RBI Prepares To Refer SREI Group Firms For Insolvency—BQ Exclusive

Non-bank lenders are referred for insolvency under a special window of the Insolvency and Bankruptcy Code. While lenders recommend the option to the regulator, it is the RBI that refers non-bank lenders for insolvency. The first case of such an action was Dewan Housing And Finance Corp.

According to the people quoted above, the regulator has finalised an administrator, who will be appointed ahead of the insolvency proceedings. Once all preparations are completed, the RBI will invoke its powers under Section 45-IE, where it can supersede the boards of non-banking finance companies, ahead of filing for insolvency.

SREI Group lenders have been under strain for the last few years and attempts at bringing in new investors have not yet succeeded. Alongside, a forensic audit has been underway into the group's lending arms.

The RBI has been closely monitoring the developments in SREI's lending businesses, after it conducted a special audit in November 2020. The regulator had highlighted certain related-party transactions and under-provisioning. Lenders have appointed KPMG to conduct their own forensic audit, which is yet to be completed.

"We are totally surprised by this rumour as we have been paying banks regularly out of our collections. We have also submitted a proposal to pay the full amount to banks under a scheme filed under Section 230 of the Companies Act 2013 in October 2020," a Srei Group spokesperson said in an emailed response. "However, they have neither accepted the scheme nor proposed a payment schedule acceptable to them."

According to the Srei Group spokesperson, banks have been controlling the company's cash flow since November 2020. Nearly Rs 3,000 crore has been collected, which they have been disbursing to themselves.

The spokesperson added that any move towards insolvency would be "unfair", especially when a company fully cooperates with them and has even gone to the Courts to make full payments.

Queries mailed to the RBI on Monday, remained unanswered.

How It Got Here

Srei Infrastructure Finance, a 35-year-old NBFC, has seen many ups and downs in its lifecycle. In recent years, it has been hit by liquidity troubles following the collapse of IL&FS and then a surge in overdue loans due to the Covid crisis. For awhile, the group managed to get relief from courts preventing banks from declaring it a non-performing asset. However, the National Company Law Appellate Tribunal set aside this restriction on Sept.7.

In the quarter ended June 30, Srei Infrastructure Finance reported a consolidated net loss of Rs 971 crore, compared with a profit of Rs 23 crore a year earlier and a net loss of Rs 3,555 crore in the quarter ended March.

Total consolidated income for the first quarter dropped 35% year-on-year to Rs 793.34 crore. Expenses rose 48% from a year earlier to Rs 1,764 crore. Finance cost of Rs 936 crore and impairment cost of Rs 439 crore were the largest contributors to the company's expenses.

The lender has attempted a restructuring and a fresh infusion of capital but neither has concluded yet.

A scheme of arrangement had been proposed where the loan assets of Srei Infrastructure Finance would be transferred to Srei Equipment Finance Ltd., which would become the sole lending arm. Some lenders to the group are not in favour of such a transfer, BloombergQuint reported earlier.

The group had received a resolution plan from U.S.-based Arena Investors to buy the majority equity stake in Srei Equipment Finance. Arena Investors is seeking to infuse Rs 2,000 crore in Srei Equipment Finance as part of the offer. However, the offer was subject to no adverse outcomes from the forensic audit underway at SREI Group's lending businesses, BloombergQuint reported.