Explained: What went wrong at Srei Group firms and why RBI took control of the NBFCs

The Reserve Bank of India (RBI) on Monday superseded the boards of directors of Srei Infrastructure Finance Ltd and Srei Equipment Finance Ltd, both non-bank lenders promoted by businessman Hemant Kanoria and his family.

The RBI’s actions came after the non-banking finance companies defaulted on their debts and failed to attract external funding. Moreover, lenders to the two companies had refused to give any moratorium on their loans.

What led the RBI to take such an extreme step against Srei Group?

The RBI said it was superseding the boards due to governance issues and loan defaults by the Srei Group companies. The Srei companies reportedly owe Rs 35,000 crore to their creditors.

The development comes a week after creditors to the Srei Group companies rejected the top management’s proposal to grant the companies a one-year standstill from any action – legal or otherwise – to recover dues.

On October 1, Moneycontrol had reported that the lenders had adjusted Rs 3,000 crore from Srei Equipment’s cash flow against the loan dues in the last 10 months and drew money from the trust and retention account.

Talks for debt realignment were still on and lenders were waiting for a forensic audit to take a call on realignment, the report said.  

So, what has the RBI really done?

The RBI has appointed Rajneesh Sharma, a former chief general manager of Bank of Baroda, as the administrator to take over the boards of directors of the two Srei companies.

Moreover, the central bank said it will soon begin the process of resolution of the two NBFCs under the country’s insolvency and bankruptcy regulations and ask the National Company Law Tribunal to make the administrator the insolvency resolution professional.

How did things come to such a pass?

Things have reportedly been brewing at Srei for a while now.

Moneycontrol reports that the group had seen senior-level exits in the last six months, including of Srei Infrastructure Finance CEO Rakesh Bhutoria, as the lenders had imposed salary caps.

Sandeep Kumar Lakhotia resigned as company secretary and compliance officer of Srei Infrastructure on March 20. Pavan Trivedi, Srei Equipment’s chief operating officer, had also stepped down a month later.

A Business Standard report said, citing the head of corporate banking at a private bank, that the implosion of IL&FS in 2018 led to a liquidity crisis for NBFCs, including Srei. “This hit business growth. In addition, problems in the infrastructure sector – road and power – led to stress on the books for Srei on delays in payments by clients,” it said.

Srei had been moving away from infrastructure financing in the last four-five years. Disbursements by the equipment finance wing were also lower. This was in line with the management’s strategy to slow down disbursements in its books and focus on the co-lending model, the report said. A planned initial public offering (IPO) for Srei Equipment was also shelved after IL&FS crisis.

Instead, in July 2019, the board of Srei Infra decided to transfer its lending business, interest earning business and the lease business together with associated employees, assets and liabilities to Srei Equipment.

“Then, the business got impacted in March and April of 2020 due to Covid-19 and what was a problem quickly turned into a crisis. This is because infrastructure projects came to a halt and projects of borrowers were stuck,” the Business Standard report said.

But didn’t the RBI do anything to bail lenders out during the Covid-19 crisis?

It did. To provide respite from debt-servicing during the pandemic, the RBI directed all lending institutions to offer a nine-month moratorium and recast debts of micro, small and medium enterprises (MSMEs) and infrastructure companies. But that apparently “led to cash flow shortages for Srei as no respite was provided to NBFCs,” Business Standard said.

Thereafter, a series of events followed. Srei moved the National Company Law Tribunal with a scheme that proposed to pay full dues to all creditors in a structured manner. Some creditors accepted it, while others, including bankers, did not.

Media reports say that, after the scheme was filed, banks took control of the company’s cash flows and then capped salaries of Srei executives. Then, the RBI conducted an audit and flagged more than Rs 8,000 crore of probable related-party lending by the Srei group.

What did Srei want to do to resolve the crisis?

Srei was in talks with private equity players for raising equity capital. Srei Equipment Finance had received expressions of interest from 11 global investors, and subsequently, received non-binding term sheets from Arena Investors LP and Makara Capital Partners.

But this was before the RBI’s move to take control of the two companies. It is unclear how such proposals will move forward now.