Retail bondholders are stressed over the impending bankruptcy proceedings in two SREI group companies -- SREI Infrastructure Finance and SREI Equipment Finance Ltd -- as they fear sharp haircuts similar to that in the recent Dewan Housing Finance Corp Ltd (DHFL) case.
The Reserve Bank of India (RBI) on October 4 superseded the board of the two SREI firms, citing issues with governance and payment defaults. The firms have been referred to the National Company Law Tribunal (NCLT), which will now take them up for insolvency proceedings.
In the DHFL case, only those bondholders with dues up to Rs 2 lakh were paid in full.
However, SREI group’s promoters moved the Bombay High Court on October 6, challenging the RBI decision. While the matter unfolds, here’s a look at how a problem turned into a crisis at SREI.
The Kanoria family
The two SREI firms are owned by the Kolkata-based Kanoria family. All SREI companies are held by a trust called the Kanoria Foundation, which includes family patriarch H.P. Kanoria and his four sons -- Hemant, Sanjeev, Sunil and Sujit.
The Kanoria Foundation holds an asset base of nearly $10 billion as reported in 2017. They have business interests in power, technology, education, finance, media and healthcare. Of these, three companies, SREI Infrastructure, India Power, and Shristi Infrastructure Development, are listed in the bourses. SREI Infrastructure is the parent business entity of SREI Equipment Finance.
Hemant Kanoria is the Chairman and MD of SREI Infrastructure. His brother Sunil Kanoria is the company's Vice Chairman.
Sujit Kanoria is the MD of Shristi Hotel, while Sanjeev Kanoria is a doctor settled in the UK.
The problem at SREI
Even though SREI claimed that banks were regularly appropriating funds from the escrow account that they controlled since November 2020, experts say trouble has been brewing at SREI long before the pandemic.
“The implosion of IL&FS in 2018 led to a liquidity crisis in the financial sector for non-banking financial companies (NBFCs), including SREI. This hit business growth. In addition, problems in the infrastructure sector -- road and power -- led to stress on the books for SREI on delays in payments by clients,” the head of corporate banking at a private bank told Business Standard.
Both the companies have strayed from infrastructure and equipment financing in the last 4-5 years on the back of the management’s strategy to slow down disbursements and focus on co-lending model, he said.
SREI Equipment was looking to list its company but the initial public offering (IPO) was shelved after the IL&FS crisis.
In July 2019, SREI Infra and SREI Equipment boards decided to consolidate their lending business through a slump exchange.
“It had peeved lenders as all were not taken into confidence,” Business Standard quoted a source as saying.
With infrastructure projects coming to a grinding halt due to the pandemic since March-April 2020, SREI’s problem soon turned into a crisis. Projects were halted and borrowers were stuck.
The RBI provided respite from debt-servicing during the pandemic, but SREI faced a cash flow shortage as there was no respite for NBFCs.
SREI proposed to the NCLT to pay all creditors in a structured manner. However, only a few lenders accepted the offer, while bankers did not.
Soon there was an exodus of employees as banks took control of the company’s cash flows.
SREI appointed KPMG Assurance and Consulting Services LLP and DMKH & Co in April to audit its debt realignment.
As on September 30, SREI’s total outstanding debt stood at Rs 30,000 crore. The company owes up to Rs 20,000 crore to 15 banks, including the State Bank of India, Axis Bank, and UCO Bank.
The company is in talks with private equity players for raising capital. It has also received 11 expressions of interest from global investors for SREI Equipment Finance. However, the RBI sealed those plans by superseding the board on October 4.
(Edited by : Shoma Bhattacharjee)
First Published: IST