Why Anil Ambani's bankrupt Reliance Capital is important enough to start bidding war between Torrent and Hinduja Group

Two years after billionaire Ajay Piramal and the US-based Oaktree Capital had a bitter battle over the control of bankrupt Dewan Housing and Finance Ltd (DHFL), the two bidders -- Ahmedabad-based Torrent and Hinduja Group –- are now slugging it out to acquire Anil Ambani's insolvent Reliance Capital Ltd (RCL). If the market capitalisation is any indicator of the valuation of a company, RCL has a total market cap of measly Rs 284 crore. The low valuation reflects the losses of Rs 8,055 crore in the NBFC’s books for 2021-22 on a revenue of Rs 19,273 crore. And not to forget the admitted claims of financial creditors to the tune of Rs 40,000 crore. So, what is it about Anil Ambani's bankrupt Reliance Capital that the two bidders are offering over Rs 8,000 crore-plus for the insolvent company.

Multiple regulatory licences at one go

RCL is a core investment company under Section 45-IA of Reserve Bank of India Act, 1934. The acquisition of RCL will provide a ready NBFC licence. In fact, the acquisition will also offer other businesses where separate licences are required from other regulatory bodies like Insurance Regulatory and Development Authority of India (IRDAI), ARC licence from RBI and broking licence from market and commodity regulators.

A foot inside the general insurance space

Reliance General Insurance, which is 100 per cent owned by the parent company, has a market share of close to 9 per cent. This subsidiary has a good presence in auto, health, home, property, travel, marine, etc. There are over two dozen players in the non-life space. In the recently concluded fiscal, the company garnered a gross direct premium of Rs 9,505 crore. It recorded a premium growth of around 13 per cent, which is considered good as the fortune of the industry is directly linked with the country’s economic growth. The company also made a healthy profit of Rs 381 crore in the same period.

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A licence inside life insurance to build a long-term annuity business

The bidder will get a 51 per cent stake in the Reliance Nippon Life Insurance (RNLI), where the foreign partner Nippon holds a 49 per cent stake. The company has a negligible market share (a little over 1.0 per cent ) with total premium collection at Rs 5,037 crore in 2021-22. It has assets under management at Rs 27,619 crore in the same period. A life insurance business provides stable income as policyholders get locked into an insurance scheme for 5, 10 or 15 years. This gives a regular flow of renewal premium income.

A play in the resolution of distressed loans in SME and retail segment

After a long bad loan cycle, the banks are sitting on a huge pile of stressed assets. The bad loan market is already witnessing some activity with government backed National Asset Reconstruction Company Ltd (NARCL) starting its operations recently. The private sector Yes Bank has also taken close to 10 per cent stake in JC Flowers ARC. There are over half a dozen private ARCs in the market. RCL has a subsidiary called Reliance Asset Reconstruction Company Limited (Reliance ARC), which buys bad loans from banks especially SME and retail segment. While bigger ARCs are focussed on large corporate loans , this subsidiary is building a business model around SME and retail assets. According to available data, the AUM of the company is Rs 2,230 crore as on March 31, 2022.

Distribution of financial products

Reliance Securities, which is a wholly-owned subsidiary, offers broking in equity, commodities, etc. and distribution platform for financial products. It has a distribution network of over 50 branches and close to 1,300 customer touch points across the country. It has over a million customers in the broking business. The high growth witnessed in the demat account post-Covid indicates a heightened interest amongst young millennials in the stock market. The commodity broking piece is also growing with over a lakh customer accounts. The inflow of customers in the broking business also offers a platform for cross selling financial products especially life, general insurance and mutual funds.