The Reliance Capital collapse: Another cautionary tale for retail investors

In November 2021, RBI took over the board of Reliance Capital and sent it to the bankruptcy courts. But what went wrong? Why did Reliance Capital fail? Let’s find out with the help of this blog.

Back in 2005, when the Reliance business was split between the two brothers Mukesh and Anil Ambani. Anil Ambani took over the financial services and telecom business because he believed they could be the future of the country (which he was right about). However, he found himself unable to run these businesses well. He decided to take riskier bets in the entertainment, power, and infrastructure industry. “His decisions did not come out of a carefully crafted strategy; they were driven by ambition”, charges a stock market analyst who did not wish to be named. “It was fashionable to bid for huge projects, which were financed by public sector banks (PSBs) at the behest of politicians,” says another observer.

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Companies under the Reliance Group took huge debts to grow at all costs. But when one business – Reliance Communications failed in 2017, Anil Ambani’s Reliance crashed and fell on its face. Reliance Capital had ventured into various financial services including asset management, life insurance, wealth management, commercial and home finance. This kind of diversity did show a lot of promise initially but after a while problems began to emerge. For example, the Home finance segment had made more than 50% of its lending to other companies in real estate development and infrastructure whereas one may imagine this segment to give out its lending to regular individuals wanting to buy their dream homes. When economic cycles came into the picture for the real estate development and infrastructure sector, the cash flows for the Reliance Home Finance segment started facing cash flow issues.

They lent money to struggling companies in the Reliance group and when those companies went bust, the same happened with Reliance Capital. When companies like Reliance Power and Reliance Communication started to fail and default on their loans, there was a chain reaction and Reliance Capital was not even able to pay its creditors. In March 2019, it had only 11 crores in cash. By June, its auditor PwC had resigned as well. The Auditor pointed out that Reliance Capital’s response to flagged issues was not satisfactory. Due to such incestuous lending, Reliance Capital had to sell its stake in companies that were performing well. Its mutual fund company was at some point the 5th biggest in India.

Despite having $9 billion in assets against its $2.9 billion liabilities, RBI had enough and it decided to put Reliance Capital in court for bankruptcy. This was majorly due to all the corporate governance issues. Anil Ambani had cut his stake in Reliance Capital from 52% in December 2018 to 2% by March 2020. Retail investors have been lapping up the shares of Reliance Capital hoping to make some quick money every time there is some good news. They own more than 50% of the company now. Banks that had lent money to Reliance Capital are expected to get 30 cents against every dollar lent by them.

This was the story of Anil Ambani’s attempt at the financial services sector. In 2010, Anil Ambani said this — “It has always been our ambition to create a world-class bank.” And now, the same dream has almost collapsed. Even DHFL went through something similar. Do you know what happened with DHFL? Comment and let us know if you remember the story of DHFL.

Thank you.

Regards,

Ankur Shukla (Section P),

Kautilya,

IBS Mumbai.