How DHFL’s Promoter legally tried to acquire the company in an illegal way

Introduction:

Dewan Housing Finance Corporation Ltd (DHFL) is a Housing Finance Company focussed in Tier-II/III cities with a loan book of more than 90,000 Crore, which was once the 2^nd largest lender in this segment (after HDFC) has faced lot of challenges on account of irregularities in operations followed by RBI suspending Board of Directors and initiating CIRP process.

In this article, we will be first focusing on snapshot of timeline of major events happened related to DHFL beginning from raising of allegations to approval of Resolution Plan by NCLT and delisting the shares from the Stock Exchanges. Next, we will be discussing about how Kapil Wadhawan, the former promoter tried to get control over the company by following the law by defeating the purpose of the relevant provisions.

Timeline of Major Events:

2019 – The Allegations & The Insolvency Initiation Phase:

Jan: It all started with the Investigative media outlet Cobrapost alleged about financial misappropriations by DHFL’s controlling shareholders and diversion of funds through shell companies. DHFL denies the same calling it as ‘unfounded and malicious’.

Feb:CEO Harshil Mehta resigned from the position. ICRA & CRISIL downgraded DHFL’s commercial papers.

Jun: DHFL has defaulted several debt payments.

Aug: Bankers drafted a resolution plan and DHFL proposed to pay the same through inter-creditor agreement. ^#

^# Inter-creditor agreement (ICA) is a contractual agreement among banks that have stressful dues from the borrower. ICA mandates a resolution plan (for recovery) which will be executed in a time-bound manner.

Oct: Forensic audit of KPMG revealed siphoning off of Rs.20,000 Crore through shell companies. Promoters loaned Rs.14,000 Crore to 25 Companies having a profit of merely Rs. 1 Lakh which was in turn transferred to promoter’s companies. DHFL did not classify those loans as NPAs despite non-payment of the same beyond specified period.

Nov: RBI suspended the Board of Directors & appointed advisory committee. It has filed application for the Corporate Insolvency Resolution Plan with IBBI.

Dec: Adjudicating Authority admitted the same. DHFL is the 1^st financial company under IBC.

2020 – The Resolution Phase:

Mar: Expression of interests are received from 23 Prospective Resolution Applicants including the Piramal Group (The Acquirer).

Oct: In 1^st round of Bidding, four suitors submitted their bids namely SC Lowry, Adani Group, Oaktree Capital and Piramal Group. In 2^nd Round, Kapil Wadhawan writes to DHFL administrator offering him a bigger settlement plan.

Nov: In 3^rd Round of Bidding, Wadhawan repeats his offer. SC Lowry withdrew and Adani revises its offer.

Dec: In 4^th round of bidding, Piramal Group & Oaktree Capital revised their bids by 14-15%.

2021 – The Acquisition Phase & The Promoter’s Play:

Jan: Committee of Creditors approved the offer of Piramal Group to take-over the company for a total consideration of Rs.37,250 Crore (including upfront payments of Rs. 14,700 Crore & carve out consideration of Rs. 3,000 Crore).

Feb: Reserve Bank gave the in-principle approval to the plan.

May: On 19^th May, the NCLT has asked DHFL’s administrator to consider Kapil Wadhawan’s offer of Rs.91,158 Crore. He even offered to pay Rs. 9,062 Crore lying with the company upfront to small investors, NCD holders and Fixed-deposit holders.

On 25^th May, the NCLAT has stayed on the above order on an appeal filed by the lenders & administrator of DHFL.

Further explanation of major events happened in this month are discussed in detail in second phase of the article.

Jun: On 2^nd June, Kapil Wadhawan moved to Supreme Court against the order of NCLAT that stayed NCLT’s order asking COC to reconsider his offer.

On 7^th June, NCLT accepts the commercial wisdom of COC and approves Piramal Group’s offer to acquire the company (subject to NCLAT & SC’s order on the same). 63 Moons Technologies has moved to NCLAT challenging this order but NCLAT upheld above order of NCLT. Shares of DHFL have been delisted w.e.f. 14^th June as per the approved resolution plan.

How Kapil Wadhawan tried to get control of the company:

Part-I: NCLT in its order dated 19^th May stated the following –

Section 29A of the IBC specifically prohibited the Wadhawan to submit a resolution plan. Regulation 30A requires the application for withdrawal U/s 12A (withdrawal with voting of 90% of COC in favor) shall be accompanied by a bank guarantee towards estimated resolution procesd.

Tribunal has stated that the proposal is not an application prescribed under Regulation 30A per-se, is a precursor (the one precedes) to possible application under section 12A since the promoter merely seeks COC to consider his 2^nd settlement proposal. He further informed the tribunal that the COC declared a Resolution Applicant as successful bidder without taking his 2^nd settlement proposal into consideration.

Mr. Wadhawan has offered Rs. 91,158 Crore which is more than 1.5 times of the value of next highest bidder (Piramal Group – Rs. 37,250 Crore). He even offered to use the Cash available with the company (of Rs. 9,062 Crore) as on 30.09.2020 to repay the dues of Non-Convertible Debenture holders, External Commercial Borrowings and Public Deposits in full.

Since the offer made by Mr. Wadhawan is not violating any of the provisions of the law and promised to repay dues of thousands of small investors, NCLT has ordered the COC to consider the proposal.

Part-II: NCLAT in its order dated 25^th May stated the following –

Mr. Kapil Wadhawan has sent a first offer proposal on 19^th December which was rejected in 18^th COC meeting that happened on 26^th December. He has sent second offer proposal on 29^th December which does not differ from the first one and COC has recorded reasons for rejection in its minutes.

Resolution Plan was already approved in Jan-21 and is now before the Adjudicating Authority but AA has passed the order ignoring the same. Regulation 30A of CIRP Regulations requires reasons to be given for application under Section 12A of IBC if filed after issue of Expression of Interest. Here the matter had proceeded to the stage where even Resolution Plan had been approved and was before Adjudicating Authority. The Appellate Tribunal further stated that there would be no end if such reversals are allowed.

Considering above facts, NCLAT has stayed the NCLT’s order dated 19^th May.

Conclusion:

Actions of the promoter Mr. kapil Wadhawan are the main reason behind current state of the company. If owners can simply re-buy businesses relieved of some debt after defaulting on their obligations, the code could turn into a debt writing-off device and this will defeat its purpose which is to place failed enterprises in competent hands for revival.

The actions of the Wadhawan clearly evidences the existence of loopholes in the system. The Board is now reviewing provisions to keep promoters out. Now, after the acquisition of the company by the Piramal Group, DHFL is banned from taking deposits, will be reclassified as Non-deposit taking housing finance company.

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