Firms forcibly dragged into bankruptcy proceedings: SREI founder Hemant Kanoria

In 2021, the Reserve Bank of India (RBI) superseded the boards of two infrastructure finance companies of the SREI group: SREI Infrastructure Finance Ltd (SIFL) and its wholly owned subsidiary, SREI Equipment Finance Ltd (SEFL).

The central bank’s action came after the two companies were unable to repay creditors, with due mounting to Rs 32,000 crore (along with interest). The RBI had, at that time, also appointed an administrator. Earlier this year, the Committee of Creditors (CoC) of the two distressed firms, appointed to oversee the resolution of their corporate insolvency, approved the resolution plan submitted by National Asset Reconstruction Company Ltd (NARCL).

NARCL is an asset reconstruction company backed by the government. The proposed transaction by NARCL involves the acquisition of a majority of stake in SREI Infrastructure Finance.

Also read: Banks set to classify ₹35K Cr loans to SREI as NPA

In a freewheeling interview with The Federal, Hemant Kanoria, founder of SREI Infrastructure Finance, said the contractual receivables of the two companies had been far in excess of the dues to creditors and that the companies were “forcibly” dragged into bankruptcy proceedings. He also questioned the NARCL takeover, saying it is owned by the same bankers who are part of the CoC and this constitutes a clear “conflict of interest”. Also, the true value of the business will not be unlocked. Edited excerpts from the interview:

Why did SREI Infrastructure Finance and SREI Equipment Finance default on debt repayment? Please provide details. How long was the delay?

SREI companies were specialised financial institutions lending to the infrastructure sector primarily through equipment financing, infrastructure loans, structured finance etc. which entail special skill sets. During COVID, the RBI came out with a circular to provide a moratorium to the borrowers. However, SREI was not entitled to the same, which led to a cash flow mismatch. We had offered the bankers a full repayment schedule (including principal and interest) through the NCLT (National Company Law Tribunal) back in October 2020, even before any default on payment. However, they immediately rejected the same, citing no reasons for the rejection, and took control of the cash flows of the company.

On the date of the appointment of the administrator, SIFL did not have any debt and SEFL had no default. This important aspect has been repeatedly overlooked till date. Despite this, the RBI decided to supersede the board of SIFL and SEFL on October 4, 2021 and put it under bankruptcy on October 8, 2021. The matter is now being challenged in court —  on the grounds that the company (SIFL) which has no debt could not have been admitted for bankruptcy. In SEFL also, the matter is with NCLT pending hearing and adjudication, as there was no default. Moreover, under section 10A of the IBC Act, during COVID a company could not be taken into IBC within the suspension regime.

How much did each company owe lenders? Since when was this amount unpaid and who were the lenders?

The total claims, till the company was forcibly dragged into bankruptcy, that were filed by the various creditors were about Rs 32,000 crore (including interest) while the total contractual receivables were around Rs 54,000 crore. Therefore, there would have been a surplus. The numbers, as we learn, have significantly eroded. Since bankruptcy in the last 18 months, the companies have been run to the ground. Legal cases have been rampantly filed against borrowers on the grounds that they have been given long-term loans which are fraudulent. 

If the lender fights with all borrowers, why will the borrowers pay back their loans? The entire company has been ransacked. Almost Rs 20 crore have been paid by way of legal charges, consultancy fees, administrator’s charges etc. The company is being unfortunately ruined.

Under what provisions did the RBI supersede the boards of both companies and then file for Corporate Insolvency Resolution Process?

The RBI superseded the board of the companies under Section 45 IE of the RBI Act, despite the fact that we got reputed international investors (pending RBI’s fit and proper). Instead of choosing the investors to revive the company, the RBI chose to supersede the board and file for bankruptcy, which was an unnecessary step and has led to the complete destruction and value erosion of the company.

Did the SREI promoters raise any objections to RBI’s action? If yes, on what basis?

Yes, the SREI promoters did appeal to the RBI and the government against the myopic and ill-conceived action initiated by RBI that has negatively impacted an important business enterprise vital to the growth of infrastructure financing in India.

NARCL has won the bid for reviving both the businesses. Why are the promoters now questioning this resolution plan?

First, NARCL is owned by the same bankers who are part of the SREI CoC (debtors’ panel) – a clear conflict of interest. Second, NARCL is acquiring SREI under a proprietary bidding mechanism that has failed to unlock its true value. As a result, NARCL is getting the company for free by using cash of Rs 3,000 crore in the system as upfront payment and forcing major haircuts to creditors.

What are your views on the Insolvency and Bankruptcy Code, its efficacy in providing lenders some recovery in the case of stressed businesses and its success rate so far?

The IBC is a well conceptualised and strategic initiative of the government. However, the bankers have misused the IBC process and caused grave destruction to businesses in due course. They have deliberately restricted its application to mere recovery through a garage sale and have not made efforts towards a resolution, which may include revival or restructuring or rejuvenation. This needs to change immediately. Instead of providing proper assistance to the company at the right time, they find it easy to push it into bankruptcy, destroy the value, generate deep haircuts to facilitate a new buyout at a distress price thereby causing loss to all the stakeholders including creditors, shareholders, promotors, employees, vendors, exchequers, customers and the public at large in the process.

The analogy would be that while IBC proposes a person having fever to be admitted to a hospital and be cured through medication, the administrator/bankers instead take it to the butcher’s shop where his hands and feet are amputated and sold in parts. You got some money through this sale, but you have killed the person in the process. 

The judiciary at NCLT may need to take cognisance of this misuse of the process by the bankers and provide recovery and rejuvenation of the companies, not destruction. Many companies have specialised businesses which the Resolution Professionals do not understand and end up destroying. SREI is a classic example. A great alternative is a public interest board for large ticket resolutions that have proved more reliable and a relatively better option.