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businesstoday.in Why FTAs are Brace up for back�iring moratorium NPAs June 28, 2020 `100 OC RERIENLVIEANNTCIENG HOW MUKESH AMBANI IS PIVOTING RELIANCE INDUSTRIES FROM A PETROLEUM COMPANY TO A TECHNOLOGY CORPORATION



From the Editor http://www.businesstoday.in Metamorphosing Reliance Editor-in-Chief: Aroon Purie Group Editorial Director: Raj Chengappa Companies age just like humans. They get stiff and unresponsive, decision-making slows and stubbornness grows. Disabilities even- Editor: Rajeev Dubey tually consume the human body but firms have the good fortune to Group Creative Editor: Nilanjan Das carry on. Provided, they change with the times. Yet, organisations are the Group Photo Editor: Bandeep Singh toughest to change. The older they are, the harder it gets. Those that manage to transition often have longevity way beyond their peers. Executive Editor: Anand Adhikari Deputy Editors: Ajita Shashidhar, One such dramatic transformation is underway at the 54-year-old Reli- ance Industries, India’s largest and most valuable firm that could enhance Naveen Kumar (Money Today) its longevity beyond the oil business. The company’s 63-year-old Chairman Mukesh Ambani – at the helm since 2002 – is in a tearing hurry, driving the SPECIAL PROJECTS AND EVENTS metamorphosis of the oil and petrochemical giant into a technology firm. He has ploughed in more than `6 lakh crore in a short span of six years to take his Senior Editor: Anup Jayaram new businesses – Reliance Retail and Reliance Jio – to top of the pecking order in India’s retail and telecom industries. CORRESPONDENTS As a result, Reliance Industries – until recently a B2B firm dominated by oil Senior Editors: P.B. Jayakumar, Nevin John, and petrochem – already generates more than a third of its cash flows and reve- Joe C. Mathew, E. Kumar Sharma, nues from B2C businesses. And now a new thrust with Jio Mart into e-tail prom- ises to leverage the expansive presence of both retail (11,784 stores across India) Dipak Mondal, Manu Kaushik, Sumant Banerji and telecom (387 million subscribers) to lead the way for consumer businesses Associate Editor: Nidhi Singal, to eventually overtake oil in revenue and profits. Senior Assistant Editor: Sonal Khetarpal Such transformation is rare in world corporate history. The cover story this issue by my colleague Nevin John puts together all the pieces of the Re- RESEARCH liance puzzle – the rapidfire stake sales in Jio Platforms during lockdown; the launch of Jio Mart and the ongoing negotiations to bring Saudi Aramco Principal Research Analysts: Niti Kiran, Shivani Sharma on board the petrochem business. It’s a must-read to decipher the Mukesh Ambani gameplan. COPY DESK From organisation transformation to brand transformation: Pressure Senior Editor: Mahesh Jagota on margins is forcing carmakers to try every new trick in the trade to inno- Associate Editor: Samali Basu Guha vate for new revenue streams. One of those is cross-badging of identical ve- Chief Copy Editor: Gadadhar Padhy hicles. Maruti-Toyota, Hyundai-Kia, Renault-Nissan, VW-Skoda have not just shared vehicle platforms but even cross-badged their vehicles. But why does Copy Editor: Aprajita Sharma cross-badging fail? Read Sumant Banerji’s analysis on page 74. PHOTOGRAPHY Meanwhile, an interesting battle is brewing between India’s 20 lakh res- taurants and restaurant aggregators such as Swiggy, Zomato and others. Deputy Chief Photographers: Shekhar Ghosh, Restaurants allege aggregators manipulate the market and impose usurious Rachit Goswami, Yasir Iqbal charges. They have decided to take charge of their fortune with the National Restaurant Association of India – the country’s largest restaurant body with Principal Photographer: Rajwant Singh Rawat five lakh members – launching an App of its own, Dotpe. Can it wean away the business once lockdown opens? Read Manu Kaushik’s report on page 80. ART And just as the Centre presses the pedal on creating robust local supply Deputy Art Director: Amit Sharma chains to enable Indian firms to export “Made-in-India” products, ongoing Assistant Art Director: Raj Verma negotiations for bilateral and multilateral trade will need to create an enabling environment. That’s why it’s vital to ensure we do not repeat our mistakes of PRODUCTION the past. Joe C. Mathew explains why most previous trade agreements have been to India’s disadvantage. That’s on page 16. Chief of Production: Harish Aggarwal Senior Production Coordinator: Narendra Singh Last, but not the least, on page 86, Niti Aayog CEO Amitabh Kant explains when India should realistically expect to get back into growth mode. Associate Chief Coordinator: Rajesh Verma [email protected] LIBRARY @rajeevdubey Assistant Librarian: Satbir Singh Publishing Director: Manoj Sharma Associate Publisher (Impact): Anil Fernandes IMPACT TEAM Senior General Manager: Jitendra Lad (West) General Managers: Upendra Singh (Bangalore) Kaushiky Gangulie (East) Marketing: Vivek Malhotra, Group Chief Marketing Officer Newsstand Sales: D.V.S. Rama Rao, Chief General Manager; Deepak Bhatt, Senior General Manager (National Sales); Vipin Bagga, General Manager (Operations); Rajeev Gandhi, Deputy General Manager (North), Syed Asif Saleem, Regional Sales Manager (West), S. 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6 June 28, 2020 Cover by Volume 29, Number 13 NILANJAN DAS The Point Snag Hits Twin 34 Engines COVER STORY Consumption and invest- REINVENTING ment growth have been RELIANCE falling for several quarters. The lockdown seems to have HOW MUKESH AMBANI IS PIVOTING RIL FROM A made things worse PETROLEUM COMPANY TO A TECHNOLOGY 16 CORPORATION Policy How to Make FTAs work India’s experience with free trade agreements has been bitter. Can the country learn from its mistakes? 22 ILLUSTRATION BY RAJ VERMA Suspended Business Today 28 June 2020 Ammunition With the insolvency and bankruptcy law suspended, the ecosystem of professionals around it faces disruption and uncertainty 4

46 64 86 Finance The Solar Mirage Interview Ticking Time Bomb “Growth should pick India’s solar capacity addition up from second half Up to `40 lakh crore worth of bank is slowing as viability of loans are under six-month morato- of the �iscal” rium. The risk of default looms large projects and host of other issues trouble developers Amitabh Kant 50 74 90 Policy Let’s Cross It Management Reimagining Work The Labour Law In a bid to contain costs, a Conundrum number of carmakers have In a world that has changed, shared platforms and even businesses are looking at States have proposed radical cross-badged products in changes in labour laws post lock- India. Almost all have failed, new organisational structures down. But those cannot trigger an but the strategy continues 96 economic revival 80 Network 56 Whose Food Is It, The Educator Anyway? Industry L&T group Chairman A.M. Naik There’s a new war brewing has fond memories of his The Indian Hand in the kitchen between childhood in Gujarat’s Endhal Whether India develops a Covid-19 restaurants and online food where his family was called vaccine/drug or not, Indian aggregators companies will be preferred the “Master Kutumb″ partners for global pharma to make 98 and distribute the life-saving drug Best Advice I Ever Got businesstoday.in “We Need to Count Upon the ‘Collective Wisdom’ STAY CONNECTED WITH US ON www.facebook.com/BusinessToday@BT_India of Our Team” An Feature Manish Sharma From time to time, you will see pages titled “An Impact 5 Feature” or “Advertorial” in Business Today. This is no different from an advertisement and the magazine’s editorial staff is not involved in its creation in any way. 28 June 2020 Business Today

Snag Hits Twin GDP Engines Consumption and investment growth have been falling for several quarters. The lockdown seems to have made things worse By Shivani Sharma Graphics by Tanmoy Chakraborty Private Consumption Private Investment The Stalled in Negative Zone Suffers Core Private Final Consumption Expenditure Gross �ixed capital formation growth Most components may dip 42% in April as more than half the (%) shrinks for three quarters in a row of the core sector consumption basket was hit by lockdown shrink in FY20 20 15 Coal Crude Oil 10 12 -0.5 -5.9 0 9 Natural Re�inery -10 6 Gas Products -20 3 5.7 0.2 -30 Quarter Apr, 0 Quarter Apr, Fertilizers Steel ended 2020E* ended 2020 -40 -3 0.2 4.2 -50 -6 Cement Electricity Jun, Jun, 2012 2012 -0.8 1 Y-o-Y growth% *E is expected: Source : RBI. MOSPI, CMIE, Bloomberg 6

5.6% The steepest fall in gross �ixed capital formation ever; this was in 1970/71 Steel Demand Automobiles in FMCG Awaits Turns Weak Reverse Gear Buyers Growth in �inished Sales shrink 15 per Sector sees a muted steel consumption cent in FY20 fourth quarter; nears zero Q1 of FY21 worse Y-o-Y growth% as lockdown 10 10 impact looms Y-o-Y growth% 8 20 8 6 Y-o-Y growth% 4 6 2 15 0 4 15 10 2 5 0 0 ’000 tonnes 71 73 Q3 2018 74 Q4 2018 77 Q1 2019 82 Q2 2019 84 Q3 2019 Q4 2019 91 Q12020 99 100 FY12 FY12 FY13 FY13 FY14 FY14 FY15 FY15 FY16 FY16 FY17 FY17 FY18 FY18 FY19 FY19 FY20 FY20 28 June 2020 Business Today 7

