“In hindsight, the biggest mistake we made was that we did not go to the bankers before going to the Court (National Company Law Tribunal/NCLT),” said Hemant Kanoria, former promoter of the Kolkata-based SREI Group. Kanoria was referring to an application filed last year by Srei Equipment Finance Limited (SEFL), a material wholly-owned subsidiary of Srei Infrastructure Finance Ltd (SIFL), for approval of a proposed Scheme of Arrangement with the creditors and SEFL for re-alignment of debts under Section 230(1) of the Companies Act, 2013. However, the Reserve Bank of India (RBI) superseded the Board of Directors of SIFL and SEFL on October 4, 2021, owing to governance concerns and defaults by these companies in meeting their various payment obligations and placed them under an Administrator (Rajneesh Sharma, Ex- Chief General Manager, Bank of Baroda). NCLT, Kolkata, accepted the central bank’s application on October 8, 2021, to initiate corporate insolvency resolution process (CIRP) against the aforementioned companies. In an interaction with BusinessLine, Kanoria observed that he will weigh, as erstwhile founder of the infrastructure finance company, if he can participate in the CIRP. He emphasised that SEFL had earlier received expression of interest from 11 investors and many of them would be interested to come back and make investment via CIRP. Excerpts:
Will you be able get back your company?
If we see someone (investor) coming and giving a very good value for the company and all the creditors are able to get their full payment, we’ll be very happy. But if people are trying to take the company for a ride and give a lower bid, we may have to come in and intervene…we are quite sure there are sufficient securities/ assets, arbitration awards, which may take a little time (to realise)…Unfortunately the infrastructure sector has been very badly impacted, because everything was derailed, and to bring things back on the rails takes time.
How did your group get into a spot?
Last year, when Covid happened and when the lockdowns began, most of our clients — construction companies and contractors, along with infrastructure companies, started facing problems. Their work came to a standstill. They were not able to get their money because government offices were closed. There were claims cases, which were in the courts, and all that came to a standstill. So, the whole cycle stopped.
RBI subsequently come out with guidelines for extending moratorium to our clients and offering them refinancing/ restructuring. That was a good move. If it had not been done, all of them would have defaulted. But, at the same time, this (moratorium) was not extended to NBFCs (who had taken loans from banks) because for the consumer-lending NBFCs it was not required as their average tenure of lending was short.
Given that we are an IFC, all of our lending was medium to long-term. Unfortunately, we being the only company in this particular (infrastructure) sector, the RBI could not have had a special dispensation/ guidelines for us.
Why did your attempt to realign debt fail?
Until and unless there was stress, we could not go in for a realignment of the debt. And that time there was no loan outstanding. So, the only alternative for us to deal with the loans from banks was to do a debt realignment under Section 230 of the Companies Act as that allowed us to do realignment in consultation with the creditors and with their consent.
We moved under Section 230 last year in October for making full payment along with interest to all the banks…and we said that the entire loan be converted into debentures and the whole payment can be made over a period of certain time along with interest.
And if this scheme was not acceptable to the bankers, they could have revised it. Unfortunately, the bankers did not like that we went to court because they thought going to the court was fighting against them. But actually it was not fighting. It was only facilitating so that repayments can take place in a structured manner and the company could continue in the proper manner without disruption being caused to the company due to either mismatch on the asset liability side or in any other matter.
And also our clients were not in a position to pay back timely because all their money was stuck up.
Were bankers uncomfortable with the idea of conversion of loans into debentures?
Anticipating all the aforementioned developments, we moved NCLT in October 2020. But in November, the bankers put a restraint on the operations of the company and also created a trust and retention account where all the cash flows were captured by them. In December last year, we had to move all the other creditors (secured debenture holders, unsecured debenture holders, secured ECB lenders, unsecured ECB lenders, PDI holders and individual debenture holders of SEFL) also for a realignment of the debt. However, at no particular time we had offered any haircut to the bankers. At no particular time we had asked for any sacrifice on the interest etc, it was full payment, because we were sure that we will be in a position to pay all the creditors in a structured, orderly fashion. And that was the reason why we moved the court and there was no other intention. But we found that this pre-emptive move was not taken very well by the bankers or by RBI.
The RBI flagged connected lending. What do you have to say on this?
The RBI raised certain issues about connected parties or related parties (lending) etc. It identified certain parties, being borrowers of SEFL, as probable connected/related companies. But there is a process which the company follows. We have a very strong board of directors and all the decisions are taken through committees etc. So, therefore, when any borrower is brought in by the team members, the appraisal is done on the basis of the project, cash flows, security, which the borrower offers, and after that, in the event that that particular borrower falls under related party or connected entity then there is a process again, which is followed through the compliance, legal and the Secretarial department to see whether it falls under related party or connected party under the Companies Act and Ind-AS. And if it does, then it is adequately reported to the audit committee of the board. If it does not, then it is not reported to the audit committee of the board. We have inspections going on by RBI, we have various other internal audits, statutory audit which keeps going on and this is not something which is new.
So, all of a sudden.. the RBI took exception to it…Borrowers which are there will be classified under the connected party…I’m only talking about the connected entities. But most of them are companies which are under the Alternative Investment Fund. Srei Infra has an investment in that AIF. They are only managers and this is third party money.
So, therefore, just to give you an example, suppose a Bank’s mutual fund arm has invested in the debt paper of an automobile company. The MF is only a manager, investing third party money in the debt paper. Now, if the bank gives a loan to this automobile company, will the company become a connected party for the bank? Under no stretch of imagination does it becomes a connected party. So, similarly, in the case of AIF and SREI that is the relationship which is there.
Because the RBI mentioned that these are probable connected parties, they were adequately reflected in the balance sheet of March 31…There is no distinction in the process which is being followed for any loan the company gives. All the borrowers assets are seen, securities are seen, cash flows are seen and proper evaluation is done. So, there has been no dilution in the processes which have been followed.
Why did you opt for debt realignment under Section 230 of the Companies Act?
We went under Section 230 so that the company does not end up being in default. Because we have so many lenders, both domestic and international, and bond holders (almost about 70,000-80,000 bond holders), going to everyone independently would have taken a lot of time and would have resulted in the company getting into a big problem.
But in hindsight, I think that the biggest mistake we made was that we did not go to the bankers before going to the court. We should have first gone to them, discussed with them, and then gone to the court… We thought if we go through the court route, we will be able to deal with many creditors on one platform and the scheme that we had given was very, very fair. There was no haircut to anyone at all. But by taking the company through CIRP, we do not know what the result will be. From our end, that is the reason we have reached out to the Administrator, the RBI and the creditors that whatever support or help that is required, we are very happy to provide that because we want the institution to get back on its feet as soon as possible. So that is our only intent — to see that all the creditors are paid off because there are sufficient assets in the company, there are claims (court), there are assets/ securities. So, that someone needs to very intensely follow up to find out solutions.
We have investors who are quite keen to come in and…about 11 Expression of Interest had already come in. Many of them would be interested to come back (via CIRP) and make investments.