Fear Of Default By Hinduja Group On RCap Deal

With just a day left for the expiry of Reserve Bank of India's (RBI) deadline on Reliance Capital's (RCAP) deal, there is heightened fear that Hinduja Group may default on its promise to pay the lenders for the third time. RBI's six months long final deadline ends on May 17 and the Hinduja's have sought more time on some pretext or other - they have filed a revised plan now wherein the bizarre proposal is to pledge 100 percent shares of RCAP (target company) in Rs 8000 crore fund raising plan to buy RCAP (target company). This begs the question: Do the Hinduja's have their own money at all for the deal?

RBI had dragged RCAP to insolvency proceedings where Hinduja Group emerged as the successful bidder with a promise to pay Rs 9,850 crores to RCAP's public lenders including LIC and EPFO. But Ashok Hinduja led entities twice defaulted on their promise: first when it missed the March 31 deadline and second again this month after insurance regulator IRDA approved its proposal. Promoter Ashok Hinduja had declared that they would be clearing the dues within 48 hours of IRDA's approval of their proposal, which came on May 10 - but there is no word from the Hinduja's on clearing the dues yet, even six days after IRDA's clearance. The RBI, in November 2023, had approved the transfer of control of RCap to IIHL BFSI.

Another deadline of National Company Law Tribunal (NCLT) for its original proposal also ends in 10 days from now i.e. May 27. All this has heightened the fear of default by Hinduja's, who have so far been unsuccessful in bringing the money on table and are assumed to be using tactics to delay the resolution process.

Does Hinduja Group Have Money For The Deal?

In the revised proposal, the Hinduja's have introduced news companies in the transaction at the eleventh hour. This requires them to go back to all the regulator's to seek a fresh approval for their plan. Such a move could delay the resolution process by several months, even though the Hinduja Group has not submitted any concrete proposal to prove beyond doubts that it had its "own capital" to pay-off RCAP lenders and close the deal.

The assumption that the Hinduja Group may "NOT" have its own money to close the deal gets credence from the fact that it has proposed to pledge 100 percent shares of RCAP under a fundraising plan for Rs 8000 crores, in a complex structure involving tax haven based companies.

The borrowings are proposed to be availed by RCAP and the Hinduja Group entity India HoldCo from eligible investors including alternate investment funds. Hinduja Group has sought RBI permission for the creation of the pledge as a condition precedent to the proposed financing. Then, the revised proposal also goes on to say: Non-resident investor IIHL BFSI, where IIHL Mauritius will hold 51 percent or more, will create a pledge on the shares of RCAP."

IIHL (Indusind International Holdings Ltd) is a Hinduja Group company based out of Mauritius, which has 600 shareholders whose data is not available in the public domain and was sought by IRDA. IIHL BFSI (another entity) will pledge RCAP shares to a foreign or Indian bank or a non banking finance company to raise funds. The IIHL BFSI application to RBI says "approval for creation of pledge on equity shares of RCAP to be held by IIHL BFSI (India), an entity incorporated in Mauritius, for securing certain financial indebtedness to be availed by RCAP and Cyqure India."

IIHL seems like a flagship Hinduja company, since the group owns more than 15 percent stake in Indusind Bank in India, via this Mauritius registered company. Interestingly, the Hinduja Group has pledged nearly 45 percent of the holdings of IIHL in Indusind Bank for many years now. Despite this, they want to pledge RCAP shares to raise more funds for the deal.

All the above simply shows that the Hinduja Group "may be woefully short on cash of its own" to close the RCAP resolution successfully. Hence, there is fear that it may default for the third time on RBI and NCLT deadline shortly.

Consequences Of A Default

RCAP is among the only three companies that RBI had dragged to insolvency proceedings. Debt resolution for the other two: Srei Infra (which went to government owned NARCL) and DHFL (to Piramal Group) closed successfully. But RCAP has dragged longer.

As per the Request For Resolution Plan (RFRP), if the NCLT and the RBI deadlines expire and the money does not come, it turns out to be an event of default. In such a case, the bank guarantee of the resolution applicant can be encashed. In this case, Rs 500 crores of Hinduja Group can be encashed and they can be termed as defaulters with regard to the deal. Also, the next step would be to cancel the letter of intent (of resolution applicant i.e. Hinduja Group) and ask the RCAP administrator to again issue form G... i.e. new RFRP and call for fresh bids. This has happened in several cases in the past wherein the resolution applicant could not close the deal. There is no other choice if the money does not come and RBI's credibility is at stake and it needs to call the bluff of the resolution applicant at some point in time.

Event Of Default: RFRP Clause

The RFRP of RCAP in clause 7.6.1 says, "Pursuant to the issuance of the Letter of Intent to the Successful Resolution Applicant(s), the Successful Resolution Applicant(s) shall be required to comply with the terms and conditions in the manner and in accordance with the timelines, in each case as set out in the Letter of Intent or as may be specified by the CoC or the Administrator, including execution of the definitive agreements, if required. The Successful Resolution Applicant(s) shall be responsible for effective implementation of the Resolution Plan(s) and shall comply with the Resolution Plan(s) and the definitive agreements and take all steps to ensure implementation within the timelines indicated.'

Clause 7.6.5 on Failure: "Upon receiving NCLT approval, if the implementation of a part(s) Resolution Plan fails, the Administrator and the CoC reserve the right to proceed against the relevant Resolution Bidder/Resolution Applicant who has failed to implement its respective part of the Resolution Plan and such other parties (including Resolution Bidders and Resolution Applicants) who have caused or contributed to such failure of implementation of the Resolution Plan."

On 13 March, the NCLT had asked IIHL to implement the resolution plan by March 31, and complete payment for the takeover in accordance with the resolution plan by 28 May.

“You are cognizant of the fact that implementation of the resolution plan in totality, especially of the size and scale of Reliance Capital Ltd in less than one month and 10 days (from the date of the order which was 27 February), is not only untenable and impractical, but unimaginable," IIHL had said in a letter to the administrator of RCAP.

But even three months after approval of its plan for the deal, the Hinduja Group has not been able to bring money on the table and instead has delayed by submitting a revised plan.

Palak Shah

BW Reporters The writer is author of the book: The Market Mafia - Chronicle of India’s High-Tech Stock Market Scandal & The Cabal That Went Scot-Free. Palak has been a journalist in Mumbai for nearly two decades now. He has worked for most premier pink papers including The Economic Times, Business Standard and The Financial Express and The Hindu Business Line. He was drawn to crime reporting at the age of 19 but a few years in the field told him that the fabric of crime had changed and the organised gangs, as Mumbai had witnessed during the eighties, no longer existed. It was business and markets that dominated the scenario. His passion to unravel the intricacies of the ‘white money’ economy led Palak to the world of finance and regulations.