Mint Explainer: Why has RCap's insolvency resolution been delayed?

To be sure, delays in the insolvency process under the IBC are quite common. It takes an average of 679 days to achieve a resolution, as against 330 days envisaged under the code.

Mint takes a closer look at the reasons for the delay in this case.

How has the insolvency resolution process progressed so far?

In November 2021, the RBI superseded the board of Reliance Capital and appointed Nageswara Rao Y as the administrator. A month later the company was admitted into the corporate insolvency resolution process under the Insolvency and Bankruptcy Code (IBC). 

Also read | IBC tale of delay: Speed up insolvency resolution for this reform to shine

Initially, a slew of resolution applicants evinced interest in the bankrupt firm, only to back out later. Then in 2023, Torrent Investments and the Hinduja Group kicked off a battle to take over Reliance Capital, delaying the resolution. Eventually, a ₹9,650-crore plan by Hinduja Group’s IndusInd International Holdings Ltd (IIHL) to turn the company around was endorsed by lenders and the tribunal in June 2023 and February 2024, respectively. 

How have the delays affected the lenders?

Concerned about delays in implementing the resolution plan, lenders have been pushing IIHL to act. According to the NCLT order in February 2024, the plan was to be implemented in 90 days (by 27 May). But IIHL recently filed an application before the NCLT seeking another 90-day extension to implement the plan, adding to the lenders’ troubles. 

Also read: Lenders refuse to extend RCap resolution deadline as Hindujas delay repayment

On 18 May, Mint reported that while IIHL had informed lenders about the delay in receiving regulatory clearances, the committee of creditors (CoC) and the administrator opposed its request. Then on 23 May Mint reported, citing two people aware of the matter, that the NCLT had granted IIHL more time to secure the remaining regulatory approvals. 

What is the status of the regulatory approvals?

The Hindujas received the RBI’s approval in November 2023. This approval was valid only for six months – that is, until May 2024 – and it was reported that the administrator had sought an extension from the regulator. The Insurance Regulatory Development Authority (IRDAI) also gave its approval to the Hinduja Group recently, though it is still awaiting approval from the Securities and Exchange Board of India. 

Also read: Bankruptcy rescues have soard this year. Here's why

In April the Hinduja Group wrote to the RBI again, seeking approval for the addition of new entities to the corporate structure through which it was planning to acquire RCap. 

What do legal experts say?

Independent counsel and IBC expert Nirav Shah said it was risky to put out a plan first and then look for investors. “That is a problem because you can’t keep going to the RBI and Sebi each time a new investor is added. You must apply to RBI once everything is in place," he said.

Shah said the insolvency process has virtually come to a “grinding halt" and that at this stage, the resolution professional or the lenders can’t do anything until the Hindujas put in the funds. The 90-day extension period could potentially be increased further, he added. 

Also read: The slow burn of bankkruptcy filings may be about to end

More importantly, Shah said, the issue probably needs to be addressed at the legislative level, by amending the IBC to prevent such delays. “Once the plan is approved, there must be a prescribed time limit within which the resolution plan must be implemented," he said. 

Vidhan Vyas, founder of Vyas Legal, said the actions of the Hinduja entity were common in IBC cases. 

It’s important to note that if IIHL fails to fulfil its obligations under the plan, it will forfeit its earnest money deposit and the resolution professional could call for the plan to be cancelled in favour of a new one. This would certainly delay the process. Of course, if no one submits a plan, liquidation is always an option, said Vyas.

Which other IBC cases have faced similar roadblocks?

Vyas said the most recent example of this is Suraksha Group’s plan for the insolvent Jaypee Group, which has been awaiting regulatory approvals from authorities in Noida. Recently, the National Company Law Appellate Tribunal (NCLAT) gave its approval to begin construction work after making the Noida authorities a party in the matter. 

Also read: Let's reform India's bankruptcy code but without getting in the way of commerce  

Tata Steel faced similar issues in its takeover of Bhushan Steel, as did Fourth Dimension Solutions Ltd in its takeover of Educomp Solutions Ltd. These cases dragged on because of delayed approvals from various regulatory bodies including the Income Tax Department, GST claims, and name changes in various licences.