LIC, EPFO’s warning to Hinduja comes after the group missed the March 31 deadline for payments. IRDA has raised suspicions over the opaque deal structure that violates India’s FDI norms. Time running out for Hinduja’s, as six-month RBI approval ends on 17 May
Uncertainty looms over the closure of Reliance Capital’s (RCAP’s) insolvency resolution plan. RCAP lenders have issued a stern warning to the Hinduja Group over payment of Rs 9850 crores in a month before May 27. Entities led by Ashok Hinduja had emerged as the successful bidder for India’s RCAP which is undergoing debt resolution. But the group, considered among Europe’s richest business houses with a net worth of over $32 billion, missed the first deadline of March 31 to make payment to RCAP’s lenders. Following this, the lenders are now pressing promoter Ashok Hinduja to pay-up within the second deadline or just quit the deal, sources told Businessworld.
Nearly 50 percent of exposure to RCAP is by India’s largest public institutions like Life Insurance Corporation (LIC), Employee Provident Fund Organization (EPFO) and such others. Last week, a meeting between Ashok Hinduja and lenders was attended by LIC, EPFO, Yes Bank-JS Flowers ARC, SSG Capital Management Singapore Pte, RBI (Reserve Bank of India) appointed administrator Nageshwara Rao Y and members of Committee of Creditors (COC). In that meeting the lenders told Ashok Hinduja to just pay-up or leave the deal as per the clauses of the Resolution Plan, the sources said. The COC is assisted in legal matters by Luthra & Luthra and the RBI administrator Rao is assisted by AZB Partners.
Time is also running out for the group since the deadline for RBI (Reserve Bank of India) approval on the transfer of RCAP business to the group ends May 17. The RBI approval was granted on November 17 and is valid only for 6 months. Once the timeline of RBI approval ends, the NCLT approval for the deal may be rendered worthless until the RBI gives a fresh nod.
Another reason for uncertainty is that Hinduja’s bid for RCAP has not yet received final approval from Insurance Regulatory And Development Authority (IRDA), which has raised doubts over the structure of the deal by questioning the finances of Hinduja Group. The deal can achieve a closure only after IRDA gives its nod. Insurance business forms a large part of RCAP’s business.
Email sent to Hinduja Group and their public relations firm with regard to the story remained answered.
Cloud Over The Deal
Hinduja Group was founded by Parmanand Hinduja who was from the town of Shikarpur (now in Sindh province of Pakistan). Hinduja’s entered the international arena with an office in Iran (first outside India) in 1919. On its website they say the group moved to Europe from Iran in 1979. It was the Bofors arms scandal of 1987 that made the Hinduja’s infamous in India. Reportedly, kickbacks were paid in the defense deal to entities linked to the Gandhi Family and Congress Party. Among the entities, the name of Hinduja Group was prominent. The scam has haunted Sonia Gandhi and Congress party since then and it made Hinduja brothers Persona Non Greta for other big political parties like the BJP in India. The rise of Hinduja’s in India’s financial sector coincided with Congress Party’s return to power in 2004. In 2005, when Prime Minister Manmohan Sing was the Prime Minister and Sonia Gandhi, perceived to be the super PM, a court cleared the Hinduja’s of the arms deal scandal charges. Yet, a plea against this quashing of charges in the Bofors scam is still pending in India’s Supreme Court.
Currently, the Hinduja Group has applied for a para banking license and was hoping to make it big in the insurance sector with the acquisition of RCAP. But IRDA has questioned the group’s source of funds and the deal structure.
Hinduja Group’s bid for RCAP is via Mauritius based Indusind International Holdings (IIHL) and Mumbai based AASIA Enterprises LLP (AELLP). While the National Company Law Tribunal (NCLT) approved Hinduja Group as it was the highest bidder, the deal cannot be concluded till the IRDA gives a final clearance. IRDA believes that Hinduja Group’s bid structure also violates India’s foreign direct investment (FDI) norms for insurance companies, since it hinges on “foreign borrowings” and also it wants to know the beneficiaries behind IIHL.
