Even by the staid standards of the regulator, the glacial pace and unspoken reluctance with which Reserve Bank of India (RBI) issued the diktat to supersede the board of Reliance Capital Ltd on 29 November 2021, the development has been little commented upon in the media that ran headlines on it.
As of 31 March 2021, the outside liabilities of the group stood at almost Rs76,000 crore. The equity of Rs10,801 crore was an impressive number but unfortunately with the wrong sign of ‘prefixed’. For a group in the state in which it is, the auditors have not seen anything amiss in accounting goodwill on consolidation of Rs5,111 crore; effectively, the net worth is a negative Rs15,912 crore!
The promoters’ shares have been entirely expropriated by the invocation of the pledge by the various lenders and, practically, the chairman and his son must be wondering how come nobody thought of ejecting them from the company earlier!
All the credit ratings are either brought to the lowest category or, worse still, withheld for the reason of ‘non-cooperation’.
How much of this is a new discovery or a revelation, as made out by the RBI communique below?
“The Reserve Bank has today superseded the Board of Directors of Reliance Capital Ltd (RCL) in view of the defaults by RCL in meeting the various payment obligations to its creditors and serious governance concerns which the Board has not been able to address effectively….”
Have the company’s latest accounts brought out some hitherto unknown information, or has a special audit or a forensic investigation brought unexpected skeletons out of the moth-eaten company? None of these!
The fate of Reliance Capital did not require any astrologer to divine it since the writing has been pretty evidently on the wall for about three years.
Even if the banks that lent money to the company had temporarily suspended their collective thinking or tightly shut their eyes, the company’s accounts for the year ended 31 March 2019 should have made matters obvious like a fake diamond in their palms!
For the first time, the company’s accounts cast under Indian accounting standard (Ind-AS) exposed the kind of fudging previously indulged in.
Interestingly, little was made explicit, though everything stared the studious reader in the face! While the accounts presented to the shareholders pertained to the year 2018-19, the profits (before tax) as computed for the previous accounting period of 2017-18 of Rs1,054 crore had turned into a loss of Rs5,549 crore!
It is a mysterious phenomenon of explaining the development as a change on account of reworking the opening balance sheet of 1 April 2018 for achieving conformity with Ind-AS!
Since the subject may baffle many a novice in the subject like the author, the extract of the profit and loss account for the period ending 31 March 2018 is annexed to this article. It shows the accounts as originally adopted by the board and the general body, first prepared for that year. The second one is where the same figures are modified under the head of the previous year’s figures in publishing the accounts for the year ending 31 March 2019.
The other two attachments to this article show the value accounted in the books for the investments in the subsidiaries and associates initially when the accounts were submitted for the year ending 31 March 2018, and the latter for the year 2018-19 when these are modified in the guise of correcting the opening balance for the period, which is the accounting period of 2017-18, effectively going back two years.
This list should be seen studiously to get a sense of how money was being siphoned. An interesting case is of investments in Reliance Land P Ltd, perhaps renamed with foresight as Reliance Entertainment Networks Ltd. It is entertainment, if you have not lent to or invested in this group!
Not only is the subsisting amount of Rs940 crore written off, but even the money invested during the year 2017-18 of Rs1,220 crore is. Thus, the fresh investment is made knowing it will be followed by a write-off!
While there can be no attribution of an attempt to conceal anything, if at all, the siphoning outstares one in the face, the silence of the board and the auditors of this is stark and shocking.
The board report mentions nothing beyond a statement that the company has adopted Ind-AS, but waxes eloquent on various global and local developments in many printed pages.
The auditor has explained the challenges involved in the valuation of assets and providing for impairment as an emphasis of matter and underscored the management’s judgement’s vitality in these esoteric issues!
One can liken the auditor’s explanations to how a history-sheeter explains to the police how he broke the lock of the safe deposit vault when caught!
The company had historically two auditors, which included a 'Big Four' audit firm. There was a change of auditor in 2017 when another one of 'Big Four' auditors replaced the then-existing 'Big Four' auditors. The new auditor had signed the accounts for the period 2017-18 but resigned just before the 2018-19 accounts where all the write-offs were made in the previous year’s figures by citing Ind-AS adoption. But the auditor had done the limited review for the three quarters and had been paid a significant portion of the fees!
The key question is whether any disclosure made of this Ind-AS impact, especially the write-offs made in the past year’s books, in presenting the quarterly numbers during 2018-19?
It has not been easy to ascertain this fact as the quarterly result copies are not accessible. Interested readers may try it at their end. If the quarterly figures did not bring this out, then serious questions should arise on this propriety both at the board of directors’ level and on the part of the auditor(s).
Effectively, the stock exchanges were kept in the dark until the 2018-19 results were published by the end of August 2019. Technically a two-year wait to know what the company’s performance was in 2017 and 2018!! The government of India provides its numbers faster!
To the benefit of the readers who have not seen the details, the board is an illustrious one with a full complement of independent directors; a former comptroller and auditor general (CAG) of the country, a leading auditor, who perhaps held high position in the ICAI, a retired chairman and managing director (CMD) of a nationalised bank and a bureaucrat, who had held very high positions in the government before retirement. The woman independent director is a leading lawyer, a partner of a premier law firm.
The only way this could have been improved upon is to have five past governors of the RBI at the same time!! This team was in place during the eventful year, though some retired subsequently and were replaced by equally eminent former bureaucrats.
To reemphasise the matter, the Ind-AS changes look dubious, to say the least and the opportunity has been cleverly availed to wash off a part of the past sins of siphoning off. Little attention was drawn to it either by the board or the auditors but with full disclosure of the details, which can be detected only if diligent!
The question is whether Securities and Exchange Board of India (SEBI) or the ministry of corporate affairs (MCA) is aware or concerned about looking into the matter from an academic perspective.
Even in 2018, the market saw what was ahead and the share prices came down in a heap and halved from a figure of about Rs460. During 2019-20, it dropped to the status of a penny stock and reached close to Rs5!! Currently, as a token of the ongoing festival mood in the bazaar, the share has moved to about Rs20!
The promoter had a little over 50% stake as shown in the accounts of 2018, and by 2020, it was almost wiped out as apparently the pledgees must have auctioned it off. Keeping to its tradition of a studied silence, these events find no mention in the board reports which, otherwise, eloquently bemoan the unfavourable conditions prevailing in the finance market where the lenders were not trusting top companies like Reliance Capital!!
Little in terms of value is left in the company and the downstream subsidiaries and the associate companies themselves are subject matter of some restructuring by virtue of the Inter-creditor Agreement of the lenders. The shares in the two insurance subsidiaries are already a subject matter of litigation due to the exercise of the pledge by the lenders.
RBI-appointed administrator and the committee of advisers would be more or less taking over a ghost house as features typically in Harry Potter movies!
Curiously, the Life Insurance Corporation of India (LIC) featured as the single largest non-promoter shareholder with over 4% stakes in many years. They had not sold even after the publication of the infamous 2018-19 accounts. Maybe they waited for the shares to come back to the face value of Rs10 which it eventually did!
Keeping to the practice of these articles being kept short and relatively non-technical, the other aspects which brought this group, which had almost close to Rs1 lakh crore of exposure to lenders at some stage, to bankruptcy, evident to all but the premier regulator, are not discussed here!!
(The author is a CA and CS and retired as a partner at EY, Chennai heading tax and regulatory advice.)