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Published on: Nov. 15, 2021, 12:04 p.m.
SREI’s twin trouble
  • Kanoria: it is a systemic failure

By Business India Editorial

He has been the sharpest business brain around, a risk-taker and probably the smartest fund manager in the Indian financial system. But today, he is the most “misunderstood” decision-maker. Hemant Kanoria, the pioneer of infrastructure and equipment lending business in India, who had once dreamt to sell his stake to Alibaba founder Jack Ma, is in big trouble.

Whether Kanoria is paying a big price for taking an “out of the box” decision single-handedly or is it because of stepping on the wrong foot of regulators – time will prove, but it cannot be denied or forgotten that this man with a legacy of 200 years has contributed a lot to the process of nation building and promoting financial inclusion for over three decades in the country. 

SREI Group had emerged as the market leader in the equipment financing segment and before the group hit this recent air pocket it was enjoying a 35 per cent market share. No doubt, it helped several small and medium contractors grow into bigger project developers, it was also instrumental in galvanizing the international equipment manufacturing companies such as Caterpillar, JCB, Komatsu and Volvo and bringing them to India. Later, many of these companies have set up their manufacturing bases in India. 

As of now, it has more than one lakh customers and 60 per cent of them are repeat customers, which reflects the strong brand loyalty the group has managed to build. The public finance institution was known for number of  “out-of-the -box” offerings, such as: Paison ki Nilami, SREI Money Bag, SREI Lotto and a 3-in-1 scheme. 

Another segment that the team explored was to buy out non-performing loans (NPLs) and leverage SREI’s ability to recover money through legal means. This was the pre-ARC era and SREI met with considerable success in several cases (e.g. Kingfisher Airlines). In many of these cases, the banks were unable to recover their dues from the borrowers and were willing to sell their NPLs to SREI as they appreciated the value the company brought to the ecosystem. 

Hemant Kanoria, founder, SREI Group recalls while speaking to Business India, “Can you guess how much was the annual sales of construction and mining equipment back then pan-India? It was only about Rs150 crore per annum for the industry as a whole. Today, the annual sales are over Rs50,000 crore per annum and SREI played a major role in nurturing and expanding this market.”

Unfortunately, despite all the good works, few days back, the Reserve Bank of India (RBI) came down heavily and had sent two of Kanoria’s crown jewel companies into bankruptcy proceedings by superseding their Boards on grounds of concern over the quality of governance and inability to service debt. The RBI had even appointed a former senior banker as an Administrator to oversee the insolvency proceedings. 

The companies in question are the Kolkata-based non-banking financial company (NBFC) twins – SREI Infrastructure Finance Ltd (SIFL) & SREI Equipment Finance Ltd (SEFL) – which have been synonymous with infrastructure financing. Hemant Kanoria and his brother Sunil Kanoria are the founders. At this point of time, the two SREI companies together owe around Rs30,000 crore to creditors which include banks, NCD holders and employees.

What went wrong? 

According to Kanoria, the root cause behind SREI’s fall was a systemic failure. The eventual cloudburst was the culmination of a number of many factors, but the build-up to this event was gradual. 

According to him, the situation worsened with the implosion of IL&FS and from late-2018 access to fresh funding, particularly for infrastructure NBFCs like SREI, became extremely challenging. “It hit the business growth of SREI hard. In addition, problems in several infra verticals like road and power led to stress on the books of SREI due to delays in payment by clients. In fact, an IPO for SEFL had to be shelved post-IL&FS crisis as the market sentiment deteriorated drastically,” Kanoria added.

  • SREI played a major role in nurturing the construction and equipment finance market

But Kanorias were riding against the tide. In 2020, the Covid-19 pandemic killed the infrastructure sector, halted the economy and brought business to a standstill putting additional stress on SREI’s balance sheet.  

