DHFL Forensic Audit Reveals a Rs20,000-Crore Hole: Why Is The Report a Secret?
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’. 
Citizen’s Action
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.
sundararaman gopalakrishnan
5 years ago
I see no hope for India..All are corrupt..politicians, auditors, rating agencies,bureaucrats etc..The common man is left to fend for himself..Case in point is PMC bank depositors..
Suketu Shah
5 years ago
People voted for Modi May 2014 as he claimed he/his party was anti-corrupt.Just another one of untrue promises by him else such disaster would not be happening last 5.5 yrs.How long can you blame Congress.Youi govt rules India for last 5.5 yrs and counting.
Replied to Suketu Shah comment 5 years ago
One is not able to tolerate 5.5 years when he/she has forgotten more than 50 years of misrule by a party whose claimed achievement is independence. This government has inherited an economy that is beyond repair. During present times, any good leader simply wants to give up and doesn't wish to carry the legacy. If someone like Modi has come forward Indians should thank their stars. It's easy for anyone (including me) to write that anything coming to the mind but getting into the worfield calls for grit, hardwork etc.
Gayaprasad Lal
5 years ago
It's matter of great concern that nowadays such things are happening where common man is suffering, concerned authority to please take stern action against guilty be punished.
S K Nataraj
5 years ago
DHFLs troubled status became public when they started defaulting on their commitments. The forensic audit reveals something very serious and can have a cascading effect on other companies and the Banking sector/economy.
SEBI/RBI should act immediately in the matter. Crooks should be swiftly and severely punished, for wrongs.
Mita Choudhury
5 years ago
what happens to fixed deposit holders?
Mita Choudhury
5 years ago
I am a fixed deposit holder in Dhfl which matures in December. Where do I stand....please advise.
Nagaraju Bommanahalli
Replied to Mita Choudhury comment 5 years ago
You can not get money because NCD not secured
5 years ago
Sir, There is greater need for stricter law enforcement. We are uncertain whether the Police and the Central Investigation Departments can be involved at the beginning itself. A fraud whether by individuals or by a group or a corporate organization is a crime and those responsible, for committing errors of omission or commission, have to be punished swiftly. In India, we have a very strange form of natural justice at play. Unlike in other countries, where criminals are convicted swiftly, we have a system in which the process punishes. It is mostly the victims who are at receiving end.
One way to turn the system on the culprits is to book them under police processes. Perhaps, there is a need to change the IPC to include such crimes as being committed under the very nose of the regulators.
Ranbir Lamba
5 years ago
SEBI knew but no action. RBI Regulator must be aware but no action. Ministry informed? Public money going to Promoter+ politicians + Mirchi ( dawood) May be used for terror funding .

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.
5 years ago
Lengthier the feature lengthier the confusion. My head started rounding and rounding though I don't stand invested. I am imagining how actual investors feel about the whole episode. Even the investigating agencies reports would be lengthy and decision makers just don't read them. All reports should have action plan of punishments and solutions not exceeding 3 pages. A usual joke that if you don't want your employees or public know about some unpleasant news, put it in the notice board.
5 years ago
Thanks Sucheta Dalal and Moneylife for being at the forefront of investigative financial news. Have been following you for several years now..
Iam one of those personally affected by the DHFL imbroglio having invested in their so called AAA rates secured NCDs. I have not recd a single update till date either from the company or the trustees of the security.
Is there is a common forum for the affected to come together ?
Can u help with a connect to the Khemkas so that I could join them in their fight.

Thks, sreenath
M Ramachandiran
5 years ago
Home loan account bank details
Manjunath Swamy
5 years ago
So it's very clear, that all these years the companies running were the biggest joke of the century. So if you have right contact you get loan no matter you will return it or not. But to an ordinary citizen, the banks burden them with processing fees, documents, proofs, notary proof etc.
I personally stand for the stance for freezing any defaulted who want to vanish the money deposited by hard working common man.
Nagaraju Bommanahalli
5 years ago
I am telling from past one year how most of the companies running fraud business by taking huge fraud loans from all banks and made banks to bankruptcy
I will ask both both parties please reply ,how much money recovered till today by selling assets of fraud persons who taken huge fraud loans,how much money returned to the bankrupted bank account holders , don't do drama,my friend lost several lakhs from Alpic finance a NBFC in twenty five years back, but till today he have not received single paise , this Alpic finance company is a subsidiary of Cipla group, this NBFC done huge fraud,but till today no action taken, these companies go to court and take stay order for the sale of theirs assets, Court will drag the case to twenty to thirty years at that time all investers will die, these fraudessters enjoy our loot money with political leaders, these are all drama nothing will happen only poor will die
In India nobody knows how Indian companies are doing fraud from the beginning to last ,for example a big business men will start the company in India as below .His companies actual value is Rs2000crores but with the help of the auditors,Banks,and chartered accountants he made his company s values to RS 6000 crores by book adjustment with bribe and he call IPO that is in share market and collect Rs10000 crores in share market, first he pumped 60%of money to foreign country in the name of business and will deposit most of the money in his name next he will file bankruptcy due to losses and will write off all the loans this is the business doing in India ED is doing drama ICICI Bank chandakochar is well known to all she done huge fraud in ICICI Bank, this drama of enquire is doing from past one year, but still she is not arrested, reasons In this icici bank scam all SEBI auditors ED RBI central government rating agencies big leaders of all parties involved.central government making all efforts to avoid arrest these fellows,if arrested all all foreign country become knows most of the Indian companies running on bogus and take away all foreign investment,then India become bankruptcy.This is well known by central government hence avoiding all efforts to arrest directors of icici bank chandakochar DHFL jetairways Videocon kingfisher airline PNB bank head il@fs etc .even Vijaymalya kingfisher airline companies don't have single plane in his companies name but all banks gave Rs10000 crores money, same type loans gave to jet airways,DLF, Devan housing finance company,il@,fs,etc wait in few months most of the common people investment in icici bank NBFC PSU banks equity NCD mutul funds become Zero,All parties RBI officers, SEBI, etc are corrupt they are taking India towards bankruptcy.

Replied to Nagaraju Bommanahalli comment 5 years ago
Well said.
5 years ago
This no longer has any shock value in an India where conversion of tuum to meum is now standard operating procedure in all financial institutions and government departments.
5 years ago
Or is it Neverland of DHFL?
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