SREI’s resolution, after DHFL, will be seen as a test case on whether IBC can work for financial firms
The Reserve Bank of India’s decision to supersede the Boards of SREI Infrastructure Finance and SREI Equipment Finance and initiate resolution proceedings against them, marks only the second instance where the regulator has used the IBC (Insolvency and Bankruptcy Code) to refer tottering financial firms to bankruptcy court. The IBC had originally excluded financial service firms from its ambit on the understanding that they would need a separate dispensation for resolution with their assets consisting mainly of loans, a fragmented creditor base and ability to trigger systemic risks on collapse. Following the successful resolution of DHFL, all eyes will now be on the SREI resolution as a test case for the future.
The only saving grace to the SREI saga seems to be that, unlike DHFL, it has limited retail liabilities. SREI is a not a deposit-taking NBFC and the bulk of its ₹30,000 crore dues are owed to domestic banks and foreign/domestic institutions, with retail NCD exposures of about ₹1,500 crore. This, coupled with the fact that the group’s debt has carried a low rating for some time, could minimise the systemic impact from its folding up. SREI’s troubles, like DHFL’s before it, serve as a cautionary tale that retail NCDs offering high rates, even if ‘secured’, come with considerable risks to the investor’s principal.