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Feb 4, 202114 min read

DHFL SCAM AT A GLANCE: FROM THE PERSPECTIVES OF AILING FD HOLDERS

Posted on February 4, 2021

updated on September 21, 2022

DHFL SCAM AT A GLANCE: FROM THE PERSPECTIVES OF AILING FD HOLDERS

COMPILED BY DEBAPRASAD BANDYOPADHYAY (TO BE UPDATED)

I. HISTORY OF THE DHFL SCAM

Dewan Housing Finance Corporation Ltd. (henceforth DHFL, established on 11 April 1984) is a deposit-taking housing finance company, headquartered in Mumbai with branches in major cities across India. As of June 2018, DHFL has 209 branches and 113 service centres. It also has a representative office in London.

DHFL was not an unregulated entity. The investors including FD holders relied upon audited financial results, ‘AAA’ credit ratings and regulatory bodies like SEBI, National Housing Bank. DHFL, with their businesses spread across various segments of financial services, were subject to different regulators, including the Reserve Bank of India, Securities and Exchange Board of India, National Housing Bank and the Insurance Regulatory and Development Authority of India defaulted on its debt repayment due to their balance sheets were hiding asset-liability mismatch risks.

On 29 January 2019, Cobrapost, an Indian investigative journalist group, published an exposé of DHFL for using various shell corporations to siphon more than ₹ 31,000 crores of public money for the personal gains of the DHFL’s primary stakeholders: Kapil Wadhawan, Aruna Wadhawan and Dheeraj Wadhawan ,

Cobrapost also raised allegations of political donations (as expected in the crony capitalist scenario) worth crores of rupees, in violation of Section 182 of Companies Act, 2013 for political donations.

Auditor Grant Thornton in his 98-page forensic report on DHFL furnished “round tripping” of funds through 2.60 lakh “fake and fictitious” home loan accounts in the non-existent Bandra Branch between 2007-2019. This allegedly helped them to siphoned off thousands of crores public money from DHFL.

The report focuses on 91 entities, 50 of these firms – which received 70 per cent of the total Bandra Book disbursements wherein the auditor found that no collateral or security was obtained before the grant of these loans and also a lower interest rate was charged and certain transactions which are undervalued, fraudulent and preferential in nature and leads to a monetary impact to DHFL.

Additionally the trail of the loan given by DHFL to Sunblink real estate in 2010 lead to gangster Iqbal Mirchi, an accomplice of the organized crime mastermind Dawood Ibrahim.

On 20 November 2019, under Section 45-IE (I) of the Reserve Bank of India Act, 1934, the Indian central bank removed the board of directors DHFL. The reasons cited by the banking regulator for the dismissal of the DHFL board of directors were: inadequate governance and the various defaults on its payment obligations.

The Reserve Bank of India vide its Order No. DOR NBFC(PD) 986/03.10.136/2019-20 dated 20th November, 2019, superseded the Board of Directors of Dewan Housing Finance Corporation Ltd. under Section 45 IE of the Reserve Bank of India Act, 1934; and has appointed Shri R. Subramaniakumar as its Administrator with effect from 20th November 2019. The RBI has also, by its press release dated 22 November 2019, constituted a 3-member committee under Section 45 IE of the Reserve Bank of India Act, 1934, to act as advisors to the Administrator, who is also the resolution professional under the Insolvency and Bankruptcy Code (IBC 2016).

The ED has linked Yes Bank for various fraud and transactions amounting to 3700 crores as debentures in DHFL. The central bank appointed administrator at Dewan Housing Finance (DHFL) has ordered a transaction audit at the non-bank lender after allegations of money laundering surfaced in the aftermath of the regulatory action on Yes Bank.

Committee of Creditors (CoC) has approved the resolution plan submitted by Piramal Capital and Housing Finance Limited, a non-listed Piramal Group company. This was approved by the CoC (in its 18th meeting concluded on January 15, 2021), by majority voting under section 30(4) of the Insolvency & Bankruptcy Code. Piramal’s bid received 94% votes as compared to 45% for the US-based Oaktree Capital.

