Rival investors are up in arms as the Adani group makes a last-minute attempt to acquire a bankrupt home-loan company in India. One such investor, the Piramal group, has written a letter to India’s Prime Minister Narendra Modi claiming that Adani’s attempt violates the rules of the bidding process.
A large Indian industrial group has written to Narendra Modi, India’s Prime Minister, apprehending that the Adani conglomerate is seeking to bypass norms and procedures in order to acquire a bankrupt housing loan company.
For over a year now, the assets of DHFL (formerly known as Dewan Housing Finance Limited), a US$13-billion 'shadow-bank' that used to specialise in providing home loans, have been undergoing insolvency-resolution proceedings under a legal process mandated by Indian bankruptcy law.
'Shadow-banks,' or non-banking financial companies (NBFCs) in India’s official parlance, are corporate entities that can offer loans and a variety of other financial services other than provide full-fledged regular banking services that a 'scheduled commercial bank' can. NBFCs are considered by many to be a key pillar of India’s financial system, accounting for around a fifth of India’s total credit market.
Not just DHFL, but many NBFCs, have going through a crisis over the recent past and especially over the past two years with several major bankruptcies that have led to macro-economic impacts across the Indian economy.
The first such bankruptcy to reach the insolvency resolution process is that of DHFL that went bankrupt in 2019 following sensational revelations in the media that its ownership had siphoned money out of the company, forcing the government to come up with a new set of rules regulating how insolvency resolutions of such bankrupt NBFCs was to take place. The resolution process for DHFL under these rules is going to set a precedent for several such NBFC resolutions that will follow in the coming years. It is these rules governing the precedent-setting DHFL resolution that Adani is accused of breaking.
Three other companies – India’s Piramal group, the US-based Oaktree Capital and Hong Kong’s SC Lowy – that are seeking to acquire different parts of DHFL’s portfolio have threatened to walk out of the resolution process if Adani’s bid is accepted, saying that the bid was submitted in violation of the rules laid down by the government. However, the letter to PM Modi sent by a representative of the Piramal group has gone one step further.
The letter from the Piramal group to PM Modi alleges that the entire bankruptcy-resolution process, involving litigation before a judicial tribunal and deliberations among DHFL’s financial creditors, was being delayed, disrupted and undermined by the failure to outright reject Adani’s late and non-compliant bid. It warned that continued delay in the process would be detrimental to all stakeholders, particularly Indian banks and lending institutions that have a large exposure to DHFL. It also warned that restarting the process to accommodate Adani’s bid would undermine efforts by other applicants and could result in judicial proceedings that would delay and frustrate the process even further.
The letter, parts of which were shown to this correspondent by a source on condition of anonymity, calls for Adani’s bid to be rejected saying that not doing so risks 'undermining the integrity' of the entire insolvency-resolution process for DHFL that may, in turn, have wide ramifications for future resolutions of other bankrupt NBFCs that are to follow.
Having initially bid a much smaller amount of around US$364 million for a small portion of DHFL’s loan-book in earlier rounds of bidding, on 15 November, six days after the deadline for final bids had passed and Oaktree capital had bid the largest amount of US$4.18 billion for DHFL’s entire loan portfolio, Adani submitted a new bid, this time for DHFL’s entire loan-book, bidding 0.8% more than Oaktree, offering US$4.21 billion.
This late bid was considered 'unsolicited,' as according to the rules of the resolution process, each bidder could only revise the value of initial offers for the section of DHFL’s portfolio that they had initially bid for, and could not revise their bids to change the category of assets that they had bid for. Having initially bid $364 million for a particular category of DHFL’s assets, Adani placed a revised bid for the entire portfolio. This is a violation of the rules, the letter from Piramal claims.
Collapse of DHFL: India’s 'Lehman Brothers Moment'
In January 2019, Cobrapost.com, an independent news website run by veteran Indian investigative journalist Aniruddha Bahal, reported that it had unearthed a massive US$4.18-billion scandal involving the original owners or promoters of DHFL who are members of the Mumbai-based billionaire Wadhawan family.
The Cobrapost.com investigation had found that 'the scam [had] been pulled off mainly by sanctioning and disbursing astronomical amounts in secured and unsecured loans to dubious shell/pass-through companies, related to DHFL’s own primary stakeholders Kapil Wadhawan, Aruna Wadhawan and Dheeraj Wadhawan through their proxies and associates, which have in turn passed the money on to companies controlled by the Wadhawans. The money has been used to buy shares/equity and other private assets in India and abroad, including in countries like (the) UK, Dubai, Sri Lanka and Mauritius.”
Within months, the thirty-five year old company that had over $13.3 billion in assets under management and earned revenues of over $1.6 billion every year, collapsed like a pack of cards. After first defaulting on a loan repayment in June 2019, the following month, DHFL declared a loss of about $300 million for the first quarter of the 2019-20 Financial Year (that ended on 31 March 2020). By the end of the financial year, India’s banking regulator, central bank and apex monetary authority, the Reserve Bank of India (RBI) had taken over DHFL’s administration and referred it to India’s bankruptcy court, the National Company Law Tribunal (NCLT).
Such was the impact of DHFL’s collapse that it led two prominent Indian banks, the Punjab and Maharashtra Cooperative Bank and YES Bank, to the brink of collapse and saw their customers take to the streets in protest. While the Union/federal government in New Delhi has been forced to bail out YES bank, the other bank is still searching for investors.
