As Srei Firms Head To Insolvency, Who's Left Standing In The Rain?

The move had come as a "surprise" to the group, said Hemant Kanoria, former chairman of Srei Infrastructure Finance Ltd., in this interview to BloombergQuint. As the processes kick in, about Rs 30,000 crore in liabilities are at stake between Srei Infrastructure Finance and Srei Equipment Finance Ltd.

According to two people with direct knowledge of the matter:

• Domestic lenders, led by UCO Bank, Axis Bank Ltd. and State Bank of India, have the largest exposure of around Rs 23,000 crore to the two companies.

• In addition, non-convertible debentures worth Rs 4,000 crore are outstanding. This includes Rs 1,500 crore in debentures sold to retail investors.

• Dues to foreign lenders and multilateral agencies stand at another Rs 2,500-3,000 crore.

The Srei Group firms are only the second to be referred for insolvency resolution under a special window of the Insolvency And Bankruptcy Code. The first was Dewan Housing Finance Corp., where resolution finally closed on Sept. 29 after a 19-month long process.

Lenders recovered about 46% of their claims in the case of DHFL.

Could a similar experience repeat in the case of Srei Group NBFCs? Bankers aren't certain.

DHFL's Rs 90,000-crore loan book comprised a large retail portion. Relatively speaking, retail loans are safer and have a higher repayment ratio than wholesale loans, a banker involved in the Srei resolution process said on the condition of anonymity.

In comparison, Srei Group's Rs 30,000-crore loan book is almost entirely toward businesses in the infrastructure sector. This includes construction and development companies as well as smaller construction equipment owners.

According to Kanoria, the split between infrastructure loans and equipment financing is roughly 50:50.

The infrastructure lending business tends to attract considerable discounts, as any buyer coming through the bankruptcy process will face prolonged recoveries, the banker cited earlier said.

A second person, closely involved with the Srei Group resolution process since October last year, said that the administrator and the committee of creditors will need to first address the restructuring of the two loan books. This may include implementing specific restructuring plans to address borrower needs, depending on complexity of their operations and size, this person said.

Additionally, the creditors and administrator at Srei Group would need to initiate recovery proceedings against the larger defaulting borrowers. According to the second person cited earlier, buyers may not want to buy the NBFCs and then spend further time and resources trying to recover bad loans. As such, this process may need to begin upfront.

Meanwhile, retail investors will see their payments delayed even further until resolution closes.

When Srei Group went to the National Company Law Tribunal last year, the repayments to all creditors, including retail bond holders, were blocked. These investors haven't received their dues since October last year.

The inability to repay retail bondholders in time has been the "saddest moment" of his life, said Kanoria.

According to the Srei Group promoter, there are about Rs 400-crore worth of funds lying in the current accounts as on Sept. 30, which could have been used to repay bondholders. He has requested banks and the RBI-appointed administrator to repay retail bondholders at the earliest, he said.

Alongside delays, retail investors may face the prospect of a haircut.

In the DHFL case, fixed depositors received only 23% of their claims. Retail NCD holders with dues up to Rs 2 lakh received their full principal, but those with larger investments had to take haircuts.

According to Babu Sivaprakasam, partner, Economic Laws Practice, historically resolution of financial entities such as DHFL and Yes Bank have proceeded on the consideration that medium and larger retail bondholders are neither given any differential treatment nor special protection qua smaller retail bondholders who usually get paid out fully.

"The courts are very unlikely to interfere with the commercial wisdom of the committee of creditors as long as the resolution plan takes into account the balancing of interest of all the stakeholders," Sivaprakasam said. "One may have to see what the eventual resolution plan holds for these investors as the plan is dependent on various factors like sustainable debt portion, liquidation , etc."