The now imminent collapse of DHFL presents a huge systemic threat to the NBFC sector of India and raises questions about the larger picture involved in it.
The unfolding tale of DHFL is sordid, murky, criminal and shocking, to state the least. It has all the ingredients of a Bollywood crime thriller, fawning babus, collusive lenders, protecting netas, underworld connects and fraudulent promoters with networking in the mightiest corridors of power. That explains why despite its dubious affairs being out in the open since January 2019 itself, yet investigation in its affairs has been going on at a suspicious snail pace and despite the huge frauds staring in the face, yet the lending banks have been keen to settle loans by converting their loans into equity and taking over a fraud-ridden company and giving a clean chit to its scammy promoters, which now looks unlikely.
Till this giant scam exploded on the scene, DHFL was India’s number three housing financial company, auditors had given it a clean chit, rating agencies gave it a good rating, banks were lending it blindly, which all hoodwinked an unsuspecting public to invest tens of thousands of crores in its shares, fixed deposits, debentures and bonds. As at 31.3.2019, as per disclosed figures, the company has borrowed about Rs.1 lakh crores by way of bank loans, public fixed deposits etc. of which only Rs.34800 crores have been given to retail borrowers and the balance is now under suspicion of having been siphoned, frittered away and defrauded by the promoters, with the regulator RBI seeming to have no clue at all, of the murky state of affairs of this NBFC.
It was a Cobrapost investigation report in January this year that upset the apple cart of this giant fraud. The report alleged that about Rs.31000 crores had been siphoned away by the promoters of DHFL through thousands of overseas and domestic shell companies, through bogus loans and investments, that finally landed in the personal kitty of the promoters. They built huge benami assets in India and abroad. It involved criminal transactions of money laundering, hawala, tax evasion and round-tripping, which had gone overlooked or colluded for years. The DHFL promoters cried foul, but the outrageous revelations of Cobrapoost triggered scrutiny and inspection of its affairs and soon precipitated a default in payments which cascaded and has caused a systemic crisis in the NBFC industry.
The MCA soon ordered an inspection of the books of account of DHFL; in June 2019 the credit rating of DHFL was downgraded and from July onwards DHFL started defaulting in its repayments, month after month. Surprisingly despite the evidence, scammy and criminal state of affairs of DHFL, its lenders led by SBI, which has a questionable exposure of Rs.11000 cr. to the company were in a hurry to settle their loans by converting their loans into equity and taking over a fraudulent company ridden with frauds and crimes.
But the giant crimes of DHFL and its promoters could not be hidden, much as the promoters and its lenders tried to. Union Bank ordered a forensic audit of the finances of DHFL by KPMG. The forensic audit report was out in October 2019 and the dubious transactions it exposed, now no longer surprised us. The KPMG report revealed by DHFL had fraudulently lent over Rs.15000 crores to 28 related entities and over Rs.25000 crores were lent to 65 entities with no track record and highly inadequate loans documents and security too. It said that thousands of crores of loans were claimed to be repaid, but the transactions could not be even traced in the books of account DFHL.
The money trail of these gigantic loans is simply missing. And then came the disclosure by the ED that DHFL and its promoters were directly involved in funding Iqbal Mirchi the Dawood gangster who was involved in the Mumbai bomb blasts, to the tune of over Rs.2100 crores. That was direct involvement of the company and its promoters with the underworld. And finally, the MCA completed its inspection of the books of accounts of DHFL, that revealed extensive frauds and manipulation of its books of account, which certainly warranted a full investigation into its books of account, which apparently have not even recorded its full state of affairs. The SFIO has now been appointed to investigate the affairs of this fraud and crime-ridden company.
With the ILFS fraud yet to the resolved, the PMC bank’s collapse, allegations of thousands of crores of siphoning of funds by India Bulls, the now imminent collapse of DHFL presents a huge systemic threat to the NBFC sector of India and raises questions about the larger picture involved in it.
- How many more such fraud entities are lurking in the background in India’s NBFC/banking sector?
- How will the ordinary public be protected and compensated from such frauds?
- Will the auditors, regulators, independent directors and rating agencies, whose negligence/collusion caused such frauds to be sufficiently punished?
- When will regulation and supervision of the NBFC sector be strengthened to prevent such frauds?
- And finally why were the lending banks in a hurry to take over such a fraud entity?