However, the Piramal plan, which has been approved by the CoC, has assigned a value of one rupee to the massive money allegedly siphoned off by DHFL promoters for which India’s elite investigation agencies, such as the Central Bureau of Investigation (CBI), the Enforcement Directorate (ED) 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 then all recoveries will accrue to Piramal’s company as a big bonanza, though they are not listed in the share market (Suspended due to procedural reasons, 2017)

II. CASES ON DHFL SCAM

  1. The Hon’ble High Court of Bombay in the case of Reliance Nippon Life Insurance and Edelweiss Asset Management Company Ltd. v/s DHFL passed an order on September 30, 2019 and October 10, 2019 restraining the company from making payments to any of its secured/unsecured creditors, including the payments to any fixed deposit holders.

  2. The Bombay High Court has allowed a plea by a group of lenders led by the lenders including the State Bank of India, Union Bank of India, HDFC Bank Ltd., among others had moved the Bombay High Court seeking a modification in the high court’s earlier order, paving the way for them to recover dues from the DHFL. A single-judge bench presided over by Justice AK Menon granted ad-interim relief to the banks and financial institutions by directing the housing financier to make payments for the present as well as future dues as per secured and unsecured creditors. (High Court of Judicature at Bombay on 10.10.2019, 17.10.2019 and 13.11.2019)

  3. Vinay Kumar Mittal and others (FD-holders) filed a case (Civil Appeal No.654 -660 of 2020 arising out of SLP (C) No.30372-30378 of 2019) by challenging the Bombay High Court order at the Supreme Court of India. Though the apex court said, “We have no doubt that the concerns of the depositors and their rights shall be considered in accordance with law.” the case was “disposed off.” (January 31, 2020)

  4. Uttar Pradesh Power Corporation Contributory Provident Fund Trust moved the National Company Law Tribunal (NCLT) to recover dues from the DHFL. The Trust, which manages the provident fund of employees of Power Corporation, claimed that the beleaguered non-banking lender owed it more than Rs 148 crore that it invested in DHFL’s fixed deposits.

All these cases were “disposed off” due to the pre-maturity of the appeals and respondents were requested to reply. Until and unless RBI would approve or disapprove the Resolution Plan of the RBI-constituted COC, no appeals are to be entertained.

5. Sasakawa-India Leprosy Foundation that has its money stuck in the fixed deposit schemes of DHFL has filed a case in the Delhi High Court. The foundation has more than ₹10 crore, which is now stuck with DHFL. (January 31, 2021)

6. The twist of the story is that Kapil Wadhawan has moved the National Company Law Tribunal in Mumbai against the Reserve Bank of India appointed administrator and the committee of creditors (CoC) meant for DHFL’s resolution over the bids made by DHFL’s four suitors (26 Nov 2020). He opined in his appeal,

“The tribunal should permit the applicant, i.e. Wadhawan (without prejudice to his rights and contentions in the pending proceedings) to address and assist the committee of creditors to appreciate and consider the bids being received for DHFL in the proper perspective and to permit the applicant to assist in the Corporate Insolvency Resolution Process.”

He also claimed that he will repay ₹65,000 crores within 7 years as opposed to ₹38,000 crores reportedly payable (by other bidders) in 10 years.

He also offered to convert a part of the debt into equity, thus making the creditors, including FD holders and retail NCD holders, majority shareholders of DHFL, ensuring that not only are they repaid the full principal amount, but are also entitled to the equity upside once the company revives and continues its business as usual.

III. MASS PETITIONS ON THE PART OF FD-HOLDERS OF THE DHFL

Apart from activities in the social Media, especially on Twitter with the tag #DHFLSCAM, there are the following four mass petitions on the part of FD-Holders of the DHFL:

In response to this letter, R. Subramaniakumar, RBI-appointed Administrator of DHFL, responded in a letter dated April 2, 2020:

“The interest of the FD Holders is being taken into consideration in the decision-making process and the undersigned is conscious of the genuine demands of payments with respect to the public depositors and that the entire CIRP of DHFL, which shall be undertaken in accordance with the applicable laws and regulations. Henceforth, the concerns and rights of FD Holders have always been and will continue to be taken care of in accordance with applicable laws.”

