Late reaction

Just when the financial markets were settling down to business-as-usual after the IL&FS crisis, Cobrapost’s sensational ‘expose’ on Dewan Housing Finance Corporation Ltd (DHFL) has set off a fresh bout of turbulence. A week has now passed since Cobrapost claimed that it had evidence of ‘systemic fraud’ and levelled a battery of allegations against DHFL, including fund diversion by promoters. The company has termed these as ‘mischievous and mala fide’ and appointed an external auditor to look into it. But in the meantime, the DHFL stock has tanked over 60 per cent, bondholders have taken large losses and investors in debt mutual funds are on tenterhooks about a liquidity freeze. Yet, the multiple financial regulators tasked with oversight of this listed deposit-taking NBFC — SEBI, NHB, RBI and the Ministry of Corporate Affairs — have remained blasé offering no guidance to investors on the way forward.

Given that Cobrapost’s allegations were high on hyperbole and provided little documentary proof, it is unrealistic to expect public investors to take a call on their veracity. Rating agencies, who are expected to deep-dive into company finances in making their assessments have as usual proved unhelpful. CARE, which marked down DHFL’s AAA rated debt paper by a notch this weekend, steered clear of offering any opinion and instead cited ‘market sentiments’ to effect its downgrade. Cobrapost claims to have unearthed this scam from DHFL’s public filings. The Ministry of Corporate Affairs or SEBI should therefore be well-placed to run preliminary checks on DHFL’s books to evaluate if there is prima facie merit in the allegations. But they have refrained from official clarifications. The RBI has maintained radio silence despite a deposit-taking NBFC coming under fire. The NBFC business is highly leveraged and works on trust; it doesn’t take long for market rumours to snowball into a liquidity or even solvency crisis. Therefore, the RBI needs to worry about the ripple effect on systemic liquidity and depositor confidence in NBFCs too.

In fact, the Cobrapost-DHFL episode would merit a thorough investigation by regulators, even if the company’s claims that it is blameless are proved right. It is certainly suspicious that the meltdown in the DHFL stock price commenced well before Cobrapost held its press conference on January 29. Reports suggest that details of the expose were doing the social media rounds at least four days before they were in the public domain. SEBI’s extant regulations lay down elaborate rules to prevent company insiders from taking advantage of unpublished price sensitive information to pocket unfair profits. But this episode proves that outsiders such as media organisations, can come to possess such information too. In such cases, SEBI must be quick to demand evidence from non-market participants engaged in such exposes, in the interests of investor protection. Given the speed at which adverse information gets disseminated in the digital era, financial market regulators and rating agencies also need to greatly improve their response times in dealing with such episodes.

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