DFHL’s Forensic Audit Exposing Massive Fraud and Cooking of Books Leads to SEBI Order Banning DHFL Promoters
Market regulator Securities and Exchange Board of India (SEBI) has barred promoters and directors of Dewan Housing Finance Corporation Ltd (DHFL), including eight members from the Wadhawan family and four of their companies for issuing fraudulent statements  and cooking the books since 2006 and making corporate announcements based on this fraud.
 
G Malalingam, whole-time member (WTM) of SEBI has issued an interim order barring 12 persons who were promoters of DHFL since 1 April 2006 to 31 March 2019. Those barred from market include: Kapil Wadhawan, chairman and managing director DHFL, Dheeraj Wadhawan, Rakesh Kumar Wadhawan, Sarang Wadhawan, Aruna Wadhawan, Malti Wadhawan, Anu S Wadhawan, Pooja D Wadhawan, as well as Wadhawan Holding Pvt Ltd, Wadhawan Consolidated Holding Pvt Ltd, Wadhawan Retail Venture Pvt Ltd and Wadhawan Global Capital Ltd (formerly known as Wadhawan Housing Pvt Ltd).
 
The order refers to a forensic audit by Grant Thornton, which refers to 'the Bandra Books Entities' which were the crux of the large-scale fraud that was revealed before the National Company Law Tribunal (NCLT) as well. The findings of the audit report are astounding and reproduced by the SEBI order. It says, 
 
“The company created a ‘logical partition’ in the Enterprise Resource Planning (ERP) Software used for bookkeeping and loan management purposes” to store data pertaining to only one branch – Bandra, which simply did not exist." It is referred to as a virtual branch. 
 
The forensic audit says, a “parallel set of books of accounts (were) maintained by the Company” and all accounts in this module were fake. These accounts have been collectively called as ‘Bandra Books’. The totally fraudulent approvals and fund disbursal in respect of 'Bandra Book' accounts were provided by the Chairman and Managing Director of the DHFL- Kapil Wadhawan, personally. 
 
The forensic report report states “that out of the Rs23,815 crores shown as disbursed to Bandra Book entities in the accounts of the Company, only Rs11,755.79 crores was actually disbursed” to 91 entities, but was portrayed as comprising 2,60,315 home loan accounts. “The closing balance outstanding in the books of the company towards such accounts as of 30 June 2019 was Rs14,046 crores.” 
 
Further, the auditor “verified the financial statements of 50 of the said 91 entities, which accounted for 70% of the disbursals, and noted that 34 entities had invested a portion of the loan amount” back in DHFL linked companies – what is worse, they were weak companies with doubtful repayment capacity.
 
What is worse, by charging lower interest to these entities, the company suffered a notional loss of Rs. 3,348 crore! According to SEBI, if the fictitious income from these Bandra entities were removed from the accounts then DHFL has been making losses “in all years except FY2018.”
 
The SEBI order says: “The financial impact of the “fraudulent transactions” covered in the Application was disclosed by the Company in the aforementioned corporate announcement as under, - 
 
(a)  Rs14,046 Crores, being the amount outstanding in the books of the Company as on 30 June 2019; 
 
(b)  Rs3,348 Crores being amount considered as due and outstanding towards notional loss to the Company on account of fraudulently charging lower rate of interest to certain entities referred to in the Application as the Bandra Book Entities.” 
 
As a result of this brazen fraud and fiction in the accounts, DHFL was able to raise a massive Rs24,000 crores through public issue of debt securities during this period, notes the SEBI order. 
 
During the period of the fraud, which was FY06-07 to FY18-19 the following entities were listed as promoters:
 
 
"Kapil Wadhawan and Rakesh Wadhawan, being the chairman and MD of the company for the past several years, were responsible for ensuring the integrity of DHFL’s accounting and financial reporting systems and based on the findings of the initial report, it appears that they were, prima facie, involved in the aforesaid manipulation or falsification in books of accounts and, thereby, misrepresented to the investors and other stakeholders the financial information pertaining to the company," the SEBI order says.
 
Holding promoters of DHFL responsible for violations of SEBI regulations, Mr Mahalingam further says, "The investors in debt securities issued by the company and investors who dealt with the company’s equity shares during this period were induced into these transactions based on the untrue information disseminated by the company. The interest of investors who take the decision of investing in the securities of the company on the basis of financial position of the company and disclosures made in the financial statements have been, prima facie, affected adversely due to the aforesaid transactions entered into by the company and the consequent fraudulent misstatements in the financial statements of the company."
 
Earlier this month, the Supreme Court on Thursday stayed default bail granted to Kapil and Dheeraj Wadhawan by Bombay High Court in the Yes Bank fraud case. Kapil Wadhawan, chairman and managing director of Dewan Housing Finance Ltd (DHFL), and Dheeraj Wadhawan, are being investigated in several cases of fraud and mismanagement. The Wadhawans, along with their beleaguered DHFL, are also co-accused in a cheating and money laundering case registered against Yes Bank co-founder, Rana Kapoor.    
 
