DHFL Headed To Insolvency As Board Superseded By RBI
The Reserve Bank of India has superseded the board of Dewan Housing Finance Corporation Ltd. and intends to refer the non-bank lender for resolution under the newly introduced insolvency window for financial service providers. The RBI appointed R Subramaniakumar, former managing director and chief executive officer of Indian Overseas Bank, as administrator of DHFL.
In a statement issued on Wednesday, the regulator said the decision has been taken in light of governance concerns and defaults at the non-bank lender.
In exercise of the powers conferred under Section 45-IE (I) of the Reserve Bank of India Act, 1934, the Reserve Bank has today superseded the Board of Directors of Dewan Housing Finance Corporation Limited (DHFL) owing to governance concerns and defaults by DHFL in meeting various payment obligations.RBI Statement
The RBI further added that it intends to “shortly initiate the process of resolution of the company.”
Non-bank lenders in India have been struggling since last year when a default by Infrastructure Leasing and Financial Services Ltd. led to a liquidity squeeze for some of the firms. In DHFL’s case, there have added concerns about governance since the start of the year when news website Cobrapost alleged diversion of public funds by promoter of the company. As a result, DHFL was unable to raise fresh funding and defaulted on its dues in June.
While bankers have been trying to put together a resolution plan, their attempts have been complicated by the fact that a significant proportion of DHFL’s borrowings are via debt securities held by investors such as mutual funds. Unlike banks, mutual funds are not in a position to restructure existing debt, and hence have not agreed to participate in the resolution plan.
The newly introduced window for financial service providers under the Insolvency and Bankruptcy Code is intended to help streamline the process.
This is obviously a good step ahead in terms of trying to consolidate the efforts of various parties and see how you can best protect the public money and move it in the resolution of the DHFL crisis.Sanjay Agarwal, Senior Director, CARE Ratings
How The New Process Will Work?
The new process notified by the government earlier this week is applicable to all non-bank lenders with assets of over Rs 500 crore (systemically important). Such firms can be resolved using the special window following a referral from the relevant regulator.
- An administrator will be appointed on the recommendation of the regulator. This administrator shall have the same power as a resolution/ liquidation professional.
- The regulator can also constitute an advisory committee of three or more experts to advise the administrator in the operations of the financial institution during the resolution process.
- An interim moratorium shall commence on the date of initiation of resolution process till admission or rejection by adjudicating authority.
- Provision of moratorium shall not apply to third-party assets or property, including any funds, securities or assets held in trusts.
- The licence or registration of the financial institution for providing financial services will not be suspended or cancelled during the interim-moratorium and the resolution process.
- Once the resolution plan by the Committee of Creditors is approved, the administrator will have to seek ‘no objection’ from the regulator for the new management of the firm. The regulator shall issue the no objection on the basis of ‘fit and proper’ criteria applicable to the financial service provider.
The resolution professional will run the non-bank lenders as a going concern and there will be a moratorium on payout except on third party assets, said Ajay Shaw, Partner, DSK Legal. “Ultimately, whatever is the restructuring package offered by a new bidder will be the way out of the insolvency,” Shaw said.
He added that any investor coming in would need to pass the RBI’s ‘fit and proper’ criteria, which is applied to large investors in financial services firms. This is in addition to the eligibility criteria set under Section 29A of the Insolvency and Bankruptcy Code, which prevents defaulting promoters from bidding for their assets.
There will be clearances required in sensitive areas such as NBFCs or national assets in addition to Section 29A of the IBC. 29A is more of a disqualification. Parameters of “fit and proper person” will be applicable and we can’t do away with it. With regards to the timeline, we should see how it pans out.Ajay Shaw, Partner, DSK Legal
DHFL: Resolution Plan Proposed So Far
DHFL first defaulted on its repayments in June when it failed to pay Rs 850 crore in commercial paper dues on time. It has since defaulted on other dues and has also limited premature withdrawals from retail fixed deposits.
While a new resolution plan may emerge as DHFL goes through the insolvency resolution process, so far the company and its lenders have been proposing a three-pronged plan.
As per the plan, the lenders to DHFL intend to split the housing financier’s debt into a sustainable and unsustainable part. Liabilities aggregating to Rs 48,826 crore have been identified as sustainable, State Bank of India said in a letter dated Sept. 19 to the Reserve Bank of India, a copy of which has been reviewed by BloombergQuint. This debt will continue to be serviced by cash flows from DHFL’s retail loan book.
The Rs 32,622-crore in liabilities identified as unsustainable. A part of these would be converted into equity or equity-like instruments.
According to a person familiar with the matter who spoke on condition of anonymity, private equity investors, who had initially expressed interest in investing in DHFL have signaled a willingness to return to the negotiating table now that the resolution plan is being implemented under the IBC.
The resolution plan may also be structured in a way that retail fixed deposit holders are paid when deposits mature, the person quoted above said.