The Point APRIL SEES PEOPLE EMPLOYED (in crore) 20 11.4 CRORE Small traders & wage labourers JOB LOSSES…15 � The number of people employed fell Salaried Apr 2020 a massive 11.4 crore in April, according 10 employees to the Consumer Pyramids Household Survey by the Centre For Monitoring 5 Indian Economy (CMIE) Entrepreneurs � The worst hit were small traders and Source : CMIE labourers, whose employment numbers fell from 11.56 crore in March 2020 to 0 3.66 crore in April 2020 Jan 2016 � The overall unemployment rate rose to 27.1 per cent in May, the highest so far. In April, it was 23.5 per cent …With Youngsters Hit the Most � Those in the 20�24 year age group were 8.5 � Job losses in 25�29 � A total of 3.3 crore per cent of the total employed in FY20. But they age group were also people in their 30s accounted for 10.9 per cent job losses disproportionately high lost job in April SHARE IN Jobs in FY20 JOBS AND JOB LOSSES BY AGE Job losses in GROUP �%� April 2020 25�29 35�39 40�44 45�49 11.1 12.1 14.2 15.3 20�24 30�34 50�54 8.5 10.8 12 15�19 30�34 35�39 40�44 55�59 1.3 13.5 13.9 14.4 9.7 45�49 25�29 12.8 60�64 11.5 50�54 3 20�24 10.9 10.9 Source : 55�59 Consumer Pyramids 15�19 Household Survey 9.4 2.1 ≥65 60�64 ≥65 0.4 0.2 1.9 8 Business Today 28 June 2020



The Point REPO RATE REPO RATE REPO REVERSE AT MULTI� 10 RATE REPO RATE YEAR LOW 8 4% 3.35% � The Monetary Policy 4.4% 3.75% Committee of the RBI has 6 reduced the repo rate MARGINAL CASH by 40 basis points to 4 4 STANDING RESERVE per cent to prevent the FACILITY RATIO economy from crashing 2 due to the lockdown 4.25% 3% 0 May 2020 4.65% 4% � It also brought May 2001 down MSF, bank and BANK RATE Latest Rate reverse repo rates 4.25% Previous Source: RBI 4.65% Rate BANKING DEPOSITS WITHIN `10 RED ZONE (` lakh crore) LAKH CRORE ALERT IN 71.9 74 75.4 Rise in bank RED ZONE 78.4 deposits in the DISTRICTS Q1 FY19 Q2 FY19 79.1 Red Zone in Q4 FQY319FY19 the last eight � The share of bank FY20 81.1 deposits in districts Q2 FY20 82.5 quarters that are in the red zone due to large 62% Q1 82.8 number of Covid-19 cases is 62 per cent, Q3 FY20 according to RBI data SHARE IN Q4 FY20 � The slump in BANKING economic activity in 12% DEPOSITS these areas will put pressure on bank 26% balance sheets Red Zone � In the red zone, Green Zone the western region Orange Zone accounts for the largest share of deposits at 35%, followed by southern region (23%) and northern region (22%) Source : CARE Ratings 10 Business Today 28 June 2020



The Point Food Inflation CPI �FOOD INFLATION Soars to 12% (% YoY) � Food in�lation touched 12 per cent 15 in April compared to 8.8 per cent in March 12 � In�lation in “cereals and products” 9 rose to a 71-month high of 7.8 per cent and in “pulses and products” 6 to a 45-month high of 22 per cent 3 � In�lation in “vegetables” was 23.6 per cent, much higher than 0 Apr the 18.6 per cent in March Apr 2020 2019 Source : MOSPI FDI in India Jumps � Foreign direct investment into India has been 13% to $49.9 steadily rising for years as the country improves billion in FY20 its position on the Ease of Doing Business Index � Singapore remained the top source of FDI, accounting for $14.67 billion, followed by Mauritius at $8.24 billion, according to the data released by the Department for Promotion of Industry and Internal Trade FDI EQUITY INFLOWS TOP FIVE SOURCES OF $14.7 INTO INDIA FDI EQUITY INFLOWS bn ($ million) ($ billion) Singapore 49.9 $6.5 $8.2 FY20 bn bn 44.8 Netherlands Mauritius FY18 $4.2 $3.7 40 44.3 bn bn FY16 43.4 FY19 US Cayman FY17 Islands Business Today 28 June 2020 12



The Point POWER GROSS GENERATION COAL GENERATION OF ELECTRICITY FALLS 25%, 40 DEMAND 40 Apr 2020 20 Apr 2020 DOWN 22% 20 0 � Gross electricity generation 0 -20 declined 25.4 per cent in April -20 -40 -40 � Production of coal- and diesel- Dec 2019 based thermal as well as hydro Dec 2019 electricity fell in double digits; they account for 80 per cent generation HYDRO NUCLEAR 40 40 � Demand declined 22 per cent as several factories and commercial 20 20 establishments remained shut due to the lockdown 00 -20 -20 -40 Apr 2020 -40 Apr 2020 Dec 019 Dec 2019 Fugures in %; Source: Central Electricity Authority Screen INDIA CONSUMES Additions to 45.8% LESS Drop Sharply FUEL IN APRIL � Cinema industry is facing turmoil � Demand for petrol, diesel � LPG was the amid the nation-wide lockdown. and aviation turbine fuel fell only fuel whose Capacity addition is expected to drop 60.4 per cent, 55.6 per cent consumption rose to 131 screens in FY21 and 91.3 per cent, respectively (12.2 per cent) � Merely 45 screens were added in the ALL PETROLEUM   HIGH SPEED   AVIATION March 2020 quarter compared PRODUCTS DIESEL TURBINE FUEL to 69 in March 2019 and 252 in March 2018 quarters 20 20 20 000 CAPACITY 401 379 -20 -20 -20 ADDITION: Exhibition -40 -40 -40 of Films (Screens) -60 -60 -60 Dec 19 Apr 20 -80 Apr 20 Dec 19 178 170 167 131   MOTOR SPIRIT   LPG -100 Apr 20 Dec 19 20 20 00 FY16 FY17 FY18 FY19 FY20 FY21 -20 -20 Source: The Multiplex Association of India, -40 -40 Industry Outlook -60 -60 Dec 19 Apr 20 Dec 19 Apr 20 Figures in %; Source: PPAC 14 Business Today 28 June 2020



MAHKOWEWOFTRTAOKs India’s experience with free trade agreements has been bitter. Can the country learn from its mistakes? BY JOE C. MATHEW ILLUSTRATION BY RAJ VERMA O n March 6, Commerce and Industry Minister Piy- ush Goyal made a candid admission on the floor of Par- liament. He told the Rajya Sabha that India’s Free Trade Agreement (FTA) with the 10-country ASEAN (Associa- tion of South East Asian Nations), its biggest trade pact so far, has increased the country’s trade deficit with them. India’s trade deficit with ASEAN was $5 billion at the time of implementation of the FTA (FY11). In FY19, it was $21.8 billion, a four-fold increase, he said. The discomfort with large trade agreements like the one with ASEAN was visible in November 2019 too when India walked out of talks for the Regional Com- 16 Business Today 28 June 2020

FIXING THE TRADE IMBALANCE ISSUE: Asymmetrical tari� commitments; India gives too much without commensu- rate gains SOLUTION: Renego- tiate tari� rates ISSUE: Non-tari� barriers like phyto sanitary measures, residue limits, etc SOLUTION: Mutual recognition of standards ISSUE: Entry barriers in services SOLUTION: Re- ciprocal visas, job permits, recogni- tion of degrees and certi�icates ISSUE: Insu�icient data, especially in the case of services sectors like tourism SOLUTION: Be ready with data to understand strengths and weaknesses ISSUE: WTO-plus rules SOLUTION: Stay away from provisions that can have long- term adverse impact prehensive Economic Partnership (RCEP) – seen as coronavirus (Covid-19) influenza. leading to create the world’s largest economic block – India has till date signed about two dozen trade signed among 16 East Asian economies, including ASEAN members. agreements – from FTAs to preferential trade pacts - with countries and groups of countries. It is negotiat- However, worries about older existing trade deals ing an equal number of deals with others. It seems to be are not preventing India from exploring new trade pacts. confident that it can make future deals work. This is only The RCEP may have been aborted, but the country has possible if it can learn from its mistakes. been in discussion for a trade agreement with its biggest trade partner, the US. The commerce ministry has also Global Minnow hinted that the country will explore opportunities aris- ing out of shakeup in global supply chains due to trade Goyal says asymmetrical tariff commitment is the big- wars (especially US-China) and outbreak of the novel gest reason for India’s rising trade deficit with ASEAN countries. “Non-tariff barriers in many FTA partner 28 June 2020 Business Today 17

Policy – FTAs countries are also an important factor contributing to if trade pacts facilitate better market access. But for this. While exports and imports vis-a-vis FTA partners that, it needs to understand what went wrong with the continue to grow, the utilisation rate of FTAs, both for earlier FTAs. India and its partners, has been moderate,” says Goyal. Steep Tariff Cuts India accounts for just 2 per cent of global trade. Its plans to engage with economic giants are driven by a desire to Biswajit Dhar, a trade expert associated with the Jawa- increase its global footprint. 15% harlal Nehru University, New Delhi, says Incidentally, India’s cumulative trade India failed to take advantage of market access offered by comprehensive econom- with its FTA and bilateral trade agreement partners adds up to 15 per cent of its total ic partnership agreements (CEPA) with global trade, with ASEAN member nations Share of ASEAN, South ASEAN, Japan and South Korea. “The ab- such as Singapore and Malaysia, and South Korea and Japan in solute value of exports to the Republic of Korea and Japan, accounting for a bulk of India's trade basket Korea and Japan fell from FY11. Exports this. On the other hand, its top five trade to ASEAN rose initially but declined until partners - US, China, UAE, Saudi Arabia FY16. Import trends from CEPA partners and Hong Kong - with whom it does not have a trade pact are in contrast with trends in exports. Imports increased account for 35 per cent of its $844 billion goods trade (in for all countries; increasing nearly 130 per cent for ASE- FY19). India hopes to find more opportunities in mar- AN and 50 per cent and 60 per cent for Japan and Ko- kets like the US, where it already has a bigger presence, rea, respectively,” says Dhar. “CEPA partners exploited AN UNEQUAL WORSENING TRADE BALANCE BALANCE India's trade balance ($billion) has been worsening vis a vis Under WTO, India has agreed to countries with which it has entered into CEPA remove tari�s on 2% of imports, but for key (CEPA) nations, this 2010/11 2014/15 2018/19 �igure is far higher -8.1 -12.9 -14.8 -9.7 -12.9 -5 -5.4 -9.9 -21.8 ASEAN ASEAN CEPA 2010/11 2014/15 2018/19 74.1% 2.1% 70% -8.5 -8.3 -9.5 -11.9 -6.7 -8.9 -8.3 MFN Tari�s Korea CEPA -8.9 (WTO) -12.1 JAPAN CEPA 86% Republic of Korea 2010/11 2014/15 2018/19 Zero tari�s -3.5 -5.7 -6.3 -2.7 -4.7 -5.2 -5.9 -6.2 -7.9 (as % of total tari� lines) Japan MFN: Most favoured nation; WTO: World Trade Organization; ASEAN: Association of CEPA: Comprehensive Economic Partnership Agreement Source: Madhyam Brie�ing Paper Southeast Asian Nations Source: Madhyam Brie�ing Paper 18 Business Today 28 June 2020

