Delhi HC stops Punjab & Sind Bank from acting on SREI loan reclassification

Sources say the order will help SREI preserve the resolution process while protecting lenders and stakeholders from any value erosion on account of such unnecessary reclassification

The Delhi High Court has restrained Punjab & Sind Bank, which recently declared SREI loans as “fraud”, from taking any further steps on the basis of its reclassification till the next hearing.

In an order dated April 22, the court said that till the next date, respondent no. 1 (Punjab & Sind Bank) will stand restrained from taking any further steps or action prejudicial to the petitioner on the basis of the order declaring the petitioner’s bank account as fraud. The petition was filed by SREI promoter, Hemant Kanoria.

The matter has been listed for August 23, 2022.

According to sources close to SREI promoters, this order will help SREI preserve the resolution process while protecting the lenders and stakeholders from any value erosion on account of such unnecessary reclassification.

On April 19, Punjab & Sind Bank declared outstanding dues of SREI companies as fraud and informed the stock exchanges. The bank, in its filing, had said that the NPA accounts, SREI Infrastructure Finance (SIFL) with outstanding dues of Rs 510.16 crore and SREI Equipment Finance (SEFL) with outstanding dues of Rs 724.18 crore have been declared as fraud and reported to the RBI as per regulatory requirement.

Now, the interim relief from the court, sources close to SREI promoters believe, will act as a deterrent and nip any such effort by other lending banks - from acting unilaterally and in haste in reclassifying SREI loans - based on the KPMG forensic report that has been challenged in court.

Lenders had appointed KPMG in April 2021 when a loan recast was being considered for SREI. However, in October, the RBI superseded the boards of the two SREI companies and the corporate insolvency resolution process was initiated.

Under the process, the total amount of admitted claims of commercial banks, as of January 31, 2022, stood at Rs 22,964.64 crore while total admitted claims including domestic institutions and ECB lenders was Rs 31,918.46 crore.

In January, Kanoria challenged the KPMG forensic report before the Kolkata Bench of the National Company Law Tribunal (NCLT). An order in the matter is awaited.

However, in the interim, Kanoria also wrote to RBI governor, Shaktikanta Das, asking him to advise banks and lenders not to act against the two SREI companies based on “inconclusive” findings in the KPMG forensic report.

In the letter, sent in March, Kanoria contested the KPMG report mainly on grounds of parallel audit and lack of proper process being followed to complete the report. The issue of parallel audit arose as the administrator of SREI had appointed BDO for an audit of SREI.