The crisis of confidence that erupted in India’s shadow banking industry in 2018 has claimed its most high-profile casualty yet. In a surprise announcement Monday evening, the central bank said that it had superseded the board of a financier controlled by Anil Ambani, the younger brother of India’s richest man, appointed an administrator, and would soon be sending the firm to the bankruptcy tribunal.
The unraveling of Reliance Capital Ltd. shows why the Reserve Bank of India remains reluctant to allow big business groups into mom-and-pop banking, despite facing huge pressure to allow a wave of corporate capital into the industry and reignite credit growth. The financiers’ potential to do harm is lethal even without access to insured deposits.
Shares of BT Group Plc jumped as much as 9.5% in London after the Economic Times reported that the Indian tycoon was considering an unsolicited bid for Britain’s largest phone company. Reliance said the article was “completely speculative.”
Anil Ambani’s misery couldn’t be more real, though. Creditors, including the government, are scrambling to recover the 758 billion rupees ($10 billion) owed to them by his Reliance Communications Ltd., which shuttered its mobile service four years ago. Last year, the 62-year-old former billionaire was ordered by a London judge to pay more than $700 million to a trio of Chinese banks that had lent money to RCom against personal guarantees by Ambani. Reliance Naval & Engineering Ltd., which had a contract to build patrolling vessels for the Indian Navy, is also in insolvency. Creditors are looking at 80%-90% haircuts, BloombergQuint reported in September.
Now that Reliance Capital joins his other group businesses in the bankruptcy slaughterhouse, investors will get a clearer assessment of why their firm, which was once worth more than $3 billion, is most likely headed for a complete wipeout of the $64 million in shareholder value that still remains. The “serious governance concerns,” which the Reserve Bank of India says the board failed to address effectively, need to come out in the open. That won’t improve the outcome for Reliance Capital shareholders, but it will hopefully prevent similar blowups in the future.
It will also inform the debate on whether large business houses can be trusted with banking licenses. “It has always been our ambition to create a world-class bank,” Anil Ambani said at the annual general meeting of Reliance Capital back in 2010, when the RBI had just floated a discussion paper on allowing some new lenders into the system. Luckily, those ambitions never received regulatory blessings. Otherwise, the RBI today might be grappling with the far messier task of making individual depositors whole.
Not that the resolution of Reliance Capital is going to be a cakewalk. With nearly $9 billion in assets, according to the financier’s latest annual report, meeting a $2.9 billion liability to creditors at the end of October shouldn’t have been this hard. But for more than two years now, various orders by courts and debt recovery tribunals have prevented the company from disposing off assets. Creditors who tried to sell units got many expressions of interest. Still, no deal could fructify because of layers of litigation, the Business Standard reported earlier this month.
Source : Economic Times
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