HOT on the heels of the IL&FS (Infrastructure Leasing & Financial Services) scam in October last year come insinuations of another major scandal in the non-banking financial companies (NBFC) sector. Touted to be much bigger in scale than the Saradha and Nirav Modi scams, the latest scandal involves the promoters of Dewan Housing Finance Corporation Ltd (DHFL), who have been accused by the investigative news portal Cobrapost of engaging in financial misappropriation.
Terming it the “biggest banking scam in Indian history”, Cobrapost alleged that DHFL’s controlling shareholders siphoned off more than Rs.31,000 crore of public money through secured and unsecured loans and advances to dubious shell companies, illegal round-tripping, tax avoidance and insider trading; the company’s total bank loans amounted to Rs.97,000 crore.
The money was used to buy equity and private assets in India and abroad, including the United Kingdom, Dubai, Sri Lanka and Mauritius, according to Aniruddha Bahal, editor of Cobrapost. The news portal said that it analysed public records available with the public authorities and information available in the public domain to arrive at these conclusions.
On January 29, Cobrapost held a press conference with the advocate Prashant Bhushan and former Finance Minister Yashwant Sinha. Demanding a special investigation team (SIT) probe by the government to look into the charges, Bhushan said that a “nexus of holy cows” had been created in the financial system. “If the banks had done some due diligence, they would have known that the loans given to DHFL had been virtually siphoned off by shell companies. Therefore, it is absolutely clear that many people in several public sector banks are involved in the scam,” he said.
DHFL denied the charges and called the exercise a “mischievous misadventure by CobraPost with a mala fide intent to cause damage to the goodwill and reputation of the company resulting in erosion in shareholder value”.
In a conference call with mediapersons, investors and analysts, chairman Kapil Wadhawan said that DHFL had never lent to a shell company, adding that neither the company nor its units had made any political donations.
In a statement to the Bombay Stock Exchange on the day the scam broke, the company said: “DHFL today received an email at 8:44 am in the morning, with a follow-up reminder one hour later, seeking answers to 64 questions from CobraPost, many of which were laced with political innuendos. We are shocked and surprised to receive this inquiry this morning, although CobraPost had announced its press conference last Friday, i.e., January 25, 2019, to disclose an alleged financial scam.... We understand, for the last several weeks, an anonymous note has been making the rounds with similar defamatory and scurrilous allegations. The real intent of this exercise appears to be to destabilise the company and the market equilibrium besides hampering our meeting ongoing obligations. We are also concerned about the timing and the holding of the press conference before the stock market close and days before the interim budget.”
DHFL is a publicly listed housing finance company and is regulated by the National Housing Bank (NHB) and the Securities and Exchange Board of India (SEBI), among other regulators. It lends money, especially to promoters engaged in slum rehabilitation, housing development and other real estate businesses.
Cobrapost sought to know how the listed entity could give secured and unsecured loans to dubious shell companies, which could then be converted into private wealth for promoters. Over five days after the allegations, DHFL’s share fell by nearly 40 per cent as the markets debated this news.
Disbursal of loans
DHFL’s net worth, according to its audited financial results for 2017-18, was Rs.8,795 crore. Cobrapost said the company took loans from banks and financial institutions to the tune of Rs.96,880 crore, including Rs.31,312 crore in the form of non-convertible debentures, Rs.36,963 crore from banks, Rs.2,965 crore in external commercial borrowings, Rs.2,848 crore from the NHB, Rs.9,225 crore in public deposits and Rs.13,567 crore from other sources. It disbursed Rs.84,982 crore in loans and advances to other entities.
According to its annual report, DHFL secured loans from 32 Indian banks and six foreign banks. They include State Bank of India, Bank of Baroda, Bank of India, Canara Bank and HDFC Bank. Cobrapost said that it then lent substantial sums to shell companies, which were created just to siphon money out of DHFL and channel it elsewhere, mostly to companies in which the promoters, Kapil Wadhawan, Aruna Wadhawan and Dheeraj Wadhawan, and their proxies and associates had personal interests.
