DHFL Default Case Study

CAPITALx - 2022

Team Alexa
BITS Pilani, Hyderabad Campus

Tanmay Srivastava
Shrinivas Reddy
Introduction
1. Scams have hit India's non-banking financial institutions (NBFIs), which make up the country's less-
regulated shadow banking sector, causing a domino effect in the country's money market. With the
revelation of the ILF&S fraud, major corporate governance concerns in NBFIs were uncovered,
effectively causing a sub-prime crisis.

2. About DHFL –
1. DHFL was founded in 1984 to provide housing finance to low- and lower-middle-income people in
tier-II and tier-III cities. Non-housing loans were also available, including loan against property
(LAP), developer loans, and small and medium enterprise (SME) loans.

3. About DHFL Crisis –

1. The corporation has plummeted from its lofty perch, losing '22.23 million in the fourth quarter of
the fiscal year 2018–2019. The company's commercial paper and non-convertible debenture credit
ratings were lowered; non-payment of interest led to the implementation of a resolution plan, with
the board of directors agreeing to nationalized banks.

2. The company's image had plummeted along with its stock values, following suspicions that its
promoters were syphoning funds through shell firms
DHFL's Ignorance of Regulations
1. In 2003, DHFL purchased ING Vysya Bank's housing finance unit, followed by the acquisition of
Deutsche Post Bank Home Finance Ltd.in 2010 to join the intermediate upper-middle-income sectors in
tier-I cities. In March 2013, DPBHFL was renamed First Blue Housing Finance Ltd. and amalgamated with
DHFL.

2. Indian banks put at least $3 billion into DHFL. DHFL has also borrowed substantially by issuing bonds and
other debt instruments in addition to this sum. The retail investor held most of these instruments, and
they faced massive losses.

DHFL shares nosedived

in late 2019 after RBI
started resolution
process.
Charges Leveled Against DHFL
1. Loans to Shell Firms
1. DHFL has issued questionable loans to shell companies. Cobrapost claimed to have discovered 34 similar
businesses. These businesses have indirect ties to the DHFL group's promoters, and sources indicate that
DHFL has granted these businesses almost $1.5 billion in unsecured loans.

2. DHFL lent money to these businesses without adopting necessary security measures. In India's banking
industry, loans to businesses are secured using assets as collateral.

3. Public funds have been lent to people with no security. The promoters had no personal assets. As a result,
they were immune from prosecution.

2. Round Tripping
1. Loaning public money without going through the proper channels is just one element of the problem. The
bigger issue is that the money that was loaned out has since returned to organizations controlled by the
DHFL group.

2. This is known as round-tripping in the financial world. As a result, DHFL effectively provided its promoters
an unsecured loan.

3. Purchasing Assets
1. The funds obtained through round tripping were used by DHFL to purchase assets in other nations.
Because all the assets were generated in foreign jurisdictions, this appears to be a hoax once again. As a
result, neither the Indian government nor the tax authority will be able to obtain the information.
Conclusion
• DHFL is a housing finance company that offers house loans under PMAY scheme – which offers loans
for the economically weaker sections, low- and middle-income group of the society for buying land
and houses. The CBI said that DHFL had processed as many as 88,651 cases under the PMAY
Scheme.

• The allegations levelled against DHFL were explosive. A swindle of this nature had the potential to
harm Indian investors significantly. Cobrapost, on the other hand, made the claims with zeal and
claimed to have sufficient evidence to back up its claim. This information forced regulatory bodies to
conduct a comprehensive investigation into the claims.

• According to a report by the NDTV, the CBI said that Kapil and Dheeraj Wadhawan created fictitious
home loan accounts under PMAY Scheme, amounting to more than Rs 14,000 crore and availed ₹
1,880 crore in interest subsidy from the Centre.

• In November 2019, the Reserve Bank of India (RBI) superseded the board of DHFL.

• In September 2021, Piramal Group completed DHFL acquisition in a total consideration of ₹34,250
crore, after beating the likes of Adani in the bid.