RBI’s request for bankruptcy proceedings against Reliance Capital is granted by the NCLT

The Reserve Bank of India (RBI) filed a petition with the National Company Law Tribunal (NLCT) in Mumbai on Monday to commence bankruptcy proceedings against Reliance Capital under Section 227 of the Insolvency and Bankruptcy Code (IBC).

The designation of Y Nageswar Rao as the company’s administrator has also been affirmed by the bankruptcy tribunal. After hearing the case earlier in the day, the bench presided over by Pradeep Narhari Deshmukh and Kapal Kumar Vohra reserved their decision.

After superseding Reliance Capital’s board last month, the RBI moved the Mumbai bench of the NCLT last week to commence insolvency proceedings against the company, claiming defaults and governance concerns.

Under Section 227 of the IBC, only the regulator, according to senior counsel Ravi Kadam, has the authority to begin bankruptcy proceedings against a financial services company.

On October 30, 2017, YES Bank, a private sector lender, subscribed to Rs 987 crore worth of non-convertible debentures issued by Reliance Capital, according to Kadam. The company then defaulted on its bank payments around the same time in 2019, triggering the expedited redemption clause. It essentially permits a lender to demand that a borrower return an outstanding debt in full if specific conditions are not met.

Darius Jehangir Kakalia, appearing for Reliance Capital’s promoters, informed the bench that they support the banking regulator’s case. Reliance Capital stated in a statement that it supports RBI’s application to submit RCAP to NCLT under Section 227 for a fast-track settlement.

“Through the IBC procedure, the firm looks forward to quickly resolving its debt and continuing as a well-capitalized going concern in the overall interests of all its stakeholders, including lenders, customers, workers, and shareholders,” the statement continued.

This is the third time in recent years that the central bank has taken over the boards of what were formerly deemed systemically important NBFCs and begun insolvency proceedings. In November 2019, the central bank replaced the board of directors of DHFL, and in October of this year, the central bank replaced the boards of two SREI Group NBFCs.

The central bank is introducing a far tighter set of restrictions for NBFCs, bringing them up to line with bank norms. The action against Reliance Capital, however, is unlikely to have a big impact on the sector because the company to which it belongs has been in problems for a long time and has often failed to repay lenders or bondholders, the most recent of which was on November 27.

The RBI has also formed an advisory council to assist the company’s administrator in carrying out his responsibilities. Sanjeev Nautiyal, ex-deputy managing director (DMD), State Bank of India (SBI), Srinivasan Varadarajan, ex-DMD, Axis Bank, and Praveen P Kadle, ex-MD & CEO, Tata Capital Limited, are among the three members of the advisory committee.