IV. AUDIT OF THE DHFL

As of July 2019, the company owed Rs 83,873 crore to banks, the National Housing Board, mutual funds and bondholders.

DHFL was sent to bankruptcy after the government on November 15, 2019, enabled the Reserve Bank to send large financial services companies, excluding banks, to the NCLT for insolvency proceedings.

Its large lenders include State Bank of India (including SBI Singapore) with Rs 10,083 crore exposure, Bank of India Rs 4,125 crore, Canara Bank Rs 2,681 crore, NHB Rs 2,434 crore, Union Bank of India Rs 2,378 crore, Syndicate Bank Rs 2,229 crore and Bank of Baroda Rs 2,075 crore, Indian Bank Rs 1,552 crore, Central Bank Rs 1,389 crore, IDBI Bank Rs 999 crore, and HDFC Bank Rs 361 crore.

DHFL had total assets amounting to Rs 79,800 crore as of March 2020, as per its annual report. Of these, Rs 50,227 crore of assets forming 63% of the total portfolio was reported as non-performing assets (Gross NPAs).

Its retail book stood at Rs 33,500 crore, with gross NPAs of Rs 7,147 crore forming 21.32% of the total portfolio.

The wholesale book stood at Rs 42,860 crore, of which a whopping Rs 39,690 crore or 92.61% is categorized as gross NPAs.

According to the RP, the overall distribution of the assets, bidding price, profits and gains are as follows (as calculated by Mr. Ashok Khemka, IAS, in his Tweet, 16/01/2021):

The whole story of the scam can be summarized in an imaginative narrative:

You have bought a bankrupt but running farmhouse according to a new government law. This is the first time that a benevolent government has brought a bankrupt farmhouse under a new law. The government has to prove the positive credentials of the newly introduced law.

If the new law would harm investors (many of them are influential people and institutions), the image of the government and the vote bank of the ruling party would be tarnished.

Anyway,

Farm House’s original price is Rs. 1500000.

You have bought it for Rs. 40,000.

Your net profit is Rs. 110,000 rupees. However, at the time of purchase, you have to pay 15% of the purchase price to the political parties and the underworld for brokerage/donation. 10-15 thousand more (“black”) money is spent. What can be done?! This is the custom of the X country. The great demonetization could not stop the flow of black money – that is tragic and sad!

Why do you have an opportunity to buy such a prospectus company at a low price?

Because, viewing the increasing profit of this farmhouse, other houses (i.e., competitors) had conspired and sunk it. These other companies have the same unrevealed flaws/corruption. However, due to the monopolistic nature of the country X, you (a business tycoon, one of the chosen few) have a crony collusion with the ruling party. You know that nationalized banks have written off 68k Crore of loans taken by the influential and super-rich willful defaulters.

Liability (including loans, money laundering etc.) of the farmhouse in the market is Rs. 80 thousand.

The Quarterly operational income of the farmhouse is Rs. 250,000. Their money rolls into the market. Share Market shows the bullish munafa value of the house.

Quarterly profit of the farmhouse is Rs. 70,000.

You have got a discount of Rs 30,000 from the government by showing it as a “sick” company (i.e., NPA). XIC and YBI have also given you time to repay the loan. You don’t have to pay in one go. Even in the case of FD-holders, you have found that 13.5% of the F-holders’(influential people and institutes) investment (only Rs. 5000)has been kept secured by the statutory body/apex financial institution under the Government of the X country. So, your stake is being lowered.

If this is the case, would you be able to repay the remaining loan of Rs.50-45000? Or, will you rot in jail like the previous owner? And will you pay off the debts, investments of the lenders and creditors (your assets) by utilizing your operational income plus profit from the business of the house?

