SBI Buys Equity In Defaulter Supreme Infrastructure Following A 93% Write-Off In Loans.

State Bank of India (SBI) has taken an unprecedented step in the debt restructuring of Supreme Infrastructure India Ltd (SIIL) which is a company that defaulted on Rs 1,023.42 crore in loans. SBI the country’s largest public sector bank will invest Rs 24.33 crore in SIIL’s preferential allotment acquiring 28,55,771 shares at Rs 85.23 per share as noted on Monday.

This investment will give SBI approximately a 2.49% stake in the restructured company. It was said that this development marks a significant shift in India’s corporate debt resolution as SBI transitions from being SIIL’s primary creditor to becoming an equity stakeholder. SIIL’s total bank outstanding stood at Rs 7,093 crore including Rs 2,200 crore in principal debt and Rs 4,893 crore in funded interest term loans and unapplied interest.

Creditors agreed to settle for Rs 464 crore which is a substantial reduction of 93.45% from the original debt and this settlement amount was approved by 92% of financial creditors which may pave the way for SIIL’s restructuring plan. The company has filed a plea with the National Company Law Tribunal (NCLT) seeking approval for the plan.

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SBI’s decision to take an equity stake in a company that has defaulted on its loans raises several critical issues as well. The experts question the bank’s risk assessment process particularly when using public funds to invest in a distressed company. The experts also added that the move may face regulatory scrutiny and SBI will need to justify its investment strategy to shareholders and regulatory bodies.

Moreover, SBI’s dual role as creditor and shareholder could lead to conflicts of interest in future decision-making processes regarding SIIL. The bank’s willingness to write off a substantial portion of the debt and invest in equity suggests a betting approach on SIIL’s long-term recovery potential.

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Apart from that, SIIL’s financial history reveals a troubling pattern of insolvency dating back to at least FY15-16. Banks including SBI failed to initiate insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) despite clear signs of financial distress. An operational creditor dragged SIIL into insolvency proceedings in November 2018 for accumulated defaults of Rs 14.26 crore in lieu.

The Corporate Insolvency Resolution Process (CIRP) order was passed on September 30, 2019, followed by a disputed mutual settlement for Rs 9.50 crore. However, the outcome of this settlement remains unclear, further questioning the opacity surrounding SIIL’s financial dealings. The financial experts also argue that SIIL’s precarious financial condition warranted a standard CIRP with promoters being ineligible under Section 29A of the IBC. Instead of that, the promoters reached a settlement with lenders under Section 12A of the IBC which raises concerns about the effectiveness of India’s insolvency resolution framework.

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