Srei Creditors Vote In Favour of Group Resolution
Moneylife Digital Team 08 December 2021
Creditors of the twin beleaguered non-banking finance companies (NBFCs) Srei Infrastructure Finance Ltd (SIFL), and Srei Equipment Finance Ltd (SEFL) have overwhelmingly voted in favour of group insolvency proceedings for the non-bank lenders. 
Creditors representing 99% of SIFL’s debt and nearly 90% of SIFL’s debt have voted in favour of the proposal for a group resolution. 
Rajneesh Sharma, the RBI-appointed administrator for both companies, is expected to file a petition with the National Company Law Tribunal (NCLT) to proceed with the group insolvency soon. After that, the NCLT decision on approval of group insolvency is expected within 30 days. 
Earlier, some lenders had indicated that they could approach the NCLT for group insolvency even if 51% voted in favour. Since such a resolution is not part of the Insolvency and Bankruptcy Code (IBC), the proposal does not need to meet the 66% benchmark set under the law. But since there has been a clear landslide vote, the administrator can now approach the NCLT without any controversy. 
The second meeting of the committee of creditors (CoC) of  SIFL was convened and conducted last week. At the meeting, the administrator apprised the CoC of the current status of the insolvency resolution process, the CoC’s composition based on the claims received and deliberated on the resolution strategy — including group resolution and timelines. As per the tentative timelines shared in an internal presentation, they aim to complete the submission of the CoC-approved resolution plan by 27 May 2022.
In India, group insolvency has not been contemplated in the IBC provisions. It remains a practice adopted by the creditors or resolution professionals (RPs) through the exercise of the powers of the NCLT and NCLAT on a case-by-case basis.
Sources say a consolidated insolvency proceeding or group insolvency if accepted by the NCLT, may garner more interest among potential bidders than individual companies. It will also allow the discovery of the actual value of assets stacked in different companies.
On the other hand, a few shareholders are understood to have written to the administrator requesting to remove SIFL from the IBC process. SIFL has no external debt, as the consolidation (slump sale) was already done in 2019. They claim that “once SIFL is removed from the IBC process, it will automatically unlock shareholder value. There is no logic whatsoever to take SIFL to IBC and destroy value for all shareholders”. 
NCLT courts are known to be quite wary of allowing group insolvency. The Insolvency and Bankruptcy Board of India (IBBI) had constituted a working group to evaluate group insolvency. In September 2019,  a framework has been recommended to facilitate insolvency resolution and liquidation of companies in a group but the same is yet to brought into force as law. 
Moneylife spoke to a seasoned RP who, on condition of anonymity, said, “A 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 necessitates an integrated view of their business while aiming to achieve value maximisation in the process of restructuring and revival or liquidation.”
There are a few legal precedents with mixed results- half of them got NCLT approval while half didn’t. 
1)  Videocon Group Insolvency (August 2019) NCLT Mumbai
The State Bank of India filed application for consolidation (on behalf of creditors). Promoter supported the same
2) Lavasa Group Insolvency (February 2020) NCLT Mumbai
A lead bank initiated consolidation on behalf of a lender consortium representing 51% of CoC. Promoter did not object to the consolidation application. 
3) KSK Mahanadi Group Insolvency - disallowed (February 2021)  - NCLT Hyderabad
Consolidation initiated by a lead bank - for consolidation of three group entities with interconnected operations. NCLT disallowed formal consolidation on the grounds of lack of powers but left room for the parallel running of the CIRP process informally. It is still pending in appeal before NCLAT. 
4) Regen Infra and Regen Power - disallowed (November 2021) - NCLT Chennai
Consolidation initiated by operational creditors. NCLT disallowed saying the ability to consolidate may not be within the powers of NCLT. CoC of Regen Power opposed consolidation. NCLT viewed consolidation as unnecessary as assets could be sold individually and value could be maximised.
In the Srei case, there are many assets where both SEFL and SIFL have extended loans where assets and the borrower are common. Further, SIFL has a direct/ indirect holding in almost 33% of the gross loans of the consolidated book of SEFL and SIFL. 
Group insolvency would help streamline the recovery process from such common and interlinked assets. An investor may bid a better resolution value for the group than the individual companies due to synergies accruing from the group as a whole. Since 90% of the lenders are common to SEFL and SIFL, the group insolvency process (if approved by NCLT) could be a seamless resolution process. 
Mr Sharma has so far admitted total claims of Rs25,115.29 crore of commercial banks’ on SIFL and SEFL.  He has also rejected claims of around Rs1,605.61 crore by the commercial banks, while Rs596.59 crore is under verification as of 30th November. 
