In a move that has surprised corporate watchers, State Bank of India (SBI) will take a dual role in the debt restructuring of defaulter Supreme Infrastructure India Ltd (SIIL). This development marks an unprecedented step in India's corporate debt resolution landscape, as the country's largest public sector bank (PSB) transitions from being SIIL's primary creditor to becoming an equity stakeholder.
SBI has been SIIL's largest lender, with the infrastructure company defaulting on a substantial Rs1,023.42 crore of SBI loans.
Now, in a surprising turn of events, SBI is poised to invest Rs24.33 crore in SIIL's preferential allotment, acquiring 28,55,771 shares at Rs85.23 per share. This investment will give SBI approximately a 2.49% stake in the restructured company. The move represents a shift from being a creditor facing a substantial write-off to becoming an equity participant in SIIL's potential recovery.
Source: Company announcements
SBI's decision to take an equity stake in a company that has defaulted on its loans is an extraordinary development in Indian banking history. This move raises several critical issues. Its eagerness to invest equity in a company that has already defaulted on over Rs1,000 crore of its loans suggests a strange risk assessment process. The Bank appears to be betting on SIIL's long-term recovery potential. As a PSB, its decision to use public funds to take an equity position in a distressed company may face scrutiny. The Bank will need to justify this investment strategy to its shareholders and regulatory bodies. SBI's dual role as a creditor and shareholder could potentially lead to conflicts of interest in future decision-making processes regarding SIIL.
On 8 July 2024, it was reported that SIIL filed a plea with the national company law tribunal (NCLT) seeking approval for a new resolution plan to settle its debts with financial creditors within a 90-day timeframe. Following the creditors' meeting, SIIL’s outstanding debt to financial creditors has been dramatically reduced from Rs2,200.36 crore to Rs464 crore as the settlement amount. Its 'composite scheme of compromise and arrangement' received overwhelming support, with 92% of financial creditors voting in favour. This scheme was initially approved by the company's board of directors in 2022. The company is now awaiting final approval from NCLT to proceed with the restructuring plan. Post-NCLT clearance, the company plans to implement the resolution by monetising company and promoters' assets, raising equity from existing or new investors and utilising promoters' contributions to finance the settlement amount. It aims to achieve debt-free status by the end of September 2024. Vikram Sharma, managing director of SIIL, expressed gratitude to the company's partners and creditors for their trust and support. He stated, "With a strong restructured resolution plan, we are confident about obtaining NCLT clearance and achieving a debt-free status for Supreme Infrastructure by the end of September 2024.”
The company's total bank outstanding stood at Rs7,093 crore, including Rs2,200 crore in principal debt and Rs4,893 crore in funded interest term loans and unapplied interest. The settlement amount of Rs464 crore represents a substantial haircut of 93.45% for the lenders. The rationale behind such a significant write-off and its long-term implications for the banking sector and other corporate defaulters remain unclear.
Its annual report received a qualified opinion from auditors in FY22-23, highlighting issues with loan confirmations and interest accruals. The auditor report also highlighted that SIIL has not recognized financial liability for Rs1,533 crore in corporate guarantees given to its subsidiaries and group companies. This significant off-balance-sheet risk could potentially undermine the effectiveness of the current restructuring plan.
SIIL is issuing up to 8,80,44,460 equity shares at Rs85.23 per share, along with 1,78,63,430 convertible warrants. This preferential allotment aims to raise approximately Rs750.40 crore.
The issuance of 1,78,63,430 convertible warrants adds another layer of complexity to this restructuring. These warrants, primarily allocated to promoters and select investors, have the potential to significantly alter SIIL's ownership structure in the future. The warrant structure, which requires only 25% payment upfront with the remaining 75% due within 18 months, provides these select investors a low-risk option to increase their stake if the company's performance improves. This structure could be seen as a backdoor for further promoter control, potentially at the expense of existing minority shareholders.