“Seeing the rising pandemic cases in the country, the RBI directed all the lending institutions to offer this moratorium and recast debts of micro, small and medium enterprises (MSMEs) and infrastructure players. That was the biggest blow to SREI, as it led to cash flow shortages plus no respite was provided to NBFCs. This is a problem, which even Union minister Nitin Gadkari has also publicly acknowledged. Thus, most of SREI’s borrowers were not in a position to service their debts. SIFL and SEFL had to abide by the new rules, but our revenue sources dried up completely. This resulted in a severe asset-liability mismatch and precipitating the crisis that we find ourselves in today,” Kanoria said.

Kanorias admit some mistakes made by the two companies that upset both the RBI and the lender-banks. In July 2019, the boards of SIFL and SEFL decided to consolidate the lending business by way of a slump exchange to SEFL. “The decision was not mine or my management’s alone. This was done in discussion with the potential investors who were interested in taking a majority stake in a consolidated entity. This move was expected to improve efficiency and cost reduction, and attract the needed capital. However, that did not quite go down well with the consortium of our lender-banks”, Kanoria explained.

The other big mistake was approaching NCLT (Kolkata Bench) with a scheme that proposed to pay full dues to all creditors in a structured manner. SEFL had approached NCLT with a scheme of arrangement to obtain consent from the required majority of lenders. “The Board took a decision that the only option was to file for Section 230 of the Companies Act, not under IBC, but in the NCLT, which allows a restructuring of the debt and which will be in alignment with the cash flow of the company,” Kanoria said.

According to Kanoria, SREI has had an impeccable record for 31 years of not missing a single payment deadline. “Till date, we have paid Rs30,000 crore as interest and Rs20,000 crore as principal. The pandemic changed the scenario. We had commitments to honour our bankers, our NCD holders and other creditors. The payment deadlines were approaching, but we had little or no source of revenue. Our reputation was at stake. That prompted us to file that application in October last year. We requested the bankers in that application how we intend to repay, spread over a period of 10 years and presented a plan with a schedule for making the entire payment with interest. But I think that it was not the right move on our side in retrospect, because the bankers got upset about why we moved the court. All that I can say is that we took that step with the honest intent to pay everyone in a systematic manner," Kanoria remarked. The move clearly backfired, and metamorphosed into a giant financial crisis. 

In the interim, the founders were also in talks with private equity players for raising capital. “We had received expressions of interest from 11 global investors, and subsequently, received non-binding term sheets from Arena Investors LP and Makara Capital Partners. But now, after RBI’s action of superseding the promoters and the possible insolvency on the cards – there is a big question mark on whether investors will at all support at this crucial juncture – a typical Catch 22 situation,” observed Hemant.

  • No doubt, we made some judgment errors, but we seemed to be hoping for an orderly resolution

Kanoria believes this may be perhaps one of the cases where the promoters cannot be blamed entirely for the failure of the troubled companies. “It can’t be denied that there were several other factors which were way beyond the control of the promoters. No doubt, we made some judgment errors, but we seemed to be hoping for an orderly resolution,” Kanoria admitted.

Baseless allegations?

Of late, serious allegations of “generous loans” and “siphoning off loans” were made against SREI group companies and promoters. Kanorias have denied all these allegations in their earlier statement saying, “We are hereby providing certain factual clarifications for setting the record straight on matters related to the Kanorias and the Kanoria Foundation. The companies mentioned in few media articles are not directly linked to the Kanorias/Kanoria Foundation and are in fact investee companies in the AIFs. The structure as provided by the articles of the purported linked entities is incorrect and baseless.”

While talking to Business India, Kanoria said, “This allegation of ‘sweetening’ of loan terms to connected parties is nothing but misreporting. We have a team of professionals and highly qualified individuals who work out the loan terms, the proposals get vetted at different layers, so no question of favouritism can arise. The expression used in the newspaper reports is ‘possible related party transaction’. It is completely misreporting by a few journalists. Before the findings of the audit reports are officially out, it is wrong to speculate and write such articles that send the wrong message within the public. I would appeal to the journalists to avoid writing such speculative articles and malign the reputation of SREI Group and the promoters.”