In the meantime, the old owner also has agreed to pay off the liabilities by selling his own properties (that is a great twist in the pre-written simulated script of this dramatic & imagined narrative) Kindly show me quickly, after diligent scrutiny of the audit book of this farmhouse: Is it good or bad for the investors, creditors and the new owner?

[NB: If there will be a huge haircut for the FD-holders, other Investors in different companies will be scared and will restrain them from investing in housing finance companies.

Thus, your competitors would also be affected.

And a haircut will affect the market as, if consumers don’t have money, they can’t buy.

And there is no such precedence of a haircut in the country X.]

Disclaimer: It is totally an imagined story. Any similarities with the real situation are totally unintended.

V. SOME QUESTIONS ON THE DHFL SCAM

The scam is not happened in one day/ one year or by a single person. It’s a decade old scam by a group of knowledgeable persons unnoticed by prestigious Govt. organizations raised serious concerns/objections on their functioning.

  1. How Cobrapost, an Indian investigative journalist group, exposé of DHFL, with an ‘AAA’ credit ratings for using various shell corporations to siphon more than ₹ 31,000 crores of public money for the personal gains and why Govt. regulatory bodies and DHFL Auditor Deloitte Haskins and Sells & Chaturvedi and Shah we’re not done so? How these fraud transactions were not been pointed out by the RBI appointed Auditor, who does audits of such firms every year? Were they sleeping? Failure of Govt Organization’s i.e RBI, NHB, SEBI, AUDITORS, BOARD OF DIRECTORS and at last the GOVERNMENT itself results in Fall of DHFL but no such onus to take for the failure of their system and safeguards repayments to innocent public depositors. FD holders of DHFL do not deserve such “capital” punishment for the fault of the regulatory authorities. Minister of State for Finance Anurag Thakur said (October 17, 2019) that the regulator, auditor and management should be held responsible for fraud in Punjab and Maharashtra Co-operative Bank or other banks.

  2. It is being told that, according to the proposed RP, only the highest bidding price will be distributed among the lenders/investors/creditors’ dues/investments. In that case:

  3. a) Will the distribution of lenders’/ investors’/creditors dues (especially FDs) only be on the basis of the buying price of the bidders?

Or

  1. b) Will it also involve the working capital, revenue generation or otherwise profits, monthly income, recovery of loans, and the overall assets of the DHFL? Will it not follow the waterfall mechanism in case of FD holders’ (may be deferred) repayment? What will be the net sales, income from operations, other operating income per annum, the profit, overall assets of DHFL, a running company?

In the case of FD holders, will not all these variables (Question b) be considered for full payment (with interest) of their investments?

3. FD-Holders are not like those super-rich willful defaulters, whose 68k Crore loans were simply waived by the PSU banks. In the case of DHFL, FD-Holders are proposed to be “extinguished” after repaying part of their investments. Is it not a discriminatory decision? FD-holders are not the persons with legal conflict (“criminals”)!

4. If FD-Holders are protected by Sections 29A and 29B in The National Housing Bank Act, 1987. How can the RBI supersede NHB ACT and put IBC on FD-Holders as minority stakeholders, when IBC (Amendment Act, 2020) has been challenged. It has prompted SC to invoke Art. 142. (January 21, 2021)

Cf.

Upheld, albeit with directions. Why was IBC (Amendment) Act, 2020 challenged? What prompted SC to invoke Art. 142? Read comprehensive point-wise analysis of the 465-pages judgment

Even the regulatory and supervisory framework of NBFCs has been restructured by the RBI. (January 22, 2021). It shall be based on a four-layered structure.

Republic of India’s constitutional flexibility is to be noted.

5. In connection with the alleged political donations worth crores of rupees, in violation of Section 182 of Companies Act, 2013 (cf. Section I above) against the DHFL, donor-receptor relationship is also to be noted.

