NEW DELHI: The Reserve Bank of India (RBI), in its inspection and risk assessment report, has identified "certain parties" as "probable connected or related parties," to whom Srei group entities had lent during 2019-2020.
In a regulatory disclosure on Thursday, the lender said the total exposure to these loans were at Rs. 8,576 crore as on March 31, 2021 and these account for nearly 30 per cent of the group's consolidated loans of over Rs.28,700 crore. Srei, meanwhile, said it has consulted legal experts to determine its relationship with these borrowers.
“ln view of the observations and directions of RBI as stated in the inspection report, the parent company (Srei Infrastructure Finance Ltd) and SEFL (Srei Equipment Finance Ltd) has been advised to reassess and re-evaluate the relationship with the said parties to assess whether they are related parties to the parent company or to SEFL and also whether these are on arm's length basis,” the lender said.
After considering the legal view, the company has “come to the conclusion that the parent company or SEFL has no direct or indirect control or significant influence over such parties”. However, the group is still renegotiating terms with these borrowers.
The RBI had directed a special audit of two key firms of Srei to examine possible links with IL&FS group which collapsed in 2018.
Srei also disclosed that the regulator has directed the lender to "reassess and factor the impact of certain parties during the finalisation or balance sheet for FY 2020·21 and to ensure that relevant accounting treatment and appropriate disclosures are done in annual accounts of March 31, 2021."
In the last financial year, the company made expected credit loss provisions worth Rs.4,685 crore. Over and above this, as per directions from the RBI, the company made additional provisions worth Rs 4,475 crore under the Income Recognition & Asset Classification Norms.
Higher provisioning impacted profitability and Srei posted a consolidated net loss of Rs. 7,338.39 crore in the year ended March 31, 2021.
For the fourth quarter, Srei posted a net loss of Rs 3,555.19 crore compared to Rs. 69.29 crore in the corresponding quarter last year.
The independent auditor’s report released along with Srei Infrastructure Finance's March quarter earnings also highlighted concerns about the ability of the lender to continue as a going concern.
"The group's net worth has eroded as of that date and has not been able to comply with various regulatory ratios/limits. All this may have an impact on the Group's ability to continue its operations in the normal course in the future and to meet its financial commitments as and when due," said the report by DK Chhajer & Co, the independent auditors of the company. The group's ability to meet its financial commitments depends on the final outcome of various schemes of arrangement which are currently pending before NCLT/NCLAT, the report added.
Meanwhile, the company’s board of directors in a meeting held on July 1 has approved a proposal to sell up to 20 per cent of assets held by SREI Equipment Finance to raise funds. It has decided to raise up to Rs 2,500 crore. Also, Srei Equipment Finance has received a term sheet from Singapore's Makara Capital Partners for investment of Rs 2,200 crore by way of capital and a term sheet from USA-based Arena Investors LP for investment of Rs 2,000 crore.
The Kolkata-based NBFC has also received Expression of Interest (EOI) from several other global private investment firms, including Cerberus Global Investments, Charlestown Capital Advisors, CarVal Investors LP, Varde Partners Asia, and Maystone Capital.
“With infrastructure activities significantly slowing down (due to the second wave), claims and arbitration awards getting delayed, cash flows of Srei’s borrowers have been affected, which has resulted in a debilitating situation for all. This has also created a mismatch in Srei’s cash flows for the first time in 32 years,” it added.
Srei Infrastructure Finance, however, said it has adequate collateral against the borrowers where additional provisioning has been made and it is "hopeful" of making significant recoveries in due course of time.