According to Kanoria, the RBI has highlighted exposures to probable connected parties which have been duly reflected in the annual accounts of the company for 31 March, 2021. “These exposures do not, as per the Companies Act or the Ind-AS norms, come under the definition of ‘related party transactions’. These are investee companies with various SEBI-registered funds where Trinity has been appointed as the investment manager/advisor. Trinity itself is a public company incorporated under the Companies Act, 1956,” Kanoria said.

“Transactions with these identified entities have been done in the ordinary course of business after due diligence and as per the process and policies adopted by the company. These customers have been granted loans following the laid down credit and risk process applicable to all customers and approved by its respective committee. The loans to these identified entities are secured against the assets of the borrowers and are dependent on recovery/monetisation of underlying assets. Further, SIFL/SEFL has no economic rights/benefits in such identified entities other than the lending to such companies in ordinary course of business and related income,|” Kanoria stated.

Ready to support regulator

Most interestingly, Kanoria refuses to associate the word ‘failure’ with his NBFC twins. “How can you say that the companies have failed? Even within this crisis the teams have been making collections. Between the two companies, they have receivables worth more than Rs50,000 crore, including contractual dues, a lot of arbitration awards and claims and valuation of physical assets in infrastructure projects. These will eventually come into our books,” Kanoria said.

According to Kanoria, what the regulator need now is a solid strategy backed by concerted efforts to recover this money. “Time and again, we have come across customers who found difficulties in servicing their loans. At SREI, our philosophy has always been to be accommodative and to work out possible solutions, even out-of-the-box ones at times. Declaring the asset as an NPA and repossessing and liquidating has always been the last option. Probably, this is why our customers prefer to stick with us,” observed Kanoria. 

  • Between the two companies, they have receivables worth more than Rs50,000 crore, including contractual dues, a lot of arbitration awards and claims and valuation of physical assets in infrastructure projects

Moving forward, SREI promoters are ready to help and support the regulators. When checked whether the promoters would be able to turn it around for the SREI twins, Kanoria replied, “Rajneesh Sharma has been a seasoned banker with a stellar career. My best wishes are with him. I have already communicated to him that I will cooperate fully in whatever capacity I can. After all, SIFL and SEFL are my two children. Whether they grow under my supervision or that of a foster parent, I will only wish to see them do well. I also understand that he is exploring the options of re-starting the lending activities. My one piece of advice to him would be to focus on the collections for the time being.”

The focus needs to be on the receivables. Kanoria remarked, “There are creditors who are banks, NCD-holders, ECBs and others. We need to repay them in an orderly fashion. So, SEFL needs to concentrate on the collections first, and co-lending may resume simultaneously. Also, as I mentioned before, many borrowers may just stop repaying thinking that the company is under insolvency proceedings. It needs to be communicated to them well that under IBC, it is business-as-usual, and repayment obligations must be honoured. I would be more than happy to assist Mr. Sharma, RBI and the bankers on this.”

It is surprising that Kanorias are ready to help the regulators who have taken control over their companies. Kanoria made a candid response, saying, “In the last few days, speculation has been rife and mine and my family name have been maligned. I wish to set the records straight. We set out on a journey with all sincerity to create a better future for India. SREI played a huge role in nation building, promoting financial inclusion and fuelling entrepreneurship. Kanorias have brought all their investments under the Kanoria Foundation, so that the resources that they generate can be channelized to diverse philanthropic activities for the better of society. These include activities in the areas of education, vocational training, healthcare, environment and rehabilitation of acid attack victims.” 

“Tell me, if we had mala fide intentions, would we have attached our family name and put our honour at stake? If we had any ulterior motive, we would have been out of this country long back. Whatever reputation we have today was built painstakingly over decades of hard work and sacrifice. It truly hurts when one’s integrity gets questioned. It is a matter of honour for us now. We are right here, and we will continue to be here. Our topmost priority is now to extend any kind of help possible from our end to revive the SREI twins. We have an obligation to our creditors, our employees, our customers and to the society at large. We hope for a quick and orderly resolution so that all these stakeholders ultimately benefit,” Kanoria concluded in his statement.

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