RBI nudges twin Srei lenders banks to classify account as fraud

The Delhi High Court directed Punjab & Sind Bank, which classified the Srei companies as fraud, not to take action against the twin Srei companies until the next hearing scheduled on August 23. Lenders believe that classifying the two accounts as fraud at this juncture could be deemed as contempt of court.

However, the banking regulator believes that the stay on ‘taking action against the companies is different from ‘declaring it as fraud.’ Lenders are seeking legal opinion on the matter, the people cited above said.

The RBI did not respond to ET’s request for comments. A spokesperson for Srei Foundation said that “the information is incorrect, speculative and completely wrong.”

The High Court stay on April 22 followed a petition filed by the embattled promoter Hemant Kanoria. If the account is classified as fraud, it will prevent Kanoria from regaining control over the companies. Under 12A of the Insolvency and Bankruptcy Code, a promoter classified as a wilful borrower or an account classified as fraud cannot submit a settlement plan to lenders. Srei Equipment Finance and Srei Infrastructure Finance were admitted for corporate insolvency proceedings by the RBI last October.

A fraud tag can also affect a defaulting promoter’s ability to control other businesses. Once an account is tagged as fraud, lenders can pursue recovery even from the related companies if the forensic report shows diversion of funds to other group companies, a fourth person said. Srei group has diversified business interests that include the power sector and road construction.

“The RBI, in a letter to banks last week, has sought their response on why the two accounts red-flagged over six months ago are not yet classified as fraud,” said a banker on the condition of anonymity. “The regulator asked banks to either declare it as fraud or reverse red-flag classification in line with the RBI’s Framework for Dealing with Loan Frauds issued in 2015.”

RBI rules require a bank to immediately log a complaint with enforcement agencies after classifying an account as fraud.

Punjab & Sind Bank classified the twin Srei accounts as fraud based on a KPMG report, which conducted the forensic audit in April 2021 at the behest of banks following a special audit by the RBI. Srei’s administrator has appointed BDO India to conduct a transaction audit.

The KPMG audit revealed Rs 8,158 crore to “connected parties,” “refinancing” of loans to “evergreen” them, and disbursal of low-interest loans of a long moratorium to multiple borrowers “without adequate justification,” ET reported on February 28. Kanoria subsequently urged the RBI governor Shaktikanta Das to advise lenders not to act on the KPMG assessment, ET reported on April 7.

In his letter to Das, Kanoria pointed out that while finalising its report, “KPMG had not given any opportunity to the board or senior management to put its contentions before it.”