Dewan Housing Finance Ltd (DHFL) was a classic case of corporate loot, as explained in the various articles published in this column. The company’s promoters systematically siphoned out money through various means, while the auditors, the board, the credit rating agencies, together with the nodal regulators, National Housing Bank (NHB) and Reserve Bank of India (RBI), were mute spectators.
DHFL had lakhs of public deposit-holders. Many institutions that had a significant public stake, like the various provident funds and the mutual funds, had invested in the debentures issued by the company.
The company was acquired through the Insolvency and Bankruptcy Code (IBC) process by the Piramal group in what could be considered a sweetheart deal struck with the committee of creditors (CoC).
The total admitted claims in the IBC was Rs87,248 crore, while the potential liability was in excess of Rs1 trillion (tn). The settlement was struck at Rs34,730 crore.
The major creditors and the details of the settlement are as below.
The valuation done during the insolvency process revealed that the average of the fair value was Rs42,492.32 crore and the average of the liquidation value was Rs26,850.03 crore.
The Piramal group discharged the consideration, partly upfront and significantly, deferred.
Out of the upfront amount of Rs13,700 crore, about Rs3,500 crore was available as cash in the corporate debtor, thereby minimising the actual cash commitment.
The deferred portion was payable over a period of ten years and carried an interest of 6.75%. Piramal group would never command a rate of 6.75% for any fund raised in the market and, hence, the value needed to be discounted. Thus, the overall number of Rs34,250 crore as the amount of settlement was itself a misnomer.
The company also carried a deferred tax asset of, approximately, Rs10,000 crore in its books, reducing further the effective cost of the acquisition.
It is quite possible that the actual value of the settlement, post all adjustments, would be closer to or lower than the liquidation value!
The company had significant amount of transactions that were tainted as fraudulent under Section 66 of the Code, or falling under other provisions like Sections 43, Section 45, etc, that deal with undervalued and like transactions knowingly carried out to defeat the claims of the creditors.
The chart below lists all such transactions.
With regard to any recovery that may arise in respect of the transactions that come under Section 43, etc. the scheme provided that the creditors would be entitled to receive those.
However, in an inexplicable exception, the resolution plan gave the right to receive the amounts recovered out of the fraudulent transactions under section 66, to the corporate debtor. Effectively, the Piramal group, that took over.
To state the facts, this was part of the resolution plan that received an overwhelming majority of creditors’ approval. There was nothing clandestine about this structure.
The national company law tribunal (NCLT), as the adjudicating authority, allowed this scheme and dismissed the opposition of some of the creditors, who had agreed to the plan in the voting but raised this dispute during the final stages of the implementation.
When appealed, the national company law appellate tribunal (NCLAT) agreed with the contention that the recoveries of such contingent sums through proceedings under Section 66 can only accrue to the benefit of the creditors.
In a further appeal to the Supreme Court, the decision rendered on All Fools Day, ruled in favour of the resolution plan approved by NCLT and reversed the decision of NCLAT.
The crux of the decision is that the resolution plan was finalised by the CoC with an overwhelming majority. Even the debenture holders who filed the case had voted in favour of the resolution plan.
The bench felt bound by the catena of cases which had affirmed and reaffirmed that the CoC’s was the last word in a resolution plan. Once a plan secured the necessary approval, no latitude existed with the adjudicating authority or the appellate forum to interfere with it.
It is a fact that the plan that Piramal signed up for provided that the Section 66 recoveries would accrue to the benefit of the corporate debtor.
In a commercial sense, the CoC’s decision was quite unsound and anomalous, as well.
A resolution applicant typically looks at the current potential of a business in making a bid. No bidder offers the highest value in the first instance. Even in an auction situation, as no two bids are made in a similar fashion, a negotiation is a given. The same had happened in this case as well.
Piramal did increase the offer from the initial one. But to attribute their increased offer to getting a potential upside on section 66-type fraud transactions is stretching one’s credulity too far!
Unless one combines doing lending business with buying tickets at Mahalaxmi on the weekends, building a speculative possibility that exists outside the business realm in valuing the business is abnormal, and contrary to how a business decision is made.
On the contrary, the bidder may push for a discount, citing the potential for the creditors to receive such contingent payments should they succeed in uncovering the loot of the promoters.
Faulting the way the court decided the issue may not be reasonable, as the court cannot be expected to divine a business deal of this complexity. Its role was to interpret the law and follow the precedents.
However, the court not expressing some surprise, if not shock, on the way the CoC structured the deal is reasonable to point out as an opportunity missed to call out such questionable deals, that IBC has become notorious for, leading to abysmal recovery for the lenders.
Why should the CoC shoot itself in the foot and do such deals is a trillion-dollar question that cannot be answered frankly in an article that goes into the public domain!
Note- Citation of the case discussed
IN THE SUPREME COURT OF INDIA, CIVIL APPELLATE JURISDICTION, CIVIL APPEAL NOS. 1632-1634 OF 2022.
PIRAMAL CAPITAL AND HOUSING FINANCE LIMITED (FORMERLY KNOWN AS DEWAN HOUSING FINANCE CORPORATION LIMITED) ….APPELLANT (S)
VERSUS
63 MOONS TECHNOLOGIES LIMITED & OTHERS.…RESPONDENT (S)
(Ranganathan V is a CA and CS. He has over 44 years of experience in the corporate sector and in consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)
1) Commercial bankers have limitations in valuations, either b caz they simply rely on a third party valuer or comparison impossibility due to handling by large number of officers.
2) If, dissenting members point out objections with facts and figures, its veracity should be looked into by
NCLT, rather than ignoring merely b caz they are minor %.
3) If malpractices with vested interest are found out, a blacklisting of Resolution Officers/ lead coc to be introduced.
4) Recovering something during my period rather than a higher amount in future should be enabled.
5) More experienced top level Credit / Restructuring Bank officials should be on board of NCLT, to quickly understand ploy made thru Settlement Scheme.
3) If fo