According to reports from various sources, the ruling party’s assets are increasing by leaps and bounds:

BJP’s Declared Assets Increased By 627% in 10 Years: ADR Report Please read more at: https://www.bloombergquint.com/politics/bjp-declared-assets-grew-627-percent-in-10-years

BJP highest earner in FY19 at Rs 2,410 crore; TMC’s income spikes 3,628%

BJP’s assets increased by 22% in 2017-18, Congress’ down by 15%: ADR

In case of politics of gift in the context of crony capitalist scenario, donor-receptor relationship is always reciprocally conditional. It is also be noted that all the cases of electoral bonds, PM Cares Fund, internal activities of political parties are not subservient to the “Right to Information Act” (2005), thus, these are lacking transparency, though On 27 December 2011, the Lokpal bill was passed by the Lok Sabha after a day-long debate and amendments.

6. Is it not violating “Access to remedy for victims of business-related abuses”, the third pillar of United Nations Guiding Principles on Business and Human Rights in the context of the DHFL’s proposed Resolution Plan? Though it is known that “international law is the vanishing point of jurisprudence”, the contradictions among the jurisprudences of IBC, RBI, NHB and the international law, human right cannot be compromised anyway.

VI. DEMANDS OF THE FD-HOLDERS OF THE DHFL

  1. De-club the FD holders from the lenders and financial creditors in the resolution process of the DHFL.

  2. Repay full amount with interest till date to all the matured FDs.

  3. Make provision of full repayment to FDs which are yet to be matured.

That is, without being “extinguished”, FD-Holders’ dues are to be treated as “ongoing” concern.

VII. ACTION PLAN OF THE FD-HOLDERS OF THE DHFL

  1. After uniting all FD-Holders, establish a society under the Societies Registration Act (XXI of 1860).

  2. Follow the legal trajectory:

NCLT (after COC Resolution Plan would be approved or not.)

–> NCLAT

–> Lokpal (?)

–> SC

–> UN (on the ground of human rights for financial abuse)

Apart from that (a) individual PILs are also to be filed;

(b) Lodge complaints at Economic Offence Wing (EOW) for financial abuse.

3. Viral flooding at the Web/social/print/electronic Media with grievances.

4. Maintaining personal and confidential contacts following management ethos as the people of the South-East Asian territory depend much on the patron-client relationship.

VIII. FROM THE PERSPECTIVE OF A SOCIAL SCIENTIST

  1. In the crony capitalist scenario of India, it is found that few of the mercantile enterprises are controlling, approximating, appropriating and codifying the ruling party and the government.

  2. Thus, the government and the ruling party are trending towards monopoly capitalism by choosing few mercantile donors.

  3. For the sake of (1) and (2), crafted crises are created to hand over all the governmental institutes and “other” private financial institutes through, what Baudrillard called, “Simulation” in the context of the consumer society.

  4. This is euphemistically glorified as “disinvestment”, as if 43% of Indian adult citizens had chosen (by the way of common suffrage/universal franchise) their government (2019) for switching over to non-governmental agencies. These private agencies are acquiring the (a) infrastructures, build by the tax payers’ money-signifiers (thus “public” is subservient to the free flow of private capital); (b) natural resources as “free gift” that leads to the catastrophic glocal heating.

  5. In the context of such consumer society, this type of situation encourages market fundamentalism apart from ruling party’s declared religious fundamentalism.

  6. Creating anxiety through crafted and simulated crises is also a hyper-real business. It contributes to the businesses of pharmaceutical companies and legal professions and cripples the cognitive competence of homo sapiens sapiens. Thinking persons are endangered.

  7. The shadow economy (cf. Pigou) of the so-called “underworld” is also controlling, approximating, appropriating and codifying the mercantile enterprises as well as political parties. This is the shadow world of the Indian economy.

  8. By encouraging FDI, India is welcoming foreign MNCs, thus it is like re-welcoming the East India Company. This not only contradicts the atmanirbhar project of the current Indian political regime under the neoliberal economy, but also it affects the economic sovereignty of India.

  9. The ideological standpoint of the ruling party and its associates is working as a mask since it does not comply with the main ideological tenets of the Indian philosophical traditions (cf. Section V, 5).

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