Auditor Concerns At Reliance Capital And Reliance Home Finance
Reliance Capital auditor raises concerns about inter-group funding and the loss of housing finance company status.
After much delay Reliance Capital Ltd. published financial earnings for the quarter ended March, 2019, alongside earnings for the quarter ended June. Financial performance aside, the company’s filings with the stock exchanges are noteworthy for a few reasons — extent of inter-corporate funding, the financial status of its subsidiaries and the potential loss of housing finance company status for listed subsidiary Reliance Home Finance Ltd.
By the way, the delay in filing results for the quarter-ended March can be attributed to the resignation of Price Waterhouse & Co Chartered Accountants LLP, one of the company’s two auditors. Hence, both sets of earnings are audited and reviewed by Pathak HD & Associates.
Inter-Group Funding
Reliance Capital Inter-Corporate Deposits
Reliance Capital had inter-corporate deposits to two entities aggregating to Rs 2,812 crore in Q4FY19 that declined to Rs 2,235 crore in Q1FY20. These are fully secured, stated the company and its auditor, including by way of a guarantee of Rs 1,600 crore approximately, extended by a group company. In fourth quarter, the company said Rs 665 crore had been recovered with Rs 2,147 crore pending. The first-quarter filing reiterates that balance “is expected to be recovered soon”.
RHFL Loans To Group Companies
The larger area of concern are the loans advanced by subsidiary RHFL under the “General Purpose Corporate Loan” category, including to some Anil Ambani group companies. The company stated that its “borrowers in some cases have undertaken onward lending transactions and it is noticed that the end use of the borrowings from the company included borrowings by or repayment of financial obligations to some of the group companies”.
In effect, RHFL lent to some group companies and some of its borrowers did the same. Its audit firm, Dhiraj and Dheeraj Chartered Accountants, have in their qualification observed “significant deviations” in these loan advances.
The amounts are not insignificant. Total loans under this category increased from Rs 7,850 crore at the end of March, to Rs 8,078 crore at the end of June. Overdues on these loans grew from Rs 566 crore to Rs 1,553 crore in the same period.
While RHFL stated these loans are secured, its auditor said “we are not getting sufficient audit evidence to ascertain recoverability of principal and interest, including time frame of recovery of overdues”.
RNLAM Inter-Corporate Deposits
Reliance Nippon Life Asset Management Ltd. has also loaned Rs 410 crore to group companies. Pursuant to the sale of that business to Nippon Life Insurance Company, it has been agreed that if the loans remain outstanding when the transaction concludes, they will be repaid from the proceeds of the sale (via a preference for payment).
Status Of Subsidiaries
That both RHFL and Reliance Commercial Finance Ltd. are in financial trouble due to asset liability mismatches is well known. RCFL and RHFL have taken steps to meet such temporary liquidity mismatch by securitisation of its loan portfolio, said Reliance Capital’s statement to the exchanges.
The two subsidiaries are also in the process of restructuring debt.
Majority of our lenders have already entered into the inter-creditor agreement. RCFL and RHFL is confident of implementing its resolution plan during financial year 2019-20. In view of the steps taken by the RCFL and RHFL, the accounts of the RCFL and RHFL have been prepared on “going concern” basis.Reliance Capital Statement
Among the other subsidiaries, the networth of Reliance Wealth Management Ltd. and Reliance Money Solutions Private Ltd. have been substantially eroded, said the parent, indicating the existence of uncertainty on their ability to continue as a going concern. Yet, their financial statements have been prepared on a going concern basis based on parent company’s financial support.
RHFL – No More A Housing Loan Company
In its Q1FY20 earnings statement, RHFL has said the proportion of non-housing loans is more than the proportion of housing loans. While the company said it is the process of increasing its housing loan portfolio, its auditor has raised concerns about its continuation as a housing loan company.
Further we draw attention to note 3 of the statement on the material shift in primary business of the company from housing finance to non-housing finance which comprise more than 50 percent of total loan portfolio raising concern about company continuing as a housing finance company.RHFL Auditor Review Report - August 2019
When PwC resigned as auditor or Reliance Capital, in June 2019, it did so under a under a legal provision that pertains to fraud. While the audit firm didn’t disclose details in its resignation letter, the company has denied any such wrongdoing and asserted that independent legal experts examined records and said there was no matter attracting fraud provisions. Reliance Capital’s remaining auditor has agreed with that in its report.