Rs 2,434 Crore Fraud: PNB flags Srei Equipment, Infra promoters to RBI after forensic audit

Punjab National Bank (PNB) has reported an alleged loan fraud of Rs 2,434 crore involving the former promoters of Srei Equipment Finance and Srei Infrastructure Finance to the Reserve Bank of India (RBI).

In a late-evening stock exchange filing, the state-run lender said it has classified the borrowal accounts of the two Srei companies as fraud, in line with SEBI’s Listing Obligations and Disclosure Requirements (LODFR) Regulations, 2015, and its internal materiality policy.

Of the total amount flagged, Rs 1,240.94 crore pertains to Srei Equipment Finance, while Rs 1,193.06 crore relates to Srei Infrastructure Finance, PNB said.

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“Pursuant to the applicable provisions of SEBI (LODFR) Regulations, 2015 and the Bank's Policy for determining materiality of events/information required to be reported to the Stock Exchanges, it is hereby informed that the bank has reported borrowal fraud to RBI against the erstwhile promoters of Srei Equipment Finance and Srei Infrastructure Finance," the filing noted.

Forensic audit flags irregularities

PNB said the decision to declare the accounts as fraud was based on findings of a forensic audit, which pointed to serious irregularities. These included loans being extended to connected parties and possible evergreening of borrowings. Evergreening refers to the practice of taking fresh loans to repay existing loans to conceal stress in accounts.

The bank clarified that it has already made 100 per cent provisioning for these loans, meaning the financial impact of the fraud classification has been fully accounted for in its books.

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Srei promoters challenge fraud tag

However, Srei group founder Hemant Kanoria has challenged the forensic audit report, arguing that it cannot be used as the basis for declaring the accounts as fraud. He has maintained that the matter is currently sub judice.

PNB is not the only lender to have taken action against the Srei companies. Earlier, Punjab & Sind Bank, Bank of Baroda and Union Bank of India had also declared loan frauds linked to the group.

Insolvency process and NARCL takeover

The Srei group has been under insolvency resolution since 2021. In October of the same year, the Reserve Bank of India (RBI) took control over the boards of Srei Infrastructure Finance and Srei Equipment Finance due to the mentioned governance failures and loan defaults, and forwarded the cases to the National Company Law Tribunal (NCLT).

February 2023 saw the National Asset Reconstruction Company Ltd (NARCL) as the winning bidder for the two companies that had a total debt of approximately Rs 32,750 crore to the banks. The resolution plan was approved by the NCLT in August 2023, and the acquisition was finalised by January 2024.