The Kolkata-headquartered SREI group, which includes SREI Infrastructure Finance (SIFL) and SIFL’s wholly-owned subsidiary SREI Equipment Finance (SEFL), has been under stress for about a year now. In December 2020, the Kolkata bench of the National Company Law Tribunal (NCLT) had issued an order
stating that any non-payment by SREI will not be recognised as an event of default, till a scheme of arrangement is signed by all creditors. On 7th September, National Company Law Appellate Tribunal (NCLAT) has set aside this earlier order. Options are quickly running out and emergency debt restructuring might well be the only option left for the group and its lenders.
In yet another setback, SIFL's chief executive officer (CEO) Rakesh Kumar Bhutoria has resigned even as the company is going through the debt resolution process. His last working day is yet to be decided but the company has hired a head-hunter to look for a suitable candidate as the new CEO.
Credit rating agencies CARE Ratings and Acuite Ratings & Research have already downgraded the company rating
and since its a known stressed account, many lenders are now getting ready to have it appropriately recognised (downgrading to non performing asset (NPA) or stressed pool) or provisioning for it in this month as the second quarter draws to a close on 30th September.
The forensic audit of SREI Infrastructure Finance and SREI Equipment Finance is still going on and the report is expected by this month-end.
It may be recalled that a lot of retail investors, including many senior citizens, have invested in non-convertible debentures (NCDs) of SREI (both group companies) in the hope of earning better interest on their investment corpus. Since, SREI has been a non-deposit taking non banking finance company (NBFC), the retail investors’ investments are restricted to only NCDs.
Since October 2019, the SREI group has been pursuing a merger of its two group companies, SREI Infrastructure Finance and SREI Equipment Finance.
In December 2020, NCLT granted relief to SREI by directing banks and financial institutions to not take any coercive action against the company after it had approached the NCLT bench requesting moratorium on loan payments (including interest on NCDs) and postponement of redemption dates until the merger is complete.
In March 2021, UCO Bank, along with the Reserve Bank of India (RBI), had appealed against the order in NCLAT. Credit rating agencies too had moved NCLAT against the NCLT order.
Debenture trustees Axis Trustee Services Ltd and Catalyst Trusteeship had also approached NCLAT on behalf of the bondholders. Many retail investors have repeatedly highlighted the utter failure on the part of the debenture trustees to protect investors’ interests. Questions have been raised on their monitoring and tracking mechanism and how they almost always wake up when it is too late and the company is doomed.
Meanwhile the SREI group is in the midst of raising equity capital from foreign investors.
Earlier in June, the company's board gave an approval
to raise up to Rs2,500 crore through various means, including qualified institutional placement. Even before this, its subsidiary SREI Equipment Finance Ltd attracted a total investment proposal of Rs4,200 crore from the US- and Singapore-based investors.
Sources said that while many banks have already categorised the loans granted to the SREI group as stressed loans in the previous quarter, they will initiate accelerated provisioning in the September quarter. Under the accelerated clause of a contract, a lender can demand the borrower to repay all of the outstanding loan if the latter fails to fulfil certain requirements.
According to reports, public sector lenders like Indian Bank and Canara Bank have credit exposure (potential loss due to default by borrower) of around Rs2,000 crore and Rs1,200 crore, respectively, to SREI, while private sector banks like ICICI Bank and Axis Bank have Rs800 crore each.
In February 2021, lenders to SREI Infrastructure hired consultancy firm KPMG to do a transaction audit on the firm as the lenders evaluate a loan restructuring proposal by the NBFC, which is struggling to meet repayment obligations due to cash-flow problems engendered by the pandemic. SREI had requested its lenders to reschedule loan repayments citing liquidity mismatches during the pandemic. As per the scheme of arrangement, the NBFC had proposed a structure where they would make repayments in a manner which is aligned to their customers' cash flows.
Back then, a core committee of banks, including State Bank of India (SBI), Indian Bank, Union Bank of India and UCO Bank, had expressed concerns that a part of the total debt—about Rs31,000 crore - may not be sustainable immediately. Bankers had said that a final decision would be taken after considering the KPMG report.
Based on the ministry of corporate affairs (MCA) website and the debt prospectus of SREI (August 2019), we have tried to collate exposure of banks to this stressed group. Again, the data is of charges and may not represent or be equivalent to actual fund-based exposure.
SREI group's bank loans as per debt prospectus (August 2019) are as follows:
Note: There is a consortium loan of Rs105bn, but bank-wise details are not available (not included in above)
Top 10 Debenture Holders on cumulative basis for all outstanding secured NCDs: (as on August 2019)
SREI group exposure as per MCA portal (as of September 2021)
Note: UCO Bank & Axis Bank are lead bankers among a consortium and hence charges are reflected against them. However, it may not represent their actual fund-based exposure.
Source: MCA portal
In June 2021, SREI had revealed in regulatory filings that RBI had detected under-provisioning against stress and had also (in FY 2019-2020) flagged off lending to probable related and connected parties by the SREI group.
RBI had initiated an audit of its books in November 2020 and RBI had identified certain borrowers with loans worth Rs8,576 crore as 'probable' connected or related parties. This corresponds to almost 30% of the group’s total loan assets amounting to Rs28.794 crore.
Several top-level executives have quit the SREI group since December 2020 as the lenders have taken control of company finances and have put a cap of Rs50 lakh salary for top-level officials. Some of these employees are even said to be exploring the option of taking legal recourse for release of their salary arrears, which has been held by banks controlling the TRA (Trust and Retention Account).
The chief operating officer (COO) of SEFL quit in April 2021. The company secretaries of SIFL and SEFL had resigned in March and May 2021, respectively. In the past few weeks, the head of treasury and head of corporate communications have also quit.
Additionally, on 13 September 2021, SIFL announced that it has entered into an agreement of sale of shares in subsidiary company Trinity Alternative Investment Managers Limited (TAIML) to Backbay Investment Managers Private Limited (BIMPL). The company will receive a consideration of approximately Rs1.33 crore, i.e., Rs166.23 per equity share.
BIMPL is into the business of an asset management company acting as manager, operator and administrator of alternative investment funds registered with the Securities and Exchange Board of India (SEBI), the company said in a regulatory filing on Monday.
SIFL has three main categories of business, namely, ‘fund based,’ ‘fee-based,’ and ‘strategic investments.’ The company, listed under public financial institution (PFI) by the MCA, was incorporated on 29 March 1985. The company’s first public issue was in 1992.