“It will be the saddest part in corporate history if this (IBC) is invoked.” Hours after Kolkata-based SREI Infrastructure Finance’s Chairman Hemant Kanoria said these words, the Reserve Bank of India (RBI) superseded the boards of SREI Group companies.
In a public notification on Monday, the central bank said, “In exercise of the powers conferred under Section 45-IE (1) of the Reserve Bank of India Act, 1934, the Reserve Bank has today superseded the Board of Directors of Srei Infrastructure Finance Limited (SIFL) and Srei Equipment Finance Limited (SEFL), owing to governance concerns and defaults by the aforesaid companies in meeting their various payment obligations.”
The regulator has named Rajneesh Sharma, former Chief General Manager of Bank of Baroda, as the administrator, and has also named a three-member advisory committee to the administrator, which includes R Subramaniakumar (Ex IOB MD, DHFL Admin), T T Srinivasaraghavan (Ex MD, Sundaram Fin), and Farokh N Subedar (Ex COO, Tata Sons).
Aashit Shah, Partner, J Sagar Associates explained that the appointment of the administrator by RBI paves way for the corporate resolution process of the two SREI entities and once the National Company Law Tribunal (NCLT) approves it, the board of directors of these entities will stand suspended.
“A moratorium will be imposed on any proceedings against these entities, enforcement of any security or transfer of assets. The CIRP (corporate insolvency resolution process) will enable foreign creditors, including ECB lenders and bond holders to restructure their debts alongside domestic creditors. If a resolution plan is successfully approved under the CIRP, it will allow the companies to start on a clean slate, which is missing under the RBI stressed assets framework. This decision of RBI follows on the heels of a successful resolution process of DHFL,” Shah added.
What happens next
With the boards superseded and control handed over to an RBI-appointed administrator, the action will now move to the courts. RBI will soon move to initiate insolvency proceedings against the NBFCs (non-bank financial institutions) and to name the administrator as the Insolvency Resolution Professional of the company. The central bank will most likely do so via a bank, which will file the relevant application with the NCLT under Section 227 of the Insolvency and Bankruptcy Code.
“The Reserve Bank also intends to shortly initiate the process of resolution of the above two NBFCs under the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 and would also apply to the NCLT for appointing the Administrator as the Insolvency Resolution Professional,” the central bank has said.
Once the application is admitted by the NCLT, the administrator will collect details of claims from various creditors, convene lenders meetings and start the process of inviting expressions of interest for a resolution plan, before eventually inviting bids for the company.
If the Dewan Housing Finance Limited (DHFL) experience is anything to go by, the resolution will be a complex matter. While there are many lessons to draw from the experience-defending against litigations from promoters, retail investors, dealing with unsolicited bids or revision of bids after deadline, selling the company in parts or whole, and so on- the challenges with SREI will be very different.
SREI vs DHFL
SREI Group’s book is skewed towards wholesale infrastructure lending, unlike DHFL’s significant retail book, which was the key attraction for potential suitors to bid for its assets. Resolution and a clear recovery pipeline of these large infrastructure loans will be important to attract suitors. As per very broad estimates, about 90 percent of the loans are towards wholesale, and barely 10 percent in equipment lending. Lenders will have to prepare for the sale by working towards a resolution of these loans.
DHFL was a deposit-taking NBFC- also a big attraction for its suitors- but SREI is a non-deposit-taking NBFC.
The administrator and his team will have to also deal with a complex web of potential related-party loans of over Rs 8500 crore, which an RBI audit had found as of FY20. SREI Infrastructure and SREI Equipment are owned by holding companies of Kanoria foundation, and the NBFCs lent to other companies in which Kanoria foundation has indirect interest via trusts, funds or subsidiaries.
Finally, many of the secured and unsecured non-convertible debentures (NCDs) are owned by provident and pension funds- the likes of MSRTC Gratuity Fund, MPEB Employees provident funds, HPGCL pension fund, Stanchart, Edelweiss Finvest, LIC, etc. There were no provident funds DHFL held, and dealing with them as another class of creditors will also potentially pose an additional challenge for Srei’s Admin and lenders.
R Subramaniakumar, former IOB MD and DHFL’s Administrator, who is on the advisory committee to Srei’s Administrator noted that comparing DHFL with SREI may not exactly be an apple-to-apple comparison. He said future opportunities with growth of the infrastructure sector will open up growth potential for Srei, which is largely in infra financing, and that could attract potential suitors.
At the centre of all of it are borrowings of over Rs 30,000 crore. Srei Infrastructure Finance Limited (SIFL) and Srei Equipment Finance Limited (SEFL)’s combined borrowings totaled Rs 30,783 crore of as March 31, 2021, as per market sources. This includes loans of Rs 21,914 crore from commercial banks, Rs 1,979 crore of borrowings from domestic Institutions like NABARDE, IFC and SIDBI, another Rs 2,160 crore from DFIs and multilateral agencies, and Rs 4,730 crore of NCD borrowings.
Union Bank of India (Rs 2,932 cr), Punjab National Bank (Rs 2,756 cr), State Bank of India (Rs 2,668 cr), Bank of Maharashtra (Rs 2,085 cr), Indian Bank (Rs 1,953 cr), Central Bank of India (Rs 1,892 cr), Canara Bank (Rs 1,759 cr), Bank of Baroda (Rs 1,387 cr), Axis Bank (Rs 1,385 cr), Punjab and Sind Bank (Rs 1,275 cr), UCO Bank (Rs 1,051 cr), Bank of India (Rs 691 cr), Indian Overseas Bank (Rs 618 cr), IDBI Bank (Rs 390 cr) are some of the lenders to the group.