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The unending despair of DHFL depositors

DHFL, which is among the largest housing finance companies in India, used to raise public deposits to fund its businesses— much like other mortgage lenders in the country. (Photo: Mint)Premium
DHFL, which is among the largest housing finance companies in India, used to raise public deposits to fund its businesses— much like other mortgage lenders in the country. (Photo: Mint)

  • Lured by the promise of higher interest, over 70,000 depositors are staring at a recovery of less than one-fourth of the dues
  • Depositors have been relying on social media to the hilt to amplify their grievances. It is a two-pronged strategy, which involves a battle in various legal fora and a fight in the public domain

A documentary-style voiceover introduces the protagonist as a “veritable encyclopedia on investments and (financial) planning". The man, accompanied by his wife, narrates how the higher interest rate on offer was the primary reason for him to turn toward Dewan Housing Finance Corp. Ltd’s (DHFL) fixed deposit scheme. The video—one of seven such testimonials that are still available on the mortgage lender’s YouTube channel—ends with the beaming couple, in tow with their children, seemingly awaiting a secure future, thanks to DHFL. The futility of the advertisement is by now self-evident.

DHFL’s bankruptcy saga has dragged on within the country’s insolvency courts since December 2019. Last month, the Piramal Group’s takeover plan got the National Company Law Tribunal’s (NCLT’s) stamp of approval. But the battle may have only just begun for the victims of the fixed deposit scheme, a financial instrument that is supposed to be among the most secure.

As things stand, the over 70,000 depositors, who had been lured by the promise of marginally higher interest from a lender that was then-rated AAA by the rating agencies, are staring at a recovery of less than one-fourth (23%) of the outstanding 5,375 crore in deposits.

Like many other mortgage lenders, DHFL—among the largest housing finance companies in India and a well-known brand—also used to raise public deposits to diversify its sources of funds. Most of DHFL’s depositors are senior citizens, who do not have any other stable source of income and rely mostly on the monthly payout from the fixed deposit scheme.

The decline and fall of the mortgage lender is an important signpost—of the plight of depositors in the event of insolvency (DHFL was the first financial services firm to enter bankruptcy proceedings in India); of the lure of higher interest rate promotions; of the risks of making decisions based on YouTube testimonials.

“In 2017, I received a call from a DHFL agent who said he found my number on AMFI’s (Association of Mutual Funds in India) website," says Anadi Shankar Biswas, a 66-year-old investment adviser from Bhilai, Chhattisgarh.

Biswas says he and many other mutual fund distributors received such calls from DHFL agents who were able to source their phone numbers through the listings on AMFI’s website. The agent, he says, explained the features of the product, harping particularly about the higher interest rate on offer, when compared to a bank deposit.

“Still unconvinced, I went back home and researched (about) the company and its financials. It was rated AAA, had negligible bad loans and the loan book was made of small-ticket sizes," Biswas recalls. “In another six months, not only did I put in some money, but I also convinced several others to deposit in DHFL," added Biswas, now one of the 405 depositors who are fighting a legal battle encompassing all manner of forums, from insolvency tribunals to the Supreme Court.

In February 2017, DHFL paid an interest of 7.75-7.8% for a deposit of 1–2 years. Senior citizens, widows, armed forces personnel, its mortgage customers and those who put in more than 50 lakh earned an additional 25 basis points (bps). In comparison, India’s largest lender, the State Bank of India (SBI), paid about 6.85-6.9% (excluding 50bps for senior citizen deposits).

“For retirees, even 10-20bps additional interest can sway their opinion in favour of a certain investment," says Biswas.

Signs of distress

The first signs of an impending crisis emerged in early 2019 when the online portal Cobrapost, though a sting operation, concluded that DHFL’s promoters had siphoned off nearly 31,000 crore of public funds.

The modus operandi, Cobrapost said, involved handing out loans to shell companies and then routing them to other entities abroad in order to acquire assets. Then, in June 2019, a rating downgrade classified the company as a defaulter after it failed to meet its bond repayment obligations. By November, the Reserve Bank of India (RBI) had superseded the board and it later referred the company to the insolvency tribunal. Several skeletons started tumbling out over the next few months.

For starters, a damning forensic audit report compiled by KPMG found that DHFL used to raise money from banks for the sole purpose of lending the sum to homebuyers, who subsequently put the money into mutual funds. There was a gaping hole in the firm’s balance sheet, which was originally thought to be pristine.

P.K. Jain, a 58-year-old depositor and bondholder from Kota, Rajasthan, says a majority of his 20 lakh investment matured in September-October (2019), but he is yet to receive a penny. DHFL, he says, was extremely punctual in paying interest to all the depositors and bondholders before the liquidity crunch and asset-liability mismatch crushed the business. Of course, Jain is not one to lose heart. He has been extremely active on the Telegram and WhatsApp groups that have sprung up to bring all the depositors together. Both the groups have about 400-600 members. The forums light up at the slightest hint of positive news.

Late last year, DHFL’s discredited promoter Kapil Wadhawan’s offer of 100% repayment caught the fancy of many of the depositors. However, under the Insolvency and Bankruptcy Code (IBC), a defaulting promoter cannot gain back control of their firm. In effect, the only way to accept the offer was for the creditors to withdraw from the bankruptcy process and reach a settlement outside the confines of the IBC.

