Hindujas can’t extinguish ESOPs, other incentive schemes of RCap arm: Legal view

The Hinduja Group cannot extinguish employee stock option plans (ESOPs) and other incentive schemes of Reliance General Insurance Company (RGICL), Reliance Capital’s (RCap’s) general insurance subsidiary.

This is because in the context of liquidation, holding companies’ subsidiaries assets do not come under the Corporate Insolvency Resolution Process (CIRP), according to the legal opinion provided by Khaitan & Co.

According to the CIRP, the resolution professional cannot takeover a holding company’s subsidiaries’ assets as the holding company and subsidiary company have separate legal status. In fact, the insolvency of the holding company per se does not directly affect its subsidiary, it said.

Based on these facts, IndusInd International Holdings (IIHL) – the group firm through which Hinduja Group has placed the bids – cannot alter the status of pre-existing assets and liabilities.

The Insolvency and Bankruptcy Code (IBC) recognises the principle of ‘separate legal entity’, which means that once incorporated, the company becomes a separate legal firm. Further, the resolution plan submitted by the IIHL under option-1 for RCap is on an “going concern” basis.

The legal opinion was necessitated as IIHL in its resolution plan for RCap has sought to extinguish all ESOPs, phantom stocks and other incentive schemes of RCap and its subsidiaries, including RGICL. This was to ensure that IIHL or RCap does not have to incur additional cost for the latter’s takeover.

haitan & Co quoted several judgments of the Supreme Court and National Company Law Tribunal (NCLT), including that of Vodafone International Holdings BV versus Union of India and others, to support its opinion. RGICL had issued ESOPs and other incentive schemes to its employees.

This also comes at a time when a clutch of overseas funds and banks, who were in discussions with the Hinduja Group to fund its plans for the RCap takeover, has collateral for providing loans. Hindujas was looking at raising $850 million from a clutch of lenders.

In June this year, RCap lenders approved IIHL’s resolution plan with 99.6% votes in favour, while the plan is currently pending before the NCLT’s Mumbai bench for final approval. NCLT will hear the resolution plan for approval on Wednesday (October 25).