Bombay High Court Allows DHFL To Make Payments To Lenders With Securitisation Arrangements

The Bombay High Court has allowed a plea by a group of lenders led by the State Bank of India, paving the way for them to recover dues from Dewan Housing Finance Corporation Ltd.

A single-judge bench presided over by Justice AK Menon granted ad-interim relief to the banks and financial institutions by directing the housing financier to make payments for present as well as future dues as per securitisation or assignment agreements executed by it.

This comes after lenders including State Bank of India, Union Bank of India, HDFC Bank Ltd., among others had moved the Bombay High Court seeking a modification in the high court’s earlier order. On Oct. 10, the court had allowed the applications filed by Edelweiss Asset Management Company Ltd. and Reliance Nippon Asset Management Ltd. to temporarily restrain the non-bank lender from making further payments or disbursements to secured and unsecured creditors.

The court had, however, allowed certain payments if they were made on a pro-rata basis to all the secured creditors. The court had also extended a similar relief towards the claims made by Kotak Mahindra Asset Management and Axis Asset Management. After this order, DHFL had stopped making payments to the lenders citing that the petitioner banks and financial institutions came under the category of creditors, and were therefore subject to the restrictions imposed by the high court.

Edelweiss AMC and Reliance Nippon informed the court today that they had no objections to the allowance of payments by the non-bank lender. However, Reliance Nippon’s no-objection was conditional and was based on the assurance given by the non-bank lender that it would maintain a security cover beyond 1:1.1 to fulfil the payment obligations towards it.

Here are the key arguments made by the parties:

Arguments By SBI And Other Banks

Janak Dwarkadas, the counsel representing SBI, BOB, Union Bank, IOB, UCO Bank, Canara Bank and Bank of India made arguments for vacation of the court’s orders on the following grounds:

Holders of securitised assets are not ‘creditors’: Counsel representing SBI and Union Bank argued that banks were holders of securitised portfolios from DHFL and therefore, they could not be considered as creditors of DHFL. Therefore, the Oct. 10 order issued by the high court won’t apply to the extent of the assets securitised by them.

The extant securitisation guidelines issued by the Reserve Bank of India clearly state that an assignor loses its rights after execution of an assignment agreement under a securitisation arrangement. Thus, a buyer gets unfettered rights over such assets and they stand completely isolated from a non-banking financial company in such cases. Therefore, they stand on a different footing and therefore cannot be subjected to any hypothecation or similar arrangement done by the non-bank lender.

A debenture trustee would only have a pari passu charge—a charge on equal footing on such assets. However, securitisation is excluded from the scope of such charge.

Edelweiss & Reliance Nippon did not make full disclosures: Edelweiss and Reliance Nippon had claimed that they were not privy to the debenture trustee agreement as well as certain details pertaining the securitisation arrangements made by DHFL. Counsel for SBI argued that this pretext was incorrect because Catalyst Trusteeship Ltd.—the trustee representing the debenture holders of DHFL—was subjected to SEBI’s regulations, which require disclosure of trust deeds by a trustee.

Large financial exposure: Lenders had an exposure over Rs 37,000 crore to DHFL out of which, SBI itself had an exposure of around Rs 5,500 crore. Some of the receivables can turn into non-performing assets if DHFL does not make payments due to them.

Arguments On Behalf Of HDFC Bank, DCB And IDFC Bank

HDFC Bank, DCB Bank Ltd. and IDFC First Bank Ltd. had moved the court to seek modification of the high court’s Oct. 10 order to the extent it affected their rights. The banks had also made a plea seeking an order to direct the non-bank lender to make payments as per the due date. Counsel for the banks made the following arguments:

Limited entitlement of a debenture trustee: Transactions of assignment by DHFL were excluded from hypothecation and hence cannot be claimed by the debenture trustee.

Moreover, the maximum entitlement of debenture trustee was limited to the asset cover of 1:1.1, therefore, any asset beyond this ratio lies beyond the scope of a debenture trustee’s claim. Similarly, any accrual to the non-bank lender is also excluded as the collection is being done on behalf of the banks who are owners of the securitised assets.

DHFL’s Arguments

Counsel for DHFL informed the courts that based on the information available with them, the non-bank lender had adequate security cover in the ratio of 1: 1.1 as on Sept. 30. This was based on preliminary estimates as the audited figures were not available. Therefore, they can be compliant with the condition put forth by Reliance Nippon.

Objections Of Deposit Holder

Air Force Group Insurance Society, holder of DHFL’s deposits, filed an intervention application in the high court for recovery of its dues today. The society which represents air force personnel moved the high court seeking recovery of Rs 84 crore, including interest, which were placed as deposits with the non-bank lender.

Counsel for the society informed the high court that DHFL had been stalling payments to them since may this year. He argued that the society’s claims had the highest priority compared to the claims made by banks and other charge holders, as per the provisions of the National Housing Bank Act, 1987. Therefore, the claims made by other parties will be subordinate to its claims.

The court adjourned the society’s matter till next week.