Crisis Brewing in Anil Ambani’s Reliance As Lenders Sell Pledged Shares

Crisis in Anil Ambani led-Reliance Group seems to be brewing. After Reliance Communications Limited (RCom) announced on February 1 that it is filing for a voluntary bankruptcy process with the Mumbai bench of National Company Law Tribunal (NCLT), the Group’s companies have lost about Rs 13,000 crore market capitalisation in a span of one week.

During this period itself, the Group has been slapped another contempt petition in the Supreme Court by its operating lender Swedish telecom equipment manufacturer, Ericsson, as it has once again failed to abide by the apex court’s order to repay its debt of about Rs 550 crore (principal plus interest), while several lenders including L&T Finance and Edelweiss sold the group’s shares pledged with them.

‘Pledged shares’ is a loan raising system through which promoters of companies raise loans from lenders using the shares held by them as collateral.

Reacting to the sale of pledged shares, the Group officials alleged on Friday that the action of the non-banking financial companies (NBFCs) is “illegal, motivated and wholly unjustified”, blaming them for the share rout. “A few NBFCs, “substantially L&T Finance and certain entities of Edelweiss Group, have invoked pledge of listed shares of Reliance Group and made open market sales of the value of approximately Rs 400 crore from February 4 to 7,” said a statement released by the Group. “The illegal, motivated and wholly unjustified action by the above two groups has precipitated a fall of Rs 13,000 crore, an unprecedented nearly 55 per cent, in market capitalisation of Reliance Group over just these four short days,” it noted.

However, L&T and Edelweiss have claimed that their sale of pledged shares is on par with their respective loan agreements. Both the NBFCs have countered the allegations, saying that the Ambani-led Group did not respond to their repetitive notices and remediation offers, prompting them to enforce their rights of invocation. “On February 4, there was a sharp drop in the prices of Reliance Group shares, which led to further erosion in the collateral value. The Edelweiss group once again gave due opportunity for remediation. Since there was no response from Reliance ADAG Group, it necessitated liquidation of the collateral as per the agreed contractual terms,” stated Edelweiss.

Reportedly, L&T sold shares worth Rs 234 crore – 20 million shares of RCom, 7.8 million shares of Reliance Capital, 4.9 million shares of Reliance Infrastructure and 62.5 million shares of Reliance Power on 7 February. While the selling data of Edelweiss is not available with the exchange websites, another NBFC, STCI Finance, sold shares worth Rs 37 crore of Reliance Infrastructure during the week.

According to BloombergQuint, nearly 57 per cent shares owned by the Reliance ADAG group were pledged, as of December 2018. Considering several factors such as RCom’s outstanding debt of over Rs 46,000 crore, and its sudden bankruptcy resolution plan through NCLT, more than 50 per cent pledged shares of the Group with its lenders, the crisis in the group will further intensify if other lenders chose to invoke rights in case of similar fall in the prices of the Group’s shares.

The group’s promoters have pledged more than 70 per cent of their shares in four of their companies – Reliance Naval, Reliance Infrastructure, Reliance Power and Reliance Capital. The group’s promoters pledged 100 per cent shares (2.01 crore shares) in Reliance Naval company.

On the other side, the Supreme Court is set to hear a contempt plea against the Group filed by Ericsson India next week. This is the third contempt petition against Anil Ambani as his firm failed to adhere to the earlier orders of the apex court to repay its debt over Rs 550 crore. RCom’s operational lender Ericsson fears that it would end up getting a delayed and reduced payment if NCLT agrees for RCom’s insolvency plea, as RCom could get a moratorium upto 270 days and financial lenders are preferred over operational lenders, according to Insolvency Bankruptcy Code, 2016. In 2014, Ericsson signed a seven-year deal to operate and manage RCom’s telecom network but differences emerged between the two companies over unmet payments.

Reportedly, the apex Court has listed all matters relating to RCom and Ericsson for February 12.

RCom appears to have gone ahead with its bankruptcy protection plan as the group had even moved to NCLAT on February 4 to withdraw its opposition to an NCLT May 2018 order which initiated insolvency against the firm.