For over 2 years, SREI group had been struggling under a pile of debt. Last week, the RBI referred SREI group to the NCLT for insolvency proceedings. While SREI had objections, High Court was unwilling to play ball. Here is the story of how SREI gradually imploded.
SREI House of Cards falls
The end came rather abruptly. A day after the RBI referred SREI Infra and SREI Equipment Finance to NCLT, the promoters dragged the RBI to court via a writ petition. The High Court rejected the writ petition on the grounds that the RBI was simply doing its job at the request of the consortium of banks. That serves to indicate that there is little option for SREI group at this point. The problems that began 3 years ago could never be rectified and pushed SREI to the verge of default on core obligations.
The creditors, to whom SREI group owes Rs.30,000 crore, had taken control of cash flows last year. SREI group was also in the midst of working out a resolution plan with banks. They opted to involve the RBI after SREI promoters asked for a 1-year standstill in which no payments would be made and no legal action would be initiated by the banks or the regulators. That was not done since the banks are already conducting a forensic audit of the group. That impelled UCO Bank to request RBI to initiate DHFL kind of bankruptcy process for SREI group also, as a special case.
End of the road for SREI?
Where the promoters miscalculated was in taking the RBI to court. The RBI was acting at the request of UCO Bank, which heads the COC. The role of the RBI was purely that of a facilitator and the Kanoria family made a grave error of judgment in getting the RBI legally involved. Not surprisingly, the petition was struck down by the High Court, and that closed the last possible window of exit for SREI group. With outstanding debts of Rs.30,000 crore, the SREI group may not pose as big a risk as IL&FS or DHFL. However, it is systemic risk nevertheless. The action will now shift to the NCLT courts. It looks like the end of road for an iconic Indian private sector infrastructure financing company!
More complex than DHFL
It certainly looks like the end of the road for the SREI group. The problems began after the IL&FS crisis. On the one hand infrastructure funding came under a cloud. On the other hand, the maturity mismatch created by borrowing short and lending long was not likely to help. That virtually closed the doors for SREI as the funding taps went dry. The problem in this case is that recoveries may be much lower. There is the money laundering case that is under the lens and the quantum of recovery uncertain. Secondly, infrastructure dues are less reliable compared to retail loans and that will restrict the recovery amount.
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