Creditors of the two besieged non-bank financial corporations (NBFC) Srei Infrastructure Finance Ltd (SIFL) and Srei Equipment Finance Ltd (SEFL) overwhelmingly voted in favor of collective insolvency proceedings for non-bank lenders.
Creditors representing 99% of SIFL’s debt and nearly 90% of SIFL’s debt voted in favor of the collective resolution proposal.
Rajneesh Sharma, the RBI-appointed director for the two companies, is expected to file a petition with the National Company Law Tribunal (NCLT) to proceed with the group’s insolvency in the near future. After that, the NCLT’s decision on approving the group’s insolvency is expected within 30 days.
Previously, some lenders had indicated that they could approach NCLT for the group’s insolvency even if 51% voted in favor. Since such a resolution is not part of the Insolvency and Bankruptcy Code (IBC), the proposal does not need to meet the 66% criterion set by law. But since there was an overwhelming clear vote, the administrator can now approach the NCLT without any controversy.
The second meeting of the SIFL Creditors Committee (CoC) was called and conducted last week. During the meeting, the administrator briefed the CoC on the current status of the insolvency resolution process, the composition of the CoC based on the complaints received and deliberated on the resolution strategy, including resolution group and deadlines. In accordance with the provisional timelines shared in an internal presentation, they aim to complete the submission of the resolution plan approved by the CoC by May 27, 2022.
In India, collective insolvency has not been considered in the provisions of the IBC. It remains a practice adopted by creditors or resolution professionals (PRs) through the exercise of the powers of the NCLT and NCLAT on a case-by-case basis.
Sources say that a consolidated insolvency proceeding, or group insolvency if accepted by the NCLT, may generate more interest among potential bidders than individual firms. It will also allow the discovery of the real value of the assets stacked in different companies.
On the other hand, a few shareholders have reportedly written to the administrator asking him to remove SIFL from the IBC process. SIFL has no external debt, the consolidation (slump sale) having already been done in 2019. They claim that âonce SIFL is taken out of the IBC process, it will automatically unlock shareholder value. There is no logic in bringing SIFL to IBC and destroying value for all the shareholders â.
NCLT courts are known to be quite reluctant to allow collective insolvency. The Insolvency and Bankruptcy Board of India (IBBI) had formed a working group to assess the group’s insolvency. In September 2019, a framework was recommended to facilitate insolvency resolution and liquidation of group companies, but the same law has not yet been put into force.
Life of money spoke to a seasoned PR who, on condition of anonymity, said, âA large percentage of companies in India are part of a group structure. As a result, they are interconnected and structurally, financially and operationally interdependent. This requires an integrated view of their business while aiming to maximize value in the process of restructuring and relaunch or liquidation.
There are a few legal precedents with mixed results – half of them got NCLT approval while half did not.
1) Insolvency of the Videocon group (August 2019) NCLT Mumbai
The State Bank of India has filed for consolidation (on behalf of the creditors). The promoter argued the same
2) Insolvency of Lavasa Group (February 2020) NCLT Mumbai
A lead bank initiated the consolidation on behalf of a consortium of lenders representing 51% of CoC. The promoter did not oppose the merger request.
3) KSK Mahanandi Group Insolvency – Denied (February 2021) – NCLT Hyderabad
Consolidation initiated by a lead bank – for the consolidation of three group entities with interconnected operations. The NCLT refused formal consolidation due to lack of authority, but gave way to the parallel operation of the CIRP process on an informal basis. It is still pending on appeal to NCLAT.
4) Regen Infra and Regen Power – unauthorized (November 2021) – NCLT Chennai
Consolidation initiated by operational creditors. NCLT is not licensed, claiming that the capacity to consolidate may be outside of the powers of NCLT. The Regen Power CoC opposed the consolidation. NCLT viewed consolidation as unnecessary as assets could be sold individually and value could be maximized.
In the case of Srei, there are many assets for which SEFL and SIFL have granted loans where the assets and the borrower are common. In addition, SIFL holds a direct / indirect stake in nearly 33% of the gross loans of the consolidated portfolio of SEFL and SIFL.
The insolvency of the group would help streamline the process of recovering these common and interconnected assets. An investor may offer better resolution value for the group than individual companies because of the synergies generated by the group as a whole. Since 90% of lenders are common to SEFL and SIFL, the group’s insolvency process (if approved by the NCLT) could be a transparent resolution process.
