How is it possible that the company which hit a high of Rs.
691.50 on 3rd/ Sep/18, is trading at paltry Rs.17 in just one year
and three months?
How is it possible that the company which was once a darling
of foreign portfolio investors, mutual funds, Rakesh Jhunjhunwala (RJ) etc. has
seen many of these investors vanishing?
How is it possible the company which was supposedly in pink
of health and had clean chit from various credit rating agencies (CRAs) having AAA
or equivalent of ratings for debt instruments has now ‘default’ rating and
heading for insolvency proceeding?
What has happened?
The ominous day of 21st/ Sep/18 when DHFL (Dewan
Housing Finance Corporation) crashed by 42%, has changed permanently the fate
of DHFL (and its’ investors & lenders) for the worst. The crash which never
recovered was in a response to the rumors generating from the bigger crisis of
IL&FS.In the last 15 months, DHFL the NBFC- has degenerated from ‘safe bet’
and ‘sound NBFC’ to a candidate for insolvency proceedings. Fast-forwarding to the
recent development, DHFL has stopped
making any payments to secured/unsecured creditors as well as fixed deposit
holders as per the order of Bombay High Court in a case filed by Reliance
Nippon Life Insurance. However, the court has amended
the order and allowed DHFL to make payments to the banks and NBFCs with
which it has existing securitization and loan assignment agreements. Looking at
the grim situation, with this circular
the Board of Directors of DHFL has been superseded by the RBI. Also, RBI has
appointed the resolution professional to take charge of insolvency proceedings.
How it has happened?
1. Snowball effect
from IL&FS trouble: First and unrecoverable dent came from IL&FS
crisis and related rumors. I could not find any warning bells on DHFL before
the ominous day. In fact in the same month last year, DHFL clocked all time
high of Rs. 691, with the promise of further upside from so called analysts
& talking heads. Default by IL&FS on various obligations certainly
choked the credit market and liquidity crunch was felt across the financial
system for a sometime. This undermined DHFL’s capability to arrange much needed
capital for meeting the upcoming debt obligations.
2. Cobra bite - Fraud
and fund diversion: Lethal salvo was fired by a post
(Thank God at least few are doing their job seriously!) from cobrapost.com
alleging the promoters of DHFL for siphoning off Rs. 31,000 crore worth of
public money to shell companies. Well, recently submitted forensic report
by KPMG confirmed that the funds were siphoning from DHFL to other promoter
backed entities. Consequently, Ministry of Corporate Affairs has ordered
investigation by SFIO (Serious fraud investigation office). Only time will
tell what SFIO is going to unearth but this has led to a huge trust deficit
from investors and lenders in the DHFL. The share holding pattern -shown as
below - at the end of Sep-19 quarter vis-à-vis Sep-18 quarter is reflective of
vanishing investors’ trust and interest in DHFL.
Share
holding pattern of select public shareholders of DHFL
|
Public
shareholders
|
Sep-19
|
Sep-18
|
|
Foreign Portfolio Investors
|
9.48%
|
19.43%
|
|
LIC
|
3.44%
|
3.44%
|
|
Mutual funds
|
0.01%
|
2.94%
|
|
Body corporate
|
6.20%
|
12.76%
|
|
Mr. Rakesh Jhunjhunwala
|
2.46%
|
3.19%
|
3. Faulted business
model & Asset- liability mismanagement: It is an open secret that how
NBFCs run their shop. Majority of NBFCs reside to the strategy of borrowing for
short term tenure and lending for long term tenure. Lure of borrowing short
term and lending long term to safeguard better interest margin/profitability is
overpowering among many financial institutions. But time and now, it has been
evident that the exploitation of borrowing short term & lending long term-
strategy has transmitted into asset –liability mismanagement. Improper
asset-liability management is harbinger of liquidity risk which if remains
unattended can lead to solvency risk. Seemingly, DHFL also travelled the same
path. Due to market conditions, downgrade in credit ratings and unearthing of the
fraud, ‘money’ pipe-line for DHFL
was choked and it was put into such a dire state that it could not arrange
capital to meet various redemptions of debt obligations leading to a default and
cascading effect.
Bigger questions:
No matter whatever bitter remedies are going to get
suggested, be it- securitization (selling loans to banks), liquidation, equity
conversion to lenders etc. following staggering questions remain unanswered!
1. Why do we remarkably fail to see the ‘Black
Swan’ events and system
at large remains stubbornly reactive?
2. Is the process and basis upon which deposit-taking NBFCs
are granted the permit
to take a deposit from public robust? Does RBI on regular intervals
appraise such permits? Should it cancel the permit after regular audit if it
finds the NBFC is not fit to take deposits from the public?
3. What will happen to the ‘hanging fate’ of fixed
depositors(unsecured creditors) consisting of retirees, salaried, senior
citizens and of course there are Mutual funds & banks?
4. Are the employees of UP Power Corporation
Limited whose money through state power employees' provident fund was fraudulently
invested Rs. 2600 crore in DHFL going to get their money back?
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