By Sudarshan Varadhan and Aditya Kalra
NEW DELHI (Reuters) - Shares of Indian home loan provider Dewan Housing Finance Corp Ltd slumped 20 percent on Thursday, after government sources told Reuters a probe had been launched into allegations of financial mismanagement against the company.
The allegations are the latest setback for India's shadow banking sector. A string of defaults at lender Infrastructure Leasing and Financial Service Ltd (IL&FS) triggered sharp falls in Indian stock and debt markets last autumn amid fears of contagion spreading to the rest of the financial sector.
India's Ministry of Corporate Affairs will look into allegations against Dewan following a report by investigative media outlet Cobrapost, two government sources with direct knowledge of the matter told Reuters on Wednesday. The sources said the probe had commenced.
Responding to a stock exchange query on reports of the government probe, Dewan said in a statement on Thursday it had not received any communication from the ministry in relation to a probe and denied news reports on it. It has earlier said the Cobrapost report was unfounded and malicious and that it had engaged lawyers to defend itself.
A spokesman for the corporate affairs ministry declined to comment.
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Cobrapost published a story alleging that a large amount secured from Indian state banks was diverted by Dewan to shell companies, including those linked to its controlling shareholders - the Wadhawan group.
Through the shell companies, money the company borrowed from the banks ended up with other entities controlled by the Wadhawans, the website alleged.
Cobrapost is best known for sting operations on businessmen, politicians and media houses.
"DHFL has never lent to a shell company," Chairman Kapil Wadhawan said on Wednesday during a call with media, investors and analysts.
Wadhawan's comments have failed to assuage investors. Dewan's shares fell for the fourth straight day on Thursday, losing as much as 20 percent to 129.50 rupees, its lowest levels since May 2014. It was down 14 percent at 0700 GMT and was the most heavily traded stock on India's National Stock Exchange.
Dewan, one of India's largest home loan lenders, has fallen dramatically from its lifetime high in September, and investors in the stock have lost over 160 billion rupees ($2.25 billion) of value in the last five months.
India's shadow banking sector comprises around 11,400 firms with a combined balance sheet worth more than 22 trillion rupees. It has been attracting new investors, particularly as the nation's banks have had to slow their lending as they seek to work through $150 billion of stressed assets.
($1 = 71.0360 Indian rupees)
(Reporting by Sudarshan Varadhan and Aditya Kalra; Additional reporting by Tanvi Mehta and Abhirup Roy; Editing by Sanjeev Miglani and Muralikumar Anantharaman)