IRDAI Flags Concerns As IIHL Bids for Reliance Capital

The Insurance Regulatory and Development Authority of India (IRDAI) recently flagged concerns over the acquisition of Reliance Capital Ltd by IndusInd International Holdings Ltd (IIHL), a Hinduja Group firm. These concerns stem from several regulatory and financial considerations that have put the Rs.9,650 Cr resolution plan under scrutiny. Let us see what are these concerns of IRDAI;

Regulatory Hurdles and FDI Limits

IRDAI has deep reservations about the adherence to insurance regulations and the limits on Foreign Direct Investment (FDI). The regulator’s communication to Nageshwara Rao Y, the administrator of Reliance Capital, highlighted that IIHL’s plan might not align with existing insurance norms. Specifically, the IRDAI is wary of the potential breach of the FDI limit in the debt-laden company post-acquisition.

IRDAI has also highlighted about the increase in FDI following the stake transfer of Reliance Capital to IIHL. The communication from the regulator sought confirmation on whether a 100% FDI in Reliance Capital is permissible under the current FDI law, IRDAI has taken this subject quite seriously because of the due diligence by IRDAI in ensuring compliance with legal frameworks.

Shareholder Details and Capital Infusion

The IRDAI has asked for detailed information about the shareholders of IIHL, quite important to evaluate the transparency and legitimacy of the acquisition. Furthermore, the regulator has requested clarifications on the capital that IIHL intends to infuse into Reliance Capital, which is grappling with a debt of over Rs.40,000 Cr. 

Debt Structure and Protection of Policy Holders

The IRDAI is examining the structure of the debt that IIHL plans to raise to fund the acquisition. The regulator has asked for specifics regarding the rate of interest, the instruments to be issued, and the identity of the proposed subscribers. This level of scrutiny indicates the IRDAI’s focus on ensuring that the financial mechanisms employed do not jeopardize the interests of policyholders, 

The regulator has suggested that the promoters should invest their capital, as insurance firms handle the funds of policyholders. 

Conclusion: Despite these concerns, the National Company Law Tribunal (NCLT) approved IIHL’s resolution plan in February. This decision came after the RBI had superseded the board of Reliance Capital in November 2021 due to governance issues and payment defaults by the Anil Dhirubhai Ambani Group company. The outcome of this acquisition will not only affect the stakeholders involved but also set a precedent for future transactions in the financial sector.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.