As SREI Promoters Move Court, What Prompted RBI To Supersede The Board
SREI promoters challenge RBI's move to supersede boards of group companies.
Promoters of SREI Group have filed a writ petition in the Bombay High Court, seeking a stay on the Reserve Bank of India's move to supersede boards of the group's two companies.
The writ petition filed by Adisri Commercial Pvt. and Srei Infrastructure Finance Ltd. Chairman Hemant Kanoria alleges that the RBI acted in "complete haste, entirely arbitrarily and without application of mind" in superseding the boards of two non-bank finance companies of the group and appointing an administrator to run affairs.
The petition states that Adisri Commercial is a shareholder of Srei Infrastructure Finance. BloombergQuint has reviewed a copy of the petition.
The petitioners have sought that the proceedings initiated by the RBI be stayed and the creditors to the two companies be asked to maintain status quo.
The hearing is scheduled for Thursday (Oct. 7).
Sequence Of Events
On Monday, the RBI superseded the boards of Srei Infrastructure Finance and Srei Equipment Finance Ltd. and appointed former banker Rajneesh Sharma as an administrator. The regulator also said that it intends to refer these two companies for insolvency proceedings.
The petition alleges that the RBI did not give the respondents enough time to respond to its requisition stated in a Sept. 22 letter.
While communication with the RBI over the health of the non-bank lender has been going on for some time, matters accelerated after an RBI risk assessment report in February 2021.
The sequence of events since is detailed as below:
April 9, 2021: The RBI asks SIFL and SEFL to infuse additional capital of at least Rs 2,000 crore. It also asks that the lenders to increase capital adequacy ratio to 15%.
Simultaneously, the RBI asks the companies to stop all lending activities including fresh disbursals till further orders from RBI.
It tells the companies to assess and factor in impact of the related-party transactions identified by the RBI as part of an audit. In addition, the companies were asked to declare any dividends to shareholders till further orders.
June 17: The RBI writes to the companies asking that capital be infused in a time-bound manner, a demand made by the regulator earlier as well.
Between June and September, the companies wrote to the RBI keeping them informed about non-binding term sheets received from two investors—Makara Capital and Arena.
Sept. 22: The RBI rejects additional time sought by the companies to complete capital raising.
Sept. 24: The companies once again highlight to the RBI, the steps taken so far.
Oct.1: The RBI supersedes the boards of the two companies. A press release to the effect is issued on Oct. 4.
Notably, while the company had been informed of the RBI's decision on Oct.1, in a statement to BloombergQuint on Monday, the SREI group termed talk of likely insolvency proceedings as a "rumour".
Why The RBI Took Action
In two separate letters dated Oct. 1, RBI executive director Jayant Kumar Dash noted that there was serious deterioration in the financial position of SIFL and SEFL. In the letters, Dash said that both companies had defaulted on their payment obligations, in respect of bank and market borrowings, which reveal serious concerns about the conduct of affairs at the companies.
"As per data submitted by financial institutions, the total borrowings of SIFL stood at Rs 11,746 crore, on June 30, 2021. SIFL has defaulted with 12 lenders aggregating to Rs 3,566 crore," Dash said in the letter.
Similarly, in the case of Srei Equipment Finance, the total borrowings stood at Rs 20,411 crore, while the company had defaulted on obligations to 13 lenders aggregating to Rs 10,457 crore.
Further, Dash noted, that the boards of the two companies had approved a transfer of assets and liabilities of Srei Infrastructure Finance to Srei Equipment Finance in July 2019.
"Despite non-receipt of no-objection certificate, from majority of the lending institutions, SIFL and SEFL had given effect to the slump exchange," the RBI noted.
According to the letters, concerns the RBI had with respect to financial positions of the two companies include:
Violation of income recognition, asset classification and provisioning norms.
Evergreening of non-performing assets.
Weak corporate governance standards.
Inadequate systems and controls.
Poor compliance standards.
These concerns had been highlighted by the RBI through supervisory and other letters and during meetings with the management as well.
In case of Srei Equipment Finance, the company had negative capital adequacy and net owned funds as well as high NPA ratios, the RBI noted. Infrastructure loans as a percentage of total assets of Srei Infrastructure Finance stood at 3.33% against a regulatory requirement of 75%.
A special audit conducted by the RBI between December 2020 and January 2021 observed that funds disbursed to certain borrowers were received back from such borrowers or their group companies on the same date of disbursal, or very close to that date. This, according to the regulator, indicated evergreening at both companies.
Both companies have remained non-compliant with the RBI regulations and supervisory instructions, the regulator said in its letters. Despite continuous engagement and follow-up by the central bank, both companies had failed to take corrective action on governance, systems and controls, compliance, it noted.
What The Petition Argues
Despite the long history of communication between the regulator and the group, the petition still argues that orders were issued in haste.
It added that the RBI erroneously observed that schemes of arrangement planned between the two companies was done without the consent of lenders. The underlying objective of the scheme was to ensure creditors are protected, the petition said.
In addition, the impugned letters do not satisfy Section 45-IE of the RBI Act, the petition argued. Section 45-IE allows the RBI to supersede the board of a non-banking company in "public interest" or to prevent the affairs of an NBFC from being conducted in a manner detrimental to the interest of the depositors or creditors.
The petition states that the two SREI Group companies have not received any default notice in relation to any of the loans advanced to the companies.
"In these circumstances, and particularly where the board of management of SIFL and SEFL were actively trying to resolve the precarious financial position the companies had found themselves in, the actions of Respondent No. 1 (RBI) are arbitrary and clearly without application of mind," the petition states.
The petition said if the RBI had provided further time to the petitioners, they would have been able to successfully complete the capital infusion process.
In an interview to BloombergQuint on Tuesday, chairman Hemant Kanoria had denied any plans to challenge the RBI’s decision. ”We are committed to support the RBI and the administrator, everyone to see whatever is in the best interest of the company,” Kanoria said.