Wadhawan’s plan was based on several assumptions about business performance. The settlement plan, which was compiled by the chartered accounting firm ZADN & Associates and submitted by DHFL to the RBI-appointed administrator, had a list of 10 disclaimers. One of the disclaimers read: “The projected financial information contained in this document are based on judgmental estimates and assumptions…about circumstances and events that have not yet taken place. Accordingly, we provide no assurance, representation or warranty in relation to the achievability of the projections."

The fact that some depositors were willing to consider such a plan was an accurate representation of the level of desperation.

Since there are investigations against the promoters, said Ajay Shaw, a partner at law firm DSK Legal, a withdrawal from IBC would be fraught with risks because “creditors might later find the promoter’s offer to be perfunctory".

Uneven distribution

In December 2020, a distribution mechanism was floated by SBI Capital Markets (SBI Caps), the advisor to DHFL’s lenders (mostly banks). It was proposed that depositors be divided into four brackets. These were: deposits of up to 2 lakh, 2-5 lakh, 5-10 lakh, and 10 lakh and above.

The lenders suggested that those in the first bracket would get 100% of their money, while the others would get between 24.6% and 33.4% of the dues. This graded approach was voted out by the fixed deposit holders in January as they called for an equitable distribution of resources and 100% recovery for all customers.

About 69% of all depositors and 71% of the secured bondholders have up to 2 lakh in DHFL, according to data presented by SBI Caps in its December distribution plan, a copy of which has been reviewed by Mint. Some experts say that depositors are now in for the long haul, and a few of them with a large chunk of money stuck with the mortgage lender are calling the shots. The highest sum of fixed deposits—at 3,901 crore—is in the last bracket of above 10 lakh.

The treatment meted out to the bondholders was similar in the SBI Caps distribution plan. According to a bondholder who spoke on the condition of anonymity, many investors wrote to the trustee (an agency that protects the interests of bondholders) saying that the distribution was unfair to those investors who have outstanding amounts above 2 lakh and is based on the flimsy premise that anybody above this bracket is a large investor.

The final proposal which was put to the vote didn’t make any major changes to the plan, however. But the DHFL fiasco might already be bringing about broader changes. The same trustee, Catalyst Trusteeship Ltd (CTL), is also handling a more recent case involving the Srei Group, an infrastructure financing company.

In an attempt to protect the rights of bondholders, Catalyst Trusteeship Ltd recently approached a tribunal to appeal against a proposal made by the Kolkata-based firm for a six-month moratorium on all repayments. “They might have learnt their lesson in DHFL," says the bondholder quoted above.

A public fight

With their hopes of recovering a substantial chunk of the dues caught up in legal tangles, depositors have been relying on social media to the hilt to amplify their grievances. It is a two-pronged strategy, which involves a battle in various legal fora and a fight in the public domain on social media.

They have already spent around 6,000-7,500 per depositor in filing petitions and hiring lawyers to plead their case. So far, there are about five separate groups that have joined the legal battle at various points in time, collectively spending about 30 lakh.

“We have appealed against the NCLT approval to Piramal’s plan in the appellate tribunal. We are seeking a 100% recovery of depositors’ dues," says Vaibhav Guliani, an advocate who is representing the depositors. There is also a simmering disquiet about the role of DHFL’s lenders in the committee of creditors (CoC). The primary reason for the prevailing concerns is linked to the decision to overwhelmingly vote for the Piramal Group’s bid of 37,250 crore, as against the 38,400 crore offer made by Oaktree Capital.

While both might have been qualitatively different, depositors allege that even an additional amount of just 1,000 crore might have been better.

Depositors say that even when the Mumbai NCLT requested the committee to reconsider the distribution plan, particularly referring to the need for fixed deposit holders to get a “fair" share. However, all that the larger creditors did was to readjust some recoveries between themselves and other creditors— a plan which they eventually voted against as well.

“It is quite unfortunate that we have to fight a legal battle to get what we deserve in the first place," says Biswas.

It is not yet clear when the depositors will receive their money as they prepare for legal challenges at every step. Ultimately, the DHFL saga is an important reminder about the risk-reward equation when it comes to depositing funds outside the banking system.

As of now, only bank depositors are covered by the Deposit Insurance and Credit Guarantee Corp. (DICGC) with the provision of a coverage amount of up to 5 lakh. Experts advise caution on the part of customers and suggest they should be well aware of the risks before investing in non-bank deposits. In this regard, the DHFL case will perhaps serve as an example and set a precedent among customers.

“People are lured by the higher interest on offer through corporate deposits but as we know, a higher return comes at the cost of greater risk," says Jehangir Gai, a consumer activist.

Apart from the non-bank lenders, corporate entities also raise public deposits and offer higher returns than banks. However, in the last few years, India has witnessed several such corporates ending up before the insolvency tribunal, including the Jaypee Group and Unitech Ltd. According to a senior financial services expert, a good credit rating is one way to determine the strength of a company’s balance sheet. But as the DHFL case has painfully highlighted, things can go from bad to worse in no time.

M. Vinay Kumar, a 30-year-old depositor, says that the DHFL episode should serve as a lesson to everybody. Investing in a company’s deposit scheme for a mere 100 basis point bump in the interest rate is loaded with risk.

“We do not know when these legal battles will end, but hope (that) it does within our lifetime," Kumar says.

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