Lenders reject Srei’s standstill appeal; company moves a step closer to bankruptcy

The "Srei board has accepted a definitive term sheet from Arena Investors LP and it is sent to the RBI for approval," the spokesperson said. The HinduBusinessline had reported in June that Arena had submitted a Rs 2000 crore capital infusion plan to Srei.

A standstill clause will enable a quick and smooth transaction that would be beneficial for the lenders and the group, Srei’s top management told lenders, according to the same person.

The consortium of creditors led by UCO Bank, however, declined to accept the proposal on grounds that the lenders had a fiduciary duty towards depositors to take every possible action to recover their dues at the earliest.

The rejection takes the company one step closer to bankruptcy proceedings, the people said. Lenders have sought guidance from the Reserve Bank of India on how to proceed on the resolution of Srei’s debt, as reported by CNBC TV 18.

The channel reported, quoting unnamed lenders, that the creditors are in favour of a resolution under the Insolvency and Bankruptcy Code (IBC). The central bank is weighing the option of pursuing insolvency proceedings, the two persons quoted above said.

No provision for a standstill 

Lenders also informed Srei’s top management that there is no provision under the Banking Regulation Act or under the RBI’s guideline to grant a standstill to a defaulting borrower, the first person said.

Axis Bank Ltd, Punjab National Bank, State Bank of India and Union Bank of India are some of other lenders to Srei Group.

Srei’s proposal is perceived as a desperate attempt by the management to retain its grip over their companies and probably an outcome of the ruling by an appellate tribunal setting aside a lower bench’s order directing lenders not to classify the accounts of Srei, according to a lender who did not want to be named.

"We are unaware of any such proposal," a Srei spokesperson said in an email response when asked about the standstill.

Despite delays in servicing loans, lenders were restrained from classifying the loans as non-performing assets (NPAs) because of a 30 December 2020 order from the Kolkata bench of the National Company Law Tribunal (NCLT).

The NCLT directed banks not to classify loans of both companies as NPAs until all lenders and bondholders agreed on a scheme of arrangement providing for a new repayment structure. Rating agencies too were directed by the bench not to downgrade the loans to default status.

Ruling reversed 

This was reversed on 7 September when the National Company Law Appellate Tribunal (NCLAT) set aside the NCLT order, paving way for banks to classify the loans as NPA for the quarter ending September 2021 and enabling them to pursue legal remedies to recover their dues.

In anticipation that they will have to take a hit on this account sooner or later, most banks set aside 20-30 percent as provisions for outstanding loans extended to Srei Infrastructure Finance and its subsidiary Srei Equipment Finance, according to a bank official cited above.

According to media reports, loan exposure of Rs 35,000 crore to Srei Infrastructure and Srei Equipment would be classified as NPAs in the second quarter of fiscal year 2022 by lenders.

For their part, lenders are awaiting a forensic audit from KPMG that would guide their course of action. If the report gives a clean chit to the group, lenders may have to undertake a deep restructuring under the June 7 circular of the RBI but if KPMG found wrongdoing such as divergence of funds, the account could be classified as fraud, paving way of legal action.

Any resolution through IBC for a finance company has to be routed through the RBI in line with the regulations.

"The Company has collected almost Rs 3000 crore and banks are already in control of the company's cash flow and are distributing funds to themselves and some other creditors, we feel they should not tag the account as NPA. We hope banks will decide on the debt realignment at the earliest so that the Company can pay all its bondholders and other creditors," the Srei spokesperson said in an email response.

Adverse findings?   

Lenders are concerned that the KPMG’s forensic report could cite irregularities, the banker cited above said.

This concern is based on an audit initiated by the RBI in November 2020 which identified Rs 8,576 crore of loans to borrowers that were connected or related to Srei Group.

This concern among lenders over the quality of credit appraisal done in disbursing the loans, the banker said.

The proposed standstill arrangement is evocative of the way it was first initiated by Zee Entertainment Enterprises Ltd and later disapproved by the market regulator Securities and Exchange Board of India.

In January 2019, mutual fund lenders with exposure of Rs 4,000 crore to Zee Entertainment entered into a standstill pact with the media company. Mutual funds extended the loan repayment deadline by six months and agreed not to declare the loans as NPAs for the duration.