News Analysis

DHFL resolution: Will lenders be able to recover their dues?

Radhika Merwin BL Research Bureau | Updated on November 28, 2019 Published on November 28, 2019

DHFL is set to become the first non-banking finance company to be referred to a bankruptcy court.   -  Reuters

With significant haircuts on the cards, reaching a consensus among various set of lenders of DHFL will be a herculean task

After a year of high drama and immense pain for investors, the troubled Dewan Housing Finance Company (DHFL) is headed towards resolution and set to become the first non-banking finance company to be referred to a bankruptcy court.

The RBI recently superseded the DHFL board and appointed an administrator and a three-member committee.

Read more: RBI supersedes DHFL board, appoints an administrator

The important questions are: what will the outcome of the resolution be? Will depositors---falling under the unsecured category-- recover their dues? Will there be steep haircuts? Amid reports of a SFIO fraud in DHFL, what will be the value that prospective bidders/buyers are willing to pay under the insolvency process?

Speaking to various lenders and lawyers suggests that there are no easy answers and the resolution process could be riddled with challenges.

Reaching a consensus

DHFL owes about ₹84,000 crore to banks, mutual funds, bondholders and other lenders. Of this around ₹74,000 crore is secured while the rest is unsecured. The wide set of lenders creates slew of complications. “Being a financial service provider, there are multiple lenders - banks, mutual funds, pension funds etc. This creates complications in reaching a consensus,” says Jairam Sridharan, Chief Financial Officer at Axis Bank.

It also needs to be seen how the process is carried on, as the resolution of a financial service provider is vastly different than the other cases under IBC.

Under a normal IBC process, the approval of the resolution plan requires 66 per cent of voting share of the committee of creditors (CoC). The CoC comprises of all financial creditors. In the DHFL case, how each class of creditor is represented needs to be seen.

“If the RBI moves the NCLT and brings DHFL under the insolvency code, all the provisions of the Code will be applicable. Here, the RBI appointed administrator will replace the insolvency professional. The regulations for financial service providers envisage a resolution plan similar to other corporate debtors. There is no replacement of the concept of CoC. Bond holders will be represented by their trustees and depositors maybe represented by a representative,” says KS Ravichandran, Managing Partner, KSR & Co Company Secretaries LLP.

R K Bansal, MD, Edelweiss ARC also says that the resolution will broadly follow the process laid down under IBC. “There will also be a constitution of a CoC (maybe on the lines of JLF) which will comprise of banks, mutual funds, insurance, bondholders and other financial creditors. Fixed deposit holders may also get a representation in the CoC, which may be welcome as their chances of getting some of their dues would be higher,” explains Bansal.

But reaching a consensus among the wide class of creditors will be a herculean task.

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. Whether the administrator decides to pay off depositors in full to safeguard their interests or provides them representation in the decision of the resolution plan needs to be seen. In case of the latter, these depositors may have to be willing to take haircuts along with other lenders.

“In my opinion it is necessary to have a special treatment for the public depositors. However the present IBC framework does not provide special treatment to any class of financial creditors other than secured financial creditors,” says Ravichandran.

Bank would want the rights of the secured creditors be upheld and given precedence over unsecured creditors, which only leads to more complications. “Though the Essar Steel case is a landmark decision and has upheld the rights of the secured creditors in most cases, in a financial services provider case, the jury is still out and we need to see how the DHLF case addresses the demands of various set of lenders,” explains Jairam Sridharan.

Will resolution work?

The case is also complex given the nature of the business. Since the December 2018 quarter, there has been no disbursement in DHFL. This lending freeze has already impacted existing borrowers of DHFL, who have probably not been able to get additional disbursements out of their earlier sanctioned limits. Further delay in release of fresh funding will only make matters worse and erode the underlying value of these assets.

The critical part of the resolution is to ensure that the company is able to continue as a going concern. For that, fresh funding is essential. “One way this could happen is by getting a strategic investor to bring in fresh capital. But this may not be sufficient. What is really required is that lenders, including banks, mutual funds, and bondholders, are willing to restructure their debt, “ says Bansal.

Under earlier proposed resolution plan, some portion of the debt was to be identified as sustainable debt to be serviced through the cash flows generated from assets of DHFL. This was to comprise of various debt instruments with a staggered payout over 10 years. A portion of the unsustainable debt was proposed to be converted into equity shares of DHFL.

“The resolution plan to be proposed under the new framework could be on similar lines, and has to involve some amount of restructuring of debt, else it may be difficult to continue the business as a going concern. Getting various lenders on board will be essential on this,” adds Bansal.

Time is of essence

While the RBI has superseded the board, and appointed an administrator, how the core functions of the business are run without disruption will be critical. DHFL has sold about ₹30,000 crore of retail loans through the direct assignment route. The responsibility of the collection of loans still lies with the seller—DHFL in this case (in most of the sale transactions). Hence smooth running of these core functions will be critical.

It will also be important to monitor the credit behaviour of borrowers of DHFL. If certain loans slip into delinquency then managing that pool could become a bigger challenge.

Above all, finding takers for DHFL’s ₹35,000-odd crore of wholesale book will be critical. In particular, DHFL has 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.

A full scale revaluation of assets and the ongoing forensic audit may lead to significant write-offs. If steep haircuts are required then reaching consensus among various lenders---bankers, mutual funds, provident fund, retail investors---will be even more difficult. The ongoing forensic audit may also dim prospects of finding buyers for the business.

Published on November 28, 2019
  1. Comments will be moderated by The Hindu Business Line editorial team.
  2. Comments that are abusive, personal, incendiary or irrelevant cannot be published.
  3. Please write complete sentences. Do not type comments in all capital letters, or in all lower case letters, or using abbreviated text. (example: u cannot substitute for you, d is not 'the', n is not 'and').
  4. We may remove hyperlinks within comments.
  5. Please use a genuine email ID and provide your name, to avoid rejection.