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The DHFL Crisis, Explained: What Happened to the NBFC?

Jan 5, 2021 11:16 AM 4 min read

IL&FS, a systemically important non-deposit accepting Core Investment Company, went bust in 2018. It defaulted on its debt payments, including bank loan repayments and commercial paper (CP) redemption obligations.

Although technically not a non-banking financial company (NBFC), this event surely sent shock waves across the country’s shadow lending i.e. NBFC sector.

Creditors, mostly scheduled commercial banks (SCBs), rushed to tighten lending norms against NBFCs. This sparked a brutal liquidity crisis that affected all shadow lenders, big and small.

One of those was Dewan Housing Finance Corporation (DHFL). Its fall from grace, insolvency proceedings and the prolonged bidding process for sale of its assets constitute a saga that continues to this day.

A Timeline of Troubles: What Happened to DHFL?

DHFL was a major player in the NBFC space for many years. As once India’s fourth largest mortgage financier, it primarily dealt with long-term housing loans. And as a shadow lender, it borrowed from financial institutions such as insurance companies and mutual funds by issuing CPs to lend to the public.

The IL&FS crisis meant there were now fewer takers for DHFL’s CPs. The NBFC was also reeling under high NPAs and hit by a series of allegations of financial mismanagement, including siphoning of funds by promoters. A default was impending, but credit rating agencies continued to issue high safety ratings for its financial products.

Then on June 4th 2019, the inevitable happened. DHFL defaulted on ₹900cr ($122.6m) worth of due payments. Its CPs’ rating was downgraded to “D” overnight and a long and painful reckoning commenced, which has sent its share price into a tailspin.

The DHFL Crisis, Explained: What Happened to the NBFC?

To add to the lender’s woes, allegations of dubious financial transactions continued to emerge against Kapil Wadhawan (the then Chairman and MD) and Dheeraj Wadhawan (then a non-executive director). In October last year, the Enforcement Directorate even conducted raids at several DHFL offices and promoter residences.

Finally, on November 29th 2019, the RBI initiated insolvency proceedings against DHFL - the first NBFC to undergo a corporate insolvency resolution process (CIRP) under recently released Government guidelines for the same. A few days earlier, the Central Bank had also removed its Board of Directors citing inadequate governance.


Bidding for Bits: The DHFL Suitors

Bidders for DHFL have engaged in a long and tight war for months now. There have been four rounds of bidding so far - the last round ended only on December 14th.

Bidders include Piramal Group, US-based Oaktree Capital, Hong Kong-based SC Lowy and Adani Group. Adani sprung a surprise ₹31,000cr ($4.2bn) offer for DHFL’s entire book in November, much to the chagrin of its competitors and forcing them to up their bids substantially.


Why Bid At All?

But wait - DHFL is an entity under extreme duress. Why would these companies be so eager to shell out increasing amounts of money for its distressed assets at all?

That may be because the buyer would acquire a fully-functional housing finance company (HFC) with 570 branches, 2,179 permanent employees and a strong presence in tier 2 and tier 3 cities, where a real estate boom is expected to take place in the near-term.

A DHFL acquisition could be a deal that might yield plenty of profits, if operated by the right hands in the right manner.


Where Things Stand, As of Today

DHFL’s Committee of Creditors (CoC) met on Thursday to evaluate the resolution plans and vote on their approval.

According to Financial Express, the CoC is “likely to give 40% weightage to the net present value (NPV) of the resolution plan and 30% weightage to upfront cash. Similarly, 10% weightage will be there for capital infusion, 5% to equity stake and remaining 15% evaluation will be done based on qualitative parameters. The qualitative parameters include track record of the resolution applicant and its key management personals.”

Particularly under the scanner are the latest bids by Piramal and Oaktree. In the fourth round, Piramal offered ₹38,250cr ($5.2bn) while Oaktree pitched ₹36,400cr ($4.95bn). Both these bidders made additional commitments recently to sweeten their bids. (Adani, mysteriously, did not significantly increase its previous bid.)

If you look at the numbers, Piramal reportedly has the edge. Livemint quoted a source as saying “As per the evaluation metrics based on a formula stipulated under the Insolvency and Bankruptcy Code, the CoC found Piramal Group’s total score to be 91 points on a scale of 100, while Oaktree scored 85 points."

Yesterday, Oaktree reportedly sent a letter to the RBI and the shadow bank’s lenders saying its proposal was “clearly superior” to the others. It claimed the benefit of any proposed fresh capital infusion by Piramal “will not be available to the lenders of DHFL, but rather to a co-mingled entity that is burdened by other liabilities.”

For its part, Piramal admonished Oaktree’s arguments as “imaginary conspiracy theories”, saying the latter’s bid “is short on upfront cash, short on NPV, short on overall score, unimplementable due to insurance related complications, and leaves lenders with weak debt paper due to the sub-debt structure offered by Oaktree to themselves.”

As of now, we wait for the CoC to reach a verdict (unless a fifth round of bidding is called or another Adani-esque entrant surprises everyone with a higher bid, sending the resolution process scrambling yet again!). As we wait, one can only hope that 2021 will be kinder on India’s NBFCs, let alone on DHFL.


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