According to an insolvency expert the table below shows that SIIL was insolvent and defaulting to banks at least since FY-2016 as is evident from the table below:
According to the insolvency expert an analysis of SIIL's financial history reveals a troubling pattern of insolvency that dates back to at least FY15-16. Despite clear signs of financial distress, there is no evidence that banks, including SBI, ever initiated insolvency proceedings under the Insolvency and Bankruptcy Code (IBC). Instead, it was an operational creditor, Vikas Shuttering Store Private Limited, that finally dragged SIIL into insolvency proceedings in November 2018 for accumulated defaults of merely Rs. 14.26 crore. This action, taken for a relatively small amount compared to the company's total debt, highlights the apparent reluctance of major financial institutions to take decisive action. The Corporate Insolvency Resolution Process (CIRP) order was passed on September 30, 2019, followed by a disputed mutual settlement for Rs9.50 crore. The outcome of this settlement remains unclear, further underscoring the opacity surrounding SIIL's financial dealings.
According to the insolvency expert given SIIL's precarious financial condition according to the insolvency expert it was logical to expect a standard CIRP with the promoters being ineligible under Section 29A of the IBC. However, it appears that the promoters reached a settlement with the lenders under Section 12A of the IBC. While such settlements can include asset and financial restructuring, including debt-to-equity conversion, the terms of this particular deal raise serious concerns.
The insolvency expert also highlighted that the decision by SBI to subscribe to SIIL's fresh equity at a premium is particularly alarming. Typically, in such restructuring scenarios, lenders are expected to recover their debt while leaving minimal equity value for the promoters. SBI's investment in equity at a premium suggests that the bank may have written off an excessive amount of debt, inadvertently leaving substantial value for the very promoters responsible for the company's financial troubles.
According to the insolvency expert this arrangement between SBI and SIIL creates a dangerous precedent in India's corporate debt landscape. It potentially encourages other defaulting companies to seek similar deals, where they can retain control and value even after significant defaults. Moreover, it raises questions about the effectiveness of India's insolvency resolution framework and the role of public sector banks in managing distressed assets. The situation bears hallmarks of what some experts are terming a "financial Stockholm syndrome," where the lender (SBI) appears to be aligning itself with the interests of the defaulting borrower (SIIL) rather than prioritizing the recovery of public funds. The unusual nature of this debt restructuring and equity investment calls for immediate regulatory scrutiny. The Reserve Bank of India (RBI) needs to step in and examine SBI's decision-making process in this matter. There is a pressing need to ensure that public sector banks maintain strict discipline in their approach to debt resolution and avoid creating moral hazards in the financial system.
This is a watershed moment in Indian corporate debt resolution. This move blurs the traditional lines between lenders and equity-holders, potentially opening up new questionable avenues for dealing with distressed assets.
Waah !!
Now its stock is riding high in the market!
Not unique to India, happened to Hertz,etc in the U S.
Baalkee
When they lend to retailers, they practically make the borrower run from pillar to post before sanctioning the loan.
For small delay they charge sever penalty interest etc. in addition to late fee.
For big borrowers the lender practically bends backwards to lend.
On default, forgive and forget by huge haircut; and again want to lend to the same thief. What an irony. What supervisory team of the RBI doing. What the court is doing? Someone must go to SC with a PIL for misusing, rather, wasting or sabotaging public money.
It seems SIIL got lot of potential that even the promoters do know (???).
With such precarious operating and financial condition, it was logical to expect CIRP of SIIL with the promoters being ineligible u/s 29A. It seems that the promoters reached settlement with the lenders u/s 12A. Such settlement can encompass asset and financial restructuring in which the banks can convert a part of the debt into equity. Even in such case, the equity is supposed to have value. But subscription to SIIL’s fresh equity at premium by SBI is shocking simply because one would expect lenders to leave a minimum value for the equity for the promoters after recovery of debt and leave them to create value afresh. SBI’s investment in equity at a premium indicates that the SBI sacrificed too much by writing off large debt, and as a result, left too much value for the errant promoters and is now seeking to garner return on equity invested at premium. This reflects an undesirable financial Stockholm syndrome and creates a bad precedence. It is time the RBI stepped in and disciplined SBI