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Explained: RBI And The Takeover Of Two Srei Companies

The RBI moved to NCLT against Srei Infra Finance and Srei Equipment Finance to approve the initiation of the insolvency proceedings. The two companies have defaulted on their payment and governance obligations.

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Reserve Bank Of India (RBI), on Saturday, filed an application for initiating the insolvency proceedings against two companies of the Srei group of companies. The application was filed at the Kolkata Bench of the National Companies Law Tribunal.

The move came after the central bank took over the board of Srei Infrastructure Finance and Srei Equipment Finance, on October 4, 2021. It has also appointed an advisory panel headed by former Chief General Manager of Bank of Baroda, Rajneesh Sharma. Other members of the panel include the former MD of Sundaram Finance, TT Srinivasaraghavan; former MD and CEO of Indian Overseas Bank, R Suramaniakumar and former COO and CS of Tata Sons Ltd., Farokh N Subedar.

Why did the RBI supersede the board of the two companies?

The bank superseded the boards of two companies because of the failure of the companies to meet the governance as well as payment obligations. The two companies owe around Rs. 29,000 crore to the creditors, as of March 6, 2021.

The problem came to the surface after the central bank conducted a special audit for the two companies. The infrastructure sector has been under constant pressure since the IL&FS crisis in 2018. Covid-19 has only escalated the problems.

After RBI’s guidelines, the two companies were allowed to restructure their assets and not their liabilities. This created a mismatch in the cash flow and delayed the further payments.

What happens next?

Now that the RBI has moved to the NCLT, after the admission of the application by the NCLT, the boards of the two companies will stand suspended. A moratorium has been implemented from the date of application till the plea is accepted or rejected by the tribunal.

In the moratorium period, no legal proceedings can be undertaken against the two companies. The companies, too, cannot transfer or dispose of any of their assets. Once the plea is accepted, the RBI will begin the insolvency proceedings under the Insolvency and Bankruptcy Rules, 2019.

This is not the first that time a financial service provider has been referred to NCLT for insolvency. Dewan Housing Finance Corporation was the first company to be referred to the tribunal. Going by the DHFL’s example, the creditors may have to let go of a major chunk of the loans and advances given to the NBFC.