The main charges against the promoters of DHFL were that they created dozens of shell entities, largely with a nominal capital of Rs.1 lakh each, and divided them into small groups of two to four companies, with many of them having the same or similar addresses and having the same set of initial directors, and in many instances having the same group of auditors.
The company also disbursed huge loans to these shell companies mostly without any security or collateral, and the proceeds appeared to have been used for the creation of private assets in India and overseas, Cobrapost said.
The news portal alleged that DHFL disbursed loans amounting to thousands of crores of rupees to these shell companies in the name of secured loans against slum development projects without any due diligence or checking of collateral or maintaining adequate debt-equity ratio.
It did so by disbursing the loans in single tranches, instead of following the established norm of disbursal in stages against progress of the project works, and ensured that most of the shell companies hid the name of the lender, that is, DHFL, the terms of loan and the terms of repayment in their financial statements to be submitted as required by the law.
These shell companies were accused of engaging in illegal insider trading in violation of SEBI takeover regulations to the tune of approximately Rs.1,000 crore; creating offshore assets of approximately Rs.4,000 crore; and having bought Wayamba, a Sri Lanka Premier League cricket team, by using loan money dubiously advanced by DHFL. Cobrapost also claimed that DHFL advanced money to several companies in Gujarat and Karnataka ahead of the State Assembly elections and gave crores of rupees in donations to the Bharatiya Janata Party (BJP).
According to the portal, the company disbursed a total of Rs.1,160 crore to various Gujarat-based companies for projects that were either put on hold by municipal corporations or suspended.
For instance, Satyasankalp Buildcon LLP took a loan for Swaminarayan Green City with an environment clearance of Rs.150 crore, whereas the loan advanced by DHFL was for a sum of Rs.680 crore. The rest of the money was allegedly for the Swaminarayan Business Park, which the Ahmedabad Municipal Corporation suspended for violation of the norms of the General Development Control Regulations. DHFL also disbursed a total of Rs.1,320 crore to different companies of Karnataka under various schemes and projects.
Political donations
Around Rs.19.5 crore was given as donation to the BJP between 2014-15 and 2016-17 by RKW Developers Pvt. Ltd, Skill Realtors Pvt. Ltd and Darshan Developers Pvt. Ltd, respectively. All these donors were linked to the Wadhawans, Cobrapost said. Of the three companies, RKW Developers, with a donation of Rs.10 crore in 2014-15, did not show any donation on its balance sheet. Similarly, Skill Realtors donated Rs.2 crore in 2014-15 but failed to show the amount on its balance sheet.
While receiving and reporting these donations, the BJP failed to provide the permanent account number (PAN) details of these donor companies. This is in violation of the provisions of Section 182 of the Companies Act, 2013, which governs corporate funding to political parties, said Cobrapost.
Interestingly, the Mumbai-based RKW Developers contributed Rs.10 crore to the BJP in 2014-15, but in 2012-13, the company posted a loss of Rs.24,77,828. In 2014-15, the Mumbai-based Skill Realtors donated Rs.2 crore to the BJP but recorded a measly profit of Rs.26,914.
Darshan Developers, which gave Rs.7.5 crore to the BJP in 2016-17, reported a loss of Rs.7,69,68,968 that year and losses of Rs.5,13,406 in 2013-14 and Rs.4,650 in 2014-15, respectively. In 2015-16, the company posted a measly profit of Rs.2,82,691.
Cobrapost pointed out that Under Section 182 of the Companies Act, and provisions of law, as of 2014, a company had to be profitable before it could make any monetary contributions to political parties and a company could contribute not more than 7.5 per cent of the net profits earned during the three preceding fiscal years. Also, all such donations had to be shown in the account books of the donor companies.
As per the Companies Act, this violation is punishable with six months’ imprisonment and a fine up to five times the donated amount.
Claiming serious violations of several civil and criminal laws and regulations, Cobrapost said that there was a massive deviation by the company both from the industry practice of lending and from good corporate governance norms.
