 "UCO Bank to propose SDR for REI Agro")
UCO Bank, the lead banker to REI Agro, is planning to propose a strategic debt restructuring (SDR) of the company to its lenders. The Kolkata-based Basmati rice export firm is alleged to have defrauded a consortium of 20 banks of Rs 3,814 crore, a matter which is being investigated by the Central Bureau of Investigation.
If the SDR proposal is ratified, REI Agro would be the third Kolkata-based company after Electrosteel Steels, in which the SDR route would be invoked to institute lenders’ control over the defaulting company. Under SDR norms, lenders can convert their outstanding loans to acquire a majority equity stake in a company.
However, the lenders of REI Agro might have to undergo a substantial haircut, as the company had allegedly massively overvalued its assets and taken loan from Indian and foreign lenders against fictitious security.
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“We will discuss the SDR route with lenders. The banks might have to take a substantial haircut, as we still do not know the exact value of the company. We will have to get the valuations done. Definitely, if any company comes forward to take over the management control of REI Agro, the SDR route can be considered,” said a source at UCO Bank.
REI Agro allegedly siphoned off funds in three ways. First, it over-invoiced the capital expenditure and inflated its assets. For example, land worth Rs 5-6 crore was shown to be valued at around Rs 100 crore. The lenders, too, failed to notice the overvaluation, an aspect the CBI will examine.
“It was a well-crafted fraud, and the company had been working on it since 2013,” said the UCO source quoted above. Secondly, the company took loans against payment receivables of close to Rs 1,000 crore from a long list of fictitious debtors or buyers of REI Agro’s products. The third route by which the company took loans from foreign lenders was through subsidiary companies.
Subsidiary companies
REI Agro created five foreign subsidiaries — Ammalay Commodities, UAE; Ammalay International, Singapore; Holy Stars, Mauritius; Orient Agro (M), Mauritius; and Auckland Holdings, Mauritius. These were mostly shell companies that took loan from foreign lenders. Allegedly, the companies were used as collateral securities for taking loans from foreign lenders. According to sources, the balance sheets of these companies were fictitious.
In January 2015, Credit Suisse Group AG sued REI Agro in Singapore, claiming that Ammalay and its associates conspired to get loans for non-existent trades. Credit Suisse has been seeking at least $80 million as damages. According to sources, the banking regulator at Singapore had alerted the Reserve Bank of India, which in turn wrote to UCO Bank about the alleged fraud.
Ammalay International allegedly did bogus transactions and inflated the balance sheet. The annual report of REI Agro showed the total revenue from subsidiary companies at Rs 5,915 crore for the financial year ended March 31, 2014 against Rs 4,487 crore for the year ended March 31, 2013.
Also, during the year under review, aggregate profit after tax of the subsidiary companies was Rs 481 crore against Rs 489 crore in the previous year. However, according to lenders, the companies were mostly defunct.
In May 2014, Care Ratings had withdrawn the rating of REI Agro citing delay in debt servicing. According to Care documents, the company's exposure to associate company increased substantially between 2012 and 2013. It rose from 14.7% (Rs 382 crore) its net worth in 2012 to 54.6% (Rs 1,508 crore) in 2013.
According to Care, this was due to the fact the company increased its favour of its overseas subsidiaries to facilitate the tie-up of the working capital limits to support growth in their early phase of operation.
According to the Care rating document in 2014, REI was engaged in setting up three projects at an aggregate cost of Rs 1,135.5 crore to be financed at a debt equity ratio of 2.7:1.
Also, the document said it had acquired a land adjacent to its existing operational Bawal unit 2 facilities at a cost of Rs .137.3 crore as a long-term strategy for future expansion. According to lenders, the actual value of land was much less than shown.
Established in 1994, the company was promoted by two brothers, Sanjay Jhunjhunwala and Sandip Jhunjhunwala. The company has been engaged in processing of Basmati rice (installed capacity of 118 tonnes per hour), and trading in commodities and wind power generation.