The three debenture trustees (who act on behalf of the non-convertible debenture (NCD)  holders) - Axis Trustee Sevices Ltd, Catalyst Trusteeship Ltd and IDBI Trusteeship Services Ltd have collectively filed total claims of Rs5,141.06 crore, out of which claims of Rs5,004.01 crore have been admitted while claims of Rs137.05 crore are currently being verified. 
The RBI appointed three-member advisory committee comprising R Subramaniakumar, former MD & CEO, Indian Overseas Bank; T Srinivasaraghavan, former MD, Sundaram Finance; and Farokh N Subedar, former COO and company secretary, Tata Sons is also assisting Mr Sharma. 
Both companies’ long-pending forensic audit report  is expected to come out by the end of this month. Bankers say that only after the report is out will they decide whether to report their exposure to the companies as “fraud”. It may be recalled that SIFL had appointed KPMG  and DmKH & Co as forensic auditors on the advice of the lending banks.
A special audit conducted by the RBI in December 2020 and January 2021 revealed evergreening of loans, negative capital-to-risk (weighted) assets ratio (CRAR) and default in payments of over Rs10,000 crore to lenders.
Lenders also had expressed concerns over adherence to prudential norms, including income recognition, asset classification and provisioning, corporate governance and related party transactions. 
Citing governance concerns and defaults by the two NBFCs in meeting their various payment obligations, the RBI, in October, superseded their boards and appointed Rajneesh Sharma, former chief general manager of Bank of Baroda, as the administrator of the companies. 
The story so far:
In July 2019, the board of  directors of  the two NBFCs had approved the transfer of lending business, interest earning business and lease business of SIFL as a going concern through a slump sale to SEFL in exchange of fully paid up equity shares and SEFL became a wholly owned subsidiary of SIFL.
The move which was reportedly approved by shareholders and some bankers was done “in order to facilitate further business, reduce overall costs, improve coordination with its customers, thus making it investor friendly”. SIFL and SEFL then entered into a business transfer agreement (BTA) on 16 August 2019.
Majority of the lenders of SEFL/ SIFL did not consent to the BTA, and, as such, although the BTA was given effect in the books of accounts by SEFL and SIFL, the same did not have the approval of the lenders. 
In November 2020, the bankers put a freeze on debits while taking control of the company’s cash flows and capping salaries. 
Subsequently, in December 2020, SEFL filed a scheme of arrangement with NCLT, Kolkata wherein it specified that the approval of the scheme by majority of the creditors would amount to a formal approval of the slump exchange under the BTA as well and all the loans outstanding to the creditors together with the securities shall stand formally notated by the creditors in favour of SEFL. Most of the secured financial creditors of SIFL rejected the scheme and therefore the slump exchange under the BTA.
Moneylife spoke to Hemant Kanoria, founder and former chairman, Srei, who said  “We are committed to providing any and all support to the RBI, in order to help them recover these dues so that the organisation can continue functioning as one of India’s leading infrastructure finance institutions. For over three decades, we have treated our customers like our partners, and worked with them to help them grow, specially during times of crisis. This is what helped us stand out as the pioneer of infrastructure financing in the country. As a founder, I only want to ensure that the legacy continues and I will provide all the help to the authorities to ensure the revival of Srei”.
In one of his old interviews, Mr Kanoria was asked about the reasons “for putting all his eggs in one basket” --an obvious euphemism for holding all his businesses under the Kanoria Foundation. In response, Mr Kanoria had highlighted their ethos to focus on investments in long term sustainable businesses that serve humanity and infrastructure. He had pointed out, “The foundation essentially ploughs back the dividends from these businesses into its social impact initiatives, such as the schools for underprivileged children, rehabilitation of acid attack victims and spirituality”.  
So, as he stands at crossroads today, is Mr Kanoria ruing his chances? When asked, Mr Kanoria, after a moment’s reflection, replied, “I am 59 now and as per our board policy, I was to retire next year when I turn 60. I guess retirement has come a year early for me.”
5 months ago
Will NCD Holders esp Sr Czn, Pensioners & Small Investors get back their blood & sweat money entrusted to SEFL. Kanorias has no moral right to talk of humanity otherwise Srei Gp would have atleast returned their principal amount. There is more than COVID constraints & NCLT shelter. Will Trustees ensure NCD Holders will get back their due & if yes, then when. Have SREI Gp purchased Electoral Bonds.
5 months ago
i hope it does not go similar to dhfl way since the trusteeship coc are same
5 months ago
Will the shares and shareholders of SREI meet the same fate as DHFL?
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