Mr Sharma has so far admitted total claims of Rs 25,115.29 crore from commercial banks on SIFL and SEFL. It has also dismissed claims of roughly Rs1,605.61 crore by commercial banks, while rupee 596.59 crore is under verification as of November 30.
The three debenture trustees (who act on behalf of the holders of non-convertible debentures (NCDs)) – Axis Trustee Sevices Ltd, Catalyst Trusteeship Ltd and IDBI Trusteeship Services Ltd have collectively filed total claims of Rs5,141.06 crore, of which the Claims of Rs5,004.01 crore have been admitted while claims of Rs137.05 crore are currently being verified.
The RBI appointed a three-member advisory board R Subramaniakumar, former Managing Director and CEO, Indian Overseas Bank; T Srinivasaraghavan, former Managing Director, Sundaram Finance; and Farokh N Subedar, former COO and Company Secretary, Tata Sons also assists Mr. Sharma.
The forensic audit report of the two companies is expected to be released by the end of the month. Bankers say it is only after the report is released that they will decide whether to report their corporate exposure as “fraud.” It should be remembered that SIFL had appointed KPMG and DmKH & Co as auditors on the advice of the lending banks.
A special audit conducted by the RBI in December 2020 and January 2021 found a permanent renewal of loans, a negative (weighted) risk capital ratio (CRAR) and a default of more than Rs 10,000 crore to lenders.
Lenders had also expressed concerns about compliance with prudential standards, including revenue recognition, asset classification and provisioning, corporate governance and related party transactions.
Citing governance issues and the two NBFCs’ breaches of their various payment obligations, the RBI replaced their boards of directors in October and appointed Rajneesh Sharma, former chief executive of Bank of Baroda, as a director of the companies.
The story so far:
In July 2019, the board of directors of the two NBFCs approved the transfer of the lending, interest-generating and rental activities of SIFL as a going concern through a sale to the decline to SEFL in exchange for fully paid shares and SEFL became a wholly-owned subsidiary of SIFL.
This decision, which was said to have been approved by shareholders and some bankers, was made “in order to facilitate doing business, reduce overall costs, improve coordination with its clients, thus making it user-friendly”. SIFL and SEFL entered into a business transfer agreement (BTA) on August 16, 2019.
The majority of SEFL / SIFL lenders have not consented to the BTA and, as such, although the BTA has been enforced in the books of accounts by SEFL and SIFL, the latter has not had the approval of lenders.
In November 2020, bankers froze direct debits while taking control of the company’s cash flow and capping salaries.
Subsequently, in December 2020, SEFL filed a plan of arrangement with NCLT, Kolkata in which it specified that approval of the plan by a majority of creditors would amount to formal approval of the slump exchange under of the BTA as well as all outstanding loans. to the creditors as well as the sureties are formally recognized by the creditors in favor of SEFL. Most of SIFL’s secured financial creditors rejected the scheme and therefore the slump exchange under the BTA.
Life of money spoke to Hemant Kanoria, Founder and Former President, who said: âWe are committed to giving our full support to the RBI, to help them collect these dues so that the organization can continue to operate as the RBI. one of the leading infrastructure finance institutions in India. For more than three decades, we have treated our customers like our partners and worked with them to help them grow, especially in times of crisis. This is what has allowed us to stand out as the pioneer of infrastructure financing in the country. As the founder, I just want to make sure that the legacy continues and I will provide all the help to the authorities to ensure the rebirth of Srei â.
In one of his old interviews, Mr Kanoria was asked about the reasons for ‘putting all your eggs in one basket’ – an obvious understatement to refer to all of his businesses under the control of the Kanoria Foundation. In response, Mr. Kanoria underlined their philosophy of focusing on investments in long-term sustainable businesses serving humanity and infrastructure. He underlined: “The foundation essentially reinvests the dividends of these companies in its initiatives with social impact, such as schools for underprivileged children, the rehabilitation of victims of acid attacks and spirituality”.
So, as he stands at a crossroads today, is Mr. Kanoria ruining his chances? When asked, Mr. Kanoria, after a moment’s thought, replied: “I am 59 years old now and in accordance with the policy of our board of directors, I was to retire next year at 60. years. I guess retirement came a year earlier for me. “