Reliance Communications default, and the fear of contagion
A debt default by such a large company as Reliance Communications—which is still only a possibility—could intensify fears about financial situation at a few other large corporate groups
The financial stress at Reliance Communications Ltd has triggered concerns about balance sheet fragility. One credit rating agency has downgraded the debt of the company to default status.
The rating action has once again come too late in the day. Bond holders have not been alert either. The price of the Reliance Communications dollar debt listed in Hong Kong began to fall only at the end of May. The role of the company board as financial leverage increased should also be questioned.
The deeper problem is that a default by such a large company—which is still only a possibility—could intensify fears about the financial situation at a few other large corporate groups. Unsubstantiated rumours have already begun to fly around. The point is that pushing the can down the road is no longer an option. The government needs to move quickly to deal with a problem that has been allowed to fester for too long through a combination of regulatory forbearance, evergreening of loans and accounting gimmicks.
Reliance Group companies have sued HT Media Ltd, Mint’s publisher, and nine others in the Bombay high court over a 2 October 2014 front-page story that they have disputed. HT Media is contesting the case.