Passing The Parcel: Why The Reliance Capital Insolvency Is A Mess

From complex asset pooling and low-ball offers to a rather fashionable e-auction, everything has been tried in this insolvency. Bidders have come, led, backed out and then returned to dominate with their offers. Yet, nearly two weeks since the final bidding process was concluded, there is no clarity.

Now, a fight has broken out between two large bidders, with the committee of creditors getting pulled into it. Torrent Investments Pvt. has approached the bankruptcy tribunal challenging Hinduja Group's late-stage revision to its offer. The bidder is seeking that creditors disallow the revision.

According to three people in the know who spoke to BQ Prime anonymously, the main reason behind this problem is the unwillingness on the creditors' part to accept any responsibility. The administrator did not reject Hinduja Group's late bid as it could have been held as working against value maximisation, while the financial creditors neither accepted nor rejected the late bid as they were uncertain whether they could accept it or not.

While the bidding is currently stalled due to an order by the National Company Law Tribunal on Tuesday, the financial creditors and their advisers are expecting a prolonged legal battle ahead, the people quoted above said.

Reliance Capital was placed under insolvency proceedings in December 2021 after the Reserve Bank of India suspended the board of the company and appointed an administrator. Financial creditors have claims worth over Rs 25,000 crore.

Queries emailed to Torrent Group, Hinduja Group and Reliance Capital's administrator Y Nageswar Rao remained unanswered.

A Flawed Process

The bidding process at Reliance Capital has seen twists and turns from the beginning. Initially, financial creditors were not sure how to sell the company's assets as they only included equity stake held in various subsidiaries.

Since the creditors were a disaggregated group of investors who had invested in debt securities issued by Reliance Capital, large institutional investors like the Life Insurance Corporation of India and Employees' Provident Fund Organisation held a majority of the power.

Finally, in February 2022, the creditors agreed to initiate a bidding process where prospective buyers had the option of buying the whole company, inclusive of its stakes in various subsidiaries or a disaggregated bidding option. Under the second option, the bidders could bid for one or many of eight different clusters of businesses.

Interestingly, the most accretive businesses, which included the general insurance and life insurance ventures were placed under different clusters.

The process eventually did find a lot of interest when 55 prospective bidders submitted initial interest by October 2022. Some of these bidders wanted the first option, while others were looking to bid for independent assets.

As is common with most insolvency proceedings, the list of prospective bidders went through many deletions. According to the first of the three people quoted above, Reliance Capital's creditors were clear that bidders who would offer bids for the entire company would be preferred over those who wanted only some pieces. As a process, it made more sense for the creditors to have a one-time sale, rather than a prolonged process, this person added.

Finally, there were five bidders left in the race, including a consortium of Piramal Capital and Cosmea Financial; Torrent Group; Hinduja Group; Oaktree Capital; and UV Asset Reconstruction Company. By the end of November, the Piramal-Cosmea consortium was found to be the highest bidder for the company with Rs 5,100-crore offer.

While Piramal Group intended to participate in the process for the general insurance venture, Cosmea Financial, run by former Reliance Capital CEO Sam Ghosh, would have taken over the other businesses, the second person quoted above said.

Creditors, however, were not happy with the bids since they were far below the Rs 12,000-crore liquidation for Reliance Capital, the first two people quoted above said. Hence, the decision to conduct an e-auction was taken.

The Messy Auction

The creditors agreed to conduct an auction where the last five bidders would go through multiple rounds of raising their bids. Originally, the base price was set at Piramal-Cosmea's bid . However, creditors chose to later raise the base amount to Rs 6,000 crore.

Very quickly, Piramal-Cosmea, UV ARC and Oaktree backed out of the auction process, leaving only Torrent Group and Hinduja Group in the fray. By the end of the bidding process on Dec. 21, Torrent Group's Rs 8,640 crore trumped Hinduja Group's Rs 8,100 crore offer. The auction was then closed and everyone was on board with the idea that Torrent Group would walk away with Reliance Capital.

However, this victory was only short-lived as Hinduja Group submitted a revised and significantly higher Rs 9,400 crore bid for Reliance Capital just two days after the auction. Rather than rejecting the revised offer, the RBI-appointed administrator put it in front of the creditors for a final call.

On its part, Torrent Group has claimed that the regulations governing corporate insolvencies do not allow such revisions. Section 39 of the Corporate Insolvency Resolution Process Regulations states that the creditors can only accept bids which are received within the timeline stipulated in the process document. Moreover, bidders are only allowed to revise their bids once, which was done during the auction.

While Torrent Group's objections are valid, creditors are also considering the large gap between the two bids, the third person quoted above said. Moreover, a large chunk of Hinduja Global's bid is in the form of upfront cash, making it more interesting for creditors, this person added.

Experts believe that maximisation is an important concern for most creditors.

"If the gap in the resolution amounts and the payment terms between the two offers are substantial, it is only fair for the stakeholders to be concerned about the they may have to let go if they have to treat the e-auction process as final," said Babu Sivaprakasam, Managing Partner, LEx Aeterna Practices. "As is well settled (in courts), balancing the interests of all stakeholders and maximisation are important tenets for the CoC to consider."

Providing one final round of challenge, where both bidders get a fair chance to put up a strong and final bid may be one of the options to explore for selecting the final successful bidder, Sivaprakasam said.