Continuing from what we had written last week in the first part Auto Policy: Scrap, Rattle or Shake? - I , it may be worth noting that in China, the initial 'cash for clunkers' scheme had relatively limited success. So, the government decided to convert that into an (almost) compulsory scrapping of older vehicles.
Any private car, which has covered 600,000km has to be scrapped. Taxis and most buses can be used for a maximum of eight and 10 years, respectively. After that, they are all crushed.
Many economists argue that it is inefficient to destroy cars in an attempt to stimulate the economy, likening it to the 'broken window fallacy': the illusion that destruction and money spent in recovery from destruction, is a net benefit to society.
A broader application of this fallacy is the general tendency to overlook opportunity costs or that which is unseen, either in a financial sense or otherwise.
This is obvious when one considers that in the UK alone, “there are more than 1.2 million historic vehicles, or classic cars, in a total vehicle parc of 38.4 million vehicles,” explains David Whale, chairman of the Federation of British Historic Vehicle Clubs (FBVHC), estimating the “worth of these vehicles at £17.8 billion (Rs162,000 crore)!”
Moreover, the numbers and the values of these historic vehicles, what we call vintage or classic cars, motorcycles and other vehicles, which are more than 30 years of age, are growing every year. The governments of the UK and most European countries recognise these vehicles as national heritage, or treasures.
India too, has a significant number of 'historic vehicles.' It has been estimated that over nine million vehicles in India are over the age of 15 years. It would be safe to guess that at least 10% of them—almost a million – are over 30 years of age, thus 'historic' as per the definition of FIVA (Féderation Internationale des Véhicules Anciens, the international federation for historic vehicles), and so could be gaining in value.
Destroying them would be a long-term loss to the nation. Restricting their use and, at the worst case, exporting them may be much better alternatives to destroying them.
Many cities in Europe have a limit to the age of taxis and other public transport vehicles, as these ones, because of their intense use, are the most polluting. Until a few years ago, taxis, buses and other public transport vehicles in Beijing, even though they constituted 3% of the vehicles, 'contributed' to 38% of vehicular pollution.
In Paris, new taxis are allowed to ply for seven years, at most. Over these seven years of constant use, many will have covered over half a million kilometres. Once they are taken off the road as taxis, they may be owned by some private buyers in Paris or France. Most, though, are exported to Africa.
Mumbai allows taxis of up to 20-years-old to ply in the city. Many of them have redone their engines several times. It would make much greater sense to restrict the age of public transport vehicles plying in the cities and elsewhere than ban all vehicles more than 15-years-old, as many private vehicles cover relatively fewer kilometres.
In fact, the calculation of the 'net societal costs' of a scrappage programme as a difference between value of destroyed assets (of a vehicle that has covered relatively low mileage) versus fuel savings, emissions avoided, and casualties avoided, may be more negative than presumed.
Export Them Instead of Scrapping
Thus, the solution of exporting the older vehicles to other, smaller markets may be the best alternative. Two-thirds of car sales in most African countries are that of second-hand imports (or pre-owned as the sellers prefer calling them), from Europe and Japan.
Even New Zealand imports more than 150,000 pre-owned cars from Japan every year. In all, Japan, exports over a million pre-owned cars every year all over the world, and it accounts for more than a fifth of the country’s vehicular exports worldwide.
Japan did try the 'cash for clunkers' programme during 2009-2010; but, after a $3.7 billion (Rs21,000 crore) hole in the exchequer, decided to push for exports of older vehicles.
How does this work? After three years of use, all cars in Japan need a roadworthiness certificate, issued after an intensive 60-point test on the car, which includes the process of mounting the car on a test ramp and shaking it nice and proper.
The Japanese call this test as 'shaken.' The car 'shaken' tests, as well as much shakin' ‘n’ rollin’, costs anything between ¥54,000 (Rs35,000) and ¥90,000 (Rs60,000), not including all the repairs and tuning that the owner may have needed to have carried out before or after passing the test.
Moreover, this is every two years, from the third year onwards. Reason enough why, after five years of ownership, most car owners are happy to sell their car, for export, after reconditioning, to Africa and elsewhere.
The US and Germany, learning from Japan, have become significant exporters of pre-owned cars too. They export left-hand-drive cars. Japan is the main exporter for right-hand-drive markets. As would be obvious, India (being one of three main right-hand drive manufacturing nations) has considerable opportunity therein.
Thus, a more stringent process, as well as the higher costs of carrying out roadworthiness certification of a vehicle after a certain number of years, may act as a better disincentive to retain older vehicles than that of higher registration fees.
