Srei Equipment's decision to convert group co loan to preference shares raise eyebrows

More skeletons are tumbling out of Kolkata-based Srei Group companies --Srei Infrastructure Finance and its wholly-owned subsidiary Srei Equipment Finance --which are facing bankruptcy proceedings for defaulting on the loans of over Rs 30,000 crore.

The Reserve Bank of India (RBI) had earlier superseded the boards of the two companies in October last year while citing governance issues.

According to available information, the Srei Equipment Finance had converted a loan obligation, and had given loan to a group company Quippo Oil & Gas Infrastructure as a preference share capital.

Sources suggest the first loan of Rs 200 crore was given to Quippo Oil by Srei Equipment Finance in December 2018. Eight months later on August 16, 2019, it extended another loan of Rs 50 crore. These two loans,  however, turned NPAs as the subsidiary was not able to pay interest as well as the principal amount.

There was a loan outstanding of Rs 225 crore in the initial facility and Rs 56 crore in the second loan as of March 21, 2021.

At the request of Quippo Oil, the Srei Infrastructure Finance had restructured the loan as a mix of term loan and redeemable convertible preference shares in the post-Covid period. As part of the restructuring, Rs 82 crore was treated as a rupee term loan. The second part of Rs 200 crore was converted into fully paid-up redeemable cumulative optionally convertible preference shares.

This conversion of loan into shares was done at a premium for a defaulting company like Quippo and without any rating from a credible rating agency. A mail to RBI Administrator and the Srei Equipment, however, didn't elicit any response at the time of publishing the story.

This conversion of a Rs 200 crore loan into preference shares had actually reduced the loan liability of the group company.  In addition, the default for the lender Srei Equipment Finance would have meant higher provisions, lower profitability, and higher non-performing loans.

Srei Group NBFCs are the second big RBI-directed bankruptcy case as the regulator had earlier taken Dewan Housing and Finance to IBC, and, subsequently, the Piramal Group had successfully bought the housing finance company.

The 15-year-old Quippo Oil and Gas Infrastructure is engaged in drilling services contractors with operations in India. It was initially a wholly-owned subsidiary of Srei Infrastructure Finance Ltd, but it ceased to be a subsidiary with effect from Mach 31, 2019.

The NBFC sector was facing a headwind because of severe liquidity crises when these loan facilities were sanctioned. In fact, the debacle of infrastructure financing institution IL&FS happened exactly during that time.

Also Read: SREI Group insolvency proceedings: SREI Equipment borrowers' AIF connection

Also Read: RBI introduces new NBFC regulatory framework to avoid debacles like IL&FS, Dewan Housing and SREI Group