DEWAN HOUSING FINANCE CORPORATION LIMITED- THE ANATOMY OF INDIA’S BIGGEST FINANCIAL SCAM
By Anirudha Bahal
cobrapost.com
January29, 2019
In what appears to be the biggest banking scam in Indian history, the primary promoters of DHFL have been found to have siphoned off more than Rs. 31,000 crore of public money. The scam has primarily been pulled off through grants of loans and advances to shell companies and by using other means. Money has also been routed through these dubious companies and parked outside India, to acquire assets. Cobrapost has unearthed the scam by closely analyzing documents available with public authorities and information available in public domain.
By closely scrutinizing public records available with public authorities and information available in public domain, Cobrapost has unearthed a financial scam where the primary promoters of Dewan Housing Finance Corporation Limited (DHFL) and their associate companies have committed a systemic fraud in broad daylight to siphon off public money amounting to more than Rs. 31,000 crore. The scam has 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 UK, Dubai, Sri Lanka and Mauritius.
The anatomy of the scam, as illustrated herein, has repercussions for the larger financial system in India. As an industry practice, loans are advanced to companies and are secured by not only the properties of the borrower company but also by personal guarantees of promoters of companies. By lending to shell/pass-through companies without due diligence, DHFL has ensured that the recovery of such dubious loans is impossible since the companies or their directors themselves do not own any assets. This way the properties/private wealth acquired by the Wadhawans and their associates by using the funds from these dubious loans are completely ring-fenced from any recovery process that may be initiated by authorities under the SARFAESI Act or Insolvency and Bankruptcy Code of India. Thus, the only losers in the entire process would be small public depositors, the public sector banks, such as State Bank of India and Bank of Baroda, with an exposure of over Rs. 11,000 crore and Rs. 4,000 crore, respectively, foreign banks and public shareholders/investors of DHFL. Debt recovery is an important metric on which ease of doing business is judged. Such scams, if not identified, resolved and persons responsible punished, will only affect India’s prestige on the world stage. In case, the Government of India takes over DHFL, as it took over IL&FS, without a thorough investigation into its affairs by investigating agencies such as CBI, SFIO and Enforcement Directorate, then the Wadhawans who are principal beneficiaries of the scam will go scot free.
What helped Kapil Wadhawan, and Dheeraj Wadhawan to pull off the scam is the position of power and influence they occupied as majority members in the Finance Committee of DHFL, which approves loans of Rs 200 crore and above to any entity. They ensured that loans were granted to shell/pass-through entities and the money ultimately ended up in the companies owned or controlled by the Wadhawans. Together, the DHFL and its primary promoters have:
Created dozens of shell entities, largely with a nominal capital of Rs. 1 lakh, divided them into small groups of two–four companies, with a lot of them having the same/similar addresses and having the same set of initial directors, and on many occasions having the same group of auditors to mask the financial details;
Disbursed huge loans to these shell companies mostly without any security and/or collateral), and the proceeds appear to have been used for creation of private assets both offshore and in India;
Disbursed loans amounting to thousands of crores to these shell companies in the name of secured loans against slum development projects without any due diligence or checking of collateral or maintaining adequate debt–equity ratio;
Disbursed loans in a single tranche, rather than following the established norm of disbursal in stages against progress of the project works;
Ensured that most of the shell companies hid the name of the lender DHFL, the terms of loan and terms of repayment in their financial statements to be submitted as required by the law;
Advanced monies to several companies (run from the same address) in Gujarat and Karnataka around state elections;
Given donations in crores to the Bharatiya Janta Party (BJP);
Been involved in illegal insider trading, and violation of Securities and Exchange Board of India (SEBI) takeover regulations, amounting to approximately Rs. 1,000 crore;
Created offshore assets of approximately Rs 4,000 crore;
Bought Wayamba, a Sri Lanka Premier League cricket team, by using loan money dubiously advanced by DHFL.
Needless to say, there have been serious violations of several civil and criminal laws and regulations. There is a massive deviation both from the industry practice on the lending policy of the company and from good corporate governance norms of the company. There is also significant deviation from Related Party policy of the company on material disclosure of information in all of the cases where the shell entities are actively suppressing facts on terms of borrowing, terms of repayment and the institution they are borrowing from. In certain cases, no agreement in black and white can even be found in public records which are to be mandatorily disclosed. Several other irregularities in the scam are in violation of the following laws/Acts:
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 on Risk Management Committee and Finance Committee whereby compliances and disclosures have been made for transparent and for better corporate governance, and the board members are obligated to constitute a Risk Management Committee to review the risks related to loans.
