DHFL: Slick Swindler, Sick Regulator, Sorry Stakeholders!
Kapil Wadhawan is the face of an unapologetic, brazen, corporate fraudsters-ridden crony capitalism in India. He is supposed to be in jail presently, having been apprehended in the alleged swindle of well over Rs30,000 crore in the company managed by him, Dewan Housing Finance Ltd (DHFL). (Read: DHFL's FD and NCD-holders May Lose Twice Over unless They Intervene)
The allegation of fraud and diversion of public funds surfaced in an online portal in January 2019. He was remanded to custody sometime in September to October 2019. In between, the credit rating agencies downgraded the debt securities of DHFL, independent directors resigned in March 2019, the auditors resigned in July or August 2019. 
Reserve Bank of India (RBI) took control of the company by appointing an administrator and took the company to Insolvency and Bankruptcy Code (IBC) process, perhaps the first for a non-banking finance company (NBFC).
The million-dollar question is what the two credit rating agencies, two auditors, one of whom is an international firm, three independent directors, respectively a former chairman and managing director (CMD) of a leading public sector bank (PSB), a former CMD of Small Industries Development Bank of India (SIDBI), and a leading corporate lawyer, debenture trustees, the three regulators, being, National Housing Bank (NHB), RBI and Securities and Exchange Board of India (SEBI), the department of company affairs and registrar of companies (ROC) were doing till an unconnected media organisation brought to light a systematic swindle spread over years of more than 30% of the all the declared assets on the balance sheet.
In other words, the company was disclosing a balance sheet with missing assets of over 30%! 
The lenders were leading public sector banks (PSBs) that have been blissfully ignorant of being taken for a royal ride! 
Of course, everyone who could resign, resigned. RBI stepped in. 
Most likely, the arrest happened because of a trigger from the Yes Bank scandal and not directly based on DHFL swindle. 
Any which way, Kapil Wadhawan landed in jail, said to be still in custody, and has hopefully not put a duplicate there like in Bollywood movies!
The major difference in DHFL case is the fact that a huge part of the borrowings, in fact more than 50%, was from the public in the form of fixed deposits (FDs) and debentures. None of the IBC cases so far involved general public, except perhaps the real estate buyers.
IBC has been a fraught process quite caught up in litigation all the way since its inception and almost every issue needed the Supreme Court to intervene. It has neither been swift, as promised, nor the level of recoveries, projected at a measly 20-odd%, anything to sing paeans about. It has been dominated by the committee of creditors (CoC) (cabal of conspirators!) and not as transparent and logical like the predecessor legislation, Sick Industrial Companies Act (SICA).
But IBC has come to stay being a flagship reform in the recent years.
Back to Kapil Wadhawan. He has been keen to wrest the control back of the company that has fed him fat with so much easy money! 
While the IBC process has been on, he has been making offers from the jail to settle the creditors. The most recent one has come even as the offer from Piramal group has almost reached finality. This has been much debated in the media in the past few days, since it surfaced. The experts are divided on the legality of the offer at this stage and the step taken by the National Company Law Tribunal (NCLT) to seek consideration of the same by the CoC. 
Kapil Wadhawan is yet only an accused and not a convicted criminal. He can seek indulgence of definitions and rules that he should not be prevented from making a better offer to settle the creditors. 
The most audacious Ponzi fraudster of all times is Bernie Madoff. When financial markets melted in 2008, the lid came off the fraud perpetrated by him for years. He pleaded guilty and was convicted in 2009 to serve a 150-year jail sentence. He died in jail later.
Lai Xiaomin  the chairman of the board of China Huarong Asset Management, the biggest asset reconstruction company (ARC) or bad bank, since 2012, was sacked for corruption in April 2018.  He was executed on 29 January 2021! 
Two super powers with contrasting legal and political systems deliver justice speedily. 
Our system, with all the political interference and corruption in judiciary, may move at a glacial pace, if at all. It may be a couple of decades when the matter comes for trial by which time most people would have forgotten the issue. Remember all the NBFC, teak plantation, chit fund scams, and the public money lost!
At some stage, bail will be the due of any accused and normal life will resume, with yacht rides and pleasure trips, and electoral contributions! 
But keeping all this aside, it is essential to look at the present case to maximise value for the creditors, especially the public investors in debt, who are very poorly represented in the process. 
The debenture trustees are mere notional figures, who have so far done nothing to protect the interest of the debenture-holders. 
Kapil Wadhawan has the confidence of the ill-gotten money stashed away somewhere safely. He would know how to re-circulate it and use it to pay a part of the debts. His strategy will be to wrest the control and use the company to launder the booty.
Unfortunately, the Piramal offer, though considered the best by the CoC, is at a huge discount to the even written down value of the assets held by the company. Prima facie, it is a shocker! 
But, as a percentage, it may beat many of the past resolutions. For the banks, it will be easy to justify the outcome as they have shamelessly written off bigger sums in other bankruptcies.
The public is the differentiator in this case. They have not got any interest for the past two years. Their patience will run out soon, if not already. 
NCLT and the system will be fussing over due procedures being observed and principles of natural justice being followed. RBI, having failed in its duty to carry out proper inspection and prevent the fraud, will act as if it has nothing further to contribute beyond bringing the company to IBC. 
Many more months may be lost in figuring out which rule and Section of the IBC prevails over what!
But Kapil Wadhawan should not be allowed to escape with his loot. 
In Madoff’s case, a trust was formed to liquidate assets stashed away and release it to the investors, who lost their money. We should create a similar framework to chase the assets held by Kapil Wwadhawan and put it in a trust to pay the depositors and debenture-holders. The recent decision of the Supreme Court (SC) that personal assets of the promoters can be attached in the corporate insolvency resolution process (CIRP) is an added fillip to this point.
The banks should not be granted anything beyond what Piramal pays as they deserve to be penalised for their dereliction of duty in not discovering the fraud earlier.
This case can be a precedent and trendsetter for many things, if the agencies wish to do justice to their existence. Kapil  Wadhawan’s offer should be rejected as he is an accused in a criminal conspiracy. While he is entitled to a fair trial, he cannot seek indulgence of parity with other bidders. 
Piramal’s upside should be capped as they cannot take advantage of a highly vitiated IBC system quite captive to the IRP and CoC and with little room for public to have a meaningful say except the sham of voting. The undervaluation in the assets on the books should be tracked and, on realisation, they should be passed on to a trust for the benefit of the depositors.    
Kapil Wadhawan’s  wealth should be attached under the prevention of money laundering act (PMLA) and distributed to the public bond-holders as and when realised. 
Lastly, all regulators, especially RBI, should expiate for their sins of negligence by pressing all central agencies into service to complete the trial in the shortest time possible; just the way political opponents are hounded currently!
It is a shame that even two years after the scandal was exposed, RBI has not done a thorough investigation to establish the extent and the modus of the fraud. 
As of now, the reliance is on the forensic audit report of an agency appointed by the company. RBI has not identified the weaknesses in its own supervision, but recommends reforms like appointing joint and several auditors for NBFCs!   
(The author is a CA and CS and retired as a partner at EY, Chennai heading tax and regulatory advice.) 
3 years ago
How much money will the FD holders get and when?
3 years ago
In your to other article you had covered how the NCD and FD holders are getting double whammied. In the meanwhile the Catalyst Trusteeship is more interested in getting approval for the expenses, there is nothing about how the resolution is progressing and what are the likelihood for the recovery and what is the status of the collaterals that are secured by the NCD etc.
The entire process favours the biggies and the Resolution Professional appointed.. All the big 5 are now going for these as it is attractive and gets them good fees.
3 years ago
Need to ponder and think why Mr. Wadhawan got the audacity to put-up such an offer, something or Someone BIG is behind him ??
3 years ago
Very well conveyed Ranganathan.
While IBC clearly lays down rules that existing promoters / management (who are the actual cause for the company coming into IBC process) are disqualified from submitting Resolution Plans ( thereby ensuring back door entry is plugged), it’s very much surprising that NCLT gives orders permitting Wadhwans to submit a settlement plan. What’s NCLT trying to achieve and how’s he going beyond the Law and spirit of IBC The law makers as well as SC should come down heavily against such decisions by NCLT and preferably go one step beyond by making the people giving such decisions which are clearly against the public Interest accountable for same.

