Unmasking Hinduja Group Entity's Shadow Ownership
IRDA wants to know the real beneficiaries behind the Mauritius-based Indusind International Holdings Ltd. (IIHL), a Hinduja Group entity which along with other opaque entities has submitted a $1.16 Billion (Rs 9661 crores) bid to acquire Reliance Capital (RCL). Earlier this month, the Mumbai bench of the National Company Law Tribunal (NCLT) had approved IIHL's bid to acquire RCL but the IRDA has found that IIHL has an opaque structure. In the past, the Hinduja Group has often faced controversies in India for their connections with the Bofors Scandal and hence the knowledge on the source of their money has often remained under a cloud.
Intriguingly, the Hinduja Group wants to delist RCL from the Indian stock exchanges post its acquisition, a manoeuvre that can curtail the flow of information to the public. IRDA discovered that IIHL has 600 shareholders and none of them hold more than 10 per cent of the Mauritius entity.
There is another Hinduja Group entity AASIA Enterprises LLP (AELLP), which had Ashok Hinduja and Shom Hinduja as its directors. Again, not much information is available about this entity too and IRDA has discovered that it had no major business activity. RCL's business involves the insurance segment too, which includes handling public money.
A letter dated March 20 in possession of BW shows that IRDA 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.
Layered and opaque structure detrimental to Indian business?
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 (Special Purpose Vehicles) 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 introduction of HoldCo of AELLP.
"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.
Since AELLP has no major business activity it indicated to IRDA that it was a proposed HoldCo in the nature of SPV. According to IRDA regulations the requirements applicable to insures are also applicable to SPV and hence details are required. Further, IRDA observed that the partnership interest of the AELLP and shares of HoldCo of AELLP is proposed to be pledged and the regulator wants the reason for the same.
"Please clarify as to why (pledging of shares) the same should not be construed as a non-compliance with (IRDA regulations) clause 6 of Schedule 2 of Registration Regulations. It is proposed to raise borrowing by the HoldCo or AELLP. Please clarify as to why the same should not be construed as non-compliance with Regulation 6(8)(i) of Registration Regulations," IRDA's letter states.
Further details sought by IRDA with regard to AELLP include proposed borrowing, Quantum of consideration to be paid by AELLP, details of the recipient of the said consideration, source of funds of said consideration for AELLP, Quantum of consideration to be paid by AELLP vis-à-vis valuation certificate submitted by the insurers along with the captioned applications.
IRDA also wants to know the structure of the said borrowing, instruments to be issued, proposed subscribers, rate of interest, tenure etc. All this since, the interest on the said debt will create a liability/obligation on the AELLP/HoldCo of AELLP, restricting its ability to provide for the future capital requirements of the insurance companies. Hence, IRDA wants to know the ability of AELLP to meet the future capital requirements of the insurance companies.
Putting Reliance Capital under Liability and stripping it of business?
As per the structure submitted by Hinduja Group entities, it is proposed that another company is proposing to acquire the entire equity of the RCL, which will then be a wholly owned subsidiary of the said another company. IRDA feels this is a non-compliance with Regulation 2(1)(h)(i) of Registration Regulations.
Further, IRDA has also learned that RCL will not be having any business operations and will continue to exist as a holding company of various other companies including the insurance companies. As per the structure provided in the note, the RCL will be wholly owned by entities based outside India. In other words, RCL will have 100 percent FDI, which according to IRDA is not permitted in India's FDI laws.
Further, IRDA wants to know the method of proposed borrowing to acquire shares of RCL including the structure of the said borrowing, instruments to be issued, proposed subscribers, rate of interest, tenure etc.The draft response provides that "Interest thereupon is expected to be of accrued till maturity (‘Payment in kind’ PIK structure). It is unclear as to how the “payment in kind" structure will operate.
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.
Reliance Capital has been undergoing insolvency proceedings since December 2021, with the resolution process seeing several delays due to multiple rounds of auctions and ongoing legal proceedings initiated by the second bidder Torrent Investments.
