At the first meeting of the committee of creditors (CoC) which took place on 2nd November, the Reserve Bank of India (RBI)-appointed administrator, Rajneesh Sharma, apprised the lenders about the status of the two crisis-ridden Srei companies’ corporate insolvency resolution process, as per regulatory filings.
Lenders of Srei Infrastructure Finance Ltd (SIFL) and Srei Equipment Finance Ltd (SEFL) have started voting on the four resolutions put forth by administrator to undertake a group insolvency resolution process for both companies. The voting started on 5th November and will end on 9th November.
Interestingly, the e-voting facility was set up only on 6th November although voting was supposed to have started on 5th November.
On 8th November late evening, after this article was published, the voting timeline was subsequently extended to 10th November. Axis Trustee Services sent a fresh email to NCD investors with the updated voting timelines.
Separately, Catalyst Trusteeship also shared the new voting timelines with NCD investors.
On 10th November, just before midnight, Axis Trustee Services sent another email to investors that the voting has been extended yet again to 17th November.
In the CoC meeting on 2nd November
, Mr Sharma informed lenders that BDO India was appointed to conduct transaction audits of both companies while AZB & Partners would be the legal counsel for the administrator.
Last month, AZB had represented the RBI as its legal counsel when Srei's promoter company, Adisri Commercial, filed a writ petition at the Bombay High Court (HC) seeking a stay on the regulator's move to supersede the boards of both bankrupt companies. The HC dismissed the petition.
The administrator is said to be considering a group insolvency (joint resolution) approach for both Srei companies. Only if more than 66% of lenders of each company vote for group insolvency, the administrator will need to make an application before the Kolkata bench of the National Company Law Tribunal (NCLT) to implement it.
EY has been appointed as the financial advisor of the administrator, while Shardul Amarchand Mangaldas & Co is the legal counsel for the financial creditors.
In a regulatory filing last week, SIFL announced, "We wish to inform you that the 1st (first) meeting of the Committee of Creditors of the company was duly convened and conducted on Tuesday, 2nd November, 2021 at 11:00 AM in Kolkata.” Separately, SEFL said in its regulatory filing that the first meeting of the committee of creditors of the company was convened on Tuesday at 2pm.
"At the aforesaid meeting, the administrator of the company apprised the Committee of Creditors about the status of CIRP since the initiation, composition of committee of creditors based on the claims received, various aspects relating to the CIRP, going concern operations of the company and the way forward in terms of the activities/milestones as stipulated under the code," both firms said in similarly worded respective regulatory filings.
The first resolution put up for voting seeks the approval for the CIRP (corporate insolvency resolution process) costs incurred/to be incurred by the administrator during the CIRP period for managing the operations of the company and carrying out the various activities as per IBC, 2016. The details are as per given above.
The monthly remuneration for the administrator is Rs4,50,000 along with car and accommodation facilities while an additional Rs1,75,000 per month will be paid to each of the three members of the advisory committee along with a monthly allowance of Rs25,000 each.
The resolution detail adds that “Further keeping in mind the request made by the CoC members along with the administrator, the fees for process advisors have been reduced by approximately 18% from the initial quote.”
The cost for appointment of independent valuers has been taken based on the two lowest quotes received. However, the evaluation for appointment of the valuers is still under process.
The second resolution seeks approval for following related-party transaction which are in the ordinary course of business as required per the provisions of Section 28(f) of the Insolvency and Bankruptcy Code, 2016 (“IBC 2016”). The details are as given below.
The third resolution seeks approval “for appointing J Kala & Associates Chartered Accountants, partnership firm, having Firm Registration No. 118769W allotted by The Institute of Chartered Accountants of India (ICAI) be hereby appointed as the Joint Statutory Auditors of the Company, in addition to the existing Statutory Auditors of the Company i.e. Haribhakti& Co. LLP., Chartered Accountants, to hold office w.e.f. October 29, 2021 till the conclusion of the 16th Annual General Meeting of the Company to be held in the Calendar year 2022.”
The fourth resolution seeks approval “for reducing the notice period for calling the meeting of Committee of Creditor from 5 days to 2 days as per Regulation 19 of CIRP Regulations.”
On 4th October, the RBI had superseded the boards of both Srei companies
(SIFL and SEFL) and appointed Rajneesh Sharma as the administrator of the two crisis-ridden firms. RBI had followed this by appointing a three-member advisory committee to assist Sharma in the CIRP of the two bankrupt firms.
On 8th October, the banking regulator had filed applications for initiation of CIRP against SIFL and SEFL at the Kolkata bench of the National Company Law Tribunal (NCLT).
