Banks' rejection of debt recast turns into a deathblow for SREI

The SREI Group firms' business has been badly hit due to Covid; SREI mulls legal recourse over RBI's decision to supersede Group firms' boards

On Monday, the Reserve Bank of India (RBI) decided to supersede the board Srei Infrastructure Finance Limited (SIFL) and Srei Equipment Finance Limited (SEFL) – both are non-banking finance companies engaged in financing to the infrastructure sector, due to governance concerns and defaults in meeting their payment obligations. This marks the end of a prolonged period of negotiations between the Srei management and the banks during which the former failed to impress the banks for a debt recast. SEFL is a wholly-owned subsidiary of SIFL.

SREI has a total outstanding debt of Rs 30,000 crore of which Rs 18,000 crore to Rs 20,000 crore are with the 15 commercial banks including State Bank of India, UCO Bank and Axis Bank among others.

RBI had conducted a special audit on the companies last year. The report has not been made public but bankers said the regulators observed related party exposure of Rs 8500 crore. SREI went for a legal opinion and countered the allegations saying under the Companies Act, those are not classified as related party exposure. The other observation of the RBI report was under-provisioning. SREI’s provisioning for bad loans went up substantially in the next few quarters.

In April, lenders to Srei Equipment Finance Ltd (SEFL) appointed KPMG Assurance and Consulting Services LLP and DMKH & Co, chartered accountants, to conduct a forensic audit as part of its proposed debt realignment and good governance processes. The report came out in September. It was said banks may recast the debt if there were no red flags raised by the auditors. Though the finding of these reports were not made public, sources said that could be the reason behind RBI’s decision as banks were in no mood to recast loans.

“Over the last three decades, Srei has already paid Rs 30,000 crore as interest and another Rs 20,000 crore principal to banks. There has never been any delay in loan servicing by Srei in the past before Covid-19 ravaged the country,” SREI said in a response to Business Standard after the RBI decision.

SREI indicated that it may go for a legal recourse, as the response said, “We will take all necessary steps as advised by our lawyers in this regard.”

Covid aggravated pain

Srei Infrastructure Finance – the flagship company of the Kanorias of Kolkata started to reduce its book from 2015, while Srei Equipment Finance continued to grow. Construction and mining equipment finance was the main focus of the company that contributed 85% of its revenue. Srei Equipment was also engaged in financing IT related equipment, medical equipment and farm equipment. It had a 33% market share in construction and mining equipment finance before its business was impacted due to the nationwide lockdown imposed in March 2020 to curb the spread of the Coronavirus pandemic.

The lockdown hit the company hard – the workforce engaged in construction work was stranded, there were hardly any takers for loans as economic activities came to a grinding halt. It was a double whammy of sorts as SREI had to offer a moratorium to its customers but was not allowed one from its borrowers. SREI, like any other NBFC, gets most of its funding from banks. The Reserve Bank of India’s repayment moratorium rules of March 2020 did not include non-banking finance companies.

SREI demanded their loans to be restructured. Then RBI came out with a one time debt recast scheme in August. Again, the scheme was not for NBFCs.

Tussle with banks

The company by then realized that they are not in a position to repay loans to the banks – the pandemic has impacted their cash flows. As a result, in October last year, SREI moved the National Company Law Tribunal (NCLT) and proposed a scheme of repayment to the banks, without any haircut, which included a moratorium period and was linked to recovery from borrowers. The company said all their loans are secured and in case of a default, they would be able to recover the money by selling the assets of the borrowers.

The NCLT ordered lenders to maintain status quo on the accounts and barred them from taking any coercive action. Furthermore, Credit Rating Agencies are directed not to consider any non-payment as default and should maintain the ratings of SEFL at least that of investment grade.

This irked the banks to no end. The scheme of repayment was only meant to the banks, not for other creditors like the debenture holders. Banks were not certainly happy with such a proposal.

In November, banks took a call that they have the first right of repayment and created an escrow account.  With this step, banks took control of the cash flows – as all cash flow of both companies to be credited in that account. SREI had to take prior approval for any expenses. In addition, banks capped remuneration of the staff at Rs 50 lakh per annum which impacted 30-35 top executives of the company. These steps were taken by the banks despite the NCLT direction which barred them from taking any coercive action.

Left with no other option, SREI moved NCLT in December once again, to include all other creditors in the repayment scheme.

“We are shocked by the RBI's move as banks have been regularly appropriating funds from the escrow account they have controlled since November 2020. Moreover, we have not received any communications from banks on any defaults,” SREI said. SREI said almost Rs 3000 crore has been collected by the banks.

Sources said the first tussle with bankers and SREI management surfaced in 2019 when the SREI Infrastructure Finance proposed to transfer its assets to SREI Equipment Finance. The decision was taken in preparation to apply for a bank license. But SEFL lenders opposed the move as they were not comfortable with the quality of SIFL assets.

IL&FS impact

The IL&FS crisis of September 2018 actually started problems for SREI’s like it did for all other non-banking finance companies as commercial banks choked lending to the sectors or made the cost of money dearer. The IL&FS event also led to SEFL calling off their proposed initial public offering scheduled in October 2018.

Srei Equipment Finance made another effort for capital raising earlier this year. In July, the company said it has received a non-binding term sheet from Singapore's Makara Capital Partners for investment of Rs 2,200 crore by way of capital. It has also received similar interest  from USA-based Arena Investors LP for investment of Rs 2,000 crore.

Infrastructure and NBFC are the two bad words in the world of business and finance in the Indian context for the last few years. SREI was involved in both.