How Anil Ambani’s risky bets drove Reliance Capital into the ground | Daily News Byte

Anil Ambani, who was previously chairman of the Reliance Group, had ambitions to turn Reliance Capital into a world-class bank, until today, when Reliance Capital is going through an insolvency process after banking regulator Reserve Bank of India sent the company to bankruptcy courts last year.

But how did Reliance Capital end up in such bad shape?

Risky bets

The story began back in 2005, when the Ambani brothers decided to divide the family business, and Anil Ambani took over the telecom business and financial services. Anil Ambani bet on what he believed could be the ‘future’ of India. But belief is not enough when you run a business.

He continued to take bigger, bolder and riskier bets in the entertainment, energy and infrastructure sectors. These risky decisions may have pushed the company into more and more debt.

Debts and internal borrowing

In an attempt to grow at any cost, companies in the Reliance Group have taken on huge debt. In 2017, one of the entities, namely Reliance Communications, finally collapsed. This was the beginning of the downfall of Anil Ambani’s business empire. Just like a pack of dominoes, his empires crumbled down to the last piece, which was Reliance Capital.

Reliance Capital was a financial services company that was involved in multiple divisions such as asset management, commercial finance, life insurance, wealth management and home finance.

At first, the plan for such a diverse set seemed to have a lot of potential. But soon problems began to surface. Take the example of Reliance Home Finance. As a home finance company, it was expected to lend money to regular people looking to buy a new home. But this was not entirely the case, because only 50 percent of the loans were for ordinary people, and the other 50 percent were for other companies involved in real estate development and infrastructure. But these sectors have always had cash flow problems, especially when the economic cycle turns.

Things are getting worse for Reliance Home Finance as they have also started lending money to struggling companies in their group. Which means that when these companies fail, Reliance Home Finance will also fail with them.

Now imagine what a mess it would be in the Commercial Finance subsidiary, whose job it was to make loans to businesses. They were in a similar mess because they were lending more money to Reliance Group companies.

Eventually, when Reliance Communications and Reliance Power started defaulting on their loans, problems began to escalate, as Reliance Capital could not even pay its creditors.

Doom begins

In March 2019, Reliance Capital had only Rs 11 crore in cash, and by June the company’s auditor, PvC, had resigned due to dissatisfaction with the way Reliance Capital had responded to the financial issues that had been flagged. By September of that year, Care Ratings had pushed Reliance Capital’s debt into default.

To make matters worse, no one wanted to lend money to non-bank financial companies like Reliance Capital. This was due to the NBFC crisis at that time due to the case of infrastructure lender IL&FS.

Eventually, funds began to dry up and the company began selling off its holdings in companies that were actually doing well as a mutual fund company. Eventually, Reliance capital began to lose its assets. Today, the company has $9 billion in assets to meet its $2.9 billion in liabilities.

The RBI finally decided to take matters into its own hands as there were corporate governance issues. RBI suspends Anil Ambani-controlled board of financiers and appoints administrator; also sent the company to bankruptcy court.

The shareholder will be in trouble

Anil Ambani began reducing his stake in the company, and by March 2020, he only had a 2 percent stake. But small investors took more and more shares and eventually owned a total of 57 percent of the company. This was because they wanted to make a quick profit whenever there was good news from the company. The problem now is that after the bankruptcy proceedings, there may not be much left for the shareholders. This initially happened when another NBFC DHFL went bankrupt.

current situation

Reliance Capital is currently undergoing bankruptcy proceedings, and the deadline for submission of bids is November 28, 2022. But Oaktree and Torren have asked for the deadline to be extended to December 16, while Piramal and Zurich want that date extended to December 23. the extended deadline is so the companies can finalize a resolution plan.

At the end of August, six non-binding offers were received for Retail Capital as a company, ranging between RSD 4,000 and 4,500 million. While Reliance General Insurance busness got bids between 3,500 and 7,000 crores.

The deadline for the completion of the Reliance Capital resolution process is set for January 31, 2023.