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DHFL defies debt default

DHFL

DHFL recorded a loss of Rs.2223 crores for the March 2019 quarter, it is unable to repay its debt and it has no money to do any further business.

 

The crisis-ridden DHFL, which is under investigation by the MCA, SEBI and perhaps SFIO too, on charges of huge siphoning of funds by its promoters, by diversion of over Rs.31000 crores to shell entities in India and abroad, belonging to its promoters, continues to default on its repayments. The company has been facing a severe liquidity crisis since September 2018 and reports say that it has not met most of its debt repayment obligations since then. It had earlier defaulted on repayment of unsecured commercial paper of Rs.100 crores to one investor, them it defaulted on repayment of secured NCDs of about Rs.1425 crores held by over 25000 investors and it has now defaulted on repayment of debt of Rs.1570 crores, under various loans.

The company’s total debt exceeds Rs.100000 crores, of which its exposure to banks is about Rs.40000 crores and to individual deposit holders is over Rs.12000 crores, apart from dues to mutual funds, corporates and other institutional investors.

The woes of DHFL have been out in the open, ever since Cobrapost claimed in January this year, that as per its investigation, the promoters of the company have siphoned away huge sums to themselves through shell companies based in India and abroad. While the MCA and SEBI initiated a probe into the affairs of DHFL thereafter, it was clear that all is not well with DHFL and its difficulties have kept mounting. Its auditor Deloitte, recently resigned because it could not get enough evidence on the basis of which is could certify that the financial statements of the company have been prepared in accordance with the mandatory accounting standards and SEBI regulations.

As per Deloitte there was not enough evidence available for it to express an opinion on the financial statements of the company, as also in respect of its ability to continue operations and it red-flagged loans of Rs.24000 crores given by the company, whose validity and use and recoverability it said was not certain, as was also so in case of corporate deposits of Rs.5652 crores. It was because of these grave unresolved issues that Deloitte decided to resign as the auditor of DHFL.

The issues raised by the auditors are serious and are reflecting on the company’s conduct and its state of affairs. It recorded a loss of Rs.2223 crores for the March 2019 quarter, its credit rating has been downgraded to default grade, impairing its ability to raise funds and do business, it is unable to repay its debt and it has no money to do any further business.

The fact is that the financial position of DHFL is fully eroded and it is shaky and doddering and if yet another ILFS like giant NBFC collapse is to be prevented, then the crisis ridden banks will have to come to its rescue, and they will have to restructure its loans. The lending banks to DHFL led by Union Bank are said to be working out a resolution plan for DHFL, which includes a one year moratorium on any interest/loan repayment by DHFL, a longer repayment loan tenure, reduction in interest rate and the most important, sanction of additional loans at Rs.1500 cr. per month, in order to enable DHFL to revive its business, so as to repay its numerous lenders.

The interesting issue is that despite its repayment defaults, allegation of fraud and siphoning of funds, a credit rating downgrade, stoppage of its operations, uncertainty as a going concern and huge losses, the banks are eager to revive the operations of DHFL and convert a part of their loans into equity, such that they own a majority stake of 51% in the company.

Banks would thus become the owner/managers of DHFL, responsible for infusing additional funds, managing its affairs, so as to recover their own dues and repay themselves. They would be responsible for recovery of those doubtful loans of Rs.24000 cr. which led to the resignation of Deloitte as the auditors of DHFL. Thus a mismanaged and sick borrower, will have to be managed and nursed back to health, ironically by the very lenders to whom it owes money.

The desperation of the banks to prevent a collapse of DHFL, which includes putting in fresh funds into it, is perhaps to avert a systemic collapse of India’s NBFC sector, already shaky after the ILFS collapse. It is also to prevent the DHFL bank exposure of Rs.40000 from being classified as a NPA, or else the NPA banking crisis will only snowball further.

While all this is being done to prevent a systemic collapse, the mismanagement of its promoters must be investigated and if found guilty, they must be suitably punished, or else the takeover of the company by banks will give them an easy unpunished exit.

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