India’s markets easily. Indian exporters were unable to FTA partners such as China, Australia, New Zealand, leverage the lower tariffs offered by the partner coun- Japan and Korea for the RCEP deal, New Delhi-based tries,” he says. PHD Chamber of Commerce and Industry (PHDCCI) One of the major findings of studies by Dhar is that had identified non-tariff barriers as causing harm to India gave up much more than what was needed. In all India-ASEAN trade. It noted that “proliferation of non- three cases, ASEAN, Korea and Japan, India agreed to tariff measures in the ASEAN market has contained the deep cuts in tariffs. “While India’s obligation under the economic integration of Indian products in ASEAN”. WTO was to remove tariffs on just 2 per cent imports, The measures cited included import controls, import the range of tariff cuts it offered was in the range of 74 permits, sanitary and phyto-sanitary measures, product per cent to 86 per cent,” he says. standards and technical barriers. It cited the example Non-Tariff Barriers of gems and jewellery, where India is competitive, say- ing that shipments to Thailand had to be routed through In the run-up to India’s hectic talks with ASEAN and its Hong Kong due to high Customs duty and complex Cus- toms procedures. This added to costs. ASEAN markets have stringent regulations, including different marking/ labeling/packaging requirements, testing/quarantine requirements, pre-shipment inspection by authorities, etc. The cost has to be borne by exporters. The PHDCCI’s fear has a solid base. Take Japan, with which India has an FTA. The World Bank's database, World Integrated Trade Solution, says Japan’s imports have a coverage ratio of 76.18 per cent and a frequency ratio of 61.20 per cent for non-tariff measures. In other words, 76 per cent products exported to Japan face some non-tariff regula- tion. In comparison, India’s imports “Non-tariff bar- have a coverage ratio of 45.52 per cent riers in many and a frequency ratio of 43.71 per cent. FTA partner Services Stuck countries are PHOTOGRAPH BY BANDEEP SINGH The comprehensive agreements are an important not only about goods trade. They have a services component too. Services is factor. The considered India’s strong area but its utilisation rate performance here is hampered be- of FTAs, both cause mutual recognition agreements for India and (MRAs), which allow qualified per- its partners, has sonnel in one region to automatically been moderate” qualify for offering services in any Piyush Goyal, Union partner country, are either absent or Minister for Commerce not implemented in spirit. The slow pace of implementation even in cases and Industry where MRAs exist further affects In- dian exporters. A trade expert associ- ated with the commerce ministry says there isn’t even a proper way to under- stand the quantum of services trade among FTA part- ners. “We do not have bilateral services data. Some of these FTAs had a built-in promise for negotiating MRAs. That process has been slow and far from complete. With ASEAN, I think we have an MRA for nursing services. Similarly, with Singapore, we have MRA for some areas, but it took decades to negotiate. The government missed the opportunity to finalise MRAs while FTA negotia- 28 June 2020 Business Today 19

Policy – FTAs tions were on and left it for a later vantage. If you're not competitive in, date,\" says the person, who did not say, 70 items, and you still open up want to be named. those items, only they gain. See what The Way Ahead gives you competitive advantages and make deals accordingly,\" says One way to make FTAs work is to Mahajan, adding that \"the fact that negotiate the new ones in a more in- ASEAN, Japan and Korean agree- formed manner and re-negotiate (if ments were bad is evident from the possible) the existing ones. Minister absence of an exit clause.\" Goyal says \"impact assessment of To government's credit, it has FTAs is a continuous process which “If you're not com- taken a decision to review 'bad' is undertaken both in terms of data petitive in, say, 70 FTAs. While some countries such analysis and stakeholder consulta- items, and you open as Singapore have agreed to a re- tions\". He also says that awareness view, one cannot expect too much about FTAs is spread through out- up those items, only change, as all such decisions are reaches across the country so that they gain. See what based on mutual agreement. India's we can enhance the utilisation rate gives you competitive plans to pursue a deal with the US of preferential exports. Further, to advantages and make and continue talks with the Euro- protect the interests of the domes- deals accordingly” pean Union may take a backseat in tic industry and agriculture, FTAs the wake of the Covid-19 threat. But provide for maintaining lists of sen- Ashwani Mahajan talks are set to resume once matters sitive, negative or excluded items on Co-convenor, settle down. It will be interesting to which limited or no tariff conces- Swadeshi Jagran Manch see how India can negotiate a bilat- sions are granted. He also says that eral deal with the global majors with in case of surge in imports and in- a long list of non-negotiable items jury to the domestic industry, India from its side. can take remedial measures such as For instance, as far as the India- imposing anti-dumping duty and EU FTA talk is concerned, any dis- safeguards. cussion on dairy will be met with These routine safeguards may stiff resistance in India. Intellectual not be enough. In fact, whatever you property rights will remain a thorny do, FTAs may not work for India, issue, so will agriculture. Sectors says Ashwani Mahajan, National such as medical devices, stents, etc, Co-convenor of the Swadeshi Jaga- will remain a problem in conclud- ran Manch (SJM). He says a very ing talks with the US too. Talks for cleverly and intelligently negoti- “CEPA partners a comprehensive FTA that encom- ated bilateral agreement may be a exploited India’s passes all products and services possibility but a blanket free trade markets easily. In- seems to be extremely difficult at agreement or a regional trade agree- dian exporters were the moment. A truncated, limited ment can never work. \"In bilateral deal, as was talked about during trade discussions, we talk to each unable to leverage the first visit of US President Don- other. Take the case of the US. We the lower tariffs ald Trump to India early this year, can tell them we are purchasing oil on offer” seems to be the only possibility. or aircraft from them. We cannot Coronavirus days are not the bring up individual trade matters Biswajit Dhar best time to reach out. However, while talking to a group of coun- Trade Expert once social distancing gives way to tries, which means hard bargain is global integration, governments not possible. That's why we favour will begin to talk to each other. bilateral trade deals over FTAs. Better strategy will have to be pre- The experience shows that plurilateral and multilateral pared. That alone will tell if preferential trade will have agreements are not doing the country any good,\" says a role in the post-coronavirus world and, if so, whether Mahajan. He says India failed to reap benefits of bilateral India can benefit from change in the global supply agreements with Korea and Japan due to bad negotiation chain dynamics. tactics. \"The problem was not with the bilateral in prin- ciple but because we didn't heed to our competitive ad- @joecmathew 20 Business Today 28 June 2020



Policy – IBC The Ecosystem 3,009 69 3,030 1 registered registered registered Information insolvency insolvency valuers Utility professionals professional Source: IBBI entities Date as of 31 March 2020

ASMUMSPUENNITDIEODN With the insolvency and bankruptcy law suspended, the ecosystem of professionals around it faces disruption and uncertainty BY DIPAK MONDAL ILLUSTRATION BY RAJ VERMA T with insolvency matters. In fact, India has 3,009 registered IPs, around 69 he government's move to suspend the insol- IPEs, 3,030 registered valuers and 29 valuer entities. Be- vency and bankruptcy law for six months to one year sides, there is an Information Utility, which collects fi- has put stakeholders of the insolvency regime in a bind. nancial information about a corporate entity and gets it Many of them – insolvency professionals (IPs), insol- authenticated by various sources, and a host of lawyers, vency professional entities (IPEs), valuers, lawyers and auditors and other professionals directly or indirectly others – face uncertain times. linked to the IBC. An IPE is a legal entity of IPs, who are its partners/ This entire ecosystem is staring at a disruption in directors. Its objective is to provide support services to case the insolvency law is suspended for a year. IPs, who run companies under insolvency and are ap- pointed by the Committee of Creditors. Many of these The Fineprint professionals/entities have invested a lot in creating The government has announced suspension of Section infrastructure, systems and networks to deal with in- 7, Section 9 and Section 10 of the IBC as part of mea- solvency cases. Over the last four years – the Insolvency sures to help businesses fight the impact of the lock- and Bankruptcy Code (IBC) came into effect in June down. This effectively means no new cases will be initi- 2016 – thousands of professionals, including chartered ated under IBC for a year from the date of notification of accountants (CAs), company secretaries, lawyers and the change. other professionals, have launched exclusive insolven- cy law-related practices. Many accountancy, company Section 7 allows financial creditors such as banks, secretary and law firms have also created wings to deal and Section 9 allows operational creditors, including vendors, suppliers and employees, to initiate insolvency proceedings against corporate loan defaulters. Section 10 allows promoters to initiate insolvency proceedings against their own firms. Apart from suspension of the IBC, the government also announced a couple of more relief measures for businesses. These include raising the minimum thresh- old to initiate insolvency proceedings from `1 lakh to `1 crore, largely to insulate micro, small and medium 28 June 2020 Business Today 23

