SBI takes 93.45 per cent haircut for bankrupt infra company

In a controversial move, the State Bank of India has decided to convert part of its debt exposure to equity in Supreme Infrastructure India Ltd (SIIL), a company that has declared bankruptcy.

News-and-views portal Moneylife noted the decision represents a sharp pivot on SBI's part from being a creditor dealing with substantial debt losses to becoming an equity participant in the company’s potential revival.

The infrastructure firm, which defaulted on Rs 1,023.42 crore of SBI loans, has triggered significant concerns from various quarters over the existing corporate debt resolution framework, and especially over SBI taking on the dual role of both creditor and equity stakeholder.

The SBI, which has been SIIL’s largest lender, has now chosen to invest Rs 24.33 crore in the company's preferential allotment, acquiring 28,55,771 shares at Rs 85.23 per share. This investment gives SBI a 2.49 per cent equity stake in the restructured SIIL.

SBI’s debt restructuring has raised eyebrows across the banking sector, especially given that the lenders, including SBI, have taken a staggering 93.45 per cent haircut on SIIL’s outstanding debts. The company’s total dues to financial creditors stood at Rs 2,200.36 crore, with the settlement amount now drastically reduced to Rs 464 crore.

The restructuring arrangement, which awaits final approval from the NCLT, is being closely scrutinised. Congress leader Jairam Ramesh joined experts to warn that this could set a dangerous precedent in India’s corporate debt landscape, with defaulting companies potentially looking to retain control and value even after significant defaults.

In a post on his X handle, Ramesh termed the arrangement as the creation of a dangerous precedent in India's corporate debt landscape. SBI’s decision to invest in SIIL at a premium has led to questions about the bank’s risk assessment exercises and the long-term implications for public-sector banks.

“This could create a moral hazard, where companies that have defaulted on their loans see a way to avoid accountability while retaining substantial control and value,” an insolvency expert told Moneylife.

The concern is compounded by the fact that SBI, as a public-sector bank, is using public funds to acquire an equity stake in a distressed company that has already defaulted on Rs 1,000 crore of loans.

The development has therefore also sparked debate about the effectiveness of India’s insolvency resolution framework. Public-sector banks, which play a critical role in managing distressed assets, appear to be aligning with defaulting borrowers rather than prioritising the recovery of public funds!

Critics have termed this situation a “financial Stockholm syndrome,” where the lender seems to be acting in the interest of the defaulter rather than enforcing strict recovery mechanisms.

Therefore, there is growing pressure on the Reserve Bank of India (RBI) to examine the decision-making process behind this move.

With such significant haircuts and the potential for conflicts of interest, the unusual nature of this restructuring surely calls for regulatory intervention to ensure transparency and accountability in public-sector bank operations?

Meanwhile, as SIIL awaits NCLT clearance for its restructuring plan, the company has outlined steps to become debt-free by the end of September 2024. The plan includes monetising assets, raising equity from investors and leveraging promoter contributions to meet the settlement amount.

In the past, Vikram Sharma, managing director of SIIL, had expressed optimism and been quoted in the media as saying, “With a strong restructured resolution plan, we are confident about obtaining NCLT clearance and achieving a debt-free status by the end of September 2024.”

However, the substantial off-balance-sheet risks — such as the Rs 1,533 crore in corporate guarantees to subsidiaries — continue to loom large, raising concerns about the sustainability of the restructuring.