Bombay HC dismisses plea filed by Srei Group promoters against RBI

Adisri Commercial Pvt Ltd had filed a writ petition on Wednesday against the RBI challenging the order and has also sought a stay on initiating insolvency proceedings against Srei Infrastructure Fin

The Bombay High Court on Thursday dismissed the writ petition by Srei Group promoters against the Reserve Bank of India’s (RBI’s) move to supersede the boards of two group companies. The division bench of the HC presided over by Ujjal Bhuyan and Madhav Jamdar said they are not inclined to entertain the matter after hearing arguments from both sides.
 
The RBI can move the NCLT for initiating insolvency proceedings against the two Srei Group companies, whose boards it had superseded earlier this week, citing governance issues. The promoters of Srei Group, Adisri Commercial and Hemant Kanoria, moved the HC late on Wednesday night seeking a stay on the insolvency proceedings against the group companies.

 
Hemant Kanoria, founder Srei Group, in a statement said, “The Srei Group has been making full efforts to repay creditors in a structured manner. It is important to note that the Srei Group had submitted a proposal to pay the full outstanding amount to banks under a scheme filed under Section 230 of the Companies Act 2013 earlier in October 2020. The banks neither accepted it nor proposed a payment schedule acceptable to them. Instead the lenders have been controlling the company’s cash flow since November 2020. Almost Rs 3,000 crore has been collected by them, of which they have been disbursing to themselves and there were no defaults.

 

“We were also exploring a fund raise and were in active talks with two strategic investors to infuse a capital of Rs 2,000, crore which would have brought relief. We deny all the allegations of diversion of funds against Srei companies and with RBI’s action and now the high court’s decision we will explore various other legal options.”
 
The RBI said it had been pointing out governance issues in the Srei Group companies in 2016 and gave the companies enough time to get their house in order. It said inspection reports have thrown up shocking revelations that the group companies were involved in related party transactions, disbursed loans to existing NPA accounts via round-tripping of funds, and also indulged in evergreening of loans, and in dubious lending activities and accounting adjustments.

 
The RBI said inspection revealed Srei Infrastructure Finance Limited (SIFL) as of March 2020, did not meet the regulatory requirements on capital adequacy and net owned funds. All the parameters were in red and they also reported very high divergence when it comes to reported non-performing assets (NPAs) and their extent.
 
The RBI counsel said, as of March 2020, gross NPAs were about 35 per cent of the loan book, while they reported gross NPAs of 9.18 per cent.
 
Also, only 3.3 per cent of their loan book was towards infrastructure financing against the regulatory requirement of 75 per cent of the loan book, the RBI counsel said.

 
Srei Group promoters said they acted on the red flags pointed out by the regulator and are in talks with two overseas investors — Makara Capital and Arena Investors — who are willing to put in more than Rs 4,000 crore.
 
Srei promoters’ counsel asked the court to direct the regulator to give them some time so that they can file the application to them for vetting the investors under the fit-and-proper criteria. In doing so, the companies can be revived without insolvency proceedings being initiated against them. They have also argued that there is huge divergence between the RBI’s decision of superseding the board of the two group companies and the communications they were having with the regulator. The promoter is ready to give up control to bring about a resolution of the company, the counsel said. Also, they have reconstituted the credit, audit, and various committees, and the promoters are not part of any of those.

 
 In an interview with Business Standard, Hemant Kanoria, promoter and former chairman of Srei Infrastructure had said from the process side, wherever the RBI suggested changes, they immediately tried to address those. Therefore, they were surprised by the RBI’s move.
 
A UCO-Bank-led consortium of lenders had reached out to the RBI, seeking a DHFL-like resolution for Srei. Apart from UCO, other banks with substantial exposures to Srei are State Bank of India, Bank of Baroda, Bank of India, Indian Bank, Punjab National Bank, Axis Bank, Canara Bank, and Union Bank of India.
 
This will be the second instance of insolvency proceedings against a financial services provider post mortgage lender DHFL was taken to NCLT and a resolution was found under Insolvency and Bankruptcy Code, wherein the Piramal Group took over DHFL.