The individuals in the midst of the scandal, members of the Wadhwan family, have since been arrested and had their assets frozen in a multitude of investigations by various Indian law-enforcement agencies.
DHFL was the second large NBFC to go bankrupt, preceded by the Infrastructure Leasing and Financial Services (IL&FS) Group in 2019. In the period that followed, four other large NBFCs defaulted on loan payments, triggering fears of an industry-wide collapse as allegations of major financial crimes swirled around executives in at least two other major groups of NBFCs including entities in the IL&FS Group and the Indiabulls Housing Finance Group.
Comparisons were made to the downfall of Lehmann Brothers that preceded the Global Financial Crisis of September 2008, as not just Wall Street in New York but stock-markets across the globe including in India reeled. The more recent havoc caused by the COVID-19 pandemic has made the economies of many countries vulnerable to financial shocks.
Following the initiation of the DHFL insolvency resolution in November 2019, a resolution process was also begun for the IL&FS group in March 2020.
The Adani Group’s Late Play
In the early rounds of bidding in the resolution process for DHFL’s assets that started in November 2009 four bidders emerged. While Oaktree Capital bid US$3.74 billion for DHFL’s entire portfolio, Piramal bid US$2.02 billion for DHFL’s retail loans, and SC Lowy and Adani made substantially smaller bids of US$310 million and US$364 million respectively for portions of DHFL’s loan portfolio.
Oaktree Capital, the only bidder for the entire loan portfolio of DHFL, is a US-based firm that specialises in these sorts of investments and is considered the largest distressed securities investor in the world. The Piramal group is a major player in healthcare and pharmaceutical manufacturing in India and also has substantial interests in real estate and financial services.
The bids that are meant to offset the bankrupt DHFL’s dues to its lenders, primarily multiple Indian banks, were judged to be too low by the Committee of Creditors (CoC), a body formed by representatives of all lenders, including banks, other companies, private investors, and the government. The bidders were then asked to submit fresh proposals with higher bids. Crucially, the rules mandated that the bidders could only update the value of their proposals and that they could not bid on different categories of assets from those that they had already chosen.
After multiple delays, including ones due to the COVID-19 pandemic and a sudden and harsh countrywide lockdown in India from the night of 24 March, the deadline for the bidders to submit their final bids was set for 9 November. While Oaktree, Piramal and SC Lowy submitted revised bids – with Oaktree bidding US$ 4.18 billion for the entire DHFL loan portfolio – Adani did not. Instead, on 15 November, six days after the deadline, Adani submitted a US$4.21 billion bid for the entire DHFL loan portfolio.
Piramal Alleges Conflict of Interest
Piramal’s letter to Modi says that Adani’s proposal should have been declared ineligible and rejected outright by the administrator of the resolution process and the CoC. Instead, the letter alleges, the bidders were informed that the administrator and the CoC would open only the three eligible bids submitted by the deadline, and would later determine what to do with Adani’s unsolicited late bid.
A new development took place at the tribunal or the NCLT. While hearing a petition filed by one of DHFL’s creditors, the National Housing Bank (NHB), the tribunal ordered that none of the bids were to be opened until its next hearing on 3 December. Notably, the Piramal letter states, this was accepted without objection by the CoC’s lawyer.
This was because, the letter claims, the lawyer who was briefed for that hearing by a representative of one particular lender of DHFL’s, that is, the public sector Union Bank of India, rather than a representative for the entire CoC.
This has caused a 'perception of serious conflict of interest in relation to one of the advisors of the CoC' the letter alleges, because of the manner in which the CoC is being advised to give undue importance to (Adani’s) unsolicited and non-compliant resolution plan...and how the NCLT proceeding(s) for the NHB application is being conducted.' The letter calls for 'such perception of conflict of interest' to be 'thoroughly examined.'
Underlining the importance of the DHFL resolution process, the letter adds:
'DHFL is the first Financial Services Provider for which the Insolvency and Bankruptcy Code (IBC) process has been initiated by the RBI. Given that it’s the first of a kind insolvency situation, along with a sizeable debt that has a macro-economic impact on the financial system and balance sheet of several public sector banks and other financial institutions, its insolvency resolution process is been widely seen as a test case for future insolvency situations of other NBFCs as well that are currently under financial stress. Any irregularity in following the due process for DHFL’s insolvency will accordingly have a wide-ranging impact on future situations where IBC proceedings are initiated against distressed financial players.'
Will the Adani Group Prevail?
While Piramal, Oaktree and SC Lowy have protested the delay caused due to Adani’s late unsolicited bid and the failure of the CoC to reject the bid outright, it is not clear at the time of writing whether the bid will eventually be rejected.
According to a report in the Indian Express daily, as far as the lenders are concerned, their only concern is to maximise the amount they can receive from a prospective buyer of DHFL’s assets. With DHFL’s dues to its lenders standing at nearly US$ 11.46 billion, even the best bid (Adani’s) at present results in the lenders standing to recoup only 36% of their dues.
With this being the case, unnamed 'legal experts' cited by the Express suggested that 'the DHFL lenders would be at liberty to call for a fresh round of bidding, which would give time to all the bidders, including the Adani Group, Piramal Enterprises, Oaktree and SC Lowy, to revise their plans and offer more money than they already have.'