Defaults, high liabilities, unaddressed concerns led to RBI action against RCap

Surabhi | | Updated on: Dec 01, 2021
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RBI had superseded the Board of directors of Reliance Capital on November 29

Defaults on debt obligations, several regulatory and supervisory concerns that were not adequately addressed by the Board of Reliance Capital as well as concerns raised by its statutory auditors that too were not addressed are some long-standing reasons that eventually led to the Reserve Bank of India superseding the Board of the company.

“There were a number of issues regarding Reliance Capital that had been brewing for some time before the RBI decided to take action,” said a person familiar with the development.

Weak financial position

Reliance Capital has defaulted on debt obligations since October 2019 with outstanding overdue towards the lenders and debenture holders of ₹20,103 crore by March 31, 2021.

According to sources, inspections by the RBI with reference to the company’s financial position as on March 31, 2020, had found that Reliance Capital did not meet the minimum regulatory capital ratio (adjusted net worth to risk weighted assets) and leverage ratio (outside liabilities to adjusted net worth).

Reliance Capital’s capital ratio was assessed at 10.75 per cent against the requirement of a minimum regulatory ratio of 30 per cent.

Also see: Reliance Capital’s public shareholders to take big hit; Anil Ambani barely hurt

Further, outside liabilities of Reliance Capital was assessed at 8.42 times of its adjusted net worth as against the maximum permissible limit of 2.5 times.

Its financial position had further deteriorated with a negative net worth at ₹7,610 crore and a negative capital ratio of 45 per cent as reflected from the audited financials as on March 31, 2021.

Regulatory concerns

Sources said the RBI had, during past inspections and through letters and in meetings with the company management, also highlighted several regulatory and supervisory concerns. These related to non-compliance with IRACP norms, lending to borrowers with negative net-worth and inadequate repayment capacity, weak corporate governance practices, inadequate internal systems and controls, and poor compliance standards.

However, the Board of directors of Reliance Capital did not satisfactorily address these issues.

Further, the audit committee of the Board also failed to address the concerns raised by the statutory auditors regarding lending to group companies with a poor track record or inadequate repayment capacity, and lending to poorly performing group companies through circuitous routes.

Lack of clarification

The previous statutory auditors of Reliance Capital — Price Waterhouse & Co — had resigned in June 2019 as it did not receive required clarifications and satisfactory responses from the audit committee.

The RBI had on November 29 superseded the Board of Directors of Reliance Capital and appointed Nageswara Rao Y, ex-executive director, Bank of Maharashtra, as the administrator of the company.

Also see: To assist Reliance Capital Administrator, RBI forms three-member Advisory Committee

The action was taken “in view of the defaults by Reliance Capital in meeting the various payment obligations to its creditors and serious governance concerns which the Board has not been able to address effectively,” the RBI had said.

It has also constituted a three-member advisory committee to assist the administrator on November 30.

The Reliance Capital scrip closed nearly 5 per cent down at ₹17.2 apiece on the BSE on Wednesday.

Published on December 01, 2021

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