SES opposes DHFL insurance hive-off plan

Cites incomplete disclosures; firm says deal beneficial to shareholders

Governance advisory Stakeholders’ Empowerment Services (SES) has advised shareholders of Dewan Housing Finance (DHFL) to vote against its management’s seeking approval for a related party transaction. It says the disclosures are not enough. The company says the deal has all the necessary approvals.

In a postal ballot that closes on Friday, DHFL has moved a resolution that will enable it to transfer its 50 per cent stake in joint venture DLF Pramerica Life Insurance to a wholly owned subsidiary called DHFL Investments.

DHFL Investments will use funds received from a promoter-owned entity called Wadhawan Global Capital (WGC) to fund this transaction. DHFL Investments will issue compulsorily convertible debentures to WGC, with a conversion period of 100 months. After the conversion, WGC will be the majority stakeholder in DHFL Investments.

Explaining its rationale, SES said the company was seeking shareholders’ approval without disclosing details. The shareholders are being asked to give a free hand to the board of directors for not only the present but future decisions related to the subject matter of the resolution. “As SES understands the transaction, the shareholding being divested at present may end up with the company again at a later date. When will this happen, under what circumstances and at what cost is not known. No further approval will be required from the shareholders in respect of this related party transaction,” SES noted.

Such unfettered discretionary powers, with incomplete disclosure, defeats the entire purpose of having the resolution approved by shareholders, it said, and was against the principles of good corporate governance.

“The transaction appears to be in the interest of the promoters. Due to inadequate disclosures by the company, shareholders cannot make an informed decision. Hence, SES is raising governance concerns regarding the proposed resolution and recommends the shareholders to vote against the resolution,” it concluded.

In response to an e-mail seeking comments, DHFL said, “The proposed transaction has been approved by the board and the audit committee, and is fully compliant with the provisions of all applicable laws, including the Companies Act and the Income Tax Act. Further, this transaction is subject to all applicable regulatory approvals.”

According to the company, the stake sale was proposed to be done in a band of Rs 1,690 to Rs 2,020. The final value will be arrived at through a valuation process undertaken by Willis Towers Watson, a leading valuer for the insurance sector globally.

The stake sale unlocks the value of the share by 55 times to its book value, amounting to Rs 1,690 crore even at the lower end of the valuation, it added. 

“This huge return has accrued to the shareholders of DHFL in about three years of the investment, through the ability of the management in adopting effective strategies and achieving a turnaround in a short time, not usually seen in the life insurance business. The board and the company believes this transaction is in the best interests of all its stakeholders,” went the DHFL statement.