIHL) for the acquisition of the financially beleaguered Reliance Capital. Sources privy to the regulator’s communications have revealed an air of skepticism, particularly as the plan encompasses undertaking Reliance Capital’s substantial insurance business operations, which span both life and non-life segments.
The IRDAI’s misgivings were formally conveyed in a correspondence addressed to Nageshwara Rao Y, the court-appointed administrator overseeing the financial rehabilitation of Reliance Capital. This letter explicitly stated that IIHL’s resolution plan, as it currently stands, diverges from established norms that govern the insurance industry.
One of the critical issues raised by the regulatory body relates to the query about the equity capital that IIHL is prepared to allocate explicitly to this endeavor. IRDAI probes whether the proposed investment aligns with its expectations, endorsing the view that the promoters ought to channel their equity to ensure a stronghold in the company, as insurance enterprises inherently handle policyholder funds. As the overseer of the sector, the IRDAI upholds the safeguarding of policyholder interests as an imperative priority.
Furthermore, IRDAI cast doubts on the prospects of IIHL raising debt to finance the buyout of Reliance Capital, enquiring about the particulars of these borrowing schemes. The regulator is seeking comprehensive details, including the interest rates, the specifics of the instruments to be issued, and knowledge regarding the likely subscribers. This scrutiny also extends to how IIHL envisions supporting the capital needs of Reliance Capital’s insurance arms in the future—addressing concerns about its capability to infuse necessary funds into the ventures.
Another red flag highlighted by the regulator concerns the potential consequences on foreign direct investment (FDI) limits post-acquisition. The transfer of Reliance Capital’s stake to IIHL would seemingly culminate in 100% FDI ownership, prompting the regulator to seek confirmation as to whether such an arrangement complies with the extant FDI laws. The IRDAI has requested IIHL to furnish legal references that sanction this purported complete foreign ownership.
This regulatory scrutiny comes in the aftermath of the National Company Law Tribunal’s recent endorsement dated February 27, 2024, of IIHL’s Rs 9,650-crore resolution blueprint for Reliance Capital—signaling green light from the judicial standpoint. However, the diverging regulatory perspective now surfaces as a potential hurdle to the group’s rehabilitation plan.
The roots of the financial conundrum can be traced back to November 2021, when the Reserve Bank of India took the drastic step of intervening in the governance of Reliance Capital due to deep-rooted issues and recurrent defaults by the Anil Dhirubhai Ambani Group entity. This led to the appointment of Rao as the administrator and the subsequent initiation of the bid process in February 2022, aimed at finding a suitable entity to shepherd Reliance Capital out of its financial thickets.
Reliance Capital’s outstanding obligations were above the towering sum of Rs 40,000 crore, attracting initial interest from four contenders with resolution plans. These plans, however, were ultimately rejected by the committee of creditors, owing to the inadequacy of the bid values. This setback prompted a second round of bidding, in which IIHL, alongside Torrent Investments, emerged as participants. By June 2023, the Hinduja Group firm clinched the committee’s favor with its offer inclusive of an Rs 9,661 crore immediate cash payment, augmented by Reliance Capital’s Rs 500 crore cash reserves to be directed to the lenders.
With the regulatory conundrum now intensifying, stakeholders await further developments and will be particularly attuned to how IIHL addresses the concerns outlined by the IRDAI, which will be determinant in the ultimate feasibility of the bid in rescuing Reliance Capital from its financial quandary.
