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SREI Group insolvency proceedings: SREI Equipment borrowers' have AIF connection

SREI Equipment Finance Limited, one of the two SREI Group companies facing resolution under the Insolvency & Bankruptcy Code, has borrowers who were also part of 'investee' companies in the Group's alternative investment fund (AIF), with a total amount involved at Rs.4,156.66 crore.

There were also a second set of borrowers of SREI Equipment where investment was also done by investee companies of AIF. The loan amount involved was to the tune of Rs. 3,216.97 crore.

The SREI Group manages multiple AIF with investment in equity, debt, and mezzanine funds.

These were the findings of the Reserve Bank of India's (RBI) Initial Inspection Report 2019-20. The regulator had noticed certain borrowers as probably connected or related companies. SREI Equipment was asked to reassess and re-evaluate the relationship with the identified borrowers to find out whether they are related parties to the company or to the holding company, SREI Infrastructure Finance Ltd.

The total exposure towards such borrowers, which were categorised as related and connected parties by the RBI, was Rs 8,575.65 crore as of 31 March 2021.

Hemant Kanoria, Founder of SREI Group, has defended by saying that SREI has been lending to borrowers on the basis of projects, equipment, and assets being an asset finance and infrastructure financing company. "The AIF has investors and the companies under them are also eligible borrowers if they fulfil the necessary credit conditions," he said in a statement.

"The proposals are prepared by the team and finally sanction is done after the approval of the committee. Therefore, lending to AIF invested borrowers are well within the framework of lending norms, which the company has been doing for a couple of decades," he said.

The company had responded to RBI while preparing its 2020-21 accounts by saying that "the loans to these borrowers are secured against assets and cash flows of the borrowers." SREI Infra and SREI Equipment has no benefit in such borrowers other than lending to such companies in the ordinary course of the business," it said.

The Kolkata-based infra financing group had defended by saying that SREI Equipment or its holding company SREI Infrastructure has no control or influence over such borrowers and is not a related party of the company or its holding company.

The company also claimed that the transactions with such borrowers were done in the ordinary course of business after proper due diligence. "The loans were given to such borrowers following the laid down credit and risk process on an arm-length basis," the company had said.

The company also claimed that the loans to such borrowers were secured against the assets and cash flows of the borrowers.

The current action by the regulator against the two SREI Group companies and also the auditor Haribhakti & Company seem to suggest that there is something more to these related party transactions.

Based on RBI's request last week, the National Company Law Tribunal has already given its nod for starting insolvency proceedings against SREI Infrastructure and its wholly-owned subsidiary SREI Equipment which is into the lending business in areas like construction, mining, and other related sectors.

The RBI had first superseded the board of these two firms citing governance concerns and loan defaults by these two non-banking finance companies.


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