DHFL – More Questions Than Answers

The reasons why the Piramals have been eager to takeover a fraud/crime invested company are not clear and that raises several questions.

With over 1,50,000 lenders/creditors, including all major banks and FIs, the repayment default by DHFL, was a major crisis for India’s banking/finance sector, which has been shaky since the past few years. Unlike in the case of ILFS, where the Government had decided to supersede the board and repay its loans by monetising assets, part by part, in the case of DHFL, the RBI decided in Nov. 2019, to refer the company to the NCLT, to decide its resolution, either by way of its takeover or by liquidation, in case no suitable offer was received.

When the NCLT invited bids for takeover of DHFL, while Oaktree USA (OT) and Piramal were the eager frontrunners, even Adani put in a bid, attracted by the real estate assets of DHFL. The jailed Wadhawans the DHFL promoters accused of money laundering frauds of tens of 000s of crores, objected to the bids, saying that they were too low and wrote to the RBI/FM etc, and offered their family assets of about Rs. 44000 cr. to repay the creditors and takeback the company. While the authorities and the lenders were not impressed by the offer of the Wadhawans, who face investigation by the ED, CBI, SFIO, SEBI etc. the bidding for DHFL was fierce and intense and in the multi round bidding, the Piramals upped their offer from an initial Rs. 15000 cr. finally to Rs. 38250 cr., to ultimately takeover the company.

After six rounds of intense bidding, mainly between Piramal and Oaktree, the COC consisting of the lenders, approved the Piramal bid of Rs. 38,250 cr. with an upfront payment of Rs. 12700 crores. The creditors found the Piramal offer better, because the total amount offered was the highest, the large amount being paid upfront and the easy proposed merger with its financial services company, with much better synergies for the revival of DHFL. Piramal plans to merge DHFL and also retain its staff of 4500. The creditors were averse to the OT offer, because of its lesser amount, lower upfront payment, too complicated offer with too many loopholes in its plan and also misleading the lenders by claiming that its bonds were AAA rated. Lenders were not impressed with OT’s offer of Rs. 36400 cr., which it claims is under valued by Rs. 2700 cr. and is thus much more. OT has repeatedly threatened to take the creditors to court, in case its offer is not accepted, which it finally was not.

The creditors decision to give the company to Piramal must now be approved by the NCLT and also by the RBI as the regulator, to make it final. While unconfirmed reports say that OT’s offer was a front put up by the Wadhawan’s themselves, keen to get back DHFL and perhaps manage the extensive criminal investigations against them, which explains its eagerness, bluster and belligerence to takeover the company, the reasons why the Piramals have been eager to takeover a fraud/crime invested company are not clear and that raises several questions :-

1. With the kind of money being invested by Piramal to takeover DHFL, it would be much better to start a fresh company, than takeover an entity which is mired neck deep in litigation and in crimes like money laundering and tax evasion. While Piramal justifies the takeover saying that it gets a ready base of retail customers, doing so by taking a fraud infested company and investing such huge money, makes little commercial sense. Sebi itself admits that the financial statements of DHFL lack authenticity and reliability and with tens of 000s of crores siphoned away, the true assets/liabilities position is a big question mark. The actual reason could be something else. Observers say that the corporate lending portfolio of Piramal, which has a huge exposure to real estate is NPA ridden and upon DHFL’s takeover, it will manage to blame DHFL for its poor financial position. To us, the takeover of DHFL by Piramal is like the winner’s curse and thus the reasons for its takeover lie somewhere else.
2. Even with a bid of Rs. 38250 cr. a large part of which will be paid over a ten year period, the creditors will take a massive haircut of at least 60% to their exposure. And that raises a question. The Wadhawans are alleged to have defrauded DHFL to the tune of tens of 000s of crores as per a report of Grant Thronton and as per their own admission they have family assets of about Rs. 44000 crores, which to us seem to be proceeds of crime. Will the Wadhawans be divested of their huge wealth to compensate the creditors for the huge loss being suffered by them, upon the DHFL taken by Piramals?
3. The entire sector is shaky and NPAs are going up. The RBI sees this as a test case to revive a finance company. But in case another big finance company fails, is there another Piramal available to take it over?
4. A takeover of the company should not dilute/and the ongoing criminal investigation and action against the Wadhawans the dubious promoters of DHFL.

DHFL’s takeover is a test case for stabilising/reviving the NPA ridden NBFC sector, but with the entire sector being shaky and not many healthy players in it, it may not be able to set a precedent for others to follow.