State Bank of India has been SIIL’s largest lender, with the infrastructure company defaulting on a substantial Rs 1,023.42 crore of SBI loans. Now, in a surprising turn of events, SBI is poised to invest Rs 24.33 crore in SIIL’s preferential allotment, acquiring 28,55,771 shares at Rs 85.23 per share.

This investment will give SBI approximately a 2.49 percent stake in the restructured AIBEA’s Banking News Bulletin from All India Bank Employees’ Association company. The move represents a shift from being a creditor facing a substantial write-off to becoming an equity participant in SIIL’s potential recovery. According to Company Announcements SBI’s decision to take an equity stake in a company that has defaulted on its loans is an extraordinary development in Indian banking history.

This move raises several critical issues. Its eagerness to invest equity in a company that has already defaulted on over Rs1,000 crore of its loans suggests a strange risk assessment process. The bank appears to be betting on SIIL’s long-term recovery potential. As a public sector bank, its decision to use public funds to take an equity position in a distressed company may face scrutiny. The bank will need to justify this investment strategy to its shareholders and regulatory bodies. SBI’s dual role as a creditor and shareholder could potentially lead to conflicts of interest in future decision-making processes regarding SIIL.

On July 8, 2024, it was reported that SIIL filed a plea with the national company law tribunal (NCLT) seeking approval for a new resolution plan to settle its debts with financial creditors within a 90-daytimeframe. Following the creditors’ meeting, SIIL’s outstanding debt to financial creditors has been dramatically reduced from Rs 2,200.36crore to Rs 464 crore as the settlement amount. Its ‘composite scheme of compromise and arrangement’ received overwhelming support, with 92 percent of financial creditors voting in favour.

This scheme was initially approved by the company’s board of directors in 2022. The company is now awaiting final approval from the NCLT to proceed with the restructuring plan. Post-NCLT clearance, the company plans to implement the resolution by monetizing company and promoters’ assets, raising equity from existing or new investors and utilizing promoters’ contributions to finance the settlement amount. It aims to achieve debt-free status by the end of September 2024. Vikram Sharma, managing director of SIIL, expressed gratitude towards the company’s partners and creditors for their trust and support. He stated, “With a strong restructured resolution plan, we are confident about obtaining NCLT clearance and achieving a debt-free status for Supreme Infrastructure by the end of September 2024.” The company’s total bank outstanding stood at Rs7,093 crore, including Rs2,200 crore in principal debt and Rs 4,893 crore in funded interest term loans and unapplied interest.

The settlement amount of Rs 464 crore represents a substantial haircut of 93.45 percent for the lenders. The rationale behind such a SBI Suffers settlement amount of Rs 464 crore represents a substantial haircut of 93.45 percent for the lenders. The rationale behind such a significant write-off and its long-term implications for the banking sector and other corporate defaulters remain unclear. Its annual report received a qualified opinion from auditors in FY 22-23, highlighting issues with loan confirmations and interest accruals. The auditor report also highlighted that SIIL has not recognized financial liability forRs1,533crore in corporate guarantees given to its subsidiaries and group companies.

This significant offbalance-sheet risk could potentially undermine the effectiveness of the current restructuring plan. SIIL is issuing up to 8,80,44,460 equity shares at Rs 85.23 per share, along with 1,78,63,430 convertible warrants. This preferential allotment aims to raise approximately Rs 750.40 crore. The issuance of 1,78,63,430 convertible warrants adds another layer of complexity to this restructuring. These warrants, primarily allocated to promoters and select investors, have the potential to significantly alter SIIL’s ownership structure in the future. The warrant structure, which requires only25percent payment upfront with the remaining 75 percent due within 18 months, provides these select investors a low-risk option to increase their stake if the company’s performance improves. This structure could be seen as a backdoor for further promoter control, potentially at the expense of existing minority shareholders.

According to an insolvency expert the table below shows that SIIL was insolvent and defaulting to banks at least since FY-2016 as is evident from the table below: According to the insolvency expert an analysis of SIIL’s financial history reveals a troubling pattern of insolvency that dates back to at least FY15-16. Despite clear signs of financial distress, there is no evidence that banks, including SBI, ever initiated insolvency proceedings under the Insolvency and Bankruptcy Code (IBC). Instead, it was an operational creditor, Vikas Shuttering Store Private Limited, that finally dragged SIIL into insolvency proceedings in November 2018 for accumulated defaults of merely Rs. 14.26 crore. This action, taken for a relatively small amount compared to the company’s total debt, highlights the apparent reluctance of major financial institutions to take decisive action. The Corporate Insolvency Resolution Process (CIRP) order was passed on September 30, 2019, followed by a disputed mutual settlement for Rs 9.50 crore.

The outcome of this settlement remains unclear, further underscoring the opacity surrounding SIIL’s financial dealings. According to the insolvency expert given SIIL’s precarious financial condition according to the insolvency expert it was logical to expect a standard CIRP with the promoters being ineligible under Section 29Aof the IBC. However, it appears that the promoters reached a settlement with the lenders under Section 12A of the IBC. While such settlements can include asset and financial restructuring, including debt-to-equity conversion, the terms of this particular deal raise serious concerns. The insolvency expert also highlighted that the decision by SBI to subscribe to SIIL’s fresh equity at a premium is particularly alarming. Typically, in such 5 restructuring scenarios, lenders are expected to recover their debt while leaving minimal equity value for the promoters.

SBI’s investment in equity at a premium suggests that the bank may have written off an excessive amount of debt, inadvertently leaving substantial value for the very promoters responsible for the company’s financial troubles. According to the insolvency expert this arrangement between SBI and SIIL creates a dangerous precedent in India’s corporate debt landscape. It potentially encourages other defaulting companies to seek similar deals, where they can retain control and value even after significant defaults. Moreover, it raises questions about the effectiveness of India’s insolvency resolution framework and the role of public sector banks in managing distressed assets.

The situation bears hallmarks of what some experts are terming a “financial Stockholm syndrome,” where the lender (SBI) appears to be aligning itself with the interests of the defaulting borrower (SIIL) rather than prioritizing the recovery of public funds. The unusual nature of this debt restructuring and equity investment calls for immediate regulatory scrutiny.

The Reserve Bank of India (RBI) needs to step in and examine SBI’s decision-making process in this matter. There is a pressing need to ensure that public sector banks maintain strict discipline in their approach to debt resolution and avoid creating moral hazards in the financial system. This is a watershed moment in Indian corporate debt resolution. This move blurs the traditional lines between lenders and equity holders, potentially opening up new questionable avenues for dealing with distressed assets. (IPA Service)