Policy – IBC Changes in IBC Suspension of Threshold to Special insolvency Covid-related debt to fresh insolvency resolution framework be excluded from the proceedings up to initiate insolvency de�inition of default one year depending for MSMEs under upon the pandemic proceedings increased Section 240A of for purpose of from `1 lakh to `1 crore the Code to be triggering insolvency situation (this largely insulates noti�ied soon proceedings MSMEs) industries (MSMEs) from the process, a special insol- later,” he says. vency resolution framework for MSMEs and exclusion The backlog can happen in two scenarios – First, of Covid-related debt from definition of default. due to ongoing insolvency cases, and second, because While legal experts and insolvency professionals of thousands of applications filed before the National say there are contradictions in these announcements Company Law Tribunal (NCLT), the adjudicating – for example, if the IBC is suspended for a year, what authority. is the need for increasing the threshold for insolvency According to data compiled by different branches of proceedings? – they admit these exemptions will help NCLTs – there are 15 such branches across the country – businesses in general, even if they cause temporary dis- over 2,000 ongoing insolvency cases are being heard by tress among insolvency and bankruptcy different benches, and thousands of appli- professionals. 15 cations for initiating insolvency proceed- “I am certainly one among the 3,000 ings are awaiting nod. It typically takes the NCLT six months to one year to admit people who will be left high and dry, but then, 3,000 is not a large enough num- Number of NCLT a case. ber compared to lakhs of jobs involved in branches, where over This huge pendency will ensure no im- companies that may get protection from insolvency. There will be some collateral 2,000 cases are mediate impact on workflow for profes- being heard sionals associated with insolvency prac- damage,” says Sanjeev Ahuja, Founding tices, says Mukherjee, but there will be Director, Ensemble Resolution Profes- a decline in number of cases not just due sionals – an IPE. to the suspension but also because of in- But then, not everyone is equally optimistic. crease in threshold for initiating the proceedings from There are concerns about drying up of revenue `1 lakh to `1 crore. “There are many cases in the range streams and breaking up of professional networks and of `25 lakh to `50 lakh. There are many IPs who handle associations. Indrajit Mukherjee, a Mumbai-based in- such cases. These cases will go out of the system for the solvency professional and a lawyer, says even if the moment,” he adds. suspension comes into effect immediately, it will be six-seven months before cases dry up and the lean phase Breaking the Chain sets in. “Even if the ordinance comes and no new fresh This one-year hiatus will break many networks and as- (insolvency) cases are allowed, by the time the backlog sociations. Professionals from different backgrounds (of pending cases) is cleared, six to seven months will – CAs, company secretaries and lawyers – have cleared lapse. So, the effect of the suspension will be felt only exams to become IPs. Also, many lawyers and CAs, who 24 Business Today 28 June 2020

“As professionals, we have are not IPs but provide legal and audit services associated alternatives. Our job is with insolvency proceedings, will see weakening of their to advise companies on networks. Many may have to go back to their old practices restructuring, M&As, to survive the lean period. The relationship between IPs, buying and selling. CAs and lawyers will be halted, says Sonam Chandwani, Managing Partner, KS Legal, a law firm. Whether the IBC is there or not, you cannot stop In a standard IBC case, which is not very complex and M&As, you cannot stop does not involve a very large firm, an IP takes help of five to buying and selling. These seven other professionals –auditors, valuers and lawyers. Similarly, a lawyer working on a particular case may seek things will continue” help from other professionals. Sutanu Sinha,IP, and Partner, Business Restruc- Chandwani says when her firm works on a particular turing Practice, BDO Restructuring Advisory case, it also hires a CA or an IP. “Now, we won’t be able to give them any work. Not that they are on our payrolls, but “I am certainly one among their income depends on work assigned to them. For exam- the 3,000 people who will ple, if I have to do a forensic audit, I have to approach a CA be left high and dry, but or a company secretary. That is how it works in our indus- then, 3,000 is not a large try,” says Chandwani. enough number compared to lakhs of jobs involved IPEs, law firms and audit firms have all built infrastruc- in companies that may get ture and manpower around bankruptcy resolution. For protection from insolvency” example, many law firms have hired a lot of in-house IPs, people have given IP exams, and many have resigned from Sanjeev Ahuja their previous work to become IPs. All those investments Founding Director, Ensemble and efforts will go waste for a year or so. Some people may even lose jobs. Resolution Partners Says Chandwani: “Our revenues will be affected as we get a number of recovery suits. The IBC is used by many op- erational creditors as a recovery tool. Now, with its suspen- sion, creditors will have to go through civil suits, which will take a lot of time.” Disruption of Ecosystem So, even if temporarily, many professionals engaged in in- solvency-related work may have to seek alternative sources of revenue to withstand a likely lean business phase. This will break the chain, and rebuilding could take time. “As professionals, we have alternatives. Our job is to advise companies on restructuring, mergers and acquisi- tions (M&As), buying and selling. Whether the IBC is there or not, you cannot stop M&As, you cannot stop buying and selling. These things will continue. As professionals, we have a number of roles to play,” says Sutanu Sinha, IP, and Partner, Business Restructuring Practice, BDO Restruc- turing Advisory. Insolvency professionals are mostly CAs, cost accoun- tants, company secretaries and lawyers, and many have other practices running in parallel. But, as Mukherjee puts it, most of those who work on insolvency practices focus only on this area. So, going back to old practices from their current jobs may not be that easy. Though the proposed suspension and other changes in the insolvency law were announced to provide relief to businesses unsettled by the lockdown, they could well end up unsettling the entire ecosystem built around the IBC. @dipak_ journo 28 June 2020 Business Today 25



















COVER STORY Segment 21,075 Revenue 33,765 RIL 69,198 (` cr) RERINEVLIEANNTCINEG 1,30,566 How Mukesh Ambani is Organised 1,62,936 pivoting RIL from a Retail petroleum company to a - technology corporation Digital 599 By NEVIN JOHN Services 23,916 ILLUSTRATION BY NILANJAN DAS Re�ining, 48,660 Petrochem 68,462 & E&P 3,24,869 Segment 3,48,496 EBIT (` cr) 4,36,598 Organised 5,71,058 Retail 5,35,997 504 784 2,064 5,546 8,263 - -52 3,174 8,784 14,363 Rising Reliance 6,59,205 Digital 37,350 Services 36,462 Both turnover and 6,25,212 44,425 EBITDA Re�ining, Petrochem 53,895 92,656 102,280 45,474 & E&P EBITDA have more Turnover FY16 than doubled 3,30,180 FY17 4,30,731 FY18 since FY16 2,93,298 FY19 55,529 74,184 FY20 Since RIL subsidiar- 52,503 Retail and ies have been doing FY16 FY17 FY18 FY19 FY20 digital have grown 35 inter-commercial much faster than deals with each oil over the years other, added rev- enues of individual Source: Ace Equity companies will be more than group revenues 28 June 2020 Business Today

In COVER STORY RIL `39,880 crore, respectively, in this period. Veteran investment banker Hemendra Kothari, a fam- ily friend of the Ambanis since Dhirubhai’s time, recalls his chat with Mukesh five years ago. The billionaire spoke about progression in digital evolution, future software offerings and business opportunities. “He is a dreamer and foresees changes in human life and society much be- fore time. He is capable of converting dreams into reality,” says Kothari. So, what is this transformation all about? Petrochemicals and refining have been RIL’s core for decades (contributing close to 90 per cent cash flows). This is changing. Consumer businesses now account for a quarterly video conference with executives in 2012, more than one-third cash flows. Ambani now calls RIL Reliance Industries (RIL) Chairman Mukesh Ambani a technology company. But the larger objective behind started with a warning — “What has brought us here will the transformation is: build three strong pillars of global not take us to the future.” He was concerned that Reli- scale in refining & petrochemicals, digital & telecom, ance’s mainstay business of crude oil refining and petro- and retail; untangle their financial inter-dependence; chemicals could lose sheen amid push for renewable en- and create debt-free balance sheets. And, perhaps, slowly ergy, electric mobility and growing global trade tensions. hand over businesses to the next generation. So what should RIL do? About a year back, in 2011, His twin children, Isha and Akash, joined Reliance Jio Ambani’s daughter Isha had sowed the seed of a new and Reliance Retail boards in 2014. People in the know business, though. Home from Yale University for a holi- say Ambani gave just four days break to elder son Akash day, Isha decried poor broadband speeds in India. Until after his graduation to join the company. The youngest then, even though Ambani had already planned entering son, Anant, joined the Jio Platforms Ltd (JPL) board a telecom by acquiring Infotel Broadband Ltd in 2010, his little late, in March. Isha and Akash work out of the cor- mind hadn’t quite zeroed in on the huge porate office in Navi Mumbai’s Reliance digital and telecom opportunity due to Corporate Park. Akash heads strategy pent-up demand. Isha’s statements con- 35.1 and leads acquisitions along with Isha, nected the dots. who is part of branding and marketing. Ambani concluded ‘Data is the New PER CENT The twins were practically living out Oil’. Thus began the relentless transfor- Proportion of cash of private jets — Ambani owns Boeing mation of RIL that continues till date. �low generated Business Jet 2, Airbus A319, among oth- The company took four years to build by RIL’s consumer ers — early this year as they led nego- the digital infrastructure to launch Re- businesses in FY20 tiations with Facebook and others in the liance Jio in September 2016. Today, it’s US for investing in JPL. the country’s largest network with 387 Those investments were critical to re- million 4G subscribers. It was in the pro- tire mounting debt. RIL invested `6 lakh cess of building Jio that Ambani under- crore in the last six years in its three busi- stood how modern retail is intertwined with technology, ness streams. Nearly `4 lakh crore of this went to digital and a realisation that generated an idea to build India’s very telecom businesses. This burdened the company with gross own Amazon/Alibaba around Reliance Retail. debt of `3.36 lakh crore (as on March 31, 2020) and doubled In the next five years, while Reliance Retail quadru- net debt to `1.61 lakh crore. However, the entry of Facebook pled its footprint from 2,621 stores to 11,784 stores, it also and six other investors in JPL for aggregate investment created an ideal launchpad for an ambitious e-commerce worth `97,885 crore for 21.06 per cent stake has alleviated platform, Jio Mart, launched in 200 cities on May 23. thosedebtconcerns.Thedeals valuedJPLat`4.9lakhcrore. Thanks to the thrust on these consumer businesses, The transfer of `70,000 crore debt to two infrastructure the company, which was primarily an oil and gas and investment trusts in tower and optical fibre, pending petrochemicals player, generated 35.1 per cent of its cash capital expenditure payments of `50,000 crore and spec- flows from consumer businesses in FY20. RIL’s revenue trum fee of `20,000 crore are not included in the gross debt and profit jumped 70 per cent to `6.59 lakh crore and number. 36 Business Today 28 June 2020

