SREI will be a very different challenge than DHFL, says R Subramaniakumar

Until now banks were waiting for Reserve Bank of India (RBI) to dissolve boards of the two SREI companies, appoint administrator and push the companies into insolvency and bankruptcy code (IBC). But now comes a realisation that SREI Group may not be like DHFL but more likely to be like IL&FS.

Head of the SREI group is Kanoria Foundation, which owns the group of four companies, Aksara Comemrcial, Adisri Commercial, Adishakti Commercial, Vara Technology – through this it holds the group. The group also has trusts like Power Trust then it has funds like SREI Alternate Investment Trust, SREI Multiple Asset Investment Trust, Bharat Nirman Fund.

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The funds are managed by asset management company (AMC) called Trinity Asset Management. SREI Infra and SREI Equipment, are owned by holding companies of Kanoria Foundation.

The 2 SREI companies have now given loans to companies in which the Kanoria Foundation has indirect interest through the trusts, funds or its subsidiaries. For example, SREI lent loans to Shrishti Infra, owned by Adhishakti (promoter company) but this loan was not recognised as a group company.

Likewise IPCL, a company owned by Aksara Commercial (promoter company), transferred its investment division to Power Trust. SREI has lent to companies owned by Power Trust but didn’t recognize them as related party because the trust which owns them has other trustees.

Also Read: SREI Infra: Why should bankers invoke IBC when we are ready to pay full money?

SREI also gave loans to companies owned by funds: Alternate Investment Trust, Multiasset Investment Trust – but even those loans were not recognized as related party.

The disagreement comes from the fact where does the beneficial interest of those companies lie which are owned by SREI managed funds – does it lie with SREI, does it lie with Kanoria Foundation or does it lie with other people who have invested in the fund?

The other problem is these group companies were given loans at very easy terms often at 1 percent for the first 5 years and all the interest payments bunched in 5th to 8th year.

While on an average, non-banking financial companies (NBFCs) have a leverage of 3.2 times in India that is equity is one then the loans they can take is three times. For SREI, it is overleveraged – leveraged upto 8 times.

Also Read: Banks in favour of RBI-led resolution of SREI Group

Final problem is who owns the NCD of SREI. The unsecured holders for SREI equipment, there are banks but there are a lot of provident funds. That is the problem. The MPEB Employee Provident Fund, Gujarat Housing Board Pension Fund Trust, ACC Babcock Employee Provident Fund. The secured NCD holders include KSRTC Provident Fund, MTNL Provident Fund and of course there are banks Central Bank, Axis Bank, Syndicate Bank;

The point is DHFL didn’t have provident funds owning FDs or the NCDs so it was a little easy to resolve. IL&FS did, which is why there could be more problems in SREI than in DHFL.

Also Read: DHFL Resolution: A feather in the cap of RBI and IBC

R Subramaniakumar, the administrator of DHFL and now the advisor to the administrator of SREI discussed this further.

“I feel that this will be a different challenge altogether than that of the DHFL and IL&FS. I would like to say that it is a different ballgame altogether. There cannot be an apple-to-apple comparison. Every resolution is unique by itself. Every resolution has its own challenges,” he said.

“It is web of transactions and web of structures which is not straight and simple as we have seen in DHFL or elsewhere,” he said.

This requires different thinking and different solutioning altogether than what has been talked about for DHFL, he noted.

Also Read: RBI flagged over Rs 8,000 crore of potential related-party lending by Srei Group in FY20, show disclosures

“There are some greenshoots which I see after this government’s intention to increase the infrastructure by investing a lot of money. So, there is likely to be a demand for the infra leasing equipment which are going to be used in these kind of structures. It requires a deeper study. Once we take a deeper look at the equipments and other things which can deployed- it will be little early to comment about it – I am optimistic about the fact that when these kind of things come up, we will be able to find some kind of investors who are ready to take it up because of the future opportunities available in the infrastructure sector which have been opened up by the government with the intent of investing heavily in this sector,” he mentioned.