Until now, the banks have been waiting for the Reserve Bank of India (RBI) to dissolve the boards of the two SREI companies, appoint a director and push the companies to the Insolvency and Bankruptcy Code (IBC). But we now realize that the SREI group may not be like DHFL but rather like IL&FS.
The head of the SREI group is the Kanoria Foundation, which owns the group of four companies, Aksara Comemrcial, Adisri Commercial, Adishakti Commercial, Vara Technology – through this it owns the group. The group also has trusts like Power Trust, then funds like SREI Alternate Investment Trust, SREI Multiple Asset Investment Trust, Bharat Nirman Fund.
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The funds are managed by an asset management company (AMC) called Trinity Asset Management. SREI Infra and SREI Equipment, belong to the holding companies of the Kanoria Foundation.
The 2 SREI companies have now granted loans to companies in which the Kanoria Foundation has indirect interests through trusts, funds or its subsidiaries. For example, SREI lent loans to Shrishti Infra, owned by Adhishakti (development company) but this loan was not recognized as a group company.
Likewise, IPCL, a company owned by Aksara Commercial (development company), transferred its investment division to Power Trust. SREI has loaned to companies owned by Power Trust but has not recognized them as related parties because the trust that holds them has other trustees.
Read also: SREI Infra: Why should bankers invoke IBC when we are ready to pay all of the money?
SREI also provided loans to companies owned by funds: Alternate Investment Trust, Multiasset Investment Trust – but even these loans were not recognized as related party.
The disagreement stems from where the beneficial interest of companies owned by funds managed by SREI resides – is it with SREI, with the Kanoria Foundation or with other people who have invested in the fund?
The other problem is that these group companies got loans on very easy terms, often at 1% for the first 5 years and all the interest payments were consolidated from the 5th to the 8th year.
While on average, Non-Bank Financial Corporations (NBFCs) have 3.2 times leverage in India i.e. equity is one, then loans they can take are thrice. For the SREI, it is over-indebted – up to 8 times.
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The last problem is who owns the SREI NCD. The unsecured carriers for SREI equipment, there are banks but there are a lot of contingency funds. This is the problem. MPEB Employee Provident Fund, Gujarat Housing Council Pension Fund, ACC Babcock Employee Provident Fund. Secure NCD holders include KSRTC Provident Fund, MTNL Provident Fund and of course there are Central Bank, Axis Bank, Syndicate Bank;
The point is, DHFL didn’t have a contingency fund that had FDs or NCDs, so this was kinda easy to figure out. IL&FS did this, which is why there might be more issues in SREI than in DHFL.
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R Subramaniakumar, DHFL Administrator and now SREI Administrator’s Advisor discussed this in more detail.
“I think it will be a whole different challenge than DHFL and IL & FS. I would like to say that it is a completely different ball game. There cannot be an apple-to-apple comparison. Each resolution is unique in itself. Each resolution has its own challenges, ”he said.
“It is a network of transactions and a network of structures which is not straightforward and simple as we have seen at DHFL or elsewhere,” he said.
This requires a totally different thinking and solution than what was discussed for DHFL, he noted.
Read also: RBI reported over Rs 8,000 crore in potential loans to related parties by Srei Group in FY20, according to disclosures
“There are green shoots that I see after this government’s intention to increase infrastructure by investing a lot of money. Thus, it is likely that there will be a demand for infra leasing equipment that will be used in this type of structures. This requires further study. Once we take a closer look at the equipment and other things that can be deployed – it won’t be too soon to talk about that – I’m optimistic that when that sort of thing does arise, we can find some sort of investors who are ready to seize because of the future opportunities available in the infrastructure sector which have been opened up by the government with the intention of investing heavily in this sector, ”he said.
For the full discussion, watch the accompanying video.