Next in Line Mukesh Ambani’s three children – Isha, Akash and Anant – are now actively taking leadership roles ISHA AMBANI: AKASH AMBANI: ANANT AMBANI: Branding Princess Tech Bu� Latest Entrant It was Isha Ambani’s complaint Over the last couple of years, RIL Anant, the youngest son about slow internet speed at has completed 15 acquisitions. of Mukesh Ambani, recently home in 2011 that made Mukesh Most of these were negotiated by joined Jio Platforms as director Ambani realise the full potential the team led by twins Akash and without fanfare. Sources say of data business. She was also Isha Ambani. They �lew down to Anant will be groomed to take the force behind Reliance Retail’s Facebook headquarters in Menlo over operational roles in other fashion portal Ajio.com. Park, California, multiple times to businesses as well. A graduate from Stanford & Yale, seal social media giant’s `43,574 Isha is on the Schwarzman Center crore investment in Jio. He is a key The 25-year-old passout Advisory Board at Yale. She is in member of Jio’s strategy team and of the Brown University has charge of branding and marketing also looks after technology aspects been leading the foundation’s at Reliance Jio and Reliance Retail. at Jio Mart. According to sources, initiatives in providing She is passionately involved in he will be trained in the re�ining Covid–19 relief along with his customer experience. Isha and and petrochemicals business. sister Isha. He is an animal her twin brother, Akash Ambani, lover. It has been reported that presented Reliance Jio's business Both Akash and Isha comple- RIL, which is building a luxe plan at the AGM in August 2019. ment each other in their roles in resort in Mumbai’s Bandra- She recently set up Reliance Arts Reliance Retail and Reliance Jio. Kurla Complex, plans to brand Foundation to showcase the best it Anantvilas. of Indian art. Isha has also taken Akash graduated from the over some of her mother's respon- Brown University and joined RIL Anant has also been sibilities at Reliance Foundation. within days of graduation. He is a appointed a member of the sports lover who collects Arsenal Badrinath-Kedarnath Temple jerseys and memorabilia. Committee. Harsh Goenka, Chairman, RPG Enterprises, says of March 23. Market capitalisation has topped `10 lakh Ambani is a combination of exceptional vision, match- crore, for the second time ever. less ambition, unwavering commitment and outstand- ing execution. Even as coronavorus sent shock waves in Ambani’s deal-making spree hasn’t ended, though. economies and industries worldwide, Ambani was strik- He is working on sale of 49 per cent stake in Jio-BP fuel ing one deal after another. In one and a half months, JPL retailing business to British oil giant BP plc for `7,000 has signed deals with private equity investors Silver Lake crore. The deal could be concluded in the June quarter Partners, Vista Equity Partners, General Atlantic, KKR, itself. These deals and the rights issue will reduce RIL’s Abu Dhabi sovereign fund Mubadala and Abu Dhabi In- net debt by `1 lakh crore. Ambani’s plan to make RIL vestment Authority (ADIA). RIL also launched India’s debt-free will be achieved three months before the target largest rights issue of `53,125 crore in May-June, which (by December 2020). More deals are in the offing. These was subscribed 1.59 times. By end of June, 25 per cent of include 20 per cent stake sale in Reliance O2C, the newly- the issue proceeds, or `13,300 crore, will be realised. The formed subsidiary, to the world’s most profitable com- rest will flow in 2021. pany, Saudi Aramco, for `1.14 lakh crore. At a time when share prices of most companies are Unlocking Interdependence under pressure, RIL has risen 80 per cent since the crash The group has now been restructered for strategic in- 28 June 2020 Business Today 37

NEW- LOOK RIL Reliance, which HYDROCARBONS began 54 years ago in Bombay, has four RELIANCE O2C LTD EXPLORATION SHALE GAS pillars today — AND IN US hydrocarbons, (Saudi Aramco to pick up 20% communications, stake for `1.14 lakh crore) PRODUCTION Marcellus: retail and media Petroleum Re�ining Petrochemicals Jio-BP Fuel Upstream oil and Pioneer holds & Marketing Stations gas exploration and 46.4% stake Revenue production blocks BP Plc. will Eagle Ford: `1,45,264 pick up 49% in India – BP Plc Chevron stake while holds 30% crore Reliance O2C stake Upstream holds will have 51% 60% EBIT Revenue Re�inery Throughput `3,87,522 70.6 crore million tonnes EBIT `25,547 Revenue EBIT EBIT Margin `21,334 Gross Re�in- crore `3,211 -`1,407 -43.8% ing Margin crore EBIT Margin crore crore 8.9% EBIT Margin 17.6% Production 5.5% Production 119.2 Billion Cubic Feet Equivalent 38.4 million tonne vestments. In the new structure, RIL will be the holding way will allow RIL to pay off a major portion of debt. To company like Tata Sons. Under it, there will be four major make JPL attractive for investors, RIL had last year in- subsidiaries — Reliance O2C Ltd (R02C), JPL, Reliance jected `1.08 lakh crore in return for optionally convert- Retail Ventures Ltd (RRVL) and Network 18 Media and ible preference shares (OCPS) and made it debt-free. Investments Ltd. This has enabled JPL to bargain for a higher valuation with Facebook and private equity companies. In oil and The refining and petrochemicals businesses come gas, the Aramco deal will multiply the value of RO2C, as under RO2C and JPL is the holding company for Reliance it has huge cash flows with limited liabilities. RRVL will Jio Infocomm as well as digital businesses such as appli- also see strategic investments soon. cations MyJio, JioTV, JioCinema, JioNews, JioSaavn and content-generation ventures. Grocery, lifestyle and fash- However, the new structure means the entities will ion, digital and e-commerce business JioMart have been have to generate own capital, besides servicing debt from housed under RRVL. own cash flows, as they will have separate governance structures with different investors. The aim of forming these holding companies under the parent is to bring strategic investments in each and RIL subsidiaries have been doing inter-commercial later unlocking value by offering shares, either in India or deals all along. The petrochemical business was buying abroad. For instance, the unlocking the JPL that is under refined crude oil from refineries and Jio was buying mo- 38 Business Today 28 June 2020

COVER STORY RIL DIGITAL & MEDIA RETAIL TELECOM NETWORK18 RELIANCE RETAIL JIO PLATFORMS LTD MEDIA VENTURES LTD It recently sold & INVESTMENTS 21.06% stake — Facebook Revenue EBIT Revenue EBIT Retail Stores: 11,784 9.99%, Vista Equity Partners 2.32%, KKR `5,357 `351 `1,62,936 `8,263 Distribution Centres: 2.32%, Silver Lake 2.08%, 100, across 23 States Mubadala 1.85%, General crore crore crore crore Atlantic 1.34%, ADIA (1.16%) Warehousing Space: for a total `97,885 crore EBIT Margin EBIT Margin No. of stores 10 million sq.ft. 6.6% 5.1% 11,784 PHYSICAL FORMAT Reliance Mart - India's largest Revenue EBIT TV18 Broadcast Area covered Cash & Carry Chain: 52 stores and other media `68,462 `14,363 28.7 Reliance Digital: 8,249 stores businesses crore crore million sq. ft. Fresh & Reliance Smart: 621 Hathway Cable, EBIT Mobile Datacom and Den Reliance Retail: Grocery, Reliance Trends: 777 stores Margin subscribers fashion and lifestyle, Networks electronics Reliance Brands: It partners 21% 387.5 with 45 international brands Jio Mart: e-Commerce and has 682 stores million platform Reliance Jewels: Reliance Jio Infocomm Ltd – Financials for FY20; Reliance Brands 93 exclusive showrooms Home, Enterprise and Wireless Source: Company and 110 shop-in-shops Broadband Services Cloud (with Microsoft), IoT, Blockchain, Big Data, Games, Apps & Content Payments and Finance bile phones for subscribers from Reliance Digital. Almost They cannot utilise each other’s cash flows. The investor 43 per cent of Reliance Re¬tail’s revenue comes from will have the freedom to choose the sector rather than in- connectivity business (billing and sim card sales for Jio) vesting in a bouquet of companies,” says an expert. and retailing of fuels. This will change if new investors in RRVL seek commercial terms for inter-subsidiary busi- Dance to Digital nesses at standard market margins, say experts. Three years ago, Ambani went past the government’s re- tirement age of 60 years. It was at this stage that he drew RIL has been using cash flow from the petroleum up the plan to build a software company inside RIL which business to build telecom and retail subsidiaries as well can provide e-commerce, cloud storage, entertainment, as acquire shale gas assets in the US, apart from media home automation and high speed broadband services for companies. RIL has spent about `4 lakh crore to build Jio businesses. JPL is developing projects around Internet of and about `1 lakh crore for expanding the petrochemi- Things, Blockchain, big data, artificial intelligence, ma- cals business in the last five years. This will change too. chine learning, robotics and drones. The ecosystem will “In the new structure, all companies are expected to be be supported by cloud, edge and super-computing. independent entities under a holding company. They will have separate balance sheets and governance structures. People who work closely with Ambani say he is a The liability of one company will not affect the other. transformed man, focusing on thought leadership, while 28 June 2020 Business Today 39

