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Now, a lenders’ takeover of DHFL just short of two regulatory nods
Photo Credit: Reuters

All banks have consented to converting financially-troubled Dewan Housing Finance Corp. Ltd (DHFL)’s debt into equity, and now await greenlight from insurers and mutual funds, which hinges on approvals from their respective regulators.

Bankers have clarified that the equity control, when it happens, will be a short-term solution and that they will look at selling it to a buyer immediately. DHFL’s parent is Wadhawan Global Capital. 

"Taking temporary control of the mortgage firm is an option banks are considering and they are still waiting for mutual funds (MFs) to sign the inter creditor agreement (ICA)...The bankruptcy resolution plan for DHFL that lenders are now examining is the best one under the circumstances," said Rajkiran Rai G, managing director and chief executive officer, Union Bank of India, the lead bank in the consortium of lenders to DHFL.

However, as of now potential investors are awaiting clarity from banks on the resolution plan for the debt-laden shadow bank and what lies ahead in terms of risks associated with it.

DHFL, India's fourth-largest housing finance company, on Monday said that it had defaulted on financial repayment obligations worth Rs 1,571 crore (around $219 million).

Of the debt worth around Rs 90,000 crore, DHFL owes over Rs 45,000 to banks, and the rest to other financiers including mutual funds, pension funds and insurers, which are not regulated by the Reserve Bank of India (RBI).

A managing director of a non-banking financial company (NBFC) told VCCircle, "A large part of the existing senior management at DHFL has now left. They are defaulting on their debt obligations. So, clearly there is not much cash flow at hand given the short-term borrowings taken to service the long-term loans. They are not lending and so their business has stagnated. It can come out of the woods but needs interim funding."

Lenders have also proposed a change in the senior management and that the promoter would also be required to pledge a part of their remaining stake to lenders (which would be below 10%). "In the immediate future, we have proposed that the promoter step down and banks take over operations until a new investor takes charge," a banker told Financial Express. Currently, the promoter group holding in DHFL is 39.21%.

A severe cash crunch in the non-banking financial companies’ (NBFCs) sector after the crisis at IL&FS in September last year has spooked investors and triggered massive sell-off from major bondholders. 

Arijit Basu, managing director at State Bank of India, said that lenders are "evaluating" the resolution plan received from DHFL. "All the regulators have to come on board and give their approval. That is moving forward in a very coordinated and systematic manner," he said on the sidelines of a banking event.

As part of the resolution plan, DHFL had also put a moratorium on repayments and sought funding from banks to start retail lending, the company said after a meeting of the special committee for resolution plan earlier this month.

While all the banks have signed the ICA, the capital markets regulator has expressed its reservations on its conditions and hence is yet to give its approval to mutual funds for signing the agreement. Reserve Bank of India (RBI) Governor Shaktikanta Das had said on 7 August that the central bank was in touch with other regulators so that insurers and mutual funds could become part of the ICA.

The resolution process in the case of DHFL is a complex one as it is the first financial company being resolved under the RBI’s June 7 circular and there are multiple categories of creditors involved — banks, insurance companies, MFs and pension funds. Rai also explained that the way MFs are structured and the kind of investments they do, for them to implement a resolution plan to the satisfaction of their investors is not easy.

Typically, as per a mutual fund debt scheme, if a restructuring plan involves conversion of debt to equity then it may end up violating the scheme's mandate.

Separately, DSP Mutual Fund, one of the creditors of DHFL, said it had initiated legal action against the housing finance company as 50% of its dues remained unpaid. Since then there have been concerns that others may also take a similar step, delaying the resolution process.

Last month, DHFL had also filed its long-delayed audited results for the quarter ended March, and revealed that its auditors (who have resigned) had raised several red flags around its numbers.

The bondholders have to communicate by letter by August 26 if they are willing to be part of the ICA.

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