How SEBI, RBI and IRDAI Turned a Blind Eye for Years as Reliance Capital Crumbled
On 29th November, when the Reserve Bank of India (RBI) superseded the board of Anil Ambani run Reliance Capital Ltd (RCL) and placed it under an administrator, the overwhelming reaction was that, finally, the regulator has bestirred itself to act! Or, as our columnist V Ranganathan says, RBI has moved with glacial speed.
RCL and the Anil Dhirubhai Ambani group (ADAG) have been in deep trouble for a long time, certainly as long as Infrastructure Leasing & Financial Services (IL&FS), at least. Yet, while the government and RBI superseded the board of IL&FS in September 2018 and initiated similar action in Dewan Housing Finance Ltd (DHFL), Yes Bank, Punjab and Maharashtra Cooperative (PMC) Bank and the two SREI companies since then, RCL was given a very long rope. A report in Business Standard suggests that RBI waited until RCL’s had a negative net worth of Rs7,610 crore, and a negative capital ratio of 45% (at the end of 31 March 2021) before summoning up the courage to act. Mr Ranganathan, in his article mentioned above, puts RCL’s negative net worth at Rs15,912 crore!
A chronology of ADAG’s financial troubles is a good indication of how reluctant the regulator has been to act against the powerful Anil Ambani. RCL’s consolidated debt was estimated to be Rs26,887 crore at the end of March 2021; ADAG’s financial liabilities are significantly higher. RCL had over 20 subsidiaries and continues to have some valuable assets such as Reliance General Insurance (100% held by it) and Reliance Nippon Life Insurance (51% holding), even after many sell-offs.
At the end of April 2019, credit rating agencies had downgraded ADAG companies, viz., Reliance Commercial Finance and Reliance Home Finance, to default category. ADAG’s spokespersons were quick to issue statements to paper over these financial problems. Both entities were on the verge of insolvency resolution, with Authum Investment and Infrastructure emerging a possible acquirer at a steep haircut to lenders. The fate of the deal remains uncertain after RBI’s latest move.
A major red flag was thrown up in June 2019 when Price Waterhouse & Co (PWC) resigned as the statutory auditor of Reliance Capital as well as Reliance Home Finance, citing unsatisfactory response to certain observations. The management, under Anil Ambani, responded with typical aggression and publicly disagreed with PWC’s findings; but, instead of waking up, RBI continued to sleep for another 2.5 years! PWC was under tremendous pressure from ADAG at that time and would certainly have conveyed its misgivings to RBI. Why was it ignored?
In the same month (June 2019), a report by Risk Event-Driven and Distressed Intelligence (REDD) exposed how RCL and DHFL, among others, used ‘box companies’ to fudge accounts and obfuscate lending to related entities. REDD specifically pointed out that Reliance Capital and its two affiliates, Reliance Home Finance and Reliance Commercial Finance, had engaged in funding through box companies. The report said loan outstanding to these box companies was Rs137 billion (Rs13,700 crore) then.
To evade recovery action to collect over US$700 million (around Rs5,000 crore) lent to Reliance Communications by three Chinese lenders against personal guarantees by Anil Ambani, he declared himself bankrupt in 2019 in a London court. The telecom company’s outstanding was then estimated at nearly Rs76,000 crore (or US$10 billion). Reliance Naval & Engineering Ltd, which was to build patrolling vessels for the Indian Navy, was already under bankruptcy proceedings. Yet, Indian regulators pretended like it was business as usual. IRDAI (Insurance Regulatory and Development Authority of India), the insurance regulator, in violation of its own ‘fit & proper’ criteria, allowed Anil Ambani to remain chairman of the two insurance subsidiaries of RCL. More pertinently, Anil Ambani’s holding in RCL had then dwindled to single digits; but even this did not matter to the regulator.
In December 2020, the Securities and Exchange Board of India (SEBI) set up its corporation finance investigation department to probe diversion funds from listed entities, but there is no action on Reliance Home Finance, despite the forensic audit having revealed a diversion of nearly Rs8,000 crore to repay loans, statutory dues, corporate expenses, etc, of related entities (Brahmayya & Co report of 7 May 2020). Earlier, a forensic audit by Grant Thornton had also found diversion of Rs12,000 crore (Reliance Home Finance gave Rs 12,000 crore loans to 'indirectly linked' borrowers: Forensic audit) by the company as well as several anomalies in the credit appraisal and disbursal process. The company had aggressively denied this and claimed that the forensic audit “found no fraud, embezzlement or diversion and siphoning of funds in the company.” Such aggression and defamation notices have been effectively used by ADAG to shut up the media, investigators and whistle-blowers, over the years.
In September 2020, Indian Bank had classified its loan exposure to Reliance Home Finance as fraud. Even that did not trigger stringent action by any financial regulator.
Even before RBI’s decision to appoint an administrator, RCL’s debenture trustee had initiated recovery action which was mired in litigation. Several banks have already sold their loans to an asset recovery company and debenture-holders are now stuck with over 95% of RCL’s outstanding debt. Ironically, Reliance Capital, in a statement, blames these multiple litigations for stalling the resolution of its payment issues.
In October 2021, The Indian Express, as part of the Pandora Papers investigation, revealed how the Anil Ambani group, which had declared itself bankrupt, had borrowed and invested US$1.8 billion through 18 offshore entities between 2007 and 2010. So far, those implementing the draconian Prevention of Money Laundering Act appear not to have noticed this.
Soon after the IL&FS board was thrown out, the media had reported that Anil Ambani had begun to reduce his stake in RCL from 52%; some of it may have been the sale of pledged shares. But, by March 2020, he held less than 2% of the capital and the public sector insurer, Life Insurance Corporation (LIC) was the single largest shareholder with a 2.98% stake.
The RBI action raises several questions, many of which suggest that strong political support may have prevented regulators and public sector entities from doing their job. Similar questions were raised about the founder CEO and, later, chairman of IL&FS Ravi Parthasarathy’s politically powerful connections. In 2018, the Serious Frauds Investigation Office (SFIO) had asked RBI to investigate (SFIO Suspects RBI Top Official’s Collusion with IL&FS) the possible role of a senior official in turning a blind eye to the serious financial problems at IL&FS. There has been no development on this. SFIO’s aggressive investigation petered out by 2020, when it ought to have been asking similar questions about RBI’s lack of action in RCL as well.
Like the insurance regulator, SEBI also forgot its ‘fit & proper’ rules for bankrupt directors, which have been aggressively applied when the founders are less powerful. Life Insurance Corporation, a public sector insurer, also ought to explain why it has hung on to more shares in RCL than Anil Ambani – if the answer is poor investment skills and research, it would be a bigger worry for all Indians. State Bank of India added to the confusion by withdrawing the ‘fraud’ tag against Reliance Infratel Ltd in June 2010 without explanation.
These actions, along with Reliance Infrastructure’s Rs2,800 crore arbitration award in September 2021 against Delhi Metro Rail Corporation, combined with its political clout, created the impression that ADAG would be allowed to slither out of its problems once again, even after Anil Ambani had declared himself bankrupt in a London Court. Indeed, despite all his financial troubles, his family announced an investment of Rs400 crore in Reliance Infrastructure with plans to invest another Rs500 crore via creeping acquisition.
The long history of inaction by all three regulators with regard to Anil Ambani and his companies is scandalous. The only reason our regulators acted like the proverbial three monkeys is, probably, political pressure. This, again, exemplifies a simple principle of regulatory action in India: Show me the person and I will show you the rule. Investors and lenders suffer the losses.

