RBI's decision to supersede boards of Srei group companies will prevent domino effect: Experts

According to experts, Reserve Bank's decision to supersede the boards of the crisis-ridden financial outfits of the SREI Group will safeguard the interest of stakeholders and prevent a domino effect on the system. Last week, RBI superseded the boards of Srei Infrastructure Finance Limited (SIFL) and Srei Equipment Finance Limited (SEFL) for their failure to repay debts.

NCLT admitted the insolvency pleas moved by RBI against the two Srei Group firms and appointed an administrator to run the companies. Source: Reuters

Reserve Bank's decision to supersede the boards of the crisis-ridden financial outfits of the SREI Group will safeguard the interest of stakeholders and prevent a domino effect on the system, said experts.

RBI had last week superseded the boards of Srei Infrastructure Finance Limited (SIFL) and Srei Equipment Finance Limited (SEFL) for their failure to repay debts.

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The National Company Law Tribunal (NCLT) on Friday admitted the insolvency pleas moved by banking sector regulator RBI against the two Srei Group firms and appointed an administrator to run the companies.

The move comes after the Bombay High Court on October 7 dismissed Srei Group's plea against RBI action on Srei Infrastructure Finance Ltd (SIFL) and Srei Equipment Finance Ltd (SEFL).

"Lenders want a DHFL kind of resolution where there will be an opportunity for strategic global investors or domestic investors to buy the assets at a good price," said Deepak Jasani, Head of Retail Research, HDFC Securities.

He said as banks are preparing to classify loans worth Rs 35,000 crore made to Srei Group as non-performing assets (NPA) in the September quarter after an appeals tribunal cleared the hurdles in this respect, a possible haircut of 50-60 per cent may be acceptable to them (given the surety of timing and amount of recovery under this resolution process).

Srei companies own infrastructure assets compared to DHFL which had home loan borrowers, branches, and a good geographical presence. Even then lenders of DHFL had to accept about 65 per cent haircut, Jasani said.

Expressing a similar opinion, L Badri Narayan, Executive Partner, Lakshmikumaran and Sridharan Attorneys said, "The regulator has taken these steps in the right direction to safeguard the interest of stakeholders and to avoid a domino effect in the system."

He further said the success of the resolution process in DHFL provides a sign of relief for this sector and regulator.

"The role of RBI in oversight and monitoring of corporate governance in regular operations of financial service companies along with other regulators will be interesting," Narayan said.

This would be the second instance after Dewan Housing Finance Corporation Limited (DHFL), where in the NBFC would be referred at banking regulator's directions for insolvency.

Commenting on the matter, Aashit Shah, Partner, J Sagar Associates, said this decision of RBI follows on the heels of a successful resolution process of DHFL.

Srei group mainly serves the MSME and infrastructure sector.

In November, 2019, the Reserve Bank had superseded the board of directors of DHFL owing to governance concerns and defaults by DHFL in meeting various payment obligations. It was the first finance company to be referred to NCLT by the RBI using special powers under Section 227 of the IBC.

RBI had referred DHFL -- then the third-largest pure-play mortgage lender -- for resolution under the Code. It was the first finance company to be referred to NCLT by the RBI using special powers under Section 227 of the IBC.

DHFL had gone bankrupt with more than Rs 90,000 crore in debt to various lenders, including banks, mutual funds and individual investors who kept fixed deposits with the company.

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