DHFL's sale poses legal hurdle for Oaktree due to insurance JV stake

Insurance sale before DHFL sale would have eliminated regulatory uncertainty, say lawyers

The insurance joint venture (JV) of DHFL, in which a foreign entity holds 49 per cent, is turning out to be a big legal hurdle for Oaktree as well as lenders, as

the acquisition by the US-based asset management firm would breach the foreign direct investment (FDI) ceiling for the insurance sector.

Before Oaktree's offer is put to vote, the administrator of DHFL has to confirm to the committee of creditors (CoC) that every resolution plan that gets submitted for voting is implementable and not in contravention of any provision of law and the Insolvency and Bankruptcy Code (IBC). "As things stand today, there is a question mark on 'if' and in how much time will Oaktree be able to secure these approvals," said a source close to the development.

In a letter addressed to the administrator this week, Piramal, which is also in the fray for the bankrupt housing finance company, cited references to sections of the IBC, which say the resolution professional shall examine each resolution plan received by him to confirm that it does not contravene any of the provisions of the law for the time being in force. Section 30 (3) says the resolution professional will present to the CoC for its approval of such resolution plans which confirm the conditions referred to in sub-section (2), it said. 

The sale of the insurance JV stake before DHFL's sale would have eliminated regulatory uncertainty, said a corporate lawyer.

In order to plug the loophole, Oaktree has indicated that the existing sale process of DHFL can continue as it will set up an alternative investment fund (AIF) to park the insurance stake in the event the sale process is not concluded by the effective date. Oaktree has offered to arrange a domestic AIF to purchase the stake. It has also mentioned that no separate approval shall be sought from the insurance regulator for this transfer to the AIF, given the AIF would be acting as a temporary or a parking vehicle.

"As things stand today, Oaktree's plan is clearly non-compliant and one has to see how the administrator addresses this issue as this could put the administrator at a significant legal risk. More so as there is a high risk of litigation as the erstwhile promoter is also likely to litigate," a lender source said. The source further stated that the concept of temporary parking might not find favour with the regulator.

"The AIF structure appears to be a loophole to bypass foreign ownership norms, beating the spirit of the law. Sebi has already constituted an advisory committee, headed by Narayana Murthy, on the AIF policy and it is presently being debated how to plug this loophole," the source said.

"It may be prudent for the administrator to consult the insurance regulator and Sebi so that there are no surprises going forward," said another source. "The key issues before the administrator and the lenders are whether the Oaktree offer is legal and unconditional and whether it can be put for voting," he said.

Oaktree has offered the highest amount for DHFL, but with deferred payments. Piramal, on the other hand, has offered to put more upfront amount on the table, apart from setting aside Rs 300 crore extra for the fixed deposit holders. The voting on all the three proposals will begin this week.