Did DHFL really siphon funds?

Any charge or accusation of siphoning of funds by promoters of a company is a serious one, more so if the accused entity is a public one, with public money at stake, whether by way of shareholding or by way of bank loans, public deposits etc. Take the recent case of DHFL, which was accused by Cobrapost of having siphoned away over Rs.31000 crores, through shell companies, through which money was diverted to acquire assets, such as shares, real estate etc. in India and abroad, including in the UK, UAE, Mauritius and Sri Lanka. Apart from such money laundering, it was alleged that DHFL was involved in round tripping, tax evasion, insider trading and hawala activities. The Cobrapost report also said that these assets have been secured/ring-fenced by the DHFL promoters so strongly, that they are beyond the reach of the creditors/lenders of DHFL. It interestingly said that DHFL has given donations of Rs.19.50 crores to the BJP.

While DHFL dismissed the Cobrapost report as a mischievous misadventure, done with a malafide intent, the markets were not convinced. The DHFL share price at that time had fallen by 60% during the preceding months and so did its profits by 37% and its business of lending by 95%. DHFL also claimed that its accounts have been audited/certified by an international audit firm and that it has a AAA credit rating.

Since in the post ILFS era in particular, neither do international audit firms command respect and credibility and nor do AAA ratings, in order to assuage the markets DHFL appointed an independent audit firm to investigate these charges. While the terms of such appointment of an independent auditor are not known and neither whether it was independent enough, in a very short period of just about a month, the said independent audit firm has already completed its investigation into the books of account of DHFL and not surprisingly, it has virtually given a clean chit to DHFL, absolving it of the serious charges of money laundering, levied on it by the Cobrapost investigation. Such investigations tend to take a lot of time before they are concluded, as we see in the case of Sun Pharma, ILFS, Chand Kochhar etc., but this one got concluded very soon.

The independent auditors’ report says that DHFL did not disburse any loans alleged to be siphoning of money and that it also did not promote the alleged 36 shell companies, through which the sum of Rs.31000 crores was said to be taken away. It also found no merit in the allegations that money was disbursed to entities belonging to the promoter Wadhawan Group or to its related Sahana Group. The auditor, however, says that it found significantly inadequate monitoring of 15 borrower accounts, involving loans of about Rs.7500 crores. It also said that by virtue of its composition, the promoter directors can be said to have a significant influence in the sanction of loans exceeding Rs.200 crores, which is not good for DHFL.

It is surprising that the independent auditor report was ready in just about 4 to 5 weeks, which reflects poorly on the hurried clean chit it has given to DHFL. While its share price rose by 20% in a single day, we are not yet fully convinced of the authenticity of the findings of the independent audit.

It, however, raises a serious pertinent issue. The findings of the independent audit prove that the allegations of the Cobrapost investigation were frivolous and baseless. If that be so, then suitable action is warranted against Cobrapost, because due to their careless report shareholder wealth was decimated and eroded and so was confidence in the Indian NBFC market. But if in a counter response, Cobrapost is able to prove its charges, then DHFL needs to be punished for its grave violations, together with the independent auditors for having given a sham report to cover up the numerous violations of the company.