M&A Critique

Reliance Capital: Renewing focus on Real Estate, Banking services

The government’s unique mission — Housing for All by 2022 — has led to creation of more focus entities in the industry with plans for expansion to grab the opportunities that are going to come. As a move in that direction, Reliance Capital has announced that the Board of Directors has approved a Scheme of Arrangement for demerger of real estate lending business of the company into its wholly owned subsidiary Reliance Home Finance.

About the company

Reliance Capital is a systematically important Non Deposit Taking Non-Banking Financial Company (NBFC-ND-SI) registered with the Reserve Bank of India (RBI). Reliance Capital has interests in asset management and mutual funds, life insurance and general insurance, commercial and home finance, real estate lending, stockbroking, wealth management services, distribution of financial products, asset reconstruction, propriety investments and other activities in financial services. Reliance Capital has also filed for Demerger of Commercial Finance Business to its Wholly Owned Subsidiary Reliance Gilts Limited.

“Housing for All by 2022” Mission by GoI has led to create more focus entities in the industry with plan of expansion to capture the opportunity.

Reliance Home Finance Ltd (RHFL ) provides a wide-range of mortgages, loans against property, construction finance and affordable housing loans. It had assets of Rs 8,259 crore as on June 2016.  It had a non-performing asset ratio of 1%. The firm’s loan book is spread across 20,400 customers from the top 50 cities in the country.  Non-convertible debentures of RHFL are listed on Wholesale Debt Market (WDM) segment of BSE Limited. It has also filed scheme of arrangement with India Debt Management Private Limited and pursuant to which it will allot 31 crores 8% Cumulative non-convertible redeemable preference shares.

Demerger transaction

Demerger of real estate lending business including property solutions, valuation of property and brokerage business from Reliance Capital Limited to Reliance Home Finance Limited was done for Share Entitlement Ratio as 1:1.

Please Note: there is no immovable property transfer as part of the demerger.


  1. It will facilitate Reliance Capital as a core investment company in terms of applicable RBI guidelines.
  2. The business has achieved scale to attract investors and provide flexibility in accessing capital for future growth of all the businesses
  3. Focused strategy for different business
  4. Value unlocking for shareholders and provide options to select investments which best suits their investment strategies and risk profile


The increase in equity share capital before implementation of the scheme was done to capitalised the company adequately through introduction of funds by the holding company into the subsidiary at a premium of Rs 20 per share. So, the holding company subscribes 2.5 crores shares before filing of scheme and further allotment of 17.21 crores shares after approval but before the record date. Why there are two separate allotments, and that, too, one not covered in the scheme of arrangement is not yet clear.

Tax Implication

The share issued by Reliance Home Finance to Reliance Capital is at value lower than the book value. As the share is issued to the company which is a public listed company i.e. Reliance Capital so there will not be any tax implication as per Section 56(2)(viia) of Income Tax Act, 1961. Similarly, for Reliance Home Finance, since it as at lower then book value, there will not be any tax implication of section 56(2)(viib) of the Income Tax Act.

On listing of Reliance Home Finance, Reliance Capital will hold a 51% stake in Reliance Home Finance. Pursuant to demerger scheme, the promoters’ holding in Reliance Home Finance will be 76.48%. Therefore the promoters will have to take necessary steps to ensure minimum public shareholding at 25% within a period of 12 months from the records date of the scheme.

The additional shares proposed to be allotted as part of the scheme if not allotted to the Reliance Capital, and then the promoters holding would have been approximately 65% as against 76.48%.

The demerger shall help Reliance Capital apply for a NBFC license and further its interests in providing banking services.

However, the 51% stakeholding by Reliance Capital might be with the intention to have control in the hands of same management till strategic investors are attracted.  The holding of promoters above 75% will be sold by the individual promoters. The realisation by the promoters holding above 75% is not available as Reliance Home Finance is to be listed.

As claimed by the management, it will be adequately capitalized to grow its lending book to more than Rs 20,000 crore in the next 18 months. But the point to note is that the Paid-up Equity Capital Share will be Rs 517 crore excluding preference share capital to be issued as mentioned above, which is almost double than its peers. HDFC and DHFL who’s revenue generation in FY 2015-16 is Rs 29257- crore and Rs 7,311 crore have share capital of Rs 315.97 crore and Rs 291.80 crore, respectively.

Lock-in period

The share issued by Reliance Home to Reliance Capital will have no lock-in period as they are preferential allotment by the unlisted company. Going forward, Reliance Home Finance issuing shares as per demerger to the shareholders of Reliance Capital will not have any lock-in period except if Reliance Capital has if any.

GDR of demerged company

There are GDRs issued by the demerged company, for which the resulting company will issue shares in accordance with the Share Entitlement Ratio to the custodian to hold such shares in trust together with all additions or accretions including dividend. All shares of the resulting company issued would exclusively be for the benefits of the GDR holders of the demerged company.

It is proposed that the custodian may, subject to the prevailing market conditions, sell, transfer or dispose of the shares held by it within a period of six months from the date of listing in such a manner as may be proper in accordance with the provisions of the Depositary Agreement and shall distribute the proceeds after deducting applicable costs and taxes to the GDR holders of the demerged company as on record date.


For the demerged company, the difference of assets and liabilities will be adjustment against appropriate reserve account.

The resulting company will record all assets and liabilities after equity shares issued the difference to capital reserve.

It is clarified that such reserves shall arise pursuant to the scheme and shall for regulatory and accounting purposes be considered to be part of the owned funds / net worth of the resulting company.


The group wants to focus on the affordable homes segment of the market, one of the fastest growing segments within the mortgage finance industry, which is also one of the main focus areas for the government. To address the needs of (affordable homes) sector, Reliance Home Finance segregated the business and created more focused structure.

By creating an NBFC, it can become one of the applicants for the banking license as they are still interested to start banking services.

Given Reliance Capital’s history of bringing in strategic partners in its leading businesses — between 2012 and 2016, it brought in Japanese life insurance major Nippon Life as a strategic partner in its life insurance and mutual fund arms with 49% stakes in each of these entities — this might be step to go for strategic investment in Reliance Home Finance and more focus on Reliance Capital for banking services.

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Hiteshkumar Jain