The troubled Dewan Housing Finance Company (DHFL) that became the first non-banking finance company to be referred to a bankruptcy court, has reported a steep ₹6,705 crore of loss in the September quarter, after posting a loss of ₹206 crore in the June quarter.

The dismal performance of the once-fancied stock highlights the extent of the issue at hand.

In December last year, corporate insolvency resolution process (CIRP) had been initiated against DHFL in line with the provisions of the IBC. The RBI had superseded the DHFL board and appointed an administrator and a three-member committee.

The administrator, advisors and present key management personnel have stated that they take no responsibility with respect to the accuracy, validity, completeness or authenticity of the information and figures mentioned in the results (for the September quarter) as they belong to a period prior to the date of their joining the company.

Also, after the erstwhile statutory auditors — Chaturvedi & Shah LLP and Deloitte Haskins & Sells LLP — had raised several red flags over DHFL’s March quarter results, the subsequently appointed auditor KK Mankeshwar had also set out disclaimers in the June quarter results, stating that it was unable to comment on the correctness of various aspects.

For the December quarter, the auditor has stated that “multiple issues of financial significance as highlighted by the predecessor joint statutory auditors in their report for the year ended 31st March, 2019 together with the suspected irregularities as reported…… are presently investigated by the concerned agencies. The administrator …. believes that adjustments of the impact of these matters… including with regard to any adjustments to the carrying values of the loans, restatement, related parties and other disclosures can be made only when the same will become known in definitive terms after the said investigations are formally concluded.”

Auditor observations

The earlier auditors had put forth several qualifications and observations to the March quarter results that could have a material impact on the financial statements of the company. This has been reviewed by the existing auditor.

In respect of Inter-corporate deposits (ICDs) aggregating ₹5,652 crore as of March 2019, the earlier auditors had noted significant deficiencies in the grant and rollover of ICDs. Of these, ICDs aggregating to ₹1,306 crore have been converted into term loans as on September 2019, resulting in an outstanding ₹3,809 crore ICDs. While provisions are made against the lCDs on the basis of the Loss Given Default (LGD) percentages, these provisions may undergo changes. The auditor has thus stated that it has not been able to comment on the correctness and adequacy / inadequacy of such provisions.

Deficiencies in documentation of project / mortgage loans were flagged by the earlier joint auditors. The RBI appointed administrator and present key personnel have expressed their inability to express any view on the documentation adequacy / completeness.

Will the resolution plan work?

DHLF had marked down value of loans (wholesale), in respect of which both past and current auditors have been unable to obtain sufficient evidence to support the values of the loans. The RBI appointed administrator is also awaiting conclusion of investigations by various agencies. Hence, there could be significant write-offs in future.

Being a financial service provider, there are multiple lenders — banks, mutual funds, pension funds, etc. This creates complications for reaching a consensus in the case of DHFL.

The case gets more complicated because of presence of fixed deposit holders. The IBC’s normal waterfall payment mechanism gives priority to repayments of secured financial creditors over unsecured creditors such as depositors. The present IBC framework does not provide special treatment to any class of financial creditors other than secured financial creditors.

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