DHFL audit firm TP Ostwal & Associates comes under Sebi, RBI lens

Ostwal was appointed by DHFL board within days of the Cobrapost expose

The banking and securities markets regulators are planning to seek the views of audit firm TP Ostwal & Associates to understand how it gave a clean chit to Dewan Housing Finance Corporation (DHFL) in March, soon after media website Cobrapost revealed DHFL’s promoters had diverted funds.

Ostwal was appointed by the DHFL board within days of the Cobrapost expose. Ostwal's report was shared by DHFL with the stock exchanges on March 5, and since then after an initial flare up, the DHFL stock continued to lose value and its shareholders have lost Rs 3,600 crore of market value due to a 86 per cent fall in its share price.

A forensic audit initiated by Union Bank of India in July, conducted by KPMG, confirmed that the promoters diverted Rs 20,000 crore from the company and, in several cases, there no proper records were kept on the end use of funds lent to over 40 entities.

The Securities and Exchange Board of India (Sebi) and the Reserve Bank will also seek the views of Deloitte, the auditor of DHFL, The forensic audit was conducted for four years between 2015 to 2019. For fiscal 2014 and fiscal 2015 , TR Chadha & Co and Rajendra Neeti & Associates were the auditors of DHFL. In  FY 17 and FY 18, Chaturvedi & Shah was appointed as the auditor. In fiscal 2019, Deloitte was the joint auditor with Chaturvedi and Shah and gave a qualified opinion on the accounts.

Ostwal declined to comment when contacted.

In its report, Ostwal gave DHFL a clean chit in respect of Rs 11,520-crore loans given to 26 related entities. “The company has not promoted any of the alleged 26 ‘shell’ companies that are borrowers. Further, it does not have any directors in common, including members from the promoter group, with any of these alleged ‘shell’ companies. Further, the company or promoters do not have any shareholding in these entities, nor are these entities shareholders of the company,” Ostwal said.

In June, Hong Kong-based research firm REDD Intelligence said several Indian non-banking financial companies (NBFCs) including DHFL floated "box companies" to evade disclosure of funds given to related parties and evergreen old loans.

In a report dated June 7, REDD said other NBFCs also used similar structures to roll over loans and avoid reporting to authorities and to shareholders in total violations of the Sebi and the RBI norms on disclosures and lending to related parties.

In the case of DHFL, the three box firms were: Hemisphere, Galaxy, and Silicon. The three firms owned 31.1 million shares in DHFL as of March 2018 or almost 9 per cent in DHFL and sold shares in the market.

All through the year, the three firms sold the stock, disposing 4 million shares of DHFL by the end of June and by September and their holdings had come down by another 7.65 million shares and did not appear in the register by March 2019.

REDD said when companies employ this structure, auditors find it difficult to ascertain the true beneficiaries of the box.

The auditors can even hide behind the ownership not being traced to the related party. By using the box structure, REDD said some of these firms have found an alternative to the concept of a roll over or ever greening. It said DHFL lent Rs 2,000 crore to four proxy companies: Earleen Real Estate Developers, Edweena Real Estate, Notion Real Estate, and Prashul Real Estate. The proxies later purchased shares of Darshan Developers, a subsidiary of Wadhawan Realtors, a firm owned by the founders.

Alarmed by the allegations of fund diversion, the banks led by Union Bank of Indian then appointed KPMG in July, which has now confirmed the findings of Cobrapost and REDD Intelligence.

How the cookie crumbled
 

 

Jan 2019: Cobrapost alleges fund diversion by DHFL to promoter entities, DHFL appoints independent audit to probe charges

 

Mar 2019: Audit firm, TP Ostwal gives clean chit to DHFL, promoters

 

Jul 2019: Banks appoint KPMG to study DHFL books between FY15 and FY19

 

Oct 2019: KPMG confirms fund diversion from DHFL