To most in Corporate India, a ‘connected entity’ and ‘related party’ mean the same — arguing over the difference is quibbling over semantics. But, is it? A confidential KPMG forensic report has run into legal ambiguity over the terms while making a litany of allegations on the lending practices of two Kolkata-based Srei companies which are categorized as systemically important non-banking finance companies in the country.According to the report, which is replete with caveats and assumptions, the Srei companies had lent about Rs 8158 crore to “connected parties”, “refinanced” loans to “evergreen” them, and disbursed low-interest loans of long moratorium to multiple borrowers “without adequate justification,” two persons familiar with the findings told ET.The management committees of the Srei entities have justified the loans which the report has questioned. However, KPMG (which was hired by two banks and submitted its report around end December) did not ask Srei promoters to respond to the allegations. While the Srei companies (with total borrowings of over Rs 31,000 crore) are undergoing insolvency proceedings and the administrator has invited ‘expression of interest’ from potential bidders by March 12, the tussle over loans to `connected parties’ — and, who indeed is one — may go on.SREI’s LEGAL OPINIONKPMG, which declined to comment on the matter, has said in its report that the connected entities (which borrowed from SREI) have not been disclosed by SREI as ‘related parties’. SREI, armed with a legal opinion, has argued that these entities do not fall under the definition of ‘related parties’. (The definition is often derived from the Companies Act which talks about ‘related party transactions).But, this definition can make a big difference when it comes to RBI regulations. As per the rules, loans to related parties carry higher ‘risk weight’ and would require more capital than regular loans. Thus, describing the connected entities as related parties could have required SREI and its promoters to infuse more money into the companies.Technically, none of these `connected’ borrowers of SREI can be technically and readily described as ‘related party’. Why? SREI companies have loans to entities whose equity has been subscribed by funds managed by an asset manager in which the listed SREI entity owns 51% equity. “Here, SREI’s argument is somewhat like this: SBI is a lender to Mahindra & Mahindra while mutual fund schemes run by SBI AMC hold shares of Mahindra. So, how can you call them related parties? SREI would probably argue that promoters or SREI has not put money in the fund pools, and the stake in the AMC, which has a professional board, is held by a listed company (Srei Infra Finance Ltd)..,” said a source.“A more detailed scrutiny is required,” says KPMG “by collecting information (which was unavailable during the forensic review) and analyzing it to determine the control and influence if any over such connected entities, any relationship with management of Srei Infra Finance and Srei Equipment Finance in undertaking loan transactions and to understand the actual substance of the transactions.” Also, since these connected entities were owned by various trusts/their funds, and financial information on them was not readily available, KPMG said it could not undertake the necessary analysis required to check whether Srei’s customers have diverted funds.The forensic review by KPMG was undertaken for the period April 1, 2016 to September 30, 2020. SREI promoters recently moved the court challenging the relevance of the KPMG report when a transaction audit by another firm BDO has been appointed by the administrator. “BDO would not do forensics. For banks the KPMG report has certain relevance. They could later use this report in trying to recover a part of their loans from the promoters.. that would be over and above what they receive from the new bidder. But at that point SREI promoters would naturally argue that the borrowers were not related parties, there was no fund round-tripping, or no loan evergreening —- for which any way there is no regulatory definition,” said a senior banker. “So, whether connected entities are indeed related parties would have to be tested in the court of law. Today, they aren’t the same. That’s why, the regulator and banks use terms like `connected entities’ and `probable connected entities’ in relation to SREI… it has to be established legally,” he said.KPMG said SREI faced a ‘working capital gap’ because of the Rs19604 crore loan reviewed by it, about Rs 7000 crore was disbursed at an interest of 1% a year during the moratorium period with an internal rate of return of 12-15% on exit. Srei has countered this on the ground that infra projects have long gestation periods and the interest rates, though low in the initial years, does not result in economic loss.