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RBI supersedes 2 SREI group firms; will it be a successful resolution like DHFL?

RBI supersedes 2 SREI group firms; will it be a successful resolution like DHFL?

Unlike DHFL, which has homeloan borrowers, branches, and good geographical presence, SREI group firms are into infrastructure, which is very different. Investors will look for revenue-generating assets to get invest in it

The total debt exposure of the two SREI group firms is over Rs 36,000 crore The total debt exposure of the two SREI group firms is over Rs 36,000 crore

After successfully resolving the failed Dewan Housing Finance Corporation (DHFL) debt issues, the Reserve Bank of India (RBI) has prepared the groundwork for taking infra financing SREI Group companies to insolvency.

The RBI today has taken the first step of superseding the board of Kolkata-based SREI Group companies --  Srei Infrastructure Finance Limited (SIFL) and Srei Equipment Finance Limited (SEFL). In fact, the decks are now cleared for taking these companies to Insolvency and Bankruptcy Court (IBC).

In the current IBC format, the lenders are not allowed to drag the non-bank entities, especially the financial services firms, to insolvency or liquidation. There is a special route where the banking regulator, the RBI, refers the failed lender to the IBC for resolution.

The process is very simple. First, the regulator has to be convinced. The RBI did conduct a special audit of the SREI group companies where it noticed certain governance issues. In its statement, it mentioned governance concerns and defaults by the two companies in meeting their various payment obligations as the reason for superseding the boards.

The RBI said it will shortly initiate the resolution process of the two NBFCs under the IBC. Clearly, the SREI group companies will now see a resolution where the parties or investors interested will bid for it. "There will now be an opportunity for strategic global investors or domestic investors to buy the assets at a good price," say experts.

In fact, the banks will be more comfortable taking a haircut based on the assets in the books.

But it is easier said than done.

Unlike the housing finance company DHFL, which has home loan borrowers, branches, and a good geographical presence, the SREI group firms are in the infrastructure space, which is very different. The investors or strategic buyers will look for real assets or revenue-generating assets to get interested in the company.

Secondly, DHFL was a deposit-taking NBFC with a lot of retail investors. SREI group companies' exposure to retail investors is only through non-convertible debentures.

The only common thread between the two is the asset-liability mismatches because of the difficult operating environment. While DHFL crashed after the IL&FS  liquidity crisis, the SREI Group companies came under severe stress after the Covid disruption.

The uncertain operating environment impacted the company's plan to raise additional funds from the market. It was downgraded by leading rating agencies because of a stressed balance sheet. Some banks or lenders also classified the company's loans as stressed. The total debt exposure of the two firms is over Rs 36,000 crore.

Also read: RBI supersedes board of SREI Infra, SREI Equipment Finance; appoints administrator

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