End of the road for Srei promoters?

(In picture: Hemant Kanoria. Source: Reuters)

On the evening of October 4, the Reserve Bank of India (RBI) issued a statement announcing the supersession of the boards of two Srei group companies, Srei Infrastructure Finance Ltd (SIFL) and Srei Equipment Finance Ltd (SEFL).

The reason cited by the regulator was governance concerns and defaults to creditors.

The move “shocked” the group. Till an hour before the RBI announcement, they were busy with meetings at the Kolkata headquarters of the company—once a prominent name in the infrastructure financing market in India—on the way ahead.

The group’s top management had met the media a few hours earlier, charting out future plans, which included ongoing negotiations with lenders and potential investors. Things seemed to be looking up.

But everything changed at 6.48 PM on Monday when the statement appeared on the central bank’s website.

“This came totally unexpected,” said a key Srei employee, speaking on condition of anonymity. “There was hurried discussions at the top and uncertainty among the staff. Obviously, all are worried what will happen next.”

A Srei group communication shared later in the evening confirmed what the employee said. “We are shocked by the RBI's move,” the statement said, adding it has already paid Rs 30,000 crore as interest and another Rs 20,000 crore principal to banks.

“There has never been any delay in loan servicing by Srei in the past before Covid-19 ravaged the country,” said the statement.

The statement added that the group was surprised because the National Company Law Tribunal (NCLT) order for all creditors was still in process. There was also an order for “no coercive measures” by creditors and/or regulators, the group said, adding it would take all necessary steps as advised by its legal team.

End of the road for promoters?

However, as it appears now, the options for Srei promoters are limited once the RBI takes over the show, said senior bankers and industry officials Moneycontrol spoke to. “The job of an RBI-appointed administrator, in this case, is not that different from a resolution professional—to ensure a smooth transition of the company to new management,” said a person who has been following the developments at Srei closely.

Srei is already under a corporate resolution process in NCLT.

Announcing the action, the RBI statement said the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019, provide for the financial sector regulator concerned appointing a committee of advisors to guide the administrator in the operations of the financial service provider during the corporate insolvency resolution process.

Hemant and Sunil Kanoria, the chairman and vice-chairman of SIFL, respectively, have been struggling to set things right. The top brass has been negotiating hard with lenders for a debt recast and with potential investors for survival capital. But nothing materialised.

The RBI action proves that the central bank no longer has confidence left in the management and the board’s ability in reviving the company either by a recast or by fresh capital infusion. That would mean end of the road for the promoters.

“The company may survive in some form,” said another Srei insider. “That is, if it manages to find a buyer.”

Srei owes around Rs 30,000 crore to its creditors, of which close to Rs20,000 crore is to lenders and the rest to other creditors including bondholders.

How the cookie crumbled

The trigger for Srei’s downfall was the collapse of Infrastructure Leasing & Finance Ltd in late 2018. The resultant liquidity crunch affected all non-banking financial companies (NBFCs). Banks shut funding channels to all such entities and SEFL had to call off its initial share sale. The group didn’t recover from the liquidity shock.

July 2019, the SIFL board decided to transfer the lending business to SEFL in what was seen as a move to enable the latter obtain a banking licence. The proposed step would also have helped SEFL attract strategic investors and also prepare the entity for a conversion into a bank, SIFL said in a stock exchange filing.

However, Srei’s lenders were not taken into confidence about the move, leading to a significant trust deficit between the group and the lenders. Major lenders to the group include UCO Bank, Axis Bank, State Bank of India and Union Bank of India.

But a bigger jolt came the following year. The Covid-19 pandemic severely hit Srei’s operations as the infrastructure sector suffered a body blow. When the RBI announced a moratorium on loan repayments, NBFCs had to extend the moratorium to their customers as well. Given that NBFCs rely on repayment of loans they have extended to, in turn, repay the banks they have taken funds from, this had a severe impact on Srei’s cash flows.

“Our borrowers find themselves in a very tight spot. The impact of the lockdown on their operations has been unprecedented, adversely affecting their revenue streams in a very significant manner,” the firm said in March 2021.

“As it is, the payments that they receive from the government agencies and other big developers are routinely delayed, even many arbitration awards have remained unresolved due to the intermittent operations of courts. Thus, they are finding it difficult to service their loans. All these factors have led to a cash flow mismatch for these players. Our own collections have suffered in the process,” Srei added.

Raters clamp down

There was also a tussle brewing between the group and rating agencies. The group on March 15 said it was evaluating legal options against decisions announced by CARE Ratings and Acuite Ratings & Research. On March 6, CARE downgraded the credit rating on various SIFL instruments to junk (CARE D).

CARE classified SEFL’s debt of Rs 17,411.96 crore and SIFL’s Rs 11,828.34 in the CARE D category, suggesting default. A day earlier, Acuite downgraded SEFL to junk rating (ACUITE D). It rated total facilities of Rs 3,492.45 crore.

Srei had about Rs 20,000 crore loan outstanding from about 15 lenders at the time it got a favourable order from the Kolkata bench of the NCLT in the form of a six-month moratorium and also permission to arrive at a mutually agreed repayment schedule with the lenders.

The Kolkata NCLT order further said creditors cannot classify Srei loans as bad till the order stands and asked raters not to revise the ratings during the said time period. But the raters and creditors moved the National Company Law Appellate Tribunal in Delhi challenging the order.

As per latest court orders, lenders are free to reclassify Srei loans.

Investors who never arrived

In the meantime, Srei had been trying hard to get investors. The group asked lenders to approve a much-needed debt recast and knocked on regulator RBI’s doors to seek clearance to get a clutch of investors on board.

The company’s board constituted a strategic coordination committee chaired by Malay Mukherjee, an independent director at SEFL, to help raise fresh funds.

Lenders said they would wait for the outcome of a forensic audit before deciding on restructuring the group’s debt, estimated at Rs 28,000 crore.  Srei group said it is confident of raising capital after the debt recast.

“We expect the capital to be raised post-realignment of debt with banks. We are confident of raising the capital,” the group said in an email response to Moneycontrol on September 14.

Eleven global investors including Arena Investors were said to have expressed interest in group company SEFL. Subsequently, the company received non-binding term sheets from Arena Investors and Makara Capital Partners.

But those investments didn’t ultimately happen.

Lenders tighten grip

At this point, it was not business as usual at Srei. Lenders, in a bid to get their money back, kept a strict check on cash flows, pre-authorising every payment including salaries and other statutory expenses. A cap on some salary payments had caused disquiet in the senior leadership team.

Since December, when lenders took control of the finances and capped the salaries of executives, at least 250 of Srei’s 1,500-strong workforce exited from both the senior and middle levels.

Sandeep Kumar Lakhotia resigned as company secretary and compliance officer of SIFL on March 20. A month later, SEFL chief operating officer Pavan Trivedi quit. On September 14, Moneycntrol reported that SIFL chief executive officer Rakesh Bhutoria had resigned.

Although the caps on salaries were lifted in April 2021, the arrears still need to be paid, Srei group said.

“We have requested the bankers to release the amount for paying arrear salaries… It is unfortunate that many executives have left and are leaving. We are trying to retain them, but as the control of the cash flow remains with the bankers since November 2020, we can only request our employees to stay with us,” the group said in its response.

What next?

With the RBI superseding the board, there could be more exits at the senior management level in the days ahead, said the first person cited above. The future course will depend on the how soon Srei gets a buyer and can repay its creditors. The Kanorias may be out of the game already.