COVER STORY RIL leaving execution to the team led by Manoj Modi, the glomerate with $410 billion revenue during his 20-year Meswani brothers (Nikhil and Hital), Executive Direc- stint as CEO. The key for Welch was diversification and tor P.M.S. Prasad, CFO Alok Agarwal, and children Isha growth, while in Ambani’s grand scheme of things, digi- and Akash. tal and retail businesses are interlinked, and can drive growth for years to come. By creating the nationwide A reluctant public speaker, he has been appearing at broadband and wireless infrastructure, he has built the leadership summits of other firms — recently at summits highways. Now, he has to build businesses along these of Mahindra & Mahindra and Microsoft — speaking on na- highways with online service offerings. The third step tional interest, humanity and how technology changes life. will be local manufacturing of products. For instance, if Jio Mart is the shopping complex on the digital highway, Shekhar Bajaj, Chairman and Managing Director of the products will be grocery, electronics and apparel of Bajaj Electricals, calls Ambani an execution specialist. Reliance Retail. Selling products to retailers and custom- “Ambani plans projects on a huge scale such as Walmart, ers will be the next step. Shopkeepers, largely kiranas, Microsoft and Google. RIL has deep pockets to convert will be provided software and financial credit to connect business plans into success,” adds Bajaj. It is this ambi- with customers and wholesale merchants. Customers tion, risk-taking and desire to build global scale that will get advantages of credit and crypto currency too. makes analysts compare him with Jack Welch, former Serial entrepreneur Ronnie Screwvala says, “Most of us CEO of General Electric (GE). Welch expanded GE from a $12 billion revenue company to an engineering con- From July 2002 Nov 2006 Dec 2008 June 2010 Oil to Founder Dhirubhai RIL enters RIL commis- Buys 95 per cent Digital organised re- sions second stake in Infotel Broad- Ambani passes tail, launches re�inery at Jam- band (promoted by RIL has switched focus away at 69. Mukesh �irst Reliance nagar, Gujarat. Mahendra Nahata) for from oil to digital Ambani appointed Fresh store in It becomes the and retail. Here is the RIL Chairman and Hyderabad world’s largest `4,800 journey re�ining hub crore Anil Ambani Vice soon after it wins Chairman broadband wireless spectrum across India June 2005 Ambani Sept 2008 April 2010 August 2011 brothers split business- Announces oil RIL gets into BP acquires es. Mukesh gets re�ining production from US shale gas 30 per cent Krishna Godavari exploration and petrochemicals Basin MA �ield and production stake in and Anil gets power, and starts gas exploration telecom and �inancial production from and production D1 and D3 in April assets for services 2009 `32,400 crore 40 Business Today 28 June 2020

get confused and waylaid thinking that while building a The back-to-back deals will help JPL become inde- global scale business, you can’t do it for your local market pendent with surplus capital. JPL will use `28,000 crore first. RIL and Mukesh have shown the way on that, time and again.” from the Facebook deal to redeem OCPS of parent RIL and retain `15,000 crore on its books. JPL, which has a The Facebook Deal debt of around `23,000 crore, may also consider listing The most striking of the six investments in JPL was Face- book's acquisition of 9.99 per cent equity for `43,574 in the US market where tech companies get exponential crore. In the absence of details from either side, it has caused a lot of curiosity and speculation regarding the valuations, say company sources. long-term plan. The most obvious being that Jio can tap WhatsApp’s 350 million users in India while Facebook In FY20, Jio posted a 87.65 per cent rise in standalone will be able to enhance its base among the 387 million Jio net profit to `5,562 crore, as against `2,964 crore in FY19, subscribers and even sell them financial products, in- cluding crypto currency Libra. Kothari says Jio is not just driven by subscriber additions and tariff increase in the an online shopping and telecom company. “It will touch various aspects of human life in coming years.” third quarter. Morgan Stanley analysts say Jio’s subscrib- er additions picked up in January as Airtel maintained its run rate and Vodafone Idea’s base declined. “Jio held about 58 per cent of the wireless data subscriber market share as of January 2020, followed by Airtel at 22 per cent and Vodafone at 18 per cent,” they add. At launch, Jio offered free lifetime voice calls and free Dec 2015 July 2019 Dec 2019 BP Plc Feb 2020 RIL May-June 2020 June 2020 Reliance Jio soft Reliance signs agreement acquires 37.7 Huge investments launches mobile Brands ac- per cent stake in JPL — by Face- `53,125 services with a quires British to pick 49 per in bankrupt book, Silver Lake, crore beta version for toy retailer cent stake in Jio- textile com- Vista Equity Partners, RIL rights Hamleys for BP fuel retailing General Atlantic, partners and pany Alok issue sub- employees `620 business for Industries for KKR, Mubadala, crore ADIA, amounting to scribed 1.59 `7,000 `250 crore crore `97,885 times crore Sep 2016 Aug 2019 Jan 2020 Apr 2020 RIL May 2020 Jio commer- Mukesh Ambani Brook�ield ac- board approves Jio Mart cially launches quires tower proposal to raise launches 4G operations announces at infrastructure across India AGM that Saudi up to e-commerce Aramco will pick investment business in up 20 per cent trust of `25,000 200 cities stake in oil and crore chemicals busi- Reliance Jio through non-con- ness for `1.14 lakh Infocomm for vertible deben- crore. He details plan to reduce `25,215 tures net debt to zero crore 28 June 2020 Business Today 41

COVER STORY RIL data for three months. The offer was commerce grocery platform, JioMart, extended. This decimated the telecom with 50,000 SKUs. It has been rolled industry. Vodafone and Idea merged. out across 200 towns to capitalise on Tata Teleservices shut shop and Anil the surge in online shopping across Ambani’s Reliance Communications the country. The initial feedback is filed for bankruptcy. Norway’s Tele- far from encouraging, though. Social nor sold its Indian operations to Bharti media is abuzz with complaints about Airtel. Russia’s Sistema also exited the quality standards and delivery effi- market. ciency. This is hardly an indication of Does this mean smooth sailing for “HE IS A DREAMER AND things to come. “Reliance’s greatest Jio? The chief architect of India's data FORESEES CHANGES advantage is financial capacity to sus- privacy law, Justice B.N. Srikrishna, IN HUMAN LIFE AND tain, which allows it to go wrong and has raised a red flag over lack of a data then correct itself,” says Ashok Ma- regulator to oversee privacy concerns SOCIETY MUCH BEFORE heshwari, who was part of the found- related to the Reliance Jio-Facebook TIME. HE IS CAPABLE OF ing team of DMart. deal. “It is a strategic investment. A CONVERTING DREAMS strategic investment means it is an Reliance’s game plan is to create a investment intended to further the INTO REALITY” consumer ecosystem through its ‘new commerce’ initiative. This involves business interest of the investee as Hemendra Kothari creating a super app, which will offer well as the investor.” Founder, DSP data and telephony and enable users to shop online across Reliance’s retail Both firms say they will not share Investment Managers data. But critics say some sharing will formats and consume entertainment. happen naturally when they work to- Consumers will be encouraged to pay gether. The deal may invite new so- through JioMoney, which is expected cial media regulations. In that case, to expand into financial services. In Ambani will be able to play a guardian order to strengthen this digital eco- angel for Facebook in India. system, it has bought technology com- Jio’s rivals allege it has got undue panies that offer solutions in artificial advantages from the telecom regula- intelligence (Haptik for `700 crore), tor. The wireless spectrum that Info- voice recognition (Reverie for `150 tel Broadband bought never had a li- crore) and virtual reality (Tesseract cence for voice. It also got an extended for `10 crore). field trial period which was objected It also owns a host of entertain- to by rivals. In this period, it allegedly “AMBANI PLANS ment businesses such as Viacom 18, grabbed customers from rivals by of- PROJECTS ON A Balaji Telefilms, Eros and Saavn and fering free data. HUGE SCALE SUCH AS so can sell its entertainment offerings WALMART, MICROSOFT on JioTV and JioMovies, available on India’s Own Alibaba AND GOOGLE. RIL HAS JioApp. In fact, Facebook’s second Mukesh Ambani’s retail universe is of- DEEP POCKETS TO agreement – the commercial partner- ten compared with Jack Ma’s Alibaba CONVERT BUSINESS ship agreement between JPL, Reliance multi-channel ecosystem. Apart from PLANS INTO SUCCESS” Retail and WhatsApp — is expected to e-commerce and physical retail, Ali- give further impetus to this new com- baba has its own version of Facebook, merce initiative. The synergies give Messenger, YouTube and WhatsApp. Shekhar Bajaj Reliance Retail a clear advantage over It also has a film production arm. Ant Chairman & MD, Bajaj Electricals peers such as DMart or Future Retail Financial, which owns Alibaba's es- and global biggies such as Amazon crow service, AliPay, valued at $150 and Walmart (Flipkart), which are not billion, is among the world’s highest valued companies. allowed to have physical presence in India. When the coronavirus pandemic brought retail busi- ness to a standstill, even a strong physical retailer such as Retail Presence DMart experienced a 45 per cent dip in sales in Q4FY20. Jio Mart will piggy ride Reliance Retail, the country’s Reliance Retail saw an opportunity and launched its e- biggest retail network with 11,784 stores (Reliance Digi- 42 Business Today 28 June 2020

