DHFL bid: CARE Ratings subsidiary on Sebi radar over Oaktree's bonds

A subsidiary of CARE Ratings is under the scanner of the Securities and Exchange Board of India (Sebi) for providing misleading information that Oaktree’s bonds to be issued to the Indian lenders for acquisition of Dewan Housing Finance Corporation (DHFL) are ‘AAA’-rated. 

A source close to the development said after receiving a letter from Ajay Piramal — another bidder of DHFL — Sebi sought clarifications from the rating firm to find out the rationale behind indicating the highest rating to Oaktree bonds. 

The markets regulator found it was a subsidiary of CARE which had rated the Oaktree acquisition proposal, not the bonds. 

A spokesperson for CARE Ratings said it had not given any rating to Oaktree, but did not comment on the stand taken by its subsidiary.  

In its letter to the lenders, Oaktree said it had expected the highest rating for the proposed non-convertible debentures worth Rs 21,000 crore to be issued to financial creditors. At the same time, it compared its proposed bonds with Piramal Enterprises (PEL), saying PEL bonds would not get a credit rating beyond ‘AA’ — a tad lower than its own. No rationale was given to the lenders for the rating. According to Sebi norms, rating firms cannot indicate the rating of an instrument. Any indicative rating could potentially mislead investors.

This disparity in rating without any rationale led to an official complaint filed by Piramal with Sebi against the rating firm whose name was not disclosed by Oaktree.

Under rating cloud

• Oaktree had told banks its bonds would get the highest rating
• Sebi norms bar indicative ratings unless a rating is given
• Sebi enquiry comes after Piramal complained to regulators
• CARE Ratings subsidiary had vetted Oaktree acquisition proposal, not bonds

Apart from Sebi, Piramal had also complained to the banking regulator — Reserve Bank of India (RBI) — saying the acquisition of DHFL by Oaktree Capital would not be able to meet the capital adequacy ratio norms prescribed by the National Housing Board and the RBI.

The letters to both Sebi and the RBI were sent days before the lenders voted on the resolution plans submitted by Oaktree, Piramal, and Adani Group for the failed home finance company. 

While Oaktree has proposed to keep DHFL as a standalone entity, Piramal plans to merge DHFL with its financial services business, thus, boosting the equity base of DHFL significantly. According to the bids, Piramal’s offer is scored higher than Oaktree’s by the lenders. Voting will end on January 14. Oaktree had offered Rs 1,700 crore after the deadline and another Rs 1,000 crore promised to bankers through sale of insurance ventures. 

There was apprehension among lenders that the deal would not go through, given this acquisition would breach foreign direct investment norms for insurance companies.

Oaktree had earlier complained to lenders that its offer was being undervalued by Rs 2,700 crore by the lenders, thus, giving Piramal the upper hand.  But a banker said Oaktree’s offer was under a cloud — it would not get the regulator’s approval to hold stake in DHFL’s insurance venture. 

Moreover, the offer of an additional Rs 1,700 crore came after the bid submission deadline, and the committee of creditors had not considered it while scoring the offers; the Piramal offer was scored the highest.