Another Loan Fraud – this time DHFL reports new loan fraud of Rs. 1,058 crore

DHFL, which already has been facing problems, has now come under the scanner once again.

The non – banking finance company, which is now being run under an administrator, had earlier this year engaged Grant Thornton, an accounting and advisory organization, to conduct an investigation in the working of the mortgage lender. 

According to the report filed by Grant Thornton, DHFL has reported a new fraud case of Rs. 1058.32 Crore. The fraudulent transactions have, by way of undervaluation, fraud, and preferential treatment to certain entities have detected as per the findings. 

DHFL has been undergoing a resolution process under the Insolvency and Bankruptcy Code (IBC). The company reviewed additional reports under the ongoing investigations, which indicated that certain transactions were undervalued, fraudulent, and preferential in nature.

Based on the transaction auditor’s reports, Grant Thornton, the administer of DHFL, has filed three applications before the National Company Law Tribunal, Mumbai Bench, on December 12.

The nature of these transactions as per the findings relate to disbursement to specific entities in the form of loans against property and the utilization of the same towards premature redemption of NCDs held by certain entities. 

According to the findings, the alleged transaction happened between April and August 2019 and involved a sum of Rs. 592 crore towards outstanding principle.

The above constitutes the first application filed and relates to the disbursements made by DHFL to specific borrowers in the form of a loan against property, including El Dorado BioTech, Fortune Broking Intermediary, Fortune Gilts, and Black Rock Financial Services.

The second application filed relates to the diversion of excess funds from DHFL’s account for “purported consideration” towards the purchase of NAPHA property by the company; according to the report, this happened between 2009 – 10 to 2016 -17, the excess amount paid for the purchase was Rs 330.31 Crore. The funds were then further diverted to entities that are linked to the promoters and ex-directors of DHFL.

The third application involves funds Rs 71 crore towards the outstanding principal and happened between 2018 -19; it is in regards to Inter Corporate Deposits by DHFL to Shrem Investments and Shrem Constructions and the execution of the pledge agreement under which the NCDs of DHFL was pledged to secure the due repayment of ICD’s.

The filing stated that the preliminary estimation includes the combination of all three applications and places the monetary impact of these transactions at approximately Rs 1058.32 crore, which also contains the Rs 18.47 crore towards notional loss of interest on account of charging lower interest rates.

The auditor has assessed a total impact of Rs 648.02 crore in the first application; Rs 330.31 crore in the second application as the excess amount paid for the purchase of the NAPHA building, and in the third case, the estimated impact is Rs 79.99 crore. 

An application has been filed with NCLT against 12 respondents, including former promoter of DHFL Kapil Wadhawan, his brother Dheeraj, all the entities that were involved and others, in the first case. 

As many as 16 respondents have been named in the second application, including the Wadhawan brothers, Cloud Nine Realtors, Aahna Infracon, Whadhawan Holdings, RKW Develepors, and certain others. 

The third application names six respondents, including the Whadhawan Brothers, Shrem Entities, Nitin Chhatwal, and one more entity.

History of DHFL

Dewan Housing Finance Corporation, or DHFL, was established in 1984 as a deposit-taking housing finance company. The purpose of the same was to enable access to the middle – class and the lower-income groups in primarily semi-urban and rural parts of the country. Rajesh Kumar Whadhawan incorporated it.

On January 29, 2019, an expose on the group was posted by Cobrapost, an investigative journalist group, for using shell companies to siphon more than Rs 31 000 crores of public money for the personal benefit of DHFL’s primary stakeholders.

The primary stakeholders were the two brothers Kapil Whadhawan and Dheeraj Whadhawan and Aruna Whadhawan; Cobrapost also alleged that political donations worth crores of rupees were made, which violates Section 182 of Companies Act, 2013.

However, DHFL refuted all claims and filed a response with the Bombay Stock Exchange. It also denied these allegations in a hosted investors conference and issued a clarification that the Rs 31,000 crore loans mentioned as per the allegations consist of its project loan portfolio and also tried to clarify the amount saying it was 21,000 crore and not 31,000 crores as mentioned by Cobrapost. 

After the said clarifications Indian Credit Rating Agency reaffirmed its high safety rating for the financial instruments issued by DHFL.

Despite such serious allegations levied on DHFL and its primary stakeholders of misconduct against its business, the Indian Credit Rating Agencies paid no heed and continued to issue high safety ratings for DHFL’s financial products.

In June 2019, the tables turned DHFL defaulted on its debt repayment, which resulted in a debt rating downgrade and resulted in an immediate wiping out of 16% of the value from its stock price. The fall in the stock price was an all-time low, and DHFL quickly lost investor confidence.

In November 2019, The Reserve Bank of India removed the board of directors of DHFL, indicating corporate governance failure and the company’s defaulted payment obligations. 

In 2019, DHFL defaulted on its loan obligations and stopped payment of bonds, this let the stock fall over 97%, and the government had to intervene. 

This led to a move to draft a resolution plan by restructuring debt into equity, some of the DHFL bondholders moved to the debt recovery tribunal.

In October 2019, several offices of DHFL and promoter residences were raided by the Enforcement Directorate and found links of money laundering activity in loans that were given to firms that had close links to the promoters of the company. 

In November, the central bank stepped in to remove the board of directors of DHFL; on January 2020, Kapil Whadhawan, the company’s promoter, was arrested under the Prevention Of Money Laundering Act (PMLA).

The arrest was made due to his firm’s alleged involvement in providing loans to Dawood Ibrahim’s organized criminal enterprise. 

The ED has also linked Yes Bank for fraud and transactions amounting to 3700 crores as debentures in DHFL. 

The Central Bank then appointed an administrator at DHFL, and the findings of the same are what has been reported above.