Buyers may turn their back on DHFL over KPMG audit report concerns

Bank debt-to-equity conversion will depend on forensic audit report details

A scathing forensic audit report by KPMG, apart from the ongoing litigation, would deter players from bidding for Dewan Housing Finance Corporation (DHFL), whose board was superseded by the Reserve Bank of India (RBI) on Wednesday, citing governance concerns and defaults.

Ongoing investigations by government agencies, including a Central Bureau of Investigation probe ordered by the Uttar Pradesh (UP) government into UP Power Corporation’s employee provident fund trusts, and reports of a Serious Fraud Investigation Office probe are other concerns of the bidders. The housing finance company has defaulted on Rs 84,000 crore of debt to Indian lenders, including banks, mutual funds, and fixed deposit (FD) holders. Banks would be reluctant to convert their debt into equity till the fraud charges made by KPMG are addressed, said a source close to the development.

In its interim report, KPMG said the promoters of DHFL siphoned off Rs 20,000 crore from DHFL to various entities, with no proper entries on the end-use of funds. “The first question a bidder will ask is whether the accounts are clean. If there is any issue related to corporate governance or fraud, it will deter any potential investor. Banks have no option but to make provision for the company in the December quarter after the RBI action,” said a lending source.

THE CONCERNS

• No clarity on DHFL’s books
• KPMG forensic audit confirms fund diversion
• Litigation in SC, HC and DRT may spring surprises
• UP govt ordering CBI probe on PF deposits

Lenders, who have exposure of Rs 38,000 crore, are awaiting the final report of KPMG. Till then, the debt-to-equity conversion will have to wait as valuation may change. “DHFL is going the same way as Jet Airways where not a single serious bidder came forward due to the ongoing investigation. The acquisition of Bhushan Power and Steel by JSW Steel is also stuck, as there is no clarity on who will take over the liabilities of the company facing investigation,” said the executive.

Apart from banks, DHFL also owes close to Rs 15,000 crore to its FD holders. One of the FD holders has already moved the SC seeking his dues. The Bombay HC is separately hearing a slew of petitions filed by banks and institutions who want their money back. The RBI will also move the National Company Law Tribunal for appointing an administrator as the insolvency resolution professional under the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019.

According to the ‘waterfall’ formula under the insolvency norms, FD holders have some bad news. According to Section 53 of the IBC, the order of priority for fund distribution places the insolvency resolution process cost and the liquidation costs as top priority.

It is then followed by employee dues for 24 months preceding the liquidation commencement date, and debts owed to a secured creditor. The debts owed to unsecured creditors like FD holders come next in line. “As the SC made the Committee of Creditors’ (CoC) decision as final as in the case of Essar Steel, it is very important that the FD holders get a seat at the CoC table,” said a lending source. Since an FD holder has already moved the SC, it is likely to get a patient hearing as seen in other IBC cases, such as Jaypee Infratech, where homeowners were given a seat and voting power in the CoC by the SC,” the executive added.