Secured lenders led by State Bank of India rejected a debt recast plan submitted by IL&FS for a project it undertook in Jammu & Kashmir to build India’s longest tunnel, said three people aware about the development. Secured lenders claim that the distribution of cash as proposed under the plan was unfair and that it was skewed in favour of unsecured creditors and lenders within the IL&FS Group, they said.

Last December, IL&FS proposed a debt recast for Chenani Nashri Tunnelway Ltd (CTNL), after a ₹3,900 crore deal to sell the special purpose vehicle to I Squared Capital’s Cube Highways did not fructify, the people said. IL&FS wanted Cube to improve the offer after signing the agreement, they said.

IL&FS has proposed that the CNTL debt be transferred to an infrastructure investment trust at Rs 5,257 crore – the revised value as per an RBSA valuation report. Secured lenders have sought a higher share of proceeds on grounds that CNTL’s enterprise value improved between mid-October 2018 – when the moratorium was imposed – and March 2021, mainly because of a ₹1,500 crore cash balance in the SPV that was the payment due to them, but was not distributed due to a moratorium imposed when IL&FS collapsed.

IL&FS did not respond to a request for comment till press time Friday.

In a series of meetings, secured lenders communicated to IL&FS that the cash balance of ₹1,500 crore should be distributed among them in line with waterfall mechanism approved by the appellate tribunal for the debt resolution of IL&FS-related companies. However, IL&FS has proposed to distribute ₹1,500 crore with all classes of lenders – secured, unsecured and IL&FS group lenders, one of the people said.

The IL&FS group will benefit if the cash is distributed to all classes of lenders since their share in CNTL’s debt is 24%, the person said.

The company has outstanding debt of ₹5,454 crore from 28 lenders. Of this, the share of secured creditors is ₹2,806 crore. It owes ₹1,353 crore to unsecured creditors, while borrowing from IL&FS group companies is ₹1,295 crore.