The Reserve Bank of India (RBI) had flagged lending to probable related parties by SREI Group companies in its assessment report for the year ending March 2020, the latest earnings disclosure made by Srei shows.
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In its inspection and risk assessment report for the year ended March 31, 2020, RBI had identified 'certain parties' as probable connected/ related companies which Srei had lent to.
Srei disclosed that RBI directed the lender to "reassess and factor the impact of certain parties during the finalisation or balance sheet for FY 2020·21 and to ensure that relevant accounting treatment and appropriate disclosures are done in annual accounts of March 31, 2021."
Following this, Srei said it took a legal view on the matter to determine whether such parties are related parties to the parent company or Srei Equipment Finance Limited (SEFL).
"Based on the legal view, the parent company and SEFL is advised and has therefore come to the conclusion that the parent company or SEFL have no direct or indirect control or significant influence (as per Companies Act, 2013, Ind AS 24) over such parties and are not under common control and accordingly, are not a related party or the Parent Company or SEFL," it concluded.
The total exposure (net or impairment) of SEFL towards such borrowers stood at Rs 8,576 crore as of March 31, 2021. These account for nearly 30 percent of the group's consolidated loans of over Rs 28,700 crore.
Srei said it is currently in the process of re-assessing and re-negotiating terms and conditions with the aforesaid borrowers and all other borrowers, who have been granted loans with moratorium period and at an interest rate that is linked with the cash flows of the project. It said that once it completes the re-assessment/re-negotiations with the respective borrowers, it would make appropriate disclosures.
The central bank had initiated a special audit of two Srei Group companies late last year. Additionally, the disclosures showed that SEFL made additional provisioning amounting to Rs 4,475 crore for the year ended March 2021 under "specific directions from Reserve Bank of India."
"Based on the overall assessment or financial stress being faced by the borrowers and the lessees and considering the overall economic and business uncertainty due to pandemic, as a prudent measure and out of abundant caution, SEFL has made ECL provision aggregating to Rs.4,685 crore for the year ended March 31, 2021. Further, in terms of the specific directions from the Reserve Bank of India (RBI), SEFL has also considered further provision amounting to Rs.4,475 crore, for the year ended March 31, 2021, under Income Recognition, Asset Classification and Provisioning Norms. Such provision is also over and above ECL provision as stated above," the disclosure said.
The independent auditor’s report released along with Srei Infrastructure Finance's March quarter earnings on Thursday also showed concerns about the ability of the lender to continue as a going concern.
"The group's net worth has eroded as of that date and has not been able to comply with various regulatory ratios/limits. All this may have an impact on the Group's ability to continue its operations in the normal course in the future and to meet its financial commitments as and when due," said the report by DK Chhajer & Co, the independent auditors of the company.
The group's ability to meet its financial commitments is dependent on the final outcome of the Scheme of Arrangement ("Schemes"), which are pending before Hon'ble NCLT/NCLAT, the report added.
"The group is also exploring the infusion of equity capital from prospective investors from whom it has received the expression of interest/ term sheets. These events or conditions, along with other matters as set forth in the aforesaid Note, indicate that there is a material uncertainty which casts significant doubt about the group's ability to continue as "going concern" in foreseeable future," the report added.
The auditor noted that Srei Group was of the opinion that it would be able to manage its business operations as usual in the future and would be able to meet its financial commitments in due course of time. "Hence, in the opinion of the Board of the Parent Company, the going concern assumption of the Group is appropriate and the financial results/statements have been prepared accordingly," the notes to account showed.
Srei on its part said both Srei Equipment Finance and Srei Infra Finance have plans to raise "significant capital." Srei Infrastructure Finance’s board has passed a resolution to raise up to Rs 2,500 crore by way of issue of one or more instruments through public offer/QIP/pref issue/rights issue.
Srei Equipment Finance, it added, had received a term sheet from Singapore's Makara Capital Partners for an investment of Rs 2,200 crore and from USA-based Arena Investors LP for an investment of Rs 2,000 crore. It said the company had also received EOIs from several other global private investment firms including Cerberus Global Investments, Charlestown Capital Advisors, CarVal Investors LP, Varde Partners Asia Pte. Ltd, and Maystone Capital. The board of Srei has also approved a proposal to sell up to 20 percent of assets held by SREI Equipment Finance to raise funds.