On October 4, the Reserve Bank of India (RBI) announced the takeover of Srei Infrastructure Finance Ltd (SIFL) and Srei Equipment Finance citing governance issues and payment defaults. The RBI also appointed Rajneesh Sharma, the former chief general manager at Bank of Baroda, as administrator. On October 11, Sharma issued a public notice asking SIFL's creditors to submit their claims after the Kolkata bench of the National Company Law Tribunal (NCLT) ordered the commencement of the corporate insolvency process against the Srei group firm on October 8.
This could mean the end of the road for Srei promoters Sunil and Hemant Kanoria. The RBI-appointed administrator has taken over the affairs of the group and the reporting structure has changed accordingly. While the Srei saga winds down, there are still a few questions that remain unanswered.
What was the outcome of the forensic audit conducted on Srei companies?
The group had appointed KPMG and DmKH & Co in April this year to conduct a forensic audit. However, according to people familiar with the development, the forensic audit hasn’t unearthed any fresh major issues, only what came out of the RBI special audit about six months ago such as under-provisioning and alleged related-party transactions.
Did the Srei board members fail to act in time?
The SIFL board had top names including Malay Mukherjee (former MD and CEO of IFCI Ltd) and former RBI executive director Deepali Pant. Similarly, Srei Equipment Finance had board members including Suresh Kumar Jain (former Union Bank of India executive director), Uma Shankar Paliwal (former RBI ED), Shyamlendu Chatterjee (former Axis Bank ED) and Indranil Sengupta (formerly of State Bank of India). But it would seem that the board members did not flag the alleged irregularities.
Will Srei get a buyer?
This is the most important question at this point. There are only two ways a resolution can happen in NCLT cases—either by resolution by sale to a buyer or through liquidation. The Srei group was into pure-play infrastructure financing, lending to projects and equipment financing, which are typically long-gestation loans. Only a buyer specializing in such a business may find it a right fit. Also, many of Srei borrowers may have stopped repayments after the NCLT proceedings started against the company. “This will make things even more difficult for the new owner,” said a former Srei official who didn’t want to be named.
What will happen to the Srei workforce?
Srei’s employees are keeping their fingers crossed. There have been a number of exits from the group since December when lenders capped cash flow restrictions including salaries at Rs 50 lakh per annum. Srei has less than 1,000 employees at this point. There is also the larger question of what happens to these employees if and when a takeover happens.
Why weren’t proposals from potential investors considered?
One of the arguments made by Srei founder Hemant Kanoria in the court while seeking a stay on insolvency proceedings was that potential investors were willing to put money into Srei companies. The group had said that Srei Equipment Finance had received expressions of interest from 11 global investors and, subsequently, received non-binding term sheets. The applications for the fit and proper clearance, the group said, was with the RBI. However, the central bank did not give its approval to the proposals.
Is there evidence of fund diversion?
Srei promoters had strongly denied charges of fund diversion and said the group’s liquidity woes are mainly due to industry problems. The outcome of the RBI’s special audit on the funds diversion front has not yet been revealed.
Why did RBI crack the whip on Srei auditors Haribhakti & Co?
The RBI had in 2017-18 given specific directions to Srei’s auditors to keep a close check on financial irregularities such as under-provisioning on loans and related-party transactions. According to people aware of the matter, the auditors failed to follow the regulator’s directions, leading to the RBI action.
How big will the haircut be for banks?
Srei owes its creditors around Rs 30,000 crore of which less than Rs 20,000 crore is to banks and the rest to other creditors. Even if Srei gets a buyer under the NCLT mechanism, the haircut banks will have to take will be huge, according to industry experts. This is because any potential buyer will want to start on a clean slate. The fate of other creditors needs to be watched as well.