It’s a fast and furious Reserve Bank of India (RBI).
I am talking about the way the banking regulator is pushing for bankruptcy proceedings for two Kolkata-based non-banking financial companies — Srei Infrastructure Finance Ltd (SIFL) and Srei Equipment Finance Ltd (SEFL).
On October 4, it superseded the boards of both the companies on concerns over the quality of governance and inability to service debt. It also appointed a former senior banker as an administrator and a three-member advisory committee to oversee the insolvency proceedings.
“Shocked” by the RBI move, the promoters of the companies announced taking all “necessary” steps, as advised by their lawyers.
It was indeed a logical reaction. After all, the non-banking conglomerate is “a holistic infrastructure institution, constantly and consistently ideating to deliver innovative solutions in infrastructure space”. (Look at its Twitter handle.)
October 6, the Srei group moved the Bombay High Court, seeking stay on any insolvency proceedings.
Once the high court dismissed the plea, the banking regulator swiftly moved the National Company Law Tribunal’s Kolkata bench for initiating a corporate insolvency resolution process. The bench admitted it instantly.
Finally, on October12, the auditor of the two companies was barred from undertaking audits in any regulated entities for two years from April 2022.
Controversy is not new to this group.
Sometime in 2011, Viom Networks, a telecom tower company partly owned by the Tatas and the Kanoria family, the promoter of Srei, hired consulting firm KPMG to probe alleged misappropriation of funds by the Kanorias and the chief executive. The forensic probe followed charges that the Kanorias and the CEO colluded for personal benefits, causing losses to other shareholders, ET NOW had reported, quoting two people familiar with the development. As part of its whistleblower policy, the group appointed KPMG to assess the alleged irregularities.
Yet another whistleblower in December 2018 alleged that Srei had restructured loans to prevent them from becoming non-performing assets (NPAs). “(The) company regularly restructured bad loans to escape NPA/launder money through the hawala route. RBI guidelines are systematically bypassed…” said the letter, sent to additional commissioner, CGST, with copies to the RBI and the Serious Fraud Investigation Office.
The whistleblower letter wanted the authorities to conduct a forensic audit, to prevent Srei from becoming the next Infrastructure Leasing & Financial Services (IL&FS), which crumbled in 2018 under misgovernance and a ~94,000-crore debt burden. Srei is just one-third of IL&FS in size. As on June 30, the two companies had little over ~32,000 crore exposure to banks and financial institutions.
KMPG returned to the group again in April this year to conduct a forensic audit as part of its proposed debt realignment, for which Srei had been in talks with the lenders.
As reported by Business Standard last week, the boards of both the companies in July 2019 approved the transfer of lending, lease and interest earning business of the infrastructure finance company by way of slump sale to the equipment finance company. But the lenders to the group did not give the go-ahead.
Slump sale is a way of transferring a business, division or a company wherein its assets and liabilities are transferred for a lump sum consideration, without assigning values to individual assets and liabilities.
After the slump sale, the size of the balance sheet of the infrastructure finance company shrank from ~18,134 crore in financial year (FY) 2018 to ~15,577.94 crore FY 2019 and finally ~3,860.62 crore in FY 2020. In the corresponding period, the equipment finance company’s balance sheet got bigger — from ~24,805 to ~26,607.32 crore and ~37,038.74 crore.
That’s fine but what worried the regulator was the slump in capital. An infrastructure finance company needs to have at least ~300 crore capital and 15 per cent capital adequacy ratio (CAR). SIFL’s capital was just ~127 crore in FY 2019 which rose to ~153 crore by FY 2020; the CAR, which was just 0.94 per cent in FY 2010, rose to 8.86 per cent in FY 2020. The gross NPAs, which were close to 40 per cent of its assets in FY 2018, dropped to close to 30 per cent by FY 2019. I don’t have the figure for March 2020.
Meanwhile, SEFL’s gross NPAs, which had been a shed less than 11 per cent in FY 2018, zoomed close to 36 per cent by FY 2020 even as the CAR dropped from close to 14 per cent to -3.4 per cent as the promoters’ net owned fund or equity was completely wiped out (from ~2,044 crore in FY 2018 to – ~1,013 crore by FY 2020).
The Kanoria brothers — Hemant and Sunil — had been on the board of both the companies. At any given point of time, either of them had been part of all critical board committees, instrumental in taking all lending decisions. Some of the borrowers had raised money from the two companies disproportionately higher than what their balance sheets could justify, both in terms of size and strength. There are also borrowers who had been given a decade-long moratorium at just 1 per cent return on investment annually while the accrued interest, 11-12 per cent, would be paid after the moratorium.
Finally, almost one-third of the lending by their two companies had been to the so-called related/connected parties and group entities, given a burial to any arm’s length principle in lending.
That’s not all. The practice of so-called evergreening was rampant. Many NPAs were closed by giving fresh loans either to group entities of the borrowers or some other accounts but the money flowed into accounts of the defaulters — a classic evergreening practice through round tripping of funds among group companies.
It seems that the RBI had very little choice as the promoters did not bring in fresh capital, make adequate provisioning and improve corporate governance despite being told to do so by the regulator. The proverbial last straw on the camel’s back was the statutory auditor’s report on consolidated financial results for FY 2021, which found erosion in net worth, inability to comply with various regulatory ratios and doubted the companies’ ability to continue as a “going concern” in the foreseeable future.
Incidentally, a few years back, BNP Paribas Lease Group announced exiting its equipment financing business joint venture with SIFL at a significant loss after almost seven years of signing up. In a complex deal, SIFL acquired back 50 per cent stake of BNP Paribas in their joint venture — SEFL. In lieu of that, BNP got just 5 per cent stake in SIFL, making huge losses for its initial investment of ~775 crore. Why did this happen?
In June 2013, British Indian businessman Sanjeev Kanoria, the third Kanoria brother, acquired the domestic banking unit of Austrian bank Hypo Alpe Adria for around $85.5 million. “New products, additional markets and fostering the core region are the aims of our engagement,” Sanjeev, a doctor, had said in a statement while buying the bank, adding that Srei would provide “financial expertise” to the business.
Sanjeev is vice-chairman of the bank and Hemant is a director on its board.
