Exclusive | In hindsight, there were some errors in judgment from our side too, says Hemant Kanoria of Srei

Hemant Kanoria, the erstwhile promoter of Srei Infra and Srei Equipment Finance, had to let go of control of his flagship companies, after the Reserve Bank of India (RBI) on October 4 announced the takeover of the boards of Srei Infrastructure Finance (SIFL) and Srei Equipment Finance Limited (SEFL) due to governance concerns and defaults by Srei Group companies. The RBI also appointed Rajneesh Sharma, the former Chief General Manager at Bank of Baroda, as administrator.

The RBI move came a week after creditors of Srei Group rejected the management’s proposal to grant the company a one-year standstill from any action—legal or otherwise—to recover dues estimated at around Rs 30,000 crore.

In an exclusive interview with Moneycontrol on November 12, Kanoria shared his thoughts on what went wrong in Srei Group and what lies ahead for the promoters and the company they founded.

Edited excerpts:

What led to Srei’s fall from grace?

I would not say that Srei has fallen out of grace. It has met with a sudden accident and it will surely come out of it. The companies are robust in their business model of equipment financing. Focus on collections and reducing liabilities along with restarting the business will bring the companies back on track.

During the pandemic, the Finance Ministry intervened and instructed the RBI to provide relief by extending moratorium and offering a one-time loan restructuring facility to the stressed borrowers. The RBI directed all the lending institutions to offer moratorium and recast debts of micro, small and medium enterprises (MSMEs) and large enterprises. However, NBFCs like Srei, as borrowers from the banks, were not allowed to restructure their debt under the guideline. That was the biggest blow to Srei – as it led to cash flow mismatch, plus no respite was provided to the NBFCs. SIFL and SEFL had to abide by the new rules, their revenue sources dried up completely. Meanwhile, their role as borrowers got overlooked. This resulted in a severe asset-liability mismatch, thus precipitating the problems.

What are the mistakes promoters made in this whole episode?

Yes, in hindsight, there were some errors in judgement from our side too, but whatever decisions we had taken were made with sincere intent.

In July 2019, the Boards of SIFL and SEFL decided to consolidate the lending business by way of a slump exchange to SEFL. Technically, it was transferring the lending business, interest earning business and lease business of SIFL together with the associated employees, assets and liabilities to SEFL. It has to be noted that this decision not mine or the management’s alone, it was taken by the Board of Directors and the shareholders together. This was done in discussion with the potential investors who were interested in taking a majority stake in a consolidated entity. This move was expected to improve efficiency and reduce costs, and attract the needed capital. However, that did not quite go down well with the consortium of our lender-banks in spite of the fact that the lead bank had given the approval and also the shareholders, ECB lenders and bondholders had given their consent.

What happened then?

Another development further complicated the problems. With things going out of control during the pandemic and its immediate aftermath, we anticipated the mismatch in cash flows that will affect our operations. So, SEFL took a crucial but risky decision to approach NCLT (Kolkata Bench) with a scheme that proposed to pay full dues to all creditors in a structured manner. As it is, between the two companies, there are receivables worth more than Rs 50,000 crore, including contractual dues, many arbitration awards, assigned claims and physical securities. Thus, it is very much possible to repay the entire debt. The scheme that we proposed intended to pay full dues to all creditors in a structured manner. The Board took a decision that the only option was to file for Section 230 of the Companies Act, not under IBC, but in the NCLT, which allows a restructuring of the debt and which will be in alignment with the cash flow of the company. But this decision did not go down well with our lender-banks.

In retrospect, these actions were well deliberated by the Board and then decided on, but may be the mistake was that there was a gap in our banker’s communication. After all, we have had an impeccable record for 31 years of not missing a single payment deadline. Till date, we have paid Rs. 30,000 crore as interest and Rs. 20,000 crore as principal. All that I can say is that we took that step with the sincere intent to pay to everyone in a systematic manner.

For the first time in the history of the company, a scheme for payment to creditors was submitted to the court for realignment of debt. Some creditors accepted this scheme, while others did not.

In hindsight, do you think promoters failed to act on time to prevent the downslide?

As Srei is a professionally managed company with a very experienced board and a competent team running the company, all decisions are taken after detailed deliberations, but may be moving to the NCLT was a hasty move.

Do you think lenders could have an easier approach to help Srei?