“There is also significant deviation from related party policy of the company on material disclosure of information in all of the cases where the shell entities are actively suppressing facts on terms of borrowing, terms of repayment and the institution they are borrowing from. In certain cases, no agreement in black and white can even be found in public records which are to be mandatorily disclosed,” said the news portal.
Multiple violations
Listing other “irregularities”, Cobrapost said that DHFL violated SEBI regulations, NHB norms and various sections of the Companies Act relating to political donations, auditing and investment limits.
It also attempted to evade capital gains tax, made unexplained investments, delayed deposits of tax deducted at source (TDS), and committed deviations in disclosures in its financial statement while violating sections of the Indian Penal Code by misappropriating public money and converting it into various movable properties for its own use.
The company also stands accused of criminal conspiracy with various persons in concert and dishonestly disposing of properties in violation of several legal contracts, having committed wilful “criminal breach of trust” and having fooled DHFL’s shareholders and common investors, and engaging in laundering. If these violations have indeed taken place, they happened right under the nose of the Reserve Bank of India (RBI), the SEBI and the Union Ministry of Finance, besides the monitoring mechanisms of the banks, the auditing agencies, the Income Tax Department, rating agencies, and so on.
“Not only does the scam point fingers squarely at the inefficient corporate governance of NBFCs as a whole, but it also questions the dubious role public bodies have played in effecting the scam. It is a clear case of complete connivance amongst public and private figures,” said Cobrapost.
As far as political donations go, it must be noted that in 2017 the government brought an amendment to Section 182 of the Companies Act that in effect enables dubious political funding without any consequences. However, it remains to be investigated whether the donations by DHFL were in violation of Section 182 as it applied then.
Pointing to a possible Panama/Paradise connection, Cobrapost said that DHFL also advanced loans of Rs.650 crore and Rs.635 crore to Kunjbihari Developers Pvt. Ltd and Edico Ventures Pvt. Ltd respectively. Kunjbihari was a 100 per cent subsidiary of Edico Ventures, itself a subsidiary of Archway Services Pvt. Ltd, which had a large investment (equivalent to the loan amount) in a company associated with the Panama and Paradise leaks.
As per its annual report for 2016-17, Edico Ventures invested $4.34 million (Rs.19 crore) in Larimar Holdings Ltd and $300 million (Rs.1,364 crore) in Tanzanite Holdings Ltd. Both these companies were linked to the Paradise and Panama leaks, as claimed by the International Consortium of Investigative Journalists.
Explaining the backstory to the DHFL saga, Cobrapost threw light on a battle over NBFCs between the RBI and the Finance Ministry. By the end of 2018, the RBI and the Finance Ministry had come to loggerheads over the formation of policies to regulate and control NBFCs. Following the collapse of IL&FS, the infrastructure finance company, after it defaulted on payments to lenders, NBFCs faced an enormous liquidity crunch as corporates lost faith in them.
This led to NBFCs squeezing lending to micro, small and medium enterprises and prompted the government to step in and take control of IL&FS in a bid to contain the damage done to the financial ecosystem. While the RBI rooted for much stricter governance, the Ministry looked for a quick fix by providing NBFCs with a special liquidity window.
Cobrapost said that if the Ministry had had its way, NBFCs like DHFL could declare bankruptcy or show that loans, which were in reality spurious transactions to shell companies, had been defaulted on.
The investigative portal also stated that ignoring the RBI’s warnings and the market’s dire state, Finance Minister Arun Jaitley tweeted: “The government will take all measures to ensure that adequate liquidity is maintained/provided to the NBFCs.”
Cobrapost warned that if the government were to take over DHFL, as it did IL&FS, without a thorough investigation into its affairs by agencies such as the Central Bureau of Investigation, the Serious Fraud Investigation Office and the Enforcement Directorate, then the Wadhawans, who it claimed were the principal beneficiaries of the scam, would go scot-free.
Even as the regulators and financial authorities look into the veracity of these claims and charges, the scandal has led to fears of how it will impact the economy and what repercussions it will have for the larger financial system.
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