You have also rightly pointed out the silence / inaction of all the regulators , independent directors, auditors till the issue of fraud and diversion of funds got highlighted by the online portal. And we have to wait endlessly to see if any of them are brought to book and made accountable.
3 years ago
Well said.
Ramesh Popat
3 years ago
It's a valid and genuine case to be taken up by moneylife to protect retail bond holders (NCD)

Kamal Garg
3 years ago
(1) Wadhawans looted DHFL is in the knowledge of every body. So much so that, they created a fake "branch" in their ERP system and advanced loans to non-existing customers against no asset or backup/collateral.
(2) There are two types of cases : One is civil liability which most of the financial/business misfortunes are covered in this and law has to take its own course to recover from the left over assets and do the needful. And that's why, most of the regulators have only authority to impose a financial penalty and not to award a sentence to an alleged culprit. Awarding a sentence is a judicial process to be done by a court of law and not regulators.
Second is criminal liability which covers forgery, cheating, siphoning off of funds, etc. which Wadhawans have done in a big way and here also, the law should take its own course to penalise Wadhawans.
(3) It is a known fact also that Piramals got this prized booty at a real throw away price. It is not clear, at least in the public domain, whether Piramals will write off/extinguish the entire share capital of DHFL and make it zero or will only partially write off/extinguish the share capital. It is of course extremely important to see that if Piramals are going to write off/extinguish the entire share capital of DHFL, then, the future recovery from any of the loan assets should be deposited separately in an escrow account held under a trust and should be fairly distributed between fixed deposit holders/NCD-debenture holders and the equity share holders, simply because Piramals' valuation offer was based upon the complete write down of the loan asset without any recovery.
And above all, the "handlers" of this case, I do not know as of now, who is the ultimate one entity/regulator/agency responsible for handling the entire case and all the aspects of this case, should be transparent and clearly communicate with all the stake holders about all the aspects of this case in a time bound manner.
3 years ago
You have packed a punch Ranganathsn. Keep going
3 years ago
Mass petition. Anyone can sign it:
3 years ago
We are sceptic about the RBI appointed Admin & AR for FD-holders:

3 years ago
The ruling party can't escape the allegation against them on the terror funding: (sarcasm intented)

3 years ago
RBI people take salaries for nothing, its ludicrous puppet of crony capitalist
3 years ago
Our regulators, courts are the most shameful organisations.Public has no say, space in India.For ordinary citizen, investors once he has parted money it is moneylost,he should think lucky when he receives back his investment.
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