THE ILLS OF OVER BORROWING

The Anil Ambani owned Reliance Infrastructure has been reeling under debt and has defaulted on its debt service obligation. The struggling company needs to reduce its debt and the most ready option is to sell its assets. Upon the sale of its Mumbai power distribution business to the Adani Group, Reliance Infrastructure Chairman Anil Ambani made some ambitious claims on Thursday at a press conference after the company’s board meeting. After announcing completion of the sale of its Mumbai power business to Adani Transmission for 18,800 crores, the ADA group chairman was quoted saying “Reliance Infra expects to be a zero debt company by next year”, he added “This transaction was the largest ever debt reduction in the infrastructure sector, representing 65% reduction of debt in just a single transaction”, stating further that “The company will emerge as one of the strongest companies in the infrastructure sector” and further went on to state that “Debt equity ratio post yesterday’s transaction will be 0.3:1, which is the lowest in the industry”. These statements heard in isolation indeed sound very encouraging, maybe that’s why shares of Reliance Infrastructure Ltd. was trading roughly 7.5% higher on Thursday in afternoon trade. However, what Anil Ambani didn’t mention (and frankly, he wasn’t expected to mention anyways) was, how the company managed to accumulate such a mountain of debt in the first place.

When Dhirubhai Ambani passed away in 2002, he left his sons a company, which was his life’s creation, Reliance Industries, a company that had Petroleum, Polyester, Telecom, Power & Financial Services businesses under its umbrella. A couple of years later, Kokilaben Ambani, mother of Mukesh and Anil Ambani found herself arbitrating a dispute between her sons over spoils of the family. When the split was finally decided, Mukesh Ambani got the core businesses of Petroleum, Petrochemicals & Textiles. Financial Services, Energy & Telecom businesses were demerged from the parent company, Reliance Industries and were given to younger brother Anil Ambani along with Rs 25,000 crores in cash.

After the split, Anil Ambani was handed over rapidly growing telecom & energy businesses and a very promising financial services business, as well as tremendous liquidity to expand his current portfolio, or venture into any other sector he chose. Initially, these companies did very well and provided handsome returns to the group as well as investors, but, he soon borrowed heavily and over-leveraged his business and Mr Anil Ambani started investing frivolously in an array of businesses such as entertainment, healthcare, manufacturing, defence, transportation & aviation. It comes as no surprise, the source of this aggressive expansion was borrowings from banks and a multitude of other lenders.

With the interest meter ticking at a rapid pace, things didn’t go as per plan. The ADA group has 5 listed entities, whose market cap peaked out at an astounding 4 lakh crores. Presently, the overall market cap of the group is down from 4 lakh crores to an embarrassing 40,000 crores.

The magnitude of such a fall begets a few questions, such as, on what basis did banks lend money to the group? Was it mismanagement or misuse of funds that led to such a rapid decline in the fortune of investors? Was it Mr Ambani’s attitude toward expansion, only chasing short-term profits, the reason for the performance?

Things turned from bad to worse, when Reliance Communications defaulted on payment to overseas non-convertible debenture holders to the tune of $300 million last year and questions were starting to do the rounds of bankruptcy proceedings to be initiated against ADA Group companies. Mr Ambani had two options, either to approach the NCLT for insolvency & bankruptcy proceedings or sell assets in the hope of reducing debt and buy some time. The latter option was chosen, and it was against this backdrop that RCom is in the midst of completing its sale of airwaves, towers & fibres to Jio, to pare it’s over Rs 45,000 crores debt. Reliance Naval & Engineering, after defaulting on Rs 9,000 crores debt has submitted a resolution to its lenders in the hope that they will come to a settlement without convening insolvency proceedings through IBC.

When we look at the entire picture of ADA Group, the sale of its Mumbai power business was a much-needed relief. It claims now that it will make good the default of its overseas non-convertible debentures and also reduce Reliance Infrastructure’s debt from 22,000 crores to 7,500 crores, hoping to make it debt free by next year. Mr Anil Ambani’s speech was comforting to some extent and investors took stock of that fact, which was reflected in its share performance on Thursday, but when we join all the pieces of the puzzle and look at it in totality, this deal entered into with Gautam Adani led Adani Transmission was a lifeline for the debt-riddled company, especially with RBI putting pressure on over-leveraged companies with its deadline for initiating insolvency proceeding via IBC route. With this sale of the power business to the Adanis, the group is perhaps undoing the ills of its past reckless over borrowing.