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.
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.
Several newspaper headlines in recent times have been proclaiming, “Scrappage policy soon to give impetus to the automobile industry.” Apparently, the government will shortly announce a policy that encourages the scrapping of older automobiles, thereby boost new purchases, which, the policymakers expect, will help the automobile industry come out of the depression that it has sunk into.
The policy, one hears, is to adopt a two-pronged strategy of dis-incentivising the older polluting vehicles, and promoting the scrapping of older vehicles in authorised scrapping centres in an “environmentally friendly” way.
The onus apparently is on the original equipment manufacturers (OEMs) to play a critical role in this: to facilitate the collection of scrapped vehicles, ensure supply of new vehicles (but of course), as well as provide incentives in the form of discounts or additional benefits to the buyers of new vehicles in lieu of the older scrapped vehicles.
The government also believes that to drive away older polluting vehicles, we need deterrents. One of them is raising registration fees by significant sums (25 times, is what one hears!), after the completion of 15 years of life. The other is to exempt registration fees for new electric vehicles altogether.
Will these measures work in rejuvenating the automobile industry? Will they mitigate the issues of vehicular pollution? I really doubt it.
The setting up of regulated scrapping centres is a good move, and is long overdue. Though it has been proposed and discussed for the last four years, it’s only now that the government seems to be taking the necessary steps to set standards and issue guidelines (all off which are available in Europe and North America, and should be emulated, with minor exceptions).
Old vehicles, in poor condition, ought to be scrapped, both from pollution and safety points of view. This calls for execution in a proper, systematic way by which important parts can be salvaged for reuse, and the rest destroyed and/or recycled correctly.
Europe, North America, Japan and other developed markets have been following this voluntary vehicle scrappage system for years now. Yet it has not had any impact in improving the “lot of the automobile industry” in any of these countries.
In United Kingdom, which has pushed for voluntary scrappage schemes over the last few years, four-wheeler vehicle sales fell from 1.82 million to 1.6 million between 2016 and 2018, a drop of over 12% in two years.
Of course, several other reasons, including the uncertainty of Brexit, amongst others, must have caused this recession, but the voluntary vehicle scrappage scheme does not seem to have helped matters.
Cash for Clunkers
During the financial crisis of 2008-2010, when the Western economies were in serious trouble, incentivising the British automobile industry with the scrappage scheme, really helped. The scheme was known as “cash for clunkers,” a phrase to describe a system of scrappage of older vehicles, replacing them with newer, “cleaner” cars, with cash incentives doled out by the government.
Introduced by the British government on 22 April 2009, British citizens who had a car, which was at least 10 years old or more, when scrapped, could apply for £2,000 (Rs1.8 lakhs) funding at the time of purchase of a new automobile.
Similar schemes were also launched by France, Spain, Italy and Germany, and for the latter, car sales surged by 11.5% during January and May 2009 (Germany had introduced the scheme on 13th January 2009). During 2009, car sales recovered significantly in France and the UK too, after a disastrous 2008.
The recovery of the industry came at a price though: it cost the British exchequer $500 million (Rs3,500 crore), the French $554 million (Rs3,870 crore), $3 billion (Rs21,000 crore) for the Spanish a whopping $7.1 billion (Rs50,000 crore) for the Germans!
Yet there was a Keynesian economic reasoning in boosting demand, which these cash rebates could do, by stimulating the economy, and escaping from what John Maynard Keynes called a “liquidity trap.” Even if the government had needed to plough in money in the shorter term, most governments expected to earn back most of it through the rise in car sales and economic activity, which, in turn must have generated more taxes, and so on.
The current Indian government’s thinking though may not be along those lines. So, what could be the alternative? We will discuss that in the next part.
(Gautam Sen is acknowledged globally as a leading automotive journalist, writer, automotive design consultant and expert from India. He founded the country’s first newsstand car magazine Indian Auto in 1986, followed by Auto India, Auto Motor & Sports and BBC’s TopGear. Mr Sen has also been directly involved with the automobile industry in India and Europe, and has worked with eminent designers such as Gerard Godfroy, Tom Tjaarda and Marcello Gandini.)