Holding companies of Hinduja Group are mainly ensconced in Mauritius, London and Switzerland. In the current RCAP deal, the Mauritius-based IIHL and Mumbai registered AELLP have bid Rs 9,850 crore. But the IRDA believes that the deal structure may be in violation of its norms that other insurance companies follow in India.
IRDA has sought details regarding the 600 secret shareholders behind IIHL and details of another opaque entity AELLP. As per IRDA’s study of the deal structure, IIHL has 600 shareholders, which are secret so far nowhere the data on them is publicly available. IRDA wants to know the real beneficiaries behind IIHL since it was found that the foreign entity has an opaque structure.
In 2021, India’s Parliament had allowed up to 74 percent FDI in the country’s insurance sector. But the Hinduja Group’s bid structure for RCAP results in 100 percent ownership of RCAP’s insurance business by foreign entities.
As per a letter written by IRDA raising its concerns on the bid structure, RCAP will be wholly owned by entities based outside India. In other words, RCAP will have 100 percent FDI. IRDA has sought a clarification from the RBI appointed administrator for RCAP, Nageshwara Rao Y. on the same matter, a letter in possession of BW shows.
Proposed Borrowings, Payments In Kind Under Scanner
Promoters of Insurance Companies cannot make investments via borrowed funds. As per clause 6(8)(i) of IRDA (Registration of Indian Insurance Companies) Regulations, 2022, which clarifies on additional Stipulations for Investment by Promoter and/or investor: “Investment shall be made entirely out of own funds and not from borrowed funds.”
But the IRDA letter to Nageshwara Rao states “It (Hinduja Group entities) has proposed to raise borrowings for acquisition of shares of RCap. Please clarify as to why the same should not be construed as non compliance with 6(8)(i) of Registration Regulations.”
The IRDA has sought details regarding structure of the said borrowings, instruments to be issued, proposed subscribers, rate of interest, tenure etc with regard to the borrowings by the Hinduja Group entities.
Intriguingly, IRDA has learned that “interest thereupon is expected to be accrued till maturity “Payment in Kind Structure.” The IRDA wants to know “How the Payment in Kind structure will operate, please clarify.”
IRDA has also learned that one of the bidding entities AELLP has no business activity and its shares along with its partnership interest will be pledged (to raise funds). Also, it means that AELLP will be in the nature of Special Purpose Vehicle (SPV) and the same requirements on borrowings are also applicable to the SPVs, IRDA letter states. Further, the structure is such that it will turn RCAP into a holding company without any business operations. The IRDA is concerned that this will simply turn RCap also into an SPV, which would then rule 6(3)(iv) of IRDA’s Registration Regulations.
Rule 3 of IRDA’s Registration Regulations states that SPVs cannot issue convertible instruments of any kind and all the other requirements to other direct promoter and investment entities will also be applicable to SPVs. Hence, if the SPVs borrow for the purpose of acquisition, it would be a violation of IRDA norms.
Also, shares of RCAP and Hinduja entity IIHL are proposed to be pledged for the deal, which too is a violation of rule 6(3)(iv) of Registration Regulations. The IRDA is concerned that the debt raising will create a liability on the holding companies and SPVs, which could restrict future capital requirements for the insurance businesses.
“Please provide the definitive structure post such change. The said definitive structure should include details of the entities involved, in order to carry out due-diligence. The details should include name, country of incorporation, shareholding pattern, capital structure, net worth, year of incorporation etc,” IRDA’s letter demands from the administrator.
The interest on the said debt will create a liability/obligation on the RCL, restricting its ability to provide for the future capital requirements of the insurance companies. Please clarify on the ability of RCL to meet the future capital requirements of the insurance companies. The application has been filed with IRDA seeking approval for transfer of shares of insurers, from RCL to AELLP.
RCAP has been undergoing insolvency proceedings since December 2021, with the resolution process seeing several delays due to multiple rounds of auctions and ongoing legal proceedings initiated by the second bidder Torrent Investments.