Key Drivers MANOJ MODI NIKHIL HITAL ALOK P.M.S. PRASAD MESWANI MESWANI AGGARWAL Modi is Director He is a Reliance of Reliance Retail Nikhil, the elder The younger Aggarwal veteran who started and Reliance Jio. son of Dhirubhai brother of Nikhil heads treasury working closely However, he is de Ambani’s cousin joined RIL in 1990 operations of with Dhirubhai facto CEO of the Rasiklal Meswani, and has been on RIL where he Ambani in 1981. conglomerate. is in charge of the the company’s has to shield the He joined RIL from Modi, Ambani’s petrochemicals board since 1995. company from Schlumberger’s classmate from business, which He was global �luctuations Africa unit. engineering became the instrumental in in currency, crude Prasad, 67, is also college, was in largest cash execution oil and interest on board of RIL, charge of building �low generating of the world-class rates. An IIM and oversees the Jamnagar vertical last year. petrochemicals graduate and a its oil and gas re�inery and He spearheaded complex at former Bank of business. He had petrochemicals the `1 lakh crore Hazira and the America executive, taken additional complex. After expansion of the Jamnagar re�inery he has an uncanny responsibility setting the stage petrochemicals complex. The knack of raising for rollout of for Reliance Retail business over the soft-spoken funds even in a Jio. His project growth, he moved last three years. Wharton graduate bad market. He execution skills are on to build the Meswani has been oversees re�inery spearheaded the incomparable, seen digital ecosystem on RIL board and manufacturing recent `53,125 in the �irst re�inery for Reliance Jio since 1988 operations crore rights issue at Jamnagar tal, Reliance Trends, Reliance Smart, Reliance Fresh and fearing they will be forced to order from Reliance in place Reliance Mart) in 6,700 towns and cities. While JioMart of the traditional distributor they have been dealing with is the new kid on the block, its other ecommerce busi- for years. “They have given PoS devices for free but kira- nesses such as Ajio (fashion) and Reliancedigital.in have nas don’t trust Reliance as they are competing with them also started contributing substantial revenue. Reliance in the B2C space,” says the CEO of a leading retail com- is the first Indian retailer to be in the top 50 on Deloitte’s pany. “A kirana may adapt to Reliance, but if he is forced to Global Powers of Retailing 2020 Index, which ranks 250 buy from Reliance, he may exit. Kirana store owners are retail firms on their revenue. It was 94th last year. “If smart businessmen. It won’t be easy to dictate terms to you take the entire Reliance Retail ecosystem, including them,” says DMart's Maheshwari. JioMart, you really can’t say they are competing with one individual company. They are going after consumers’ RRVL, the holding company of all retail businesses, wallet share. Their business is multi-channel, including plans to go for a public issue, besides bringing in a strate- cash and carry,” says Arvind Singhal, Chairman, Tech- gic investor. “RRVL will get listed. The operating compa- nopak Advisors. nies, Reliance Retail and JioMart, will be part of it,” says Dinesh Thapar, Group CFO, Reliance Retail. A significant part of Reliance Retail’s multi-channel strategy involves partnering with local grocery stores. Reliance Retail has been growing using RIL’s cash It plans to have an ecosystem of over five million kirana flows. Its growth has been exponential after the launch stores as last-mile delivery points. The idea is to penetrate of Jio, whose connectivity revenue (billing and SIM card the unorganised retail market (90 per cent of the retail sales) contributed 34 per cent to revenue and 13 per cent market) by helping them digitise through mobile PoS to EBITDA in FY20. Petro retailing added 9 per cent to (MPoS) devices. This will enable better inventory man- revenues and 2 per cent to EBITDA. agement for kiranas and also help them take orders online. Grocery, fashion and lifestyle are success stories in However, the challenge here is that a large chunk of Reliance Retail. If you take out petroleum and Jio, physi- kirana store owners don’t want to use the Reliance Mpos cal retail was around `95,000 crore in FY20. Dmart’s `24,870 crore (FY20) and Future Retail `20,165 (FY19) 28 June 2020 Business Today 43

COVER STORY RIL crore revenues were way behind. “AMBANI HAS to function as a marketplace. Both Reliance’s platform strength, cash SUCCESSFULLY PIVOTED Amazon and Walmart are not allowed to sell their own brands legally, except and carry arm, physical retail busi- RIL TO A RETAIL in categories such as food. This gives nesses and partnership with kirana AND TECHNOLOGY Reliance an upper hand, as it can push retailers give it a huge multiplier effect ORGANISATION. IT private brands, which account for but the $800 billion Indian retail mar- REQUIRES EXTREME 90 per cent of all merchandise offer- ket has room for multiple players. Re- ings in categories such as apparel and tail experts say if there is anyone who COURAGE AND jewellery. has the financial might to give Reli- DETERMINED MIND TO ance a run for its money in the plat- PUT THE WORLD IN THE Recharging Petrochem form business, it is Jeff Bezos-owned PALM OF YOUR HAND” Anticipating demand destruction in Amazon. The American ecommerce crude oil refining, Ambani had de- giant is known to be in talks with Harsh Goenka cided to invest `1 lakh crore in ex- Bharti Airtel for a 5 per cent stake. If Chairman, RPG Enterprises panding the petrochemicals business this happens, Amazon will emerge a four years ago. In mid-May, after two formidable competitor with a combi- “MOST OF US GET months of lockdown, RIL exported a nation identical to Jio-Jio Mart. WAYLAID THINKING shipload of petrochemical products to THAT WHILE BUILDING China for the first time. The ship Sana However, the Indian retail market of Maersk sailed with 2,611 containers has seen more misses than hits. Indi- A GLOBAL SCALE of 68,000 tonnes from Jamnagar. It an retail’s poster boy, Kishore Biyani, BUSINESS, YOU CAN’T was possible only because of transfor- is staring at bankruptcy because of DO IT FOR YOUR LOCAL mational projects in petrochemicals, debt. Biyani was in a similar situation MARKET FIRST. RIL HAS says an RIL executive. in 2012 when he was forced to sell his most profitable venture, Pantaloons, SHOWN THE WAY” Harsh Goenka says Ambani has to Aditya Birla Retail. In 2015, Bharti successfully pivoted RIL from an oil Airtel exited its loss-making joint ven- Ronnie Screwvala and petrochemical giant to a retail and ture with Walmart and eventually sold Serial Entrepreneur technology organisation. “It requires its grocery retail business, EasyDay, to extreme courage and determined mi- Future Retail. In 2018, Aditya Birla Re- nd to put the world in the palm of your tail sold its unprofitable grocery retail hand,” Goenka says, referring to Reli- business, More, to Samara Capital and ance India Mobile’s 2002 advertise- Amazon. Last year, the Godrej Group ment, kar lo duniya mutthi mein. ended its tryst with retail by selling its premium grocery retail business, The shift to consumer businesses Nature's Basket, to Spencer's Retail. started with gross refining margins The only retail success story has been (GRMs) — the margin earned for stock-market tycoon Radhakrishna turning every barrel of crude oil into Damani's `24,870 crore DMart, which fuel — in petroleum falling three years has emerged as the most valuable re- ago, and pricing instability in the hy- tail business in India. Its retail arm drocarbon business. There was also Avenue Supermarts Ltd is valued `1.6 uncertainty in oil supply due to height- lakh crore in the stock market. ened geopolitical tensions in West Asia and sanctions on Iran. The crisis Some analysts allege the retail FDI escalated in March 2020, when crude policy has been framed in such a way prices crashed to record lows. In FY20, that it suits RIL. It doesn’t allow FDI RIL’s GRMs fell to $8.9 a barrel from in multi-brand retail, which means $9.2 in FY19. However, according to the likes of Amazon and Walmart research analysts at Bernstein, these can't have physical presence in India. are still higher than the Singapore Walmart tried to fulfill its B2C aspira- benchmark GRM at $7.7 a barrel. How- tion by acquiring Flipkart in 2018 for an ever, with the lockdown still in place astronomical $16 billion, but its wings and crude oil storage nearly full, the have been clipped, as it is allowed only 44 Business Today 28 June 2020

current quarter may be much more challenging, they say. The Jamnagar complex has also commissioned the While refining was stronger than expected, petro- world's first fully-integrated refinery off-gas cracker and chemicals faced pressure on margins due to contracting petcoke gasifiers. Aramco will supply 500,000 barrels GDP growth and declining demand. The earnings before of crude oil every day to RIL's Jamnagar refinery (28 per interest and tax (EBIT) margins for the petrochemicals cent of its requirement) on a long-term basis. Ambani is business fell for the fourth consecutive quarter to $67 a focussing on converting RIL's O2C business into one of tonne during Q4FY20, the lowest since 2016. the top five petrochemicals companies in the world. “The outlook on margins is challenging given start of new units in China and weak demand for chemicals. Struggling Segments However, a strong recovery from the virus could see mar- The turnaround of hydrocarbon exploration & produc- gins rise,” says an analyst. tion (E&P) and media is a pain point. The RIL-led con- The petrochemicals business had surpassed the EBIT sortium has committed nearly `80,000 crore in the KG of the refining business in FY19. But revenue from pet- Basin — `45,000 crore 10 years ago and `35,000 crore rochemicals decreased 15.6 per cent (this is continuing) for three fields. to `145,264 crore in FY20 due to lower `97,885 The E&P business has also been price realisations and weaker demand making losses for the last four financial in well-supplied markets. The EBIT CRORE years. RIL roped in BP in 2011, selling 30 per cent stake for $7.2 billion, to revive for the petrochemicals segment was Investment the business. It helped it cut losses, but `25,547 crore, down 21.1 per cent com- commitment in JPL in pared to the previous year, due to lower one and a half months BP had to write-off a part of its invest- margins in key products. However, ments. Ambani is bullish on petrochemicals. `1.14 The Bernstein report says E&P re- He has prepared a blueprint for its oil- mains weak as domestic gas volumes to-chemical (O2C) play as negotiations LAKH CRORE continue to decline. Production in US progress with Saudi Aramco. He had, in shale operations increased 14.4 per cent fact, discussed his plans with the Crown The amount RIL is during quarter ended March, but due to Prince of Saudi Arabia, Mohammed bin expected to raise by low gas prices in the US, profitability Salman, in February 2019, when the de- selling a 20 per stake remains low. facto leader was visiting India. in Reliance O2C to “While production remains on a RIL wants to convert 70 per cent of Saudi Aramco downward trend, the KG-D6 project is its output from the Jamnagar refinery and petrochemical on track to deliver significant production growth,” ac- complex to chemicals. At present, the complex produces cording to the report. The project will on stream more 90 per cent fuels — primarily petrol, diesel, naphtha, than three trillion cubic feet of gas. RIL has been in talks kerosene and liquefied petroleum gas — and 10 per cent with overseas funds to sell stake in optical fibre InvIT to chemicals. further reduce debt. Sources say it is also in talks with Convinced by Ambani’s concept, Saudi Aramco has Microsoft for another deal in JPL. The IPOs are not Am- expressed its desire to be a strategic partner. The deal in- bani’s immediate priority. cludes stake in material assets such as the two refineries RIL is also scouting for buyers for some of RIL's real and a petrochemical complex in Jamnagar, besides stake estate assets (might include land RIL bought for special in fuel retailing. “As the world migrates from fossil fuels economic zones in Mumbai), and some financial invest- to renewable energy, we will maximise O2C conversion ments. Ambani said in the last AGM that RIL is ”de-em- and upgrade fuels to high-value petrochemicals. This will phasising” its shale gas business in the US and will focus be done in a phased manner over the next decade to meet only on India. RIL may eventually consider selling the the rapidly increasing demand for petrochemicals, in In- shale gas business. dia and the region,” Ambani said in the company’s last Ambani doesn’t want a bad apple in the basket. Ron- annual report. nie Screwvala says the assumption is that if you have The O2C strategy involves new ways to upgrade the access to unlimited capital, you can think big, but most refinery intermediate streams by value, according to lose their way when it comes to executing ideas. Perhaps company officials. “Furthermore, RIL has developed a Mukesh Ambani is different. disruptive technology, a multizone catalytic cracking (With inputs from Ajita Shashidhar) process, which converts a wide range of feedstock to high-value propylene and ethylene,” they add. @nevinjl 28 June 2020 Business Today 45

