Reliance Capital Resolution Faces Delays Due To A Dispute With Credit Suisse

The resolution of insolvent Reliance Capital Ltd. may face further delays due to a dispute with Credit Suisse AG, four people in the know told BQ Prime on condition of anonymity.

The challenges stem from a 2018 transaction, as part of which a third of Reliance General Insurance Co. shares were pledged to Credit Suisse. This pledge and treatment of these shares is under dispute. Since Reliance Capital's general insurance business is the most coveted among the group's subsidiary, an inability to resolve the dispute could delay a resolution in the case of Reliance Capital.

Creditors to Reliance Capital are seeking to resolve the matter with Credit Suisse but, for now, the stalemate continues, the people quoted above said.

Reliance Capital is one of three large non-bank financial companies that were referred for resolution under the Insolvency and Bankruptcy Act. While Dewan Housing Finance Corp. Ltd. has been successfully resolved, insolvency proceedings for Reliance Capital and Srei Group non-bank lenders are still underway.

Already, the resolution process at Reliance Capital has seen delays. Creditors extended the last date from Sept. 9 to Nov. 2, 2022. This was the second such extension, after the deadline was pushed from June. If the matter is not resolved soon, it may impact bidder interest in Reliance Capital, which is under insolvency proceedings, the people quoted above said.

Credit Suisse declined to comment. IDBI Trusteeship, Vistra ITCL and Reliance Capital didn't respond to emailed queries.

The tussle dates back to March 2018, details of which can be found in publicly available court documents.

At the time, Reliance Home Finance Ltd. had raised Rs 400 crore through private placement of non-convertible debentures to investors including Credit Suisse. The housing finance company was to redeem the NCDs in June 2019, but failed to do so.

As part of a proposal to restructure that NCD issue, investors sought additional securities, which included corporate guarantees from Reliance Capital and the pledge of its entire holding in Reliance General Insurance. The shares were to be held by IDBI Trusteeship, according to the agreement. Later, in November 2019, when payments under the restructuring proposal were not met, IDBI Trusteeship invoked the pledged shares on behalf of the investors.

Following the invocation of shares, the NCD investors informed the Insurance Regulatory and Development Authority of India. The insurance regulator, in a December 2019 letter, said that since prior approval was not obtained, the pledge was in violation of the Insurance Act. It deemed the pledge null and void.

In February 2020, Nippon India Mutual Fund, another investor in the NCD issue, and Credit Suisse challenged IRDAI's decision to cancel the pledge of shares at the Securities Appellate Tribunal. The tribunal is empowered to hear appeals against any order passed by the insurance regulator.

In its order in the same month, SAT said that the investors were not trying to wrest control of Reliance General Insurance by invoking the pledge, but only liquidate the shares. The tribunal upheld the pledge but said that the insurance regulator would have the right to approve or disapprove the eventual owner of Reliance General Insurance shares.

"As and when a suitable buyer is found, suitable application would be made before IRDAI for appropriate approval to enable the IRDAI to carry out due diligence and to ascertain fulfillment of Fit and Proper criteria, financial soundness, etc.," SAT said in its order.

Later in December 2020, IDBI Trusteeship, on behalf of the NCD investors, filed another case with SAT. It argued that its attempt to sell the general insurance company to another promoter was being stalled by Reliance General Insurance and Reliance Capital.

At this stage, Vistra ITCL, which was the custodian for secured and unsecured debentures issued by Reliance Capital prior to the Rs 400 crore issue, intervened. It argued that the pledge created was not legally maintainable. Vistra claimed that the pledge could not be made since it was the sole trustee on behalf of public debenture holders for all of Reliance Capital's assets, which included the shares in Reliance General Insurance.

SAT disposed off Vistra ITCL's challenge in the matter and ordered the insurance regulator to issue clear orders to Reliance Capital and Reliance General Insurance to cooperate with the sale. This effectively upheld SAT's previous decision that the pledge was valid.

A separate case filed by Vistra ITCL against the pledge of shares is pending resolution at Bombay High Court.

The issue was further complicated when insolvency proceedings was initiated against Reliance Capital in November 2021. Due to this, any sale proceedings against the company's assets were stopped and a committee of creditors was formed, of which Credit Suisse is a member. Under the Insolvency & Bankruptcy Code, any sale of assets must be approved by the committee and not individual creditors.

In March, Credit Suisse challenged Reliance Capital administrator's decision to reject a Rs 660 crore claim it had submitted as a financial creditor, at the National Company Law Tribunal. Credit Suisse had submitted Rs 1,074 crore in claims but only Rs 414 crore were admitted. The rejected amount is secured by Credit Suisse's claim on Reliance General Insurance's shares, the people quoted above said.

According to the first two of the four people quoted above, Credit Suisse feels that it has a strong case owing to the SAT judgments from 2020. If its claim on the stake is upheld, any sale of Reliance General Insurance under the insolvency proceeding cannot be concluded without Credit Suisse's approval, the first two people quoted above said.

The investment bank does not intend to block any resolution under insolvency, the second person quoted above said. It is, however, seeking that its claim on the stake be considered when deciding the distribution of funds, when a sale of Reliance General Insurance does occur, this person said.

"Since the Insolvency & Bankruptcy Code prescribes that all matters relating to an insolvent company are to be clubbed under the NCLT, that is most likely the next step, said Akil Hirani, managing partner at Majmudar & Partners.

"Reliance Capital's creditors may look to challenge the pledge by claiming that there was a breach of contract." Hirani said. However, the administrator's decision to outrightly reject Credit Suisse's claims may also not be right, which can lead to legal complications, he said.

The Reliance Capital resolution hinges on what happens to Reliance General Insurance. According to the four people quoted above, the general insurance company is the most valued asset under Reliance Capital.

According to the third of the four people quoted above, there are about five parties still interested in submitting a binding bid for Reliance Capital or its individual assets. Four of these five bidders are keen on buying the general insurance company as part of their bid.

BQ Prime had reported last week that Piramal Group was seeking to bid for Reliance Capital's assets, especially the general insurance subsidiary.

Without clarity on Credit Suisse's standing in the matter, a formal bid cannot be submitted, the third person quoted above said.

The bidders have also been concerned with the lack of a united front among creditors, this person said. Since creditors to Reliance Capital largely includes debenture holders, the decision making process at the committee of creditors takes longer than expected.

"If the financial creditors have provided debt by investing in securities, the insolvency regulation allows a trustee or agent to act as an authorised representative on behalf of such financial creditors. The IBC provides that if an authorised representative votes in accordance with the majority vote of such financial creditors, then it will bind all the financial creditors whom the authorised representative represents," said Divyanshu Pandey, partner, S&R Associates.