When we had approached NCLT with our scheme, we were open to feedback from the lender-banks and were also open to discuss and sort out whatever concerns the lenders had. But that somehow it did not materialize. We pray and hope that under IBC the creditors get their full dues and all support needed will be provided.

What is the way ahead for Kanorias in the context of Srei?

At present as we and other directors have been superseded, so we can only pray for the well-being of Srei and will cooperate in all manner with the administrator, creditors, regulator and the government. There is nothing more that we can do at this juncture.

What will be the challenges ahead for Srei?

As infrastructure investments will be accelerated by the government in our country, Srei is in a unique position to take advantage of this growth. As soon as the business is restarted with another team focusing on collections, all clients and vendors will be back. Srei has the largest franchise in equipment financing in the country.

 There are allegations of related party transactions and fund diversions?

We are a developing nation, and for developing our infrastructure, ‘structured credit’ is a must. We picked up our lessons on ‘structured credit’ from the global financial institutions who helped us grow in our formative years. They have been the epitome of global best practices and we learnt from them, quite early in our career, the importance of aligning the customer’s repayment schedule as per their projected cash flows and the value of the underlying assets. This has been the guiding principle behind the ‘structured credit’ deals as well when Srei diversified into project financing. Thus, which loans are to be offered to whom and at what terms are essentially decided after taking these factors into consideration. We have a team of professional and highly qualified individuals who work out the loan terms, the proposals get vetted at different layers, and thus no question of favouritism can arise. The expression used in the newspaper reports is ‘possible related party transactions’. These exposures do not, as per the Companies Act or the Ind-AS norms, come under the definition of ‘related party transactions’. They are investee companies with the various SEBI-registered funds where Trinity has been appointed as the investment manager / advisor. Trinity itself is a public company incorporated under the Companies Act, 1956 and is not owned by the family, but by Srei, so any management fees which accrues goes to Srei.

Do you suspect a conspiracy/campaign to malign the image of Srei and its promoters? If yes, who?

I cannot comment if there is a conspiracy angle to it, but yes, the way some very unresearched reports have surfaced sullying the Srei brand name and also dragging our family name into it, we cannot rule it out completely. All I can say is it is very unfortunate. For more than three decades we have provided a national service in promoting financial inclusion and nation building and have painstakingly built a reputation through lot of hard work and sacrifice. If after all this, one’s integrity gets questioned, it truly hurts. Our family has been engaged in businesses over three centuries and the philosophy has always been to work as custodians, one dividend earned from investments also go for all the charitable work that the family does.

What is your message to Srei employees?

My message to Srei employees is very clear – you all have been the most valuable assets, your hard work and innovation have made Srei what it is today, you have seen several ups and downs in the last 32 years. This phase too shall pass. Just hold on to your feeling of ownership and pride in the brand that you have all created and do everything possible to turn the companies around. Extend your fullest co-operation to the administrator and the Srei twins will surely bounce back.

There are comparisons to Srei with DHFL/IL&FS episodes.

It is fully misplaced. Srei’s business model has always been very robust, the processes for credit evaluation and disbursement being extremely strong. Working with customers, even in tough times, finding out solutions along with them has enabled good recovery. The team at Srei has worked extremely closely with all borrowers, knowing them and understanding them, therefore recovery should not be a problem.

You have said earlier an out-of-court settlement would have been better for Srei.

An amicable solution between lender and borrower is always better. Sometimes, there may be misunderstandings, but it is better to sort out across the table, to preserve its value.

 What is the future for Srei as an infra-pure play company?

Look, Srei started its journey more than three decades ago by filling in the void created by the exit of the development financial institutions (DFIs). Today, the government has realized the need for DFI and the NaBFID has been created for that purpose with K V Kamath as its chief, but it will take some time to become fully operational. I would like to see Srei position itself as a DFI – that would have addressed the resource mobilization problems to a large extent and India would also have another DFI-Srei fully operational with 32 years’ experience. India needs Srei to be fully operational now that the National Infrastructure Pipeline (NIP) projects start getting tendered. NIP will open up opportunities for thousands of small and medium companies who provide services like construction, transportation, etc. in the infrastructure projects. They will be needing equipment for undertaking assignments in the NIP projects, and for a large section of these players Srei used to be the best choice as they were used to getting customized solutions from us.

In our country, two infrastructure financing institutions, NaBFID and Srei will serve the needs of our country immensely.