Reliance Capital Case [UPSC Notes]

Reliance Capital is a financial services company that was part of the Reliance Group. In 2019, the company began to undergo an insolvency process due to financial issues. The Reliance Capital insolvency process has been plagued by delays, and bidders are undermining the integrity of the process, highlighting the need for an overhaul of India’s financial sector insolvency laws. 

In this context, it is important to understand what the Reliance Capital insolvency case is all about, and the current issues facing it. This topic assumes relevance for the IAS exam Indian economy segment.

Reliance Capital Insolvency Case

The insolvency process for Reliance Capital began in November 2019 when the company defaulted on its debt obligations. 

• The creditors filed an application for the initiation of the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC) 2016.
• The Mumbai bench of the National Company Law Tribunal (NCLT) admitted the application and appointed a resolution professional to manage the company’s affairs during the insolvency process. The resolution professional invited bids from potential buyers for Reliance Capital’s assets.
• The National Company Law Appellate Tribunal (NCLAT) ordered a second auction for the debt-ridden Reliance Capital, more than 500 days after the first one. 
• The hope is to recover a significant portion of the dues; however, due to the delay, banks are likely to receive less than the liquidation value of around Rs 13,000 crore. 
• The auction process has been delayed in an attempt to maximise the value, but it has eroded the auction results’ integrity.

Shortcomings:

• Veteran Banker Uday Kotak has highlighted that the Insolvency and Bankruptcy Code (IBC) needs to be strengthened to reduce interpretation susceptibility and be more effective for all cases, including financial sector insolvencies. 
• The insolvency process is short on checks and balances, and the winning bid put in by Anil Agarwal’s Twin Star Technologies for Videocon Group companies was nearly identical to the liquidation value. 
• The Mumbai National Company Law Tribunal (NCLT) pointed out the haircut of nearly 96% and called for further safeguards to ensure confidentiality. 
• One of the shortcomings of the insolvency process for Reliance Capital has been the delay in finding a buyer for the company’s assets. The initial bidding process for the assets was unsuccessful, and the resolution professional had to extend the deadline for submitting bids several times.
• The NCLT Chennai bench has also raised questions about the one-time settlement between IDBI Bank and Siva Industries and Holdings consortium. 

Insolvency Case Judgments

• A verdict in the Vidarbha Industries versus Axis Bank case noted that the National Company Law Tribunal must assess the grounds presented by the corporate debtor against admission on its own merits, indicating that the lenders’ applications may be denied even if the borrower has defaulted. 
• The tribunals should not take over powers that belong to the lenders and creditors; lenders should have exclusive control over commercial considerations.

Way Forward:

• The banks need to work harder by spotting stress in time and moving quickly. The tribunals must be cognisant of time limits and ensure the rules are respected. 
• Despite the delay, the Essar Steel case ultimately led to the transfer of the business at a fair price and forced the defaulting promoter to relinquish control of the company.
• The insolvency and bankruptcy code needs to be made more effective and less susceptible to interpretation.

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