Congress criticises SBI's decision to convert SIIL debt into equity, urges RBI intervention

The ongoing issue involving Supreme Infrastructure India Limited (SIIL) and the State Bank of India (SBI) has become a focal point in India’s financial and political landscape. It concerns SIIL’s default on significant loans and SBI’s decision to convert this debt into equity, raising concerns about the precedent it may set for future debt resolutions in India.

SIIL's financial troubles

SIIL, a construction and infrastructure company, was once engaged in large-scale projects such as roads and bridges across India. Over the years, however, the company faced severe financial troubles due to project delays and insufficient revenues. As SIIL’s cash flow problems worsened, it struggled to repay its loans, leading to the company’s default.

The State Bank of India (SBI), being SIIL’s largest lender, found itself at the centre of this financial turmoil, as SIIL declared bankruptcy. In response, SBI decided to take an unusual step to recover its dues.

SBI's debt-to-equity conversion decision

In a surprising move, SBI converted its outstanding debt into equity in SIIL. This means that instead of pursuing traditional recovery methods or selling off assets, SBI has now become an equity stakeholder in SIIL, shifting from being its primary lender to part-owner. The controversial decision also involved other lenders who agreed to take a 93.45% “haircut” on the debt, which indicates that they are recovering only a fraction of the original loans extended to SIIL.

Criticism and concerns

The decision has drawn sharp criticism, particularly from political circles. Congress leader Jairam Ramesh, through a post on the social media platform X (formerly Twitter), criticised SBI’s approach and raised several concerns. He highlighted that SBI’s decision to become an equity stakeholder in a company that declared bankruptcy could set a "dangerous precedent in India’s corporate debt landscape".

"This arrangement creates a dangerous precedent in India's corporate debt landscape — it encourages other defaulting companies to seek similar deals, where they can retain control and value even after significant defaults," Ramesh noted.
His concerns extend to how this move might affect the Insolvency and Bankruptcy Code (IBC) and India’s overall framework for handling distressed companies. By converting debt to equity, SBI could be seen as aligning itself with the interests of the defaulting borrower (SIIL) rather than prioritising the recovery of public funds, which are at stake in cases involving public sector banks like SBI.

“The SBI appears to be aligning itself with the interests of the defaulting borrower (SIIL) rather than prioritising the recovery of public funds,” Ramesh further argued. "The Reserve Bank of India (RBI) needs to step in and examine SBI's decision-making process in this matter."

Given the unusual nature of this debt restructuring and the potential risks it introduces, Congress is urging the Reserve Bank of India (RBI) to step in and examine SBI’s decision-making process. Ramesh emphasised the need for regulatory scrutiny to ensure that public sector banks maintain discipline in their approach to resolving bad loans.

Congress' position is that SBI’s move could create a moral hazard within India’s banking sector, encouraging more companies to default on their loans with the hope of retaining control through similar debt-to-equity swaps. Ramesh pointed out that the entire situation raises questions about how distressed assets should be managed by public sector banks, and whether SBI’s actions are truly in the best interests of the public.
"There is a pressing need to ensure that public sector banks maintain strict discipline in their approach to debt resolution and avoid creating moral hazards in the financial system."

Broader implications

This situation shines a light on broader challenges in India’s banking and insolvency frameworks. When public sector banks like SBI take significant financial losses (haircuts) and switch from creditors to shareholders, it risks undermining confidence in the banking sector’s ability to handle bad loans effectively. Moreover, it raises questions about the long-term sustainability of the Insolvency and Bankruptcy Code (IBC) if companies that default can avoid paying back substantial portions of their debt and still retain operational control.

(With inputs from PTI)