Informist, Friday, Oct 8, 2021

--Sources: Srei companies had negative to very low net owned funds

--Promoter family influenced lending calls at Srei companies

--One-third of Srei loans to related parties, group companies

--Audits showed Srei group was evergreening loans

By T. Bijoy Idicheriah and Alekh Archana

MUMBAI - The Reserve Bank of India decided to supersede the boards of Srei Infrastructure Finance and its subsidiary Srei Equipment Finance after its supervisory audits detected widespread evergreening of loans and related-party lending, two sources aware of the matters said.

The central bank, which superseded the boards of the Srei group companies on Monday, moved the National Company Law Tribunal today to start insolvency proceedings against the two lenders. The petition was admitted by the Kolkata bench of the tribunal.

The supervisory audits and audits commissioned by lenders found that almost one-third of the loans advanced by the two companies were to group companies or entities associated with the promoter family--Kanorias.

The promoter family held key positions in credit, audit, investment and risk committees of the two companies and influenced decision-making, a source from the banking industry said.

In some cases, loans were given to borrowers whose balance sheets were completely disproportionate to the size of the loans, the source said.

"These loans were given despite weak financials being apparent on books of the borrowers," the source added.

Many of these loans were linked to entities that were associated with the promoter family, and given at extremely favourable terms, the source said. In some term loans, the rate of interest payable was just 1% with accrued interest of 11-12% kicking in only after 10-12 years.

Such long moratorium on loans adversely affected the liquidity position of both the companies, as payments even on these were postponed and pushed down further by evergreening of loans.

Evergreening of loans refers to a practice used by lenders to prevent loans from slipping into non-performing asset category, by providing fresh loans that are used to repay past dues.

Srei Infrastructure gave fresh loans to many existing stressed accounts, by lending in new names.

The funds eventually were used to pay back existing loans, thus keeping the accounts standard on the books, another source said.

The company round-tripped funds through misuse of internal accounts or even accounting on books unrealised cheques that had been received but weren't deposited for long periods, the second source said.

These issues were raised by the RBI with the promoters and management group in its annual supervisory meetings and in specific meetings held to discuss the issues, the source said.

The RBI had identified certain parties as probable related companies as part of its inspection and risk assessment report for 2019-20 (Apr-Mar). The total exposure to these borrowers was 85.8 bln rupees as on Mar 31.

The central bank followed these meetings with letters asking the companies to increase provisions to cover the divergences in stressed assets. The regulator also asked promoters to bring in capital and improve corporate governance, the source said.

The central bank said these rectifications were imperative if the Srei group wanted to retain the infrastructure finance company status, sources said.

One of the issues flagged by the RBI was transfer of assets of Srei Infrastructure on slump sale basis to Srei Equipment in lieu of equity shares of the former, they added.

The arrangement, effective from October 2019, meant that Srei Infrastructure's book had reduced to a quarter by March 2020 from 155.8 bln rupees a year ago. At the same time, Srei Equipment's book rose nearly 40% on year to 370.4 bln rupees as on Mar 31.

As on Mar 31, Srei Infrastructure's net loans, which included term loans, leasings, inter-corporate deposits and letters of credit, fell to 215 bln rupees from 288 bln rupees a year ago.

The arrangement went ahead despite not receiving no-objection certificate from most of the lenders as is mandated, the first source said.

This led to erosion of net worth of Srei Equipment at the cost of Srei Infrastructure even though the latter's capital and net owned funds were also below regulatory requirements, the source said.

Srei Infrastructure reported a consolidated net loss of 73.4 bln rupees for 2020-21 (Apr-Mar), eroding its net worth.

Forensic audit, initiated by the lenders, will determine how much of dues of Srei group can be recovered.

Srei group owes around 300 bln rupees to creditors, of which the share of banks is about 200 bln rupees and rest includes non-convertible debentures and external commercial borrowings.

The RBI action came after the consortium of lenders led by UCO Bank approached the regulator seeking a Dewan Housing Finance-style resolution.

Today on the National Stock Exchange, shares of Srei Infrastructure ended nearly 5% lower at 7.10 rupees.  End

Edited by Ashish Shirke

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