DHFL Survival Uncertain as Crisis Intensifies

Crisis at mortgage lender Dewan Housing Finance Corporation Ltd (DHFL) has now intensified for two reasons. Firstly, the company’s statutory auditors have sought additional information to reconcile its annual results for financial year 2018-19, raising additional doubts as the company is already under government scanner amid allegations of its involvement in fraudulent activities. Secondly, the company would require nearly Rs 3,000 crore of new equity investments to infuse its capital base to overcome its liquidity crisis, a potential task ahead for its survival.

DHFL shares on Monday plunged to 29% (to Rs 48.5) on Bombay Stock Exchange after the company on Saturday, in a stock exchange filing, said that several recent developments “may raise a significant doubt on the ability of the company to continue as a going concern.” However, Kapil Wadhawan, DHFL chairman and Managing Director said on Monday that he expects the company “will be able to restart its business in August 2019”.

But the mortgage lender has been struggling to find a strategic or equity investor to bolster its capital base for some time now. Unless it could accumulate enough capital, banks will not be ready to fund loans, stagnating or worsening its business. As per a report in Mint, the company needs between Rs 2,500 crore to Rs 3,000 crore of fresh investments to sustain lending operations.

Wadhawan’s claim that the company could come out of the liquidity crisis by pointing out that it (company) “has managed to make repayments of over Rs 41,800 crore through securitisation of assets and repayment collections in the last ten months.” But this doesn’t seem to convince its lenders. Already, DHFL has entered an inter-creditor agreement with its lenders and is supposed to announce its resolution process by July 25. As per media reports, MFs (lenders) are now considering to break ranks with banks and are going to the Debt Recovery Tribunal (DRT) to settle matters.

As per the company’s unaudited financial results for the fourth quarter, ending in March 2019, it declared a net loss of Rs 2,223 crore in Q4 and overall net loss of Rs 1,036 crore for the last fiscal. The company has an outstanding loan of Rs 89,387 crore at the end of March 2019. Of this, the banks’ share is about Rs 40,000 crore, and the remaining is owed to MFs, provident funds and retail investors.

On June 6, Deloitte Haskins and Sells and Chaturvedi & Shah, statutory auditors of DHFL had sought additional financial information from the company to reconcile its annual results for the 2018-19 financial year, invoking Section 143 of the Companies Act, 2013, which includes rules and regulations for auditors to report instances of fraud or suspected fraud. DHFL is supposed to submit the demanded information by July 21.

Furthermore, the revival of the housing finance company is uncertain considering the developments which pushed it onto the verge of collapse. When the Infrastructure Leasing and Financial Services (IL&FS) debacle broke out, DHFL was worst hit, as the fund houses, especially Mutual Funds, tightened refinancing norms. And in January this year, investigative news portal Cobrapost had claimed that DHFL had siphoned off Rs 31,000 crore of public money “through grants of loans and advances to shell companies and by using other means”. This prompted the Serious Fraud Investigation Office to look into the allegation wherein a probe is currently underway.

While DHFL management denied all allegations of the existence of “shell companies” and appointed TP Ostwal and Associates LLP, an accounting firm, to look into the allegations. Although the firm refuted with Cobrapost’s allegations, it had pointed out a few discrepancies in the DHFL books. For instance, although DHFL is mandated to monitor its post disbursal end use of funds by the borrower, the accounting firm found that the company’s monitoring in respect of 15 borrowers (loans amounting to Rs 7,485 crore) is significantly inadequate. But the latest demand by its auditors has only added to the woes of DHFL. 

Also read: DHFL Default: Financial Sector on Edge, Analysts Warn of Contagion