Some lenders had earlier raised questions on the feasibility of the administrator taking control over the cash of subsidiaries since they are run by different boards and also because they may have different lenders. Lenders had even expressed fears that this could lead to litigation and further delay resolution. One of the suggestions by lenders was to appoint a director on the boards of the subsidiaries of Srei Infrastructure and Srei Equipment to monitor their operations.
For instance, Bharat Road Network, a subsidiary of Srei Equipment, has seven special purpose vehicles (SPVs) for strengthening expressways, of which two SPVs have been sold but lenders can access the revenues of the remaining ones. Srei also has a business interest in the energy and hospitality sector, so lenders may be able to access cash flows of these units as well.
Mr Sharma had also sought lenders' consent to propose a resolution in the first CoC on appointing Ernst & Young (EY) as financial advisor to the administrator. Two banks (lenders) are said to have earlier raised objections to this citing conflict of interest. It might be recalled that before being admitted for the corporate insolvency and resolution process, EY was advising Srei's promoters on debt restructuring
and the proposed fund-raising exercise.
In one of the initial meetings, the RBI-appointed administrator had also discussed the possibility of restarting the lending business of both the Srei companies.
KPMG, which is conducting a forensic audit of both the Srei companies, is yet to submit its report to the lenders.
Meanwhile, large public sector banks (PSBs) have proactively made substantially higher provisions, ranging from 40%-100% towards their exposure to the Srei group
. RBI norms require banks to make a general provision of 15% on their total outstanding exposure to a substandard asset. Unsecured substandard assets attract an additional provision of 10%.
This is due to the uncertainty over what a forensic audit of the account may reveal and the haircut lenders may have to take under the CIRP which is currently under way. Bankers want to avoid any ugly surprises which could be thrown up on the provisioning front in the coming quarters for the Srei group companies. Besides, the recovery from the resolution of Dewan Housing Finance Ltd (DHFL) and healthy profits during the second quarter have also given them enough room to manoeuvre these higher provisions.
The banks that have made higher upfront provisions towards their exposure to the Srei group include State Bank of India (SBI) 100%, Union Bank of India (UBI) 65%, Bank of India (BoI) and Central Bank of India 50% each, and Punjab National Bank (PNB) 40%). PNB has an exposure of Rs2,600 crore to the Srei group, UBI Rs2,558 crore, BoI Rs1,024 crore in direct exposure and Rs970 crore via pooled route, and Central Bank of India Rs1,149 crore. SBI’s exposure is reportedly more than Rs2,000 crore.
In June 2021, SIFL disclosed that a report by the RBI has identified Rs8,576 crore of loans as related party transactions and directed SIFL to "re-evaluate the relationship with the said parties to assess whether they are related parties to the parent firm or SEFL and also whether these are on an arm's length basis."
SEFL, which provides financing for construction and mining equipment, IT infra equipment as well as healthcare and farm equipment had made expected credit loss provisions worth Rs4,685 crore for FY 2020-21. As per the RBI’s directions, over and above this, the company made additional provisions worth Rs 4475 crore
under the Income Recognition and Asset Classification Norms.
It has been a rough three years for the Srei group which at one point was almost close to coming out with an initial public offering (IPO). In January 2018, SEFL, the wholly-owned subsidiary of SIFL, had announced plans for diluting up to 25% of its equity capital through an IPO. Unfortunately, post the IL&FS crisis, the group was forced to shelve its plan to float an IPO due to lacklustre investor interest.
Despite opposition from lenders, the boards of both companies passed resolutions in July 2019 to implement the composite scheme of arrangement relating to slump sales with effect October 2019. Accordingly, RBI directed Srei to seek lenders' consent to implement this scheme. However, the slump sale was again rejected by lenders.
Subsequently, following the pandemic stress in the economy which led to an asset-liability mismatch, in December 2020, the Srei promoters proposed a scheme of arrangement seeking moratorium from all classes of lenders in order to implement a debt recast plan. Subsequently, Kolkata bench of NCLT also supported this and passed an order
barring lenders from treating non-payment of dues by SIFL and SEFL as a default until all lenders agree to the new scheme of arrangement.
The NCLT order was set aside by the National Company Law Appellate Tribunal (NCLAT) on 7th September, prompting lenders to classify both accounts as non-performing loans.
Just before being admitted to the NCLT, lenders had rejected the proposed slump sale of the leasing and lending business of SIFL to SEFL citing that the scheme was aimed at preventing the imminent collapse of SIFL, whose capital adequacy ratio had fallen below the regulatory requirement of 15%.