The Reserve Bank of India superseded the boards of Srei Infrastructure Finance and Srei Equipment Finance on October 4 and appointed former Bank of Baroda chief general manager Rajneesh Sharma as their administrator. The central bank also appointed a three-member committee to advise and assist the administrator. Here’s what went wrong and why the RBI superseded the boards.
Why did the RBI supersede the boards of Srei Infrastructure and Srei Equipment Finance?
The Reserve Bank said the boards of the two companies were superseded owing to governance concerns and defaults in their various payment obligations.
The banking regulator had conducted special audits of the two NBFCs, whose problems had escalated after the Covid-19 outbreak. Both companies were already under stress after the Infrastructure Leasing & Financial Services and Dewan Housing Finance Corporation crises in 2018 created a liquidity crunch in the NBFC ecosystem.
How much do the two NBFCs owe creditors?
The two companies together have debt obligations to the tune of over Rs 29,000 crore, according to a note by Care Ratings on March 6, 2021, of which Srei Equipment’s dues were Rs 17,411.96 crore and Srei Infrastructure’s were Rs 11,828.34 crore. These include long-term facilities, short-term facilities, non-convertible debentures, long-term infrastructure bonds and perpetual bonds.
Why did Brickwork Ratings downgrade Srei’s ratings?
On April 6, 2021, Brickwork Ratings downgraded the long-term ratings of Srei Infrastructure on the innovative perpetual debt instrument to ‘BWR D’ from ‘BWR BB.’ The rating company also lowered the ratings of Srei Equipment to ‘BWR D’ from ‘BWR BBB/BB/A3.’
The rating company said in a note that the Srei Equipment downgrade was due to continuous delays by the company in meeting debt repayment obligations.
On Srei Infrastructure, it said the downgrade was on account of continuous delays in meeting debt repayment obligations and on the applicability of BWR’s cross-default policy, which is in line with guidelines. The rating company noted that Srei Infrastructure restructured the coupon payments of the perpetual debt instruments by taking the consent of investors prior to the due date, in line with the RBI’s guidelines. However, the rating company said it was restrained from treating non-payment of interest or principal as default earlier.
Why did the NBFCs delay their debt obligations?
Care Ratings, which had also downgraded Srei Equipment’s long-term and short-term facilities and NCDs, said in a note that the company’s collections had been significantly impacted due to the Covid-19 pandemic and the RBI’s directive on restructuring. As per the RBI guidelines, Srei only had the option of restructuring assets and not liabilities, which impacted the asset-liability mismatch profile.
It continued to have significant exposure to entities executing projects in the infrastructure sector including entities related to the group. A large proportion of Srei Equipment’s borrowers had sought a one-time restructuring of their loans, which resulted in cashflow mismatches. This forced the company to enter into arrangements with secured creditors, Care Ratings said.
The proposed meeting of creditors is yet to happen and there are ongoing delays and default on the borrowings availed by the company, it added.
What happens next?
The RBI said on October 4 it will shortly initiate the process of resolution of the two NBFCs under the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019, and would also apply to the National Company Law Tribunal for appointing the administrator as the insolvency resolution professional.
Once the NCLT approves the proposal, the boards of these entities will stand suspended and a moratorium will be imposed on any proceedings against these entities and enforcement of any security or transfer of assets, said Aashit Shah, a partner at J Sagar Associates, a law firm.
The corporate insolvency resolution process will enable foreign creditors, including bondholders, to restructure their debt alongside domestic creditors, he added.
If a resolution plan is successfully approved, it will allow the companies to start on a clean slate, which is missing under the RBI stressed assets framework, Shah said.
The NCLT will gather details of claims from various creditors. It will discuss with lenders and could start the process of inviting expressions of interest and lastly invite bids.
What happens to the creditors?
Going by the resolution in the DHFL case, banks may have to forego a significant portion of the loans they advanced to the entities. While DHFL was a retail franchise in the housing space with a presence across India, Srei is in infrastructure financing, where not many lenders have survived, including banks that have shifted their focus to retail lending.
As the resolution process moves forward, there will be greater clarity on how much the bondholders will receive. Unlike in the DHFL case, pension/provident funds have invested in Srei’s NCDs.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
