The Hinduja Group, which is set to take over Reliance Capital, is reworking its resolution funding plan after the insurance regulator disallowed pledging shares of the insurance subsidiaries to infuse capital.

“They were exploring whether the insurance companies’ shares held with RCap can be taken as security and used for funding. IRDAI said pledging is not possible, so they now have to make alternate arrangements,” a source told businessline.

Hinduja Group submitted its resolution plan for RCap to the NCLT in July 2023. It had proposed and sought approval for change in control of the ownership, and creation of pledge over the shares of Reliance General Insurance and Reliance Nippon Life Insurance, to raise funds from investors.

What IRDAI said

In a letter to the RCap administrator dated October 18, 2023, IRDAI said that as per the existing framework investment in insurance companies can only be made out of “own funds”. “Investment in the insurance companies out of borrowed funds is not permitted,” the regulator said as per the letter accessed by businessline.

“With regard to creation of pledge, it is to reiterate that no pledge or any other kind of encumbrance/charge shall be created over the shares of insurance companies without prior written approval of the IRDAI,” it added.

The insurance regulator has also sought a copy of the resolution plan submitted to NCLT and details of the source of funds through which Hinduja Group proposes in the resolution plan and also to meet the future capital requirements of the insurance subsidiaries.

“The borrowed funds only refers to funds raised by way of pledging of shares,” the source said, adding that Hinduja Group is in discussions with several players to look at alternative funding routes but talks are still in a nascent stage.

Hinduja Group is said to be raising $850 million from leading foreign funds and banks such as JP Morgan, Barclays Bank, Brookfield, Cerberus Capital, Apollo - USA, and Oaktree Capital. The funding is being raised against RCap’s assets, of which the insurance subsidiaries are estimated to account for a bulk of valuation.