Moreover, by doing so, the owner makes sure that the vehicle is maintained in a good condition, thereby addressing the issues of emission and safety, as well as retaining enough value for the vehicle to be good enough to be exported at the right time.
(Author of several automotive books, founder editor of many leading auto mags, Gautam Sen has also consulted with most of the Indian auto majors. He has also worked with several leading car designers such as Gérard Godfroy, Tom Tjaarda and Marcello Gandini, among others.)
A forensic audit of DHFL (Dewan Housing Finance Ltd) by KPMG, commissioned by top lenders to the non-banking finance company (NBFC), is understood to have confirmed diversion of Rs20,000 crore to private entities of the promoters through the use of ‘box companies’. I have this information from a top banker who wishes to remain unnamed. Here is how box companies operate:
I have further learnt that the report has not been submitted to the board of directors. The Securities and Exchange Board of India (SEBI) is aware of the forensic audit report.
The question then is: Why hasn’t the DHFL board been sacked? Why do SEBI and Reserve Bank of India (RBI) allow the Wadhwan family to remain in management, even when actions of the Enforcement Directorate (ED) suggest underworld links and lending to companies belonging to Iqbal Mirchi, an associate of gangster Dawood Ibrahim?
What is behind this extraordinary reluctance to initiate decisive action against them even after such a huge crisis? Is there a political deal with DHFL’s promoters in exchange of information on politicians who were in cahoots with the group and the underworld? Even if that is the case, can a financial crisis causing systemic damage be ignored for so long? DHFL owed a massive Rs83,873 crore to a spectrum of lenders and investors as of 6 July 2019.
And, yet, as recently as on 14th October, the company signed a term sheet with Oaktree Capital to sell its entire Rs35,000-crore wholesale book, reports The Economic Times. Over time, it has allowed buyers to cherry-pick chunks of its loan book, leaving a virtual shell behind. Media reports talk about lenders working on a resolution proposal, including conversion of debt to equity which will allow DHFL to get fresh credit with the Wadhwan family sacrificing only half their promoter holding in the process.
Who Is Afraid of SEBI’s Corporate Governance Rules?
In DHFL’s case, SEBI seems unwilling to enforce the corporate governance rules it had tightened just recently. SEBI has not asked lenders to present the forensic report to the board of directors for discussion. The report is material disclosure under the listing obligations and disclosure requirements regulations of SEBI.
Deepali Pant-Joshi, former executive director of RBI, who is an independent director of DHFL since May this year, says she is unaware of the forensic report and has refused to say if she has raised this with the management.
Ironically enough, none of this is a surprise. Many people in the realty industry are at pains to distance themselves not only from the DHFL but the Wadhwans of HDIL (Housing Development and Infrastructure Ltd).
The Wadhwan family separated in 2008 and, after a formal separation agreement in 2010, DHFL was with one part of the family and HDIL with another. Both sides stand accused of large-scale misuse of funds. This raises serious questions about the role, responsibility, due-diligence and accountability of lenders, who are now running helter-skelter to salvage what they can of their massive loans, while retail investors and depositors are left to fend for themselves.
Private Investigations, Silent Regulators
DHFL has been tottering and has faced allegations of large-scale loot for over 10 months now. In December 2018, Debashis Basu wrote in Moneylife about how loans to promoters and poor disclosure were used to boost net worth and valuation.
Two weeks earlier, Moneylife wrote about how two mutual funds (MFs), viz., Templeton and Aditya Birla Mutual Fund, had subscribed to non-convertible debentures (NCDs) of the group without showing promoters’ shares as a pledge against them. The regulator did nothing.
At the end of January 2019, an explosive sting by Cobrapost alleged that the Wadhwans had siphoned off a massive Rs31,000 crore to create personal wealth, through a network of shell companies. The KPMG forensic audit appears to have confirmed at least Rs20,000 crore of that amount.
Lenders and regulators should have gone into an overdrive right then, but they failed to respond even in June 2019, when Risk Event-Driven and Distressed Intelligence’s (REDD) report exposed the modus operandi of how DHFL and other large NBFCs avoided disclosure using the ‘box system’.
Finally, when DHFL actually began to default, it is bondholders and shareholders, not the lenders, who may have prodded regulators and watchdog intermediaries to act. Ashok Khemka, a whistle-blower and IAS officer from Haryana, whose wife, Jyoti Khemka, has invested in bonds of DHFL, is at the forefront of this fight.
Ms Khemka has written to the heads of RBI, SEBI and the finance minister; filed queries under the Right to Information (RTI) Act and moved the consumer court in Haryana against Catalyst Trusteeship Ltd, CARE Rating, Brickworks Rating, DHFL and SEBI. She also filed a writ petition in the Chandigarh High Court.