10 months ago
It is normal thing for all these regulators in every respect of monitoring they wait till the scam reaches trillion dollars to match the 5trillion economy target of Govt. Fema violations are being ignored even after bringing it to their notice. They are busy with collecting KYC every now and then for every one facilitating frauds and selling of data by vested interests. So that the they can abscond their responsibility by missing in these huge data collection and not using available data effectively.
10 months ago
You aptly compared the regulators to three monkeys ???? ???? ???? . No one knows for sure how much is the real loss incurred since the accounts are highly fudged with the help of the accommodative auditors. Regulators took their own time so that Anil could take away whatever flesh left with leaving the bones only to the lenders. I have never seen some of the PSU banks acting softly against billion dollar defaulter. The present Government May say that most of the loans were given during the earlier regime. But my question what prevented them from taking prompt action in protecting the investors and lenders interest in the company. Regulatory actions are not instilling confidence on the investors and lenders.
10 months ago

Should be June 2020 (not 2010).

"State Bank of India added to the confusion by withdrawing the ‘fraud’ tag against Reliance Infratel Ltd in June 2010, without explanation."
10 months ago
very well researched..India will never improve..Government bows to farmers and industrialists like Anil Ambani,Mallya etc and goes after middle class ..Poor are needed for winning elections..Rich are needed for funds,
Replied to sundar_ramang comment 10 months ago
i dont knowwhat kind of farmers u r talking about ? there r majority of farmers who have land holdings of 5 acres or less and they make less than 20000 per acre ( gross realization) and there r few farmers who make money in bribes and invest for tax benefits and conceal the black money. whereas the sweeper in a govt school earns something like 30000 a month for now risk whereas the farmers has to fight spurious seeds, chemicals and govt whims and fancies in exporting and importing only to benefit few big traders. the farms which were abolished are framed with flaws only to benefit corporates. that is why Mr modi did not have the face to face opposition in the parliament and repealed without discussions
10 months ago
we have to understand how the law is applicable to raffale contractors. how dubious our PM is when it comes to favoritsm and nepotism
Replied to vachoudary comment 10 months ago
He is making us to believe that Government has no role in selecting the offset contractors and it was purely the act of the plane manufacturer. No idea how many of us will buy this story. The case was heard and judgement delivered in a hurry. The judge also got a lucrative RS MP soon after retirement. Now having delivered the planes, whether the offset contractor has started his work or this clause exists only on paper as Jumla. There is a saying However big the fool there is always a bigger fool to admire him.
10 months ago
10 months ago
Regulators have their own limitations ,preferences and pressures to be independent ,professional and timing to initiate regulatory and supervisory actions against corporates having heavy weights as Directors who can dictate their own terms and conditions and who can wield power to decide the regulatory Institutions' manpower , their continuance and their future career. The undercurrents are very many and they seldom get exposed or discussed openly. When the conditions favour they venture to take actions but then it becomes late and damage is already done to the economy and all its stakeholders. The only consolation in this case is that action is taken at last. Better Late than never. But the promoters stake seems to have drastically come down as per some reports and unfortunately the mantle of burden is to be carried on by investors, share holders, tax payers and other stakeholders. This article definitely is an eye opener and hope will serve as a check and balance for regulators to be more vigilant and daring to initiate the prompt remedial action when something is amiss in the running of the corporates with public money .
10 months ago
""All animals are equal. But some are more equal than others."

George Orwell, Animal Farm
Kamal Garg
10 months ago
It is of course a shame on the fall of this once a business tycoon (being counted among the wealthiest Indian globally) to dust and virtual demise. There is a huge difference between MA and AA and this reflects in how they work, strategise and their respect for law of the land.
10 months ago
All regulators have no inclination to prevent any frauds from happening. All that they do is post mortem. Due to this, they can be called MORTUARY,.
10 months ago
It would seem that India's judiciary have had a deep cultural impact on all branches of the Government inspiring them to glacial speed: We need a climate change:
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