Regulators encourage good governance practices, alongside powers to oust management and takeover control in case of default. Case in point, Dewan Housing Finance Corporation Limited (“DHFL”) superseded by RBI owing to governance concerns and failure to meet payment obligations.
GOVERNANCE ISSUES
A forensic audit of October 2019 by KPMG for lenders of DHFL revealed diversion of over INR 19,000 crore of bank loans to DHFL’s related entities. The promoters are also facing charges of money laundering.
RBI took over the management and appointed an Administrator. Insolvency proceedings under Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority Rules, 2019 (“FSP Rules”) were invoked seeking appointment of an Administrator as Insolvency Resolution Professional (“IRP”).
DHFL is the third largest pure-play mortgage lender and the first finance company to be referred to NCLT by RBI using special powers under Section 227 of the IBC.
Administrator filed for fraud worth INR 12,705 crore against the promoters. CBI too filed a case against DHFL and promoters for siphoning off funds under the Pradhan Mantri Awas Yojana (“PMAY”) by creating fake home loan accounts and claiming interest subsidy.
CIRP FOR DHFL
RBI set an advisory committee with industry experts, for effective implementation of RP, to advise the Administrator with operations during the CIRP.
For Expression of Interests (“EOI”) from Prospective Resolution Applicants (“PRA”), the following was offered –
- Entire business of DHFL as going concern
- One or more groups as going concern (owing to complexity and scale of operations and these groups collectively constituted all assets of DHFL.)
CoC, by a majority of 93.65%, approved resolution plan under Option 1 from Piramal Capital & Housing Finance Limited (“Piramal”). The option proposed a reverse merger under the resolution plan, making the resultant entity a wholly owned subsidiary of Piramal Enterprises Limited.
Piramal offered performance bank guarantee, and regulatory approval was obtained from RBI as a NoC to the resolution plan for change in control and management in DHFL. However, RBI revoked the deposit-taking license of DHFL and allowed the resulting entity to operate as a non-deposit taking housing finance company1.
APPROVED RESOLUTION PLAN
The total consideration paid by the Piramal Group of INR 34,250 Crores, includes an upfront cash component of INR 13,700 Crores and issuance of debt instruments of INR 19,550 Crores (10-year NCDs at 6.75% p.a. on a half-yearly basis).
Noting CoC’s resolution to provide liquidation value, NCLT upheld that dissenting Financial Creditors shall be paid upfront cash and not debt securities prior to making any payment to other Financial Creditors per judgment of Hon’ble Supreme Court in Jaypee Kensington Boulevard Apartments Welfare Association & Ors. Vs. NBCC (India) Ltd. Ors.2
A capital reduction done with delisting, without any payment for any existing shareholders except for shares issued to Piramal.
SUPERVISION OF THE RESOLUTION PLAN IN INTERIM
A Monitoring Committee for the supervision of the Resolution Plan till Implementation Date was set up. The management of affairs vested with the Administrator under CIRP (as against with the promoters under PPIRP). The Monitoring Committee comprised of CoC representatives, Piramal, Expert Member and NCLT-appointed Observer Cum Permanent Invitee, to ensure smooth functioning and transition.
RECONSIDERATION OF PROMOTER’S OFFER UNDER CIRP
While approving the resolution plan, reliance was placed on multiple judgments confirming that in a supervisory capacity, NCLT is duty-bound to approve the resolution plan duly approved by CoC with the requisite majority unless it is in violation of the Code3.
The first resolution plan submitted by Promoters was rejected by CoC since the Code prohibits wilful defaulters, promoters of defaulting firms and undischarged insolvents from participating in the resolution of companies4.
Thereafter, while CoC approved Piramal’s resolution plan and it was submitted to NCLT for approval promoters offered to revise the resolution plan.
On appeal, NCLAT set aside NCLT’s order which directed the Administrator to present the second resolution plan. As adjudged by Supreme Court in a matter of Ebix Singapore, NCLAT noted that there was no scope for negotiations between the parties once the CoC has approved the resolution plan.
NCLAT held that “The said exercise was beyond the jurisdiction of the adjudicating authority (NCLT), hence unsustainable and liable to be set aside”.
While pendency of this appeal, NCLT had passed an order to approve the resolution plan submitted by Piramal5.
PIRAMAL, THE WAY FORWARD
In a press release, Ajay Piramal, Chairman, Piramal Group said, “We are very pleased to announce the consideration payment made towards the completion of this exciting acquisition. This accelerates our plans to become a leading digitally oriented, diversified financial services conglomerate that focuses on serving the financial needs of the unserved and underserved customers of our country”.
The statement also confirmed that the transaction will lead to a significant diversification of the overall loan book, growing the retail loan book to ~5 times. Piramal is aiming to achieve nearly 50:50 retail wholesale mix in the near-term. It also intends to leverage the “phygital” lending platform, driven by Machine Learning (ML) and Artificial Intelligence (AI), including the new mobile app.6
- NHB Circular – Housing Finance Companies – Approval of acquisition or transfer of control (NHB) Directions, 2016
- Civil Appeal No. 3395 of 2020
- CoC of Essar Steel; Swiss Ribbons v/s UOI (Writ Petition Civil No. 99 of 2018); K Sashidhar v. Indian Overseas Bank & Others (in Civil Appeal No.10673/2018 decided on 05.02.2019)
- DHFL resolution: NCLT seeks consideration of Wadhawan offer by CoC | Business News,The Indian Express
- DHFL: NCLAT sets aside order directing NCLT to consider Wadwan’s 2nd offer – BusinessToday
- Press-Release_Piramal-DHFL-Acquistion_Sept-29-.pdf
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