Mr Khemka points out that DHFL’s NCDs were given ‘AAA’ rating (highest possible) by CARE and Brickworks from July 2016 to January 2019 and then, suddenly, downgraded them to default rating (D), within a span of just three months. He alleges that rating agencies and the trustee company failed in their responsibility to do their job and protect investors.
He makes the point that options, such as approaching the Debt Recovery Tribunal and the National Company Law Tribunal, are not open to retail investors; so they have to depend on RBI and SEBI, as regulators, to act on their behalf to recover their dues.
Mr Khemka has demanded an investigation by SEBI under Section 11C and action to suspend activities, forfeit security and impose costs u/s 11 (4) and 11D of the SEBI Act. He also wants the promoters of DHFL to be declared personally bankrupt, their shares frozen and assets seized so that depositors’ dues are recovered.
On 15th October, the Chandigarh High Court admitted the plea of Jyoti Khemka, issued notices and posted a hearing on 18th November against the notice of motion.
Earlier, an interim order of the Bombay High Court on 10 October 2019 (Suit No. 1034 of 2019) by two MFs (Reliance Nippon and Edelweiss) had brought out how DHFL and Catalyst Trustees failed to protect debenture-holders’ interest and has restrained them from making payments to unsecured lenders.
The order brings out how DHFL and the debenture trustees allowed a sale of securities to avail securitisation advances and also paid Rs150 crore to an unsecured creditor, DSP Mutual Fund, ignoring the rights and interests of secured creditors.
It also highlights other shenanigans of DHFL, such as deliberately issuing a cheque of Rs200 crore from an account which did not have sufficient funds. The order notes that DHFL had 132 bank accounts with resources to cover the payment.
Big Lenders & Enforcement Agencies Wake Up
Interestingly, big lenders seem to be showing some urgency, but still no unity, even after things have reached a point of hopelessness. State Bank of India (SBI) wants the finance ministry’s intervention to force united action, since the government has no financial resolution law.
The effort is to get MFs, which have an exposure of over Rs5,000 crore to DHFL, to agree to a joint resolution plan. Funds with exposure to DHFL include: UTI, Kotak, Reliance Nippon, Axis, Tata, DSP and Primerica. Kotak and Axis have also filed litigation to recover their dues. The custodian of DHFL bondholders has finally moved court on 17th October.
So, the united action that SBI wants is easier said than done. How will they recover the Rs20,000 crore siphoned off by the promoters? The ED has raided over a dozen DHFL properties (and unearthed a loan of Rs2,186 crore to a company called Sunblink Real Estate, reportedly connected to gangster Iqbal Mirchi), but whatever is recovered or attached by ED will land up before the PMLA (Prevention of Money Laundering Act) court.
This indicates that we would see a morass of litigation by lenders and depositors against DHFL, as well as credit rating agencies, trustees and MFs, without any positive outcome in the foreseeable future.
Those affected include: DHFL’s debenture-holders and equity investors; the Life Insurance Corporation, International Finance Corporation and the Employees’ Provident Fund Organisation have invested in this dubious enterprise which will affect their investors indirectly.
DHFL is yet another example of what columnist Andy Mukherjee calls the ’jungle raj’ in finance, where failed supervision and timely action hurts all lenders, but retail investors face the hardest blow.
Heavy electrical equipment maker Bharat Heavy Electricals Ltd(BHEL) on Friday gained over 22 per cent on the BSE over reports that the government may soon divest its stake in the company.
BHEL scrips on the BSE had surged as much as 29.29 per cent to hit an intra-day high of Rs 57.60 apiece before closing at Rs 54.45 a share.
"Shares of state-run BHEL jumped the most in a decade and NMDC rose nearly 6.5 per cent after reports that a group of secretaries would meet on Friday to consider lowering the government's holdings in public sector companies below 51 per cent," said Deepak Jasani of HDFC Securities.
IANS had earlier reported that the state-owned BHEL may sell four to five units of its non-core manufacturing business under the government's asset monetisation programme during the ongoing financial year.
The government also plans to dilute its equity in the power equipment manufacturing entity to 26 per cent in phases under the plan unveiled in this year's budget.
According to official sources, out of the total 16 manufacturing units of the company, a few units which do not have material synergies with its core business, such as transportation and water would be put to sale.
Asset monetisation of public sector enterprises has been on the government's agenda for some time now given the fiscal pressure the Centre is under, while the companies too are going through a rough financial phase.
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