 Last month, granting the Wadhawan brothers 'default' bail, Justice Bharati Dangre of the Bombay HC directed them to surrender their passports and deposit Rs1 lakh each as surety.
 
The default bail was granted citing failure of Enforcement Directorate (ED) in filing charge-sheet against the Wadhawan brothers within the mandatory 60-day period after the arrest.
 
The Wadhawans had moved the Bombay HC seeking bail on grounds that the ED failed to file the charge-sheet within the stipulated 60-day period after the ED arrested them on money-laundering charges on 14 May 2020.
 
The Wadhawan brothers have contended before the HC that the ED had filed its charge-sheet a day after the deadline—on 15th July—against them as well as Yes Bank founder Rana Kapoor, his wife Bindu Kapoor and their daughters Roshni and Rekha, besides others.
 
The ED launched its probe in the case after the Central Bureau of Investigation (CBI) filed its first information report (FIR) in the case on 7 March 2020 before the lock-down, over dubious loans granted by the Yes Bank and alleged quid pro quo between Kapoor and the Wadhawans.
 
In its charge-sheet, the ED has claimed that Dheeraj Wadhawan, the then non-executive director of DHFL, owned 44 companies of the Wadhawan group and also managed the works of the real estate business of the Wadhawan group.
 
The ED investigation into the Yes Bank-Rana Kapoor money-laundering probe had also found that Kapil Wadhawan, started his realty business in 2007-08, pursued it in United Arab Emirates (UAE) by forming Wadhawan International Investments Ltd (WIIL), and the company has some assets in Australia worth Rs1,000 crore.

 

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    COMMENTS

    i_sakarwala

    1 month ago

    Seal and confiscate all the moveable and immovable assets, property, cash and everything remotely related to the wadhwans, Rana kapoor , auditors and everyone connected to this scam. They have not only cheated the innocent investors but have committed crimes against our national interest. They should be charged for financial terrorism and also for acts which have caused deaths of so many innocent depositors due to the shock suffered by them.

    hudafshaikh

    1 month ago

    Such a huge fraud definitely involves most of the senior management, HO accounts / internal audit and IT teams - and especially, the external auditors.
    DHFL adminstrator should immediately suspend those who were involved in this fraud and request CBI/ED to immediately initiate criminal action against them.
    Further, he should initiate action against the external auditors who approved the accounts.

    bkochar1506

    1 month ago

    Shocking - in light of this, DHFL Adminstrator should immediately refund all the debentures issued thru public issues immediately.

    s5rwav

    1 month ago

    Fraudulent Accounts now Transferred to ICICI Bank Limited to Serve the DHFL Customers and the Investors of the Private Sector Bank - ICICI Bank Limited - to Pay the Price or the MD of ICICI Bank Limited is a Question. I am Babubhai Vaghela. Thanks.

    bsd5760

    1 month ago

    I don't know if investors, like me, will ever get back their money invested in DHFCL NCDS. May be if Government make some provision for refunding the investors' money by selling assets of DHFCL and its Directors .

    rajoluramam

    1 month ago

    DHFL-It is a demon in the country who swindled hard earned money of Indian public and banks. Every day some news about the WADWANS is disturbing the peace of the people of the country. Right from 2006, they are deceiving the people. No body or even the Government and its agencies have any doubt about the misdeeds of these fradusters. One wonders whether any business man in the country can be so greedy as these wadhwans. Definitely God punishes the entire famly with severest punishment.

    ganesanjaicare

    1 month ago

    HITTING THE DEAD SNAKE USELESS.WHAT IS THE POINT NOW AFTER THEY MANIPULATED AND CHEATED .NO USE

    IL&FS Fraud: SEBI Increases Monetary Penalty to Rs1 Crore Each on India Ratings, Care Ratings and ICRA
    Market regulator Securities and Exchange Board of India (SEBI) has increased its penalty to Rs1 crore each on India Ratings and Research Pvt Ltd, Care Ratings and ICRA Ltd for default committed in rating Infrastructure Leasing & Financial Services (IL&FS) and its subsidiary company IL&FS Financial Services Ltd (IFIN).
     
    G Mahalingam, whole-time member (WTM) of SEBI, passed three separate orders, which state, "I find that the lapses on the side of the noticee, while rating the securities of IL&FS and IFIN have resulted in real and severe financial loss to investors. It has shaken up the investors’ faith in the reliability of credit ratings in the context of the corporate debt market. Had the noticee downgraded the ratings at the appropriate time and thereby forewarned the investors, the impact of the default on investors who invested in AAA rated instruments, could not have been this severe. Considering the above, I am convinced that the case merits imposition of exemplary penalty provided under Section 15HB of the SEBI Act."
     