Various Instructions/Directions of National Housing Board on inter alia anti-money laundering, corporate governance, prudential norms, etc.
Section 182 of Companies Act, 2013 for political donations.
Section 447 of Companies Act, 2013 for fraud.
Section 177 of Companies Act, 2013 for Audit Committee.
Section 186 of Companies Act, 2013 for breaching the limit of investment.
Section 185 of Companies Act, 2013 for investment in companies where directors have interests.
Section 45 of Income Tax Act, 1961 for escaping the Capital Gain Tax.
Section 68 of Income Tax Act, 1961 for unexplained investment.
Schedule III of Companies Act, 2013 for deviation in disclosure in financial statement.
Section 201 of Income Tax Act, 1961 for delay in deposit of Tax Deducted at Source (TDS).
Section 6 of the Foreign Exchange Management Act, 1999 (42 of 1999), read with Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 for foreign divestment of shares.
In addition, the Wadhawans have violated several Indian laws:
For misappropriating public money and converting it into various movable properties for their own use, under Section 403 of the IPC.
For criminal conspiracy with various persons in concert and dishonestly disposing of properties in violation of several legal contracts, under Section 405 of the IPC.
For having committed wilful “criminal breach of trust” and having fooled DHFL’s shareholders and common investors, under Section 405 of the IPC.
For wilfully deceiving DHFL’s investors, and fraudulently influencing their decisions to invest in a corporation routing their money to criminal agents, in violation of the investors’ legal rights and cause them material damage, under Section 415 of the IPC.
For criminal conspiracy to cheat and defraud investors and loot their hard earned money, under Section 420 of the IPC.
For misrepresenting important documents held sacrosanct by investors, such as government disclosures that give an overview of DHFL and its various promoters’ net share in the company and its dealings in movable properties, under Section 467 of the IPC.
For money laundering, under Section 3 of the PMLA.
All these violations have taken place right under the nose of the Reserve Bank of India (RBI), the SEBI and the Union Ministry of Finance, not to mention monitoring mechanisms of the banks, the auditing agencies, the Income Tax Department, the rating agency and so on. Not only does the scam point fingers squarely at the inefficient corporate governance of non-banking financial companies (NBFCs) as a whole but it also questions the dubious role public bodies have played in effecting the scam. It is a clear case of complete connivance amongst public and private figures.
An interesting part of the scam is that donations of Rs 19.5 crore have been given to the BJP between the financial years 2014–15 and 2016–17 by RKW Developers Pvt. Ltd., Skill Realtors Pvt. Ltd. and Darshan Developers Pvt. Ltd., respectively. All these donors are linked to the Wadhawans.
Of the three companies playing a benefactor to the BJP, RKW Developers, with a donation of Rs. 10 crore in 2014–15 and Darshan Developers (Darshan) in 2016–17, with a donation of Rs. 7.5 crore, top the list, shelling out huge amounts in political charity. Interestingly, RKW Developers has not shown any donation in its balance sheets for the fiscal 2014–15. Similarly, Skill Realtors donated a sum of Rs. 2 crore in 2014–15 but failed to show the same in its balance sheets. While receiving and reporting these donations, the BJP also failed to provide PAN details of these donor companies. These charities, however, flout the provisions of Section 182 of the Companies Act 2013, which govern corporate funding to political parties.
Under Section 182 of the Companies Act, and provisions of law, as it stood in 2014:
A company has to complete three (3) years of business operations before it can make any political donations;
A company has to be profitable before it can make any monetary contributions to political parties;
A company can contribute not more than 7.5 per cent of the net profits earned during the three preceding fiscal years;
All such donations have to be shown in account books of the donor companies.
Interestingly, the government in 2017 brought a new amendment to Section 182 of the Companies Act, which in effect enables such dubious political funding without any consequences. However, it is to be noted that the above contributions were in violation of Section 182 as applied then.
The following case studies the Cobrapost team has put together in this story makes it clear that all these companies have made donations without bothering to act in accordance of the law.
THE BATTLE OVER NBFCS BETWEEN THE RBI AND THE FINANCE MINISTRY
By the end of 2018, the RBI and the Finance Ministry came to loggerheads over the formation of policies to regulate and control NBFCs. Following the collapse of India’s leading infrastructure finