The Story Behind The Sacking Of Reliance Capital Board

A six-line press release of the Indian central bank, signed by a chief general manager, on Monday evening, announced supersession of the board of directors of Reliance Capital by the Reserve Bank of India (RBI).

The act, done “in exercise of the powers conferred under Section 45-IE (1) of the Reserve Bank of India Act, 1934”, was prompted by the defaults by Reliance Capital in meeting the various payment obligations to its creditors and serious governance concerns which it board was not been able to address effectively.

Nageswar Rao Y, former executive director of Bank of Maharashtra, has been appointed as the administrator of the company under Section 45-IE (2) of the RBI Act.

The released mentioned that the RBI would shortly initiate the process of resolution of the company under the insolvency and bankruptcy rules. The Reserve Bank would also apply to the National Company Law Tribunal for appointing the administrator as the insolvency resolution professional.?

A day later, on Tuesday, the RBI announced setting up a three-member advisory committee to assist the administrator during the corporate insolvency resolution process. They are : Sanjeev Nautiyal, former DMD, State Bank of India; Srinivasan Varadarajan, former DMD, Axis Bank; Praveen P Kadle, former MD & CEO, Tata Capital.

In the first week of October, the RBI had superseded the boards of?Srei Infrastructure Finance and?Srei Equipment Finance and initiated insolvency proceedings owing to governance concern and payment defaults by both the companies.

This is the second instance of the?banking regulator superseding a finance firm’s board. Earlier, it had taken such action in the case of mortgage lender DHFL, which is now after successful resolution under the wing of Piramal Enterprises. Its new avatar is called Piramal Capital and Housing Finance.

So, Reliance Capital is the third instance of the RBI sacking the board of a non-banking financial company. Why has it done so?

Here are the reasons:

The company started defaulting in its debt obligations in October 2019. As on March 31, 2021, outstanding overdues towards the lenders and debenture holders stood at Rs20,103 crore.

The RBI inspection with reference to financial position as on March 31, 2020 revealed that RCL was not meeting minimum regulatory capital ratio or adjusted net worth to risk weighted assets – as well as the leverage ratio (outside liabilities to adjusted net worth). Against the requirement of minimum regulatory 30 per cent capital ratio, it had just 10.75 per cent.

RCL’s outside liabilities were 8.42 times of its adjusted net worth – more than three times the maximum permissible limit (2.5 times).

The audited financial results for the year ending March 2021 shows further deterioration in its health -- negative net worth at R7610 crore and negative capital ratio 45 per cent.

Through letters and at meetings held with the management of the company, the Reserve Bank has been continuously communicating its regulatory and supervisory concerns to the company -- non-compliance with IRACP norms, lending to borrowers with negative net-worth/inadequate repayment capacity, weak corporate governance practices, inadequate internal systems and controls, poor compliance standards, among other things.

However, its board of directors has not addressed these issues.

The audit committee of the board also failed to address the concerns raised by the statutory auditors -- lending to group companies with poor track record/inadequate repayment capacity and lending to poorly performing group companies through circuitous routes.

Incidentally, the previous statutory auditors Price Waterhouse & Co. had resigned in June 2019 for not receiving clarifications and satisfactory responses from the audit committee of the board.

The writer is Consulting Editor of Business Standard. His latest book `Pandemonium: The Great Indian Banking Tragedy' has won the Tata Literary Live Best Business Book 2021 Award