RCAP Deal: IRDA Wary of Hinduja Group's Sealed Cover Responses

Hinduja Group has submitted a "sealed cover" response to the Insurance Regulatory And Development Authority (IRDA) with regard to its acquisition of Reliance Capital (RCAP), sources said. IRDA had expressed its concerns on the structure of the deal since it violates India's Foreign Direct Investment (FDA) norms and also proposes to borrow money to acquire RCAP's insurance business, something which is not allowed by IRDA in the insurance sector.

Indusind International Holdings (IIHL) and  AASIA Enterprises LLP (AELLP) are the two entities through which the Hinduja Group has bid Rs 9850 crore for RCAP. The sealed cover responses to IRDA's lengthy queries were submitted by IIHL, the sources said. IRDA is treading a cautious path on the seal cover responses.

According to sources, IRDA has communicated to RBI appointed administrator of RCAP, Nageshwara Rao Y, that in their view, (IIHL's) response to IRDA has to be approved by the administrator and its advisors, Monitoring Committee of Lenders, COC (Committee Of Creditors), RCAP board and also the board of three RCAP insurance companies including Reliance Nippon Life Insurance, Reliance General Insurance and Reliance Health Insurance. Sources also say that administrator Rao has informed IRDA that the submissions made by IIHL are the sole responsibility of the company and have not been placed before the appropriate legal authorities, as per the applicable laws unde IBC (Insolvency And Bankruptcy Code) and IRDA.

BW contacted administrator Rao and asked him if he was aware of the contents of IIHL's response letter and if he approved it. To the query from BW, Rao said, "Contents of the letter were explained and the replies have to be accepted by IRDA after examination." IRDA did not respond to BW's email queries and Debasish Panda did not reply to phone messages. Email sent to Hinduja Group also remained answered.

RCAP has nearly 10 lakh shareholders and Hinduja Group has proposed to delist the company.

IRDA's concerns
IRDA has sought details regarding the 600 secret shareholders behind IIHL and details of another opaque entity AELLP.  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. IRDA wants to know the real beneficiaries behind IIHL since it was found that the foreign entity has an opaque structure.

In 2021, India's Parliament had allowed up to 74 percent FDI in the country's insurance sector. But the Hinduja Group's bid structure for RCAP results in 100 percent ownership of RCAP's insurance business by foreign entities.

As per a letter written by IRDA raising its concerns on the bid structure, RCAP will be wholly owned by entities based outside India. In other words, RCAP will have 100 percent FDI. IRDA has sought a clarification from administrator Rao on the same matter, a letter in possession of BW shows.

Proposed Borrowings, Payments In Kind Under Scanner
Promoters of Insurance Companies cannot make investments via borrowed funds. 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.

Intriguingly, 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."

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, if 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.

"Please provide the definitive structure post such change. The said definitive structure should include 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," IRDA's letter demands from the administrator.

The interest on the said debt will create a liability/obligation on the RCL, restricting its ability to provide for the future capital requirements of the insurance companies. Please clarify on the ability of RCL to meet the future capital requirements of the insurance companies. The application has been filed with IRDA seeking approval for transfer of shares of insurers, from RCL to AELLP.