In a notification to the bourses yesterday, Kolkata-based non banking finance company (NBFC) SREI Infrastructure Finance Ltd informed that a special audit of the company and its subsidiary, SREI Equipment Finance Limited is being undertaken by an auditor appointed by Reserve Bank of India (RBI) in exercise of its powers under Section 45 MA(3) of the RBI Act, 1934.
As per the said section, RBI may at any time by order conduct a special audit of the accounts of a NBFC, if it is of the opinion that it is necessary so to do in the public interest or in the interest of the non-banking financial company or in the interest of the depositors of such company. Usually, a special audit undertaken if there is a sharp deterioration in the quality of lender’s book.
SREI holds a 3.34% stake in the Lakshmi Vilas Bank, which has been put under a 30-day moratorium by RBI.
Earlier this week, there were news reports that a few lenders to the 35-year old SREI group are expected to approach the National Company Law Appellate Tribunal (NCLAT) over SREI’s move to reconsolidate its assets in a separate group company in potential breach of loan covenants. The matter relates to the consolidation of the group’s lending business into Srei Equipment Finance Ltd (SEFL) announced last year. This was done through a slump exchange and was effective 1 October 2019.
In July 2019, the company said “The proposed step will also facilitate the lending entity, SREI Equipment, to attract strategic investors and also prepare the company for a conversion into a bank, as and when the RBI decides to allow the conversion."
SREI Infrastructure Finance had shared in its FY19-20 annual report that both companies (SREI Infrastructure Finance and SREI Equipment Finance) had obtained approvals from their respective lead bankers to the consortium, Axis Bank Ltd and UCO Bank Ltd, and a few other lenders, but approval from the remaining lenders is still in process. According to the company, “Usually, the formal approvals take time due to the internal processes of the lenders. Unfortunately, because of the outbreak of covid-19 in March 2020 and the continued lockdown, the entire process got delayed further.”
The company claimed that the slump exchange process involves taking approval from several stakeholders and, hence, the company has taken approvals from debenture trustees, shareholders, lenders and several other stakeholders, including the lead banker.
As a direct fallout of the IL&FS (Infrastructure Leasing & Financial Services) debacle in 2018, SREI had to face some challenging times but has especially seen new business come to a standstill and liquidity drying up in the current financial year. Mr Hemant Kanoria had earlier in August made a statement that the lender was looking at mergers with a bank as a possible survival strategy.
Last week, the company reported a drop of 91.5% in its consolidated net profit at Rs4.72 crore in the second quarter ended September 2020. It had posted a net profit of Rs55.37 crore in the year-ago period. Sequentially, the profit was also down from Rs23.01 crore posted in the June quarter of the current fiscal year.
The company reported in a regulatory filing, that its total consolidated income decreased to Rs1,182.21 crore during the July-September period of 2020-21 as against Rs1,424.18 crore in the same period of 2019-20. The company also shared that consolidated assets under management stood at Rs43,339 crore as on 30 September 2020 as compared to Rs44,213 crore as on 30 June 2020. The company’s balance sheet has been shrinking over the last two years.
Commenting on the financial results last week, Mr Kanoria said "The first half of this financial year has been very challenging for businesses and stability has been the mantra in this period of pandemic. Many sectors have already started doing well. But infrastructure is a sector where projects have long gestation periods; so any fundamental disruption takes a long time to bring business back on track.”
He had added that “The immediate need of the hour is for state governments, the central government and all public sector undertakings to release the dues of the contractors/construction companies, and the judiciary to issue appropriate orders that when an arbitration award is against a government organisation or the government, it should not be "stayed". If cash flow improves in the hands of contractors/infrastructure companies by realisation of dues/arbitration award payments then the companies can revive and complete pending contracts and/or undertake new one.”
Last week, in a separate news report, the National Company Law Tribunal (NCLT) directed ArcelorMittal Nippon Steel India to pay Rs1,300 crore to SREI Infrastructure for using the slurry pipeline during the insolvency period.
The NCLT order on 21st October has mentioned that creditors to the company will meet on 16th December and 23rd December. On 9th November, Care Ratings placed ratings of SEFL under credit watch with developing implications pending outcome of the proposed meetings of creditors and said “The collections of SEFL have continued to remain impacted even after the end of the moratorium because of the challenges in deployment and slow movement in infrastructure projects on account of the COVID-19 pandemic. Further, it has been approached by a large proportion of its borrowers for restructuring as per RBI guidelines. The company has total bank facilities of Rs16,912.2 crore.”