Hinduja's Bid To Acquire RCap Violates India's FDI, Insurance Norms, Fears IRDA
Can you imagine the Hinduja Group, which is said to be among Europe's wealthiest families with more than USD 30 billion in net worth, having to borrow little over USD 1 billion to fully fund its acquisition of an insolvent company in India? India's Insurance Development and Regulatory Authority (IRDA) believes that Hinduja Group's Rs 9,661 crore bid structure to acquire Reliance Capital (RCap) "that hinges on foreign borrowings" is likely to be in violation of several norms with regard to the acquisition of insurance business in India and also the country's FDI (Foreign Direct Investment) norms. Hinduja Group's deal to acquire RCap cannot conclude till the IRDA and other regulatory authorities give a final clearance.
As per a legal opinion by the IRDA, Hinduja's bid structure violates India's FDI norms in the insurance sectors and also key regulatory clauses of IRDA's rules on acquisition of insurance business. Reliance General Insurance (RGIC) and Reliance Nippon Life Insurance (RNLIC) fall under RCap, which comes directly under the ambit of IRDA.
In 2021, India's Parliament had allowed up to 74 per cent FDI in the country's insurance sector. But the Hinduja Group's bid structure for Rcap results in 100 per cent ownership of RCap's insurance business by foreign entities. As per a letter written by IRDA raising its concerns on Hinduja's bid structure, RCap will be wholly owned by entities based outside India. In other words, RCap will have 100 per cent FDI and IRDA has sought a clarification from the RBI (Reserve Bank of India) appointed administrator for RCap, Nageshwara Rao Y. IRDA wrote the letter on March 20.
Also, the IRDA (Registration of Indian Insurance Companies) Regulations, 2022 disallows promoters or investors to bid for an insurance company "with borrowed money."
Bid Structure Under A Cloud
The Hinduja Group operates its Indian business mainly via foreign holding companies coming from Mauritius, London and Switzerland. In the current deal for RCap, the Mauritius-based IndusInd International Holdings Ltd. (IIHL) and a Mumbai registered AASIA Enterprises LLP (AELLP) have bid Rs 9,661 crore, which was recently approved by the National Company Law Tribunal (NCLT). But the IRDA believes that the deal structure may be in violation of its norms that other insurance companies follow in India.
As per clause 6(8)(i) of IRDA (Registration of Indian Insurance Companies) Regulations, 2022, which clarifies on additional Stipulations for Investment by Promoter and/or investor: "Investment shall be made entirely out of own funds and not from borrowed funds."
But the IRDA letter to Nageshwara Rao states, "It (Hinduja Group entities) has proposed to raise borrowings for acquisition of shares of RCap. Please clarify as to why the same should not be construed as non compliance with 6(8)(i) of Registration Regulations."
The IRDA has sought details regarding structure of the said borrowings, instruments to be issued, proposed subscribers, rate of interest, tenure etc with regard to the borrowings by the Hinduja Group entities.
Further intrudingly, IRDA has learned that "interest thereupon is expected to be accrued till maturity 'Payment in Kind Structure.'" The IRDA wants to know "How the Payment in Kind structure will operate, please clarify."
Violation Of IRDA SPV Norms
IRDA has also learned that one of the bidding entities AELLP has no business activity and its shares along with its partnership interest will be pledged (to raise funds). Also, it means that AELLP will be in the nature of Special Purpose Vehicle (SPV) and the same requirements on borrowings are also applicable to the SPVs, IRDA letter states. Further, the structure is such that it will turn RCap into a holding company without any business operations. The IRDA is concerned that this will simply turn RCap also into an SPV, which would then rule 6(3)(iv) of IRDA's Registration Regulations.
Rule 3 of IRDA's Registration Regulations states that SPVs cannot issue convertible instruments of any kind and all the other requirements to other direct promoter and investment entities will also be applicable to SPVs. Hence, it the SPVs borrow for the purpose of acquisition, it would be a violation of IRDA norms.
Also, shares of RCap and Hinduja entity IIHL are proposed to be pledged for the deal, which too is a violation of rule 6(3)(iv) of Registration Regulations. The IRDA is concerned that the debt raising will create a liability on the holding companies and SPVs, which could restrict future capital requirements for the insurance businesses.
Not much information is available about AELLP while the website of IIHL does not give email addresses for media queries. The column on contact details does not give any email address for correspondence but only a Mauritius Map to reach the company physically at Level 3, Ebene House, hotel Avenue 33, Cybercity, Ebene, 72201, Mauritius. As is the culture of Mauritius to just provide a tax base, several different companies are registered at the same address as can be seen from the Offshore Leaks Database by the International Concretum of Investigative Journalists. Another address mentioned on one of the letter head of IIHL says 1A Ground Floor North Building, Beau Plan Business Park, Pamplemouses 21001, Mauritius.
Hidden Shareholder details
As per IRDA's study of the deal structure, IIHL has 600 shareholders, which are secret so far nowhere the data on them is publicly available.
RDA wants to know the full details of these shareholders including names, country of incorporation/citizenship, percentage of equity stake held, and details of the equity stake held in IIHL by major shareholder groups acting in concert. IIHL's website is sketchy since it has no details of shareholders or any other financial records etc.
IRDA has told RCL administrator Nageshwara Rao Y that they had observed that the 'Indicative Transaction Structure' was only indicative and subject to change. "You are requested to provide a definitive structure, along with details of the entities involved, in order to carry out due diligence. The details should include name, country of incorporation, shareholding pattern, capital structure, net worth, year of incorporation etc."
As per the letter, the IIHL transaction structure involves multiple SPVs based outside India. "You are requested to provide shareholding pattern and capital structure of the said SPVs including the details of the said SPVs i.e. name, country of incorporation, year of incorporation etc," IRDA's letter says. Regarding AELLP, IRDA letter states that it was indicated in the draft response that the structure of the AELLP will undergo change due to the introduction of HoldCo of AELLP.