    "... having found the AO Order dated 26 December 2019 as erroneous to the extent it is detrimental to the interests of securities market, hereby impose a monetary penalty of Rs1 crore upon the noticee under Section 15HB of the SEBI Act," the orders say. 
     
    Mr Mahalingam further stated, "I note that substantial public interest was involved in the securities issued by IL&FS and the credit ratings thereon, which were relied upon by the investors to make investment decisions.
     
    "However, the failure of the noticee to exercise adequate due diligence with respect to the assessment of the mounting credit risks of IL&FS in the light of its stressed balance sheet position and in turn, the failure to review and modify the ratings on time, so as to alert the market in advance, has resulted in abrupt downgrading of rating of these securities just before the default. In any case, a CRA cannot be heard to contend that its accuracy in ratings should not be relied upon by institutional investors." 
     
    Earlier in December 2019, the adjudicating officer (AO) had found that the credit ratings agencies (CRAs), while assigning their credit ratings to the non-convertible debentures (NCDs) of IL&FS, failed to exercise proper skill, care and due diligence while discharging their responsibilities as a CRA and thereby violated the provisions of Regulation 24(7) and clauses 4 and 8 of the code of conduct of the CRAs, read with Regulation 13 of the SEBI (CRA) Regulations, and had hence imposed a penalty of Rs25 lakh each on them.
     
    Until July 2018, India’s credit rating companies had put out investment grade ratings on billions of dollars of corporate debt raised by the IL&FS group and its subsidiaries. The first signs of trouble came in June 2018, when the special purpose vehicles tied to IL&FS Transportation Networks Ltd (ITNL), a group subsidiary, defaulted on its debt obligations. More defaults in other parts of the empire followed in August and September. Finally, the rating agencies were forced to downgrade the rating status to default in September 2018.
     
     In October 2018, the government was forced to dismiss the IL&FS board and replace it with six eminent persons of its choice led by the well-known and respected banker, Uday Kotak.
     
     The IL&FS case is a prime example of locking the stable door after the horses have bolted. The credit rating agencies had clearly failed to discharge their prime responsibility.
     
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    COMMENTS

    yerramr

    1 month ago

    Rating agencies need thorough overhaul. The regulators have helped these rating agencies giving weightage for credit disbursal. They have overrated the directors' performance and even failed to disclose facts relating to their previous failures and frauds. They have also failed to recognize the non-disclosure or wrong disclosure of debts owing to their MSE suppliers. Number of companies show cheques issued but not realized as paid dues.

    m.prabhu.shankar

    1 month ago

    1 Crore Penalty on Rating Agencies. Is this a penalty first ? Put 100 Crores and if they can't pay just take out all the assets of the rating agencies, sell it and add the money to govt ex-chequer.

    Newme

    1 month ago

    Behind every Financial crime there is the usual suspects of Bankers, Auditors, Rating Agencies.

    No Compulsion To Invest in Small-/Mid-caps, Schemes Must Be 'True to Label': SEBI Chief
    As the market regulator's recent change in norms regarding constitution of multi-cap schemes continues to cause some discomfort among mutual funds, SEBI (Securities and Exchange Board of India) Chairman Ajay Tyagi on Tuesday said that the regulator is not forcing anyone to invest in mid- or small-cap companies, as it has only asked fund houses to keep their schemes "true to label".
     
    On September 11, SEBI said that multi-cap funds will now invest minimum 75% of total assets in equities with 25% each in large-cap, mid-cap and small-cap companies.
     
    Describing the recent 'confusion' regarding its circular on multi-cap funds as 'unfortunate', Tyagi said: "What we are saying and what we are trying to address here is 'true to label'."
     
    "So when we said that multi-cap should have some portion in small cap and mid cap, we are not really forcing anyone to invest in those caps, we are saying investment should be done in the best interest of the investors."
     
    He added that if a fund is given a label, its form should be as per the name.
     
    Mr Tyagi, however, said that SEBI has received representation from the Association of Mutual Funds in India (AMFI) and it is 'actively' examining them and it will look at how further clarification can be provided.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    COMMENTS

    payalmehr

    1 month ago

    Mr. Tyagi what is your view on BSE code - Issuer Name: CJCPPL-21%-30-6-21-PVT. Why a company which has shown construction cost at 207 crores be listed on BSE? Do you do due diligence??

    payalmehr

    1 month ago

    Uday Kotak, phoenix arc gives loans worth 99 crores to a litigated Project 1 Aerocity. Website www1aerocity.com some loans are getting restructured since 2003. visit the YouTube channel for all documents Vishal Brijmohan Mehra.
    BSE code - Issuer Name: CJCPPL-21%-30-6-21-PVT. Why would such a brand do this ?

    ganesanjaicare

    1 month ago

    it is not confusion.planned pump and dump of small and midcap stocks of low quality.sebi is doing like that whom to trust by gullible investors.

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