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Ticking waivers that has affected credit discipline of farmers. “A Time longer moratorium does bring a risk if things are bleak Bomb on the economic front,” says Chandan Sinha, a Direc- tor on board of State Bank of India, India’s largest bank. Up to `40 lakh crore worth of But Sinha, who has had a long stint with the RBI, says, loans of banks are under “Things have to look up.” six-month moratorium. The risk of default looms large This is what every banker must be praying for con- sidering the huge loan payments that are stuck because BY ANAND ADHIKARI of the moratorium. Under the moratorium, which ends ILLUSTRATION BY RAJ VERMA in August this year, banks and non-banking finance companies (NBFCs) do not have to classify loans that S turn bad during this period as non-performing assets (NPAs). This means the first batch of Covid-related anjiv Bajaj is not known to mince words. The NPAs will hit the street in the December quarter. The 50-year-old Bajaj family scion, who runs India’s larg- exact damage will be known only by January next year. est non-banking consumer finance company with 43 million customers, has been vocal in opposing the six- New NPA Cycle month moratorium on loan payments announced by the Bank NPAs fell for the first time in seven years in FY19, Reserve Bank of India (RBI) to help borrowers tide over when gross NPAs settled around `9 lakh crore, roughly 9 the cash crunch due to the Covid-19 lockdown. “It can per cent of advances. But before bankers got any breath- alter credit behaviour of customers,” warns the younger ing space, the lockdown set the ball rolling for a new son of industrialist Rahul Bajaj. NPA cycle. This vice chairman of Bajaj Finance has a point. “The banking sector is looking a lot more exposed Consider the moral hazard created by massive farm loan today than in the previous NPA cycle,” says Saswata Guha, Director at Fitch Ratings. The reasons are likely negative GDP growth in FY21, low credit growth, high NPAs, shrinking capital and lower profitability. “The banking system was in a better shape when it had en- tered the last NPA cycle,” says Guha. The numbers bear this out. Some public sector banks (PSBs) have reported that 65-70 per cent of their loan book is under moratorium. For most private sec- tor banks, the figure is one-third. The outstanding term loan book was `59.52 lakh crore on December 31, 2019. As per RBI estimates, `38.68 lakh crore is under the six-month moratorium. In a worst-case scenario, 20 per cent of this, or `8 lakh crore, can turn bad. This will double bank NPAs (9 per cent at present). Agencies have made various estimates of how each loan segment will behave. India Ratings and Research has estimated FY21 corporate slippages alone at `3.4 lakh crore. “The incremental stress is mainly from power, infrastructure, construction, hospitality, iron & steel, telecom and realty sectors,” it says. The MSME segment, with loan outstanding of over `15 lakh crore, is next in line. “MSMEs have been enjoying benefits of past restructuring also. The current guarantee and other support will also help. Their problem (loans turn- ing NPAs) will get postponed for a year or two,” says a banker. PSBs are more exposed to the MSME segment than private sector banks. In retail, the biggest worry for large private banks such as ICICI Bank, HDFC Bank and Axis Bank is unse- cured loans, especially personal loans and credit cards. 47

Finance – Banking The Prescription Banks and NBFCs’ strategies to deal with moratorium book Raise Raise capital in Recapitalise Slow down Create additional provisioning private banks public sector fresh loans liquidity since EMI from pro�its moratorium will hurt banks cash �lows Take Federal Bank. Its 35 per cent loan book is under provisioning for these accounts in March and June quar- moratorium. Its assessment has found that 5-6 per cent ters. However, no provisioning is needed for a large part of the retail book under moratorium is at high risk. In of the `40 lakh crore moratorium book, where there is case of Bandhan Bank and small finance banks, almost high possibility of fresh NPAs considering that those 90 per cent of the micro loan book is under moratorium. who have opted for delayed payments are under a severe Bandhan is very active in the small loan space. But R. cash crunch. These include companies in aviation, real Baskar Babu, MD & CEO of Suryoday Small Finance estate, construction, hospitality sectors, all of which Bank, is positive and says small finance banks have a have been badly hit by Covid-19. Similarly, a number much better personal touch with customers than other of individuals who have opted for the moratorium are institutions and so will emerge out of the crisis rela- workers of mid-sized enterprises that have announced tively unscathed. “This is a crisis which tells you about job and salary cuts. the personal connect with customers if you are in retail lending,” says Babu. NBFCs are on a much weaker wick- Banks know they will have to make extra provision- et than banks as most of their customers have irregular ing to keep themselves safe from these future NPAs. incomes. ICICI Bank has already made Covid-related provision- ing of `2,725 crore against standard assets. This in- The stress will unfold after the lockdown opens. cludes `607 crore for SMA accounts, as per the RBI rule, Experts say considerable pain awaits financial services for the March quarter. Bandhan Bank has made a provi- companies. sioning of `690 crore for FY20, of which `64 crore is for SMA accounts. In fact, Bandhan made the entire 10 per Prudence & Conservatism cent provisioning for SMA accounts (5 per cent each for The moratorium will certainly make borrowers more March and June quarters) in March quarter itself. Axis indebted as lenders add interest for the period the pay- Bank and Small Finance Bank Equitas also made the en- ments are stopped. The interest accrued to banks but tire SMA provisioning in March quarter itself. not paid is estimated to be `2 lakh crore for the six- month period. “Creditworthiness of a borrower is also Stress Testing likely to fall because of depressed economic activity,” The worried banks have started testing the moratorium says Saswata of Fitch Ratings. book for stress. They are analysing borrowers based on past default, age, leverage, company profile (level of Co- Banks are clearly in uncharted territory considering vid impact), geography (green, orange, red or contain- that the economy will shrink this year after growing for ment zone). several decades on a trot. At present, special mention ac- counts (SMAs), the potentially risky accounts with less A young borrower who has taken the moratorium than 90 days default, add up to `4 lakh crore. The RBI will be seen as a lower risk as he or she is likely to work has, as a precaution, has asked banks to make 10 per cent for more years. Banks are working with credit bureaus 48 Business Today 28 June 2020

Payments on Hold tomer has taken the moratorium option in the past. The will become a starting point for fresh lending. A staggering 65% bank loans are under moratorium Banks are also segmenting their loan book under different sub-segments. Take the retail book, where mi- Loans 59.42 cro loans, commercial vehicle loans, personal loans and outstanding credit card dues are more prone to default. Similarly, 23.54 Banks in the MSME book, Mudra loans and farm sector loans Loans under 38.68 NBFCs require closer scrutiny. These are the segments where moratorium banks have seen high moratorium requests. Amitabh 7.06 Figures in ` lakh crore Chaudhry, MD & CEO of Axis Bank, recently assured Worst-case investors the bank has stress-tested its entire portfolio. default* 8 Banks’ outstanding for Dec 2019; Banks are also making an assessment of collateral con- 1.41 NBFCs’ for Sept 2019; NBFC loans sidering that its value will fall if GDP shrinks. Experts say PSBs will be the hardest hit due to high proportion of under moratorium (30% book under moratorium (65-70 per cent) as against 25- 30 per cent for private banks, though they add that cor- of total); * Default rate porate book of PSBs may face more headwinds but retail book of PSBs is in a far better shape than that of private 20% of moratorium banks. “Our retail book mostly comprises home loans,” says Samuel Joseph Jebaraj, Deputy MD at IDBI Bank. Equitas Capital Buffer 90 Uday Kotak, the promoter of Kotak Mahindra Bank, which recently raised capital from the market, has said Bandhan the banking sector will need recapitalisation of `3-4 lakh crore. The capital will be required for loss of cash 70 inflows via EMIs, higher provisioning for NPAs and delay in recoveries because of suspension of the Insol- Bank of Baroda vency and Bankruptcy Code. For PSBs, which control two-third of banking, this will be an urgent require- 65 ment. Their low valuations mean the equity sale option is ruled out. Also, given the fiscal constraints, immedi- Under Edelweiss ate government support is unlikely. Experts say the gov- Suspension ernment can issue bonds to PSBs and pump in the mon- 33 ey raised into PSBs as capital. The regular outgo for the Percentage of government will be the interest paid, though this will loan book under ICICI Bank create a big future liability during the bond redemption moratorium stage. “The future capital requirement will depend on 30 loan repayment, recoveries and likely delinquencies in Latest numbers the moratorium book. It is quite possible that the banks declared by banks Yes Bank will need capital,” says Sameer Narang, Chief Econo- over March-May 2020 mist at Bank of Baroda. 30 Ratings downgrade is another risk for banks which RBL Bank can hit their ability to raise resources, says Gopalkrishna Tadas, former Executive Director at IDBI Bank. Moody's 30 has already downgraded close to a dozen banks. More downgrades are likely as the economy shrinks. Axis Bank So far, banks are putting up a brave face. They are 28 conserving liquidity and sitting on cash rather than lending. Most are saying that their moratorium custom- Bajaj Finance ers have money in their accounts. But banks, as custo- dians of public money, have to prepare for the worst. 27 @anandadhikari Kotak Mahindra 26.2 like CIBIL and Experian for this. “We have the capabil- ity of identifying and creating segmentation of borrow- ers,” says Sathya Kalyanasundaram, Managing Direc- tor, Experian India. So, banks doing fresh lending after the moratorium period will be able to know if the cus- 28 June 2020 Business Today 49

PHOTOGRAPH BY JAISON G 50 Business Today 28 June 2020 PHOTOGRAPH BY CHANDRADEEP KUMAR