Consider the irony. On the one hand, fixed deposit (FD) and non-convertible debenture (NCD)-holders are on the verge of losing a significant chunk of their tax-paid, hard-earned savings in Dewan Housing & Finance Ltd (DHFL), because they relied on dubious and falsely high credit ratings. On the other hand, when a complaint about rating agencies has landed up before the Competition Commission of India (CCI), the market regulator SEBI (Securities and Exchange Board of India) has suddenly woken up to its territorial rights and asked CCI to keep off its jurisdiction, knowing full well that compromised ratings are the root cause of the losses inflicted on investors.
Another irony is that the rating agency that has approached the CCI is one of the two that had rated DHFL’s NCDs so highly. Both, CARE and Brickworks, gave DHFL NCDs ‘AAA’ rating (highest possible) from July 2016 to January 2019 and, then, suddenly, downgraded them to default rating (D), in a span of just three months after DHFL started defaulting. But this column is not about regulators’ turf wars but about the fate of investors crushed by the collapse of DHFL.
For starters, this is one more bankruptcy resolution that is moving ahead in record time, after the sale of the steel companies. About Rs35,000 crore may be recovered (against admitted claims of Rs87,083 crore) Also, Kapil Wadhawan’s attempts (like those of the Ruias of Essar Steel) to derail the resolution have failed. Two branches of the Wadhawan family had been allowed to run riot and decimate a lot of wealth in poorly-supervised listed entities. While Kapil and Dheeraj Wadhawan have looted and run DHFL to the ground, their relatives did the same with Housing Development and Infrastructure Ltd (HDIL) and Punjab and Maharashtra Cooperative Bank (PMC Bank). Members of both families are now in jail.
Purely from a macro perspective, that 35% of the money in case of DFHL’s outstanding is being recovered, and rather quickly by Indian standards, through bankruptcy proceedings and several thousand jobs saved, is a positive outcome. The government and regulators will chalk it up as a big success.
FD- and NCD-holders are the biggest lenders to DHFL at Rs45,000 crore and they represent the savings of ordinary people. Another Rs35,000 crore is owed to commercial banks; but they dominate the committee of creditors (CoC) and will influence the outcome. The losses, even after a successful sale, are massive—over Rs52,000 crore. Other than those who invested up to Rs2 lakh (who will get back their entire principal, not interest), the FD-holders stand to lose 75% of their investment, while those with secured NCDs will lose 60%.
The key issue here is: What happens to Rs33,309 crore siphoned away by the Wadhawans which was established by the Grant Thornton forensic audit report? Can any part of it be recovered? If, yes, who gets the recovery proceeds, if any? Shockingly, this money may go to the new bidders, depending on who wins. At the moment, there are two serious bids for DHFL: one from the Piramal group and another from Oaktree Capital Management. A final decision will be taken on 14th January.
One of DHFL’s largest investors, 63 Moons Technologies (formerly Financial Technologies), has raised some valid concerns and invited FD- and NCD-holders to join it in opposing the resolution plan at the National Company Law Tribunal (NCLT). It has demanded that any future recoveries should go only to financial creditors. There are valid reasons for its worry. According to the Oaktree proposal, accessed by an investor, the recoveries will be a pass through to financial creditors, so long as the company’s assets are not impacted.
However, the Piramal plan has assigned a value of one rupee to the massive money siphoned off and all recoveries will accrue to the new company as a big bonanza. Unless investors ensure that NCLT spells out what happens to this money, FD- and NCD-holders could end up losing again.
Remember, all of India’s elite investigation agencies, such as the Central Bureau of Investigation (CBI), the Enforcement Directorate and the Serious Frauds Investigation Office (SFIO) as well as economic offences wings of the police in some states, are investigating the DHFL fraud and would, hopefully, manage to recover at least some of the money siphoned off. Since neither of the current bidders has made bids on the expectation of substantial recovery of this siphoned off money, should they get a bonanza, if there is any recovery?
63 Moons fears that banks may find a way to exercise personal guarantees by the Wadhawans and only FD- and NCD-holders would be left high and dry, if the siphoned money is, indeed, recovered. The documents, painstakingly obtained by an investor, show that financial creditors (read FD-/NCD-holders), who do not accept the resolution, will get only liquidation value in cash (about Rs30,000 crore), while other financial creditors would then divide the balance as per the approved resolution (the bid amount of about Rs38,000 crore minus costs). The difference between the two is hefty. All this only goes to show that investors need to put up a fight to protect their rights and look at some interesting facts, painstakingly obtained by a diligent investor who wants to remain unnamed.
The National Housing Bank (NHB), a regulator, which abjectly failed to exercise adequate oversight over DHFL, has filed a preferential claim over other financial creditors to get Rs2,436.67 crore. Why should NHB, a subsidiary of the Reserve Bank of India (RBI), get this benefit? In response to an investor’s objection to this preferential treatment, the administrator has said that ‘the legalities of NHB’s claim’ will be decided by NCLT. But most investors who stand to lose are, probably, unaware of the proposal.
Another concern is that legal advisers of the CoC (read bankers) will walk away with Rs100 crore in fees as seen in the table below.
Separately, Ernst & Young, as process advisers to the administrator, will get a success fee of Rs15 crore on successful resolution and legal advisers will get Rs2 crore.
Even the debenture trustees, Catalyst Trusteeship and IDBI Trusteeship Services, who have failed to protect investors, are being taken care of in the resolution by creating a corpus of Rs7 crore for their costs. Is it any wonder that debenture trustees are careless about their fiduciary obligations and duties?
The tragedy is that DHFL’s losses could have been contained if the regulators had acted swiftly. The company has been tottering since late-2018. In December of that year, Debashis Basu wrote how loans to promoters and poor disclosure were used to boost net worth and valuation. Even earlier, we wrote how Templeton Mutual Fund and Aditya Birla Mutual Fund subscribed to DHFL’s NCDs without revealing that the Wadhawans had pledged shares against them. The regulator did nothing. Today, investors stand to lose heavily from a successful resolution, with no sign of justice. There is no guarantee that this kind of fraud will not happen over and over again. After all, no institution has been inflicted with exemplary punishment for what is a failure of fiduciary duty, at best, and collusion, at worst.