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SREI Infrastructure: A train wreck in slow motion for over two years now

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For the last couple of years, CNBC-TV18 had been regularly raising red flags about the quality of SREI's books.

SREI Infrastructure: A train wreck in slow motion for over two years now
The Reserve Bank of India (RBI) has had to finally step in sort out the mess at SREI Infrastructure, whose financials were beyond the understanding of most analysts.
For the last couple of years, CNBC-TV18 had been regularly raising red flags about the quality of SREI's books.
SREI Equipment Finance
It was the most ambitious project of the group, but plans to take it public came a cropper.
On August 6, 2018, we had reported that SREI Equipment Finance’s initial public offering (IPO) was likely to be postponed or called off. The IPO was originally planned for the fourth quarter of FY18, rescheduled to the first quarter of FY19, and then to the second quarter. Eventually, it was shelved.
Investors in SREI Infrastructure were worried that keeping the equipment finance arm as a separate entity would end up making SREI Infrastructure a holding company. That would hurt the company’s valuation because holding companies traditionally are valued at a discount to the sum of their parts.
The market too was of the view that merging equipment into the parent company would create more value for shareholders.
Road to nowhere
Another group company, Bharat Road Network, was created just a few months before its IPO.
On September 10, 2018, we analysed SREI's balance sheet and showed how its group company BRNL appeared to have been spun off for the sole purpose of taking it public and raising money.
BRNL was a minority stakeholder in most of the special purpose vehicle projects that SREI Infra transferred to the company (BRNL).
It had a negative net worth of Rs 67 crore in FY16. With the help of funds from a rights issue and preferential issue of shares to parent SREI Infrastructure, that figure dramatically improved to Rs 596 crore in FY17.
Projects given to this entity ran into all kinds of problems and were never completed. Within a year of listing, the company was already knocking on the doors of the National Company Law Tribunal (NCLT). BRNL's IPO, priced at Rs 205 per share is now available for Rs 28.75.
IL&FS fallout
When the troubles at IL&FS surfaced in October 2018, the entire non-banking finance industry faced a liquidity crunch as lenders took fright.
SREI Infra laid off around 200 of its employees soon after. The company’s CEO resigned and was not replaced. The management did not try to increase the company’s loan book from then on. It was the first sign of the company’s underlying problems.
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