Ashok Hinduja's Leverage In The RCap Deal

Hinduja Group's acquisition of Reliance Capital (RCAP) now hinges on the extent of leeway that the Reserve Bank of India (RBI) is willing to give the group. But the trail of the insolvency process so far suggests that billionaire Ashok Hinduja may hold leverage over the regulator.

Indusind International Holdings (IIHL), a Mauritius entity of Hinduja Group, had won the bid in NCLT (National Company Law Tribunal) to acquire RCAP by promising to pay Rs 9850 crores to lenders. In November, RBI gave six months to IIHL to make the payment but the deadline ended on May 17 without Hinduja putting money on the table. Also, the NCLT deadline will end on May 27. Now the group is seeking extension of the deadline from the RBI, which has only two options: give some leeway and extend the deadline or ask the RCap administrator to cancel the current deal and issue a new Request For Resolution Plan (RFRP).

How Does Hinduja's Leverage Work

Two weeks ahead of the deadline, Hinduja Group has presented a revised offer for which it now requires approvals from around a dozen regulatory authorities including RBI, Sebi, Competition Commission of India, stock exchanges, NCLT etc. Hinduja Group revised the deal structure on the back of reasoning that insurance regulator IRDA had raised several concerns over its old structure.

Although the IRDA approved the Hinduja Group's revised offer, the regulator has done so by overlooking a few questions. RCap derives 99 percent of its value from the three insurance businesses including health, life and general. So the most crucial approval was that of IRDA, which has come and is valid for 90 days.

But pending all the other regulatory approvals, technically, the Hinduja Group can claim that there is no event of default and it is only logical that RBI extends the deadline since all the approvals will require at least 30-60 days more.

The most important fact is that Hinduja Group had bid Rs 1200 crore more than the second highest bidder for RCap i.e. Torrent Group, which had bid Rs 8650 crores. Hinduja Group's higher bid is its key leverage as no lender would like to let go of Rs 1200 crore extra on the deal. Also, if a new RFRP is issued, it is likely that the new bidder could submit a lower bid than Hinduja Group. This reason alone could force the regulatory authorities to extend the deadline.

In usual cases, the committee of creditors (COC) is known to give such extensions. But in this case, pending all the regulatory approvals, the leverage has moved to Ashok Hinduja, the promoter of Hinduja Group. Hence, the RBI is likely to extend the deadline to August 10. That said, RBI is yet to make any further moves but Ashok Hinduja is in the driver's seat, clearly.