Red Flags in Reliance Group, India? A Probe into Reliance Infrastructure Ltd.

In early 2021, an investor had a substantial amount invested in three companies in the Reliance Anil Dhirubhai Ambani Group Reliance Group: Reliance Communications Ltd., Reliance Infrastructure Ltd., and Reliance Capital Ltd. The market price of Reliance Group shares had fallen steeply during the past five years (2016–2020), eroding the wealth of shareholders; consequently, the investor had lost almost all of his investments in the three group companies. Further, in 2019, Reliance Communications Ltd. had filed for bankruptcy. In 2020, the chair of the Reliance Group mentioned that Reliance Capital Ltd. had stopped its lending business and initiated stake sales. The investor decided to sell his shares in Reliance Communication Ltd. and Reliance Capital Ltd. at a huge loss. However, good dividend payments, and positive signals from the Reliance Group chair regarding betterment in the top line, a promotors’ stake increase, and his intention to reduce the companies’ debt to zero in 2020 made the investor hold their Reliance Infrastructure Ltd. shares. Nevertheless, to understand the possibility of improved fundamentals, the investor had to analyze the financial statements of Reliance Infrastructure Ltd., examining these for potential red flags that could identify significant threats to the future of the company and his investments.

This exercise can be used in advanced corporate finance sections of post-graduate management courses. It lends itself to a discussion surrounding red flags in financial statements. Conceptually, red flags are subjective in nature, and the use of case studies is essential to helping students easily understand the concept. This exercise places students in the position of an investor analyzing the financials of a company to identify potential red flags and, based on the severity of these, to determine their expected impact on the company’s share performance. After working through the exercise and assignment questions, students will be able to do the following:<ul><li>Define the concept of red flag analysis and explain its relevance.</li><li>Identify the possible areas to examine for red flags in the financial statements.</li><li>Identify significant red flags in the financial statements of the target company.</li><li>Explain how the fundamentals of a company and investors’ expectations drive share prices.</li></ul>

• red flags
• financial distress
• accounting