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Friday, November 27, 2020

DHFL board superseded, RBI initiates bankruptcy process

The RBI, which stepped in after the banks and DHFL failed to agree on a resolution plan to bring the firm back on the rails, has appointed R Subramaniakumar, former MD and CEO of Indian Overseas Bank, as the Administrator to run the affairs of the company.

Written by George Mathew | Mumbai | Updated: November 21, 2019 5:31:56 am
Security features delayed as Govt and RBI juggle currency printing, demand The RBI announcement came after market hours. The DHFL stock which closed at Rs 20.15 Wednesday had touched a 52-week high of Rs 252.20 on December 31, 2018.

THE Reserve Bank of India Wednesday superseded the board of directors of crisis-ridden Dewan Housing Finance Corporation Ltd (DHFL), which has liabilities of close to Rs 84,000 crore, and initiated the bankruptcy proceedings “owing to governance concerns and defaults by DHFL in meeting various payment obligations”.

The RBI, which stepped in after the banks and DHFL failed to agree on a resolution plan to bring the firm back on the rails, has appointed R Subramaniakumar, former MD and CEO of Indian Overseas Bank, as the Administrator to run the affairs of the company. The immediate fallout of the move is that banks will have to declare DHFL loans as non-performing assets (NPAs), adding to the bad loan worries of the banking system.

The RBI announcement came after market hours. The DHFL stock which closed at Rs 20.15 Wednesday had touched a 52-week high of Rs 252.20 on December 31, 2018.

The central bank said it would take the company to the National Company Law Tribunal to chalk out a rescue package or liquidation for DHFL which defaulted on repayments to banks, mutual funds and reatil investors. “The Reserve Bank also intends to shortly initiate the process of resolution of the company under the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 and would also apply to the NCLT for appointing the Administrator as the Insolvency Resolution Professional,” the RBI said.

DHFL owes Rs 26,324 crore to banks as term loans, Rs 1,203 crore as short-term loans and Rs 10,815 crore as non-convertible debentures (NCDs) . It also owes Rs 2,747 crore as ECBs, Rs 2,350 crore to National Housing Bank, Rs 6,188 crore as public deposits and Rs 2,267 crore as subordinate debt, among others, as of July 2019. The total liabilities were around Rs 84,000 crore.

Audit firm KPMG, which carried out the forensic audit of DHFL, has reportedly found instances of fund diversion. The report has is learnt to have detected diversion of over Rs 19,000 crore of bank loans to DHFL’s related entities, sources said.

The board of DHFL includes Kapil Wadhawan, Chairman & MD, Dheeraj Wadhawan, Non- Executive Director, Alok Kumar Misra, Srinath Sridharan, Sunjoy Joshi and Deepali Pant Joshi. Mishra was the former MD of Bank of India and Deepali Pant Joshi was an ED in RBI.

Banks which were trying to resolve the DHFL crisis were unable to formulate a suitable plan as mutual funds were not willing to go by it. “Rating agencies downgraded the company to the default status in June this year. Since then, lenders were trying to salvage their loans extended to the company. We are not sure how much money can be recovered from the company through the NCLT route,” said an official of State Bank of India.

The bankruptcy proceedings in DHFL is expected to exacerbate the already parlous liquidity situation in the non-banking financial companies (NBFC) sector. Defaults by IL&FS group last September had rocked the financial sector, leading to a liquidity crunch.

The RBI will take DHFL to the bankruptcy court as per the new rules laid down by the government for finance companies. The government had last week instituted an interim resolution mechanism for systemically important financial service providers (FSPs) other than banks, pending the Financial Resolution and Deposit Insurance (FRDI) Bill. According to the relevant rules issued and put into effect by the Ministry of Corporate Affairs, the RBI or other financial-sector regulators as the case may be, can initiate the insolvency process for such FSPs under the Insolvency and Bankruptcy Code (IBC). This considerably consolidates the process in the hands of the regulator.

According to the ministry, an interim moratorium should commence on and from the date of filing of the application for initiation of the process by the regulator till its admission or rejection by the adjudicating authority. The provisions of interim-moratorium or moratorium shall not apply to any third-party assets or properties in custody or possession of the FSP, including any funds, securities and other assets required to be held in trust for the benefit of third parties.

The administrator should take control and custody of third-party assets or properties in custody or possession of the FSP and deal with them in the manner, to be notified by the Central government under Section 227.

The Enforcement Directorate (ED) had recently issued a lookout notice against non-executive director and promoter of DHFL, Dheeraj Wadhawan. According to the ED, the Rs 225-crore land deal between Sunblink Real Estate Pvt Ltd and Iqbal Mirchi was negotiated on behalf of Dheeraj Wadhawan – popularly known as Baba Dewan and one of the promoters of DHFL. Earlier in April-May this year, the Ministry of Corporate Affairs (MCA) had issued look-out notices against the promoters of DHFL, in connection with its enquiry into the piling debt of the housing finance firm.

“If the company goes into liquidation, chances of recovering the funds are minimal. Banks will have to write off the loans. With the Mirchi link coming out in the open, many banks are now worried,” said a banking source.

While downgrading DHFL to the ‘D’ category in June this year, Care Ratings said the liquidity profile of the company continues to remain stressed on account of delay in identification and induction of strategic investor and limited progress on generating additional liquidity mainly through builder loan book sell down and securitization.
DHFL had a loan portfolio of Rs 91,930 crore as on March 31, 2018. Incorporated in 1984, DHFL is among the large size housing finance companies in India with total asset size of Rs 1,07,436 crore as on March 31, 2018.

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