What Next, Reliance Home Finance?

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Grant Thornton, a globally known firm for audit, forensic and investigation services, among others, has not recorded any adverse findings on 11 parameters, including any diversion or siphoning of funds, embezzlement, falsification of accounts and fraudulent transactions by the promoter, the company, its employees or any associates, in its forensic audit report of Reliance Home Finance Ltd (RHFL). The RHFL statement said so last week.

The company’s lenders had appointed Grant Thornton for the audit in August 2019, in accordance with the Reserve Bank of India norms for resolution of bad debt. “The forensic report has confirmed the potential group entities’ exposure through several intermediate unlisted entities at Rs7,984 crore (including interest). The company had voluntarily and publicly disclosed even before the commencement of forensic audit to its auditors, regulators, lenders…,” the RHFL statement said.

The National Housing Bank, the apex level institution for housing finance companies in India, has already taken actions against the company by slapping penalty and directing it on the alleged regulatory anomalies, including concentration of credit and related party transactions. It has also asked RHFL to increase the housing loan disbursements and reduce corporate exposure.

After the completion of the forensic audit, the company now wants its bankers to fast-track the debt resolution plan “under change of management and control in the overall interests of all lenders, including over 20,000 retail non-convertible debenture holders and over eight lakh shareholders”.

RHFL claims to have disclosed to all stakeholders potential related party transactions to the tune of Rs7,500 crore – close to 60 per cent of its total debt. Is on-lending to group companies (supposedly to repay their liabilities on interest and principal) a normal business transaction? Is a home finance company lending more than half of its balance sheet to its group companies in sync with the spirit of the agreement between the company and its lenders?

RHFL has defaulted on paying at least Rs 2,000 crore of public debt. The money raised from normal business and securitisation and flowed to group companies could have easily taken care of its debt repayments. Would the firm have been in default if such group lending had not happened? Should the lenders be penalised for the troubles in the group companies to whom RHFL has extended business loans?

Incorporated in 2008, RHFL marked the Anil Dhirubhai Ambani Group’s entry into India’s expanding mortgage market. It had a presence in financial services through Reliance Capital Ltd, a non-banking finance company (NBFC), which until some time ago, had a triple-A rating.

RHFL, Reliance Capital’s wholly-owned subsidiary, hired Ravindra Sudhalkar from Kotak Bank Ltd in October 2016 as its CEO. Listed on stock exchanges in September 2017, RHFL grew at a compounded annual growth rate of around 44 per cent from fiscal year 2014 to 2018 to stack up Rs16,380 crore assets under management (AUM).

In September 2018, the AA+ company’s gross bad loans were just 0.8 per cent and AUM was Rs16,460 crore. Its investor presentation for the quarter ended June 2018 indicates that 51 per cent of the AUM consisted of loans for affordable housing, 20 per cent loan against property and 29 per cent construction finance. The scenario changed dramatically, coinciding with the default of Infrastructure Leasing & Financial Services Ltd, which triggered a crisis of confidence in the NBFC sector. The September 2018 investor presentation and subsequent investor disclosures stopped showing the break-up of its AUM.

In June 2019, its statutory auditors PWC resigned, stating delay in convening an audit committee meeting and certain observations on a few transactions for which the company apparently did not offer satisfactory response. PWC had also filed a letter with the Ministry of Corporate Affairs, under Section 143(12) of the Companies Act 2013. Under this section, if an auditor has reason to believe that a fraud is being committed against the company by its officers or employees, the auditor must report it to the central government immediately.

The company has disputed this allegation of PWC (through a press release on August 8, 2019). Audit firm Dhiraj & Dheeraj stepped in but it too gave a qualified opinion with respect to its financial statements as on March 31, 2019, stating significant deviations on loans advanced under the “general-purpose corporate loan” to certain entities, including group companies, aggregating Rs7,850 crore.

“Majority of company’s borrowers have undertaken onward lending transactions and end use of the borrowings from the company included borrowings by or for repayment of financial obligation to some of the group companies. There have been overdues of Rs566 crore of these loans as on 31 March 2019. We are not getting sufficient audit evidence to ascertain recoverability of principal and interest including time frame of recovery of overdues,” it had said while highlighting the shift in primary business of the company — from housing finance to non-housing finance (more than half of its total loan portfolio).

From October 2018, RHFL faced a slew of rating downgrades — dropping to D in April 2019 from AA+ in September 18. In April 2019, the bank facilities were downgraded to D. This rating indicates that the issuer has defaulted or is expected to be in default soon. By September 2019 all outstanding debt instruments had been downgraded to the default status. During this period, certain directors, during whose regime “group companies” had been lent money, started resigning. Anil Ambani’s son Jai Anmol Ambani resigned as non-executive director on May 31, 2019.

In July 2019, RHFL entered an inter-creditor agreement (ICA) with its banks, led by Bank of Baroda. Such a framework has been prescribed by the RBI for prompt identification and resolution of stressed assets. The ICA proposed the so-called standstill agreement which refrains banks from initiating any recovery proceedings. The banks, however, continued to receive interest payments for a few months and did not classify RHFL as a bad loan. They appointed BOB Capital Markets Ltd and E&Y as resolution professionals, Deloitte as cash flow monitoring agent, Grant Thornton as the forensic auditor and RBSA Advisors as the valuer.

Typically, under this framework, the resolution plan is not known at the time of framing the ICA. If the resolution plan, being worked out, is not acceptable to the bank, it gets the liquidation value, estimated by the valuer. Simply put, a bank does not know the liquidation value while signing the ICA. As I write this column, this process is on.

RHFL is not a default caused by liquidity tightness or lack of funds available to a housing finance company. It could have been avoided had these loans to group companies not been given. Period.

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