Even as Debashish Panda, the chief of insurance regulatory body IRDA was away in New Delhi last Friday, his office was working overtime to clear a revised proposal filed just 10 days ago by the Hinduja Group to takeover Reliance Capital (RCAP). On May 10, the express approval of IRDA came a little later than 10 p.m., which is way past office hours for public servants in India. There seems no reason behind IRDA's speed in granting its approval, other than to facilitate the Hinduja group, which is pressed for time to meet the deadline of May 27 for the completion of the deal. Yet, with the extra labour and the toil of the extended hours apart, IRDA's actions had left a laundry list of questions and a cloud over its sudden U-turn.
In a letter on March 20, the IRDA had raised concerns over the structure of the deal submitted by the Hinduja group entity Indusind International Holdings (IIHL) to acquire RCAP, which is undergoing a corporate insolvency resolution process (CIRP). RCAP has three insurance businesses including life, general and health, where handling of public money is involved and hence IRDA was wary of the obscure deal structure. The regulator wanted to conduct a due diligence to know the names of the 600 hidden shareholders of IIHL, a company registered in a tax haven (Mauritius). But in giving an express approval to the deal and saving the Hinduja group the hassle of overshooting the deadline, did IRDA give up on the idea of due diligence?
IIHL's resolution plan was approved by the National Company Law Tribunal (NCLT) on behalf of the Hinduja group and the tax haven-based entity is still part of the deal structure even in the revised proposal, albeit in convoluted ways. The new proposal says: "IIHL has emerged as the successful resolution applicant and as a part of the resolution plan, IIHL BFSI (India) Limited, an entity in which IIHL shall hold 51 percent or more shareholding is the implementing entity. Accordingly, IIHL BFSI will hold 100 per cent equity shares of Rcap (''Implementing Entity''). Further, IIHL BFSI Holdings Limited holds 100 per cent equity shares of IIHL BFSI. IIHL Holdings is held 51 percent by IIHL and the remaining 49 percent is held by an equity partner."
The above submission by the Hinduja group, even though a complex structure, makes it clear that there are still hidden shareholders in the deal, who are not publicly known but would be the beneficiaries. But suddenly, the IRDA has chosen to turn a blind eye in sheer disregard towards the 20 million policyholders of Rcaps insurance business.
Borrowing Money For Deal Against IRDA Norms
As per the legal opinion by IRDA, Hinduja's bid structure violated key regulatory clauses of IRDA's rules on the acquisition of insurance business since the IRDA (Registration of Indian Insurance Companies) Regulations, 2022 disallows promoters or investors to bid for an insurance company "with borrowed money." 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 revised proposal still talks about borrowing money for the deal and out of the Rs 9850 crores that the Hinduja Group has to pay for the deal, around Rs 8000 crore is debt or simply borrowed money, for which RBI permission has been sought. Why is the IRDA conveniently indifferent to it now?
The whole resolution plan now seems like a mockery of the collective intelligence of India's bureaucracy, banking and insurance officials since Hindujas have proposed to pledge 100 per cent RCAP shares to raise Rs 8000 crores for Rcap acquisition deal. Do the Hindujas have no money of their own and depend on RCAP shares as collateral to raise funds? If that was the case, why can't RCAP's large lenders like LIC and EPFO do the same?
The new proposal says: "Non-resident investor IIHL BFSI, where IIHL Mauritius will hold 51 per cent or more, will create a pledge on the shares of RCAP."
For this, the Hinduja Group has sought the approval of RBI's Foreign Exchange Department. Simply put, IIHL BFSI 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."
"Since the borrowings are proposed to be availed by RCAP and the India HoldCo from eligible investors which include alternate investment funds and other eligible investors, in light of the regulations set out above, the creation of pledge over the shareholding of RCAP by the Implementing Entity will require approval of the RBI. Please note that we are required to obtain the consent of your good offices in relation to the creation of the pledge (as set out above) as a condition precedent to the proposed financing." Hinduja Group entity has said in its proposal to seek RBI's nod.
Does IRDA's express approval now overlook the fact that the Hindujas are still talking about borrowing money to acquire RCAP, which goes against the letter and spirit of IRDA rules (as quoted above)?
Reliance General Insurance (RGIC) and Reliance Nippon Life Insurance (RNLIC) fall under RCap, which comes directly under the ambit of IRDA and pledging of RCAP shares simply means borrowing money to acquire insurance business. Why should the Central Vigilance Commission not probe IRDA for the lapse, since there is nobody to conduct an audit of the IRDA decisions?
Capital Adequacy Ratio
The capital adequacy ratio of Reliance General Insurance (RGIC) is below 1.75 and the company is required to raise at least Rs 1000 crores more to comply with IRDA rules. Earlier, the IRDA had questioned the ability of IIHL and ASIA Enterprises LLP (AELLP), another company part of the deal structure, to get the funds to shore up RGIC's capital adequacy. But in granting the express approval, has the IRDA now overlooked this aspect too?
Also, how did the IRDA forget to ask for a shareholder agreement (SHA) between Nippon Life Insurance and RCAP as part of its due diligence? Nippon Life and RCAP are two promoter shareholders of Reliance Nippon Life Insurance and for the purpose of the deal, the NCLT had cancelled all the shareholding agreements. Has IRDA checked for SHA between two promoters of a crucial life insurance company?
Even while the IRDA has given an express approval for the deal in sheer disregard to its own concerns and regulations, the closing of RCAP acquisition before the May 27 NCLT deadline, will be a race against time for the Hinduja Group. This, since they require special abilities like with the IRDA, to get speedy approvals from nearly a dozen other regulatory authorities including RBI, SEBI, exchanges, Competition Commission of India etc on their revised proposal. The Hindujas may also have to go back to NCLT to get a fresh nod, since they revised the resolution plan at the eleventh hour and added new companies to the transaction. The wait may get as much longer for RCAP lenders.
