Inside RBI's decision to supersede SREI Group Companies' Boards

Weak corporate governance, evergreening of loans, violation of income recognition & asset classification norms, connected lending, poor compliance. The list of lapses by Kolkatta-based SREI Group’s two non-banking finance companies that led to the regulator taking an extreme step is rather long.

CNBC-TV18 reviewed the contents of the two letters sent by the Reserve Bank of India to SREI Infrastructure Finance Limited (SIFL), and SREI Equipment Finance Limited (SEFL) on October 1, 2021 detailing reasons why it was superseding their boards. The letter was sent three days before RBI made the notification public on October 4, 2021.

In its letter, the regulator said that a statutory inspection of the books of both SIFL and SEFL conducted by RBI under Section of 45-N of the RBI Act, 1934 in regard to their financial position as on March 31, 2020 “revealed serious deterioration in (their) financial position.”

It noted that defaults by both the NBFCs in meeting their payment obligations in respect of bank borrowings and market borrowings, revealed “serious concerns about the conduct of the affairs of the company.”

RBI’s letter showed that the total borrowings of SIFL stood at Rs 11,746 crore as on June 30, 2021. Out of this, SIFL defaulted on repayments to 12 lenders aggregating to Rs 3,566 crore.

Similarly, SEFL’s total borrowings stood at Rs 20,411 crore as on June 30, 2021, and it had defaulted with 13 lenders aggregating to Rs 10,457 crore.

“The Board of Directors of SEFL and Srei Infrastructure Finance Limited (SIFL) had on July 04, 2019 approved transfer of assets and liabilities (including liabilities towards issued and outstanding NCDS) of SIFL by way of slump exchange to SEFL with effect from October 01, 2019. Despite non-receipt of No-objection Certificate (NOC) from majority of the lending institutions, SIFL and SEFL had given effect to the slump exchange,” the Reserve Bank said in the list of reasons detailed for the supersession of the boards.

It further said, that there were “several supervisory concerns (e.g. violation of IRACP norms, evergreening of NPA accounts, connected lending, weak corporate governance standards, inadequate systems and control, poor compliance standards, etc.) observed during past inspections by the RBI communicated through supervisory letters, and also reiterated in the meetings held by the Reserve Bank with the management of the company (SIFL).” It raised similar concerns with regards to SEFL as well.

“Inspection of SIFL with reference to financial position as on March 31, 2020 revealed that the company is not meeting minimum regulatory CRAR (15 percent) and NOF (Rs.300 crore). Further, infrastructure loans as a percentage of total assets was assessed at 3.33 percent as against the regulatory requirement of 75 perccent,” RBI said in its letter to SREI Infrastructure.

To SREI Equipment, it added, “Inspection of SEFL with reference to financial position as on March 31, 2020 revealed negative CRAR of (+3.40 percent as against regulatory requirement of 15 percent and non-adherence to IRACP norms resulting in huge divergences in major financial parameters as reported by SEFL and as assessed by the inspection team of Reserve Bank.”

RBI said it had found instances of evergreening both SIFL and SEFL during the forensic audit it conducted between December 2020 and January 2021. “Special Audit conducted by the Reserve Bank in December 2020-January 2021 observed that funds disbursed to certain borrowers were received back from such borrowers/ their group companies on the same date/dates close to the date of disbursement, which indicated evergreening,” it said.

It said both SIFL and SEFL remained non-compliant with RBI regulations and supervisory instructions. The regulator added, that despite continuous engagement and follow up by it, the NBFCs failed to take corrective action on governance, systems and controls, compliance, etc.

CNBC-TV18 reported on Wednesday that the promoters of SREI Group, the Kanoria family, had moved the Bombay High Court against RBI’s action. A writ petition filed by Kanorias on October 6 seeks to stay the appointment of the Administrator by the regulator, and to also stay any insolvency proceedings against the companies. The court is expected to take up the matter on Thursday.

On October 4, RBI said in a press release, ” In exercise of the powers conferred under Section 45-IE (1) of the Reserve Bank of India Act, 1934, the Reserve Bank has today superseded the Board of Directors of Srei Infrastructure Finance Limited (SIFL) and Srei Equipment Finance Limited (SEFL), owing to governance concerns and defaults by the aforesaid companies in meeting their various payment obligations. Shri Rajneesh Sharma, Ex-Chief General Manager, Bank of Baroda has been appointed as the Administrator of the aforesaid companies under Section 45-IE (2) of the RBI Act. The Reserve Bank also intends to shortly initiate the process of resolution of the above two NBFCs under the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 and would also apply to the NCLT for appointing the Administrator as the Insolvency Resolution Professional.”

SREI Group did not respond to CNBC-TV18’s query regarding the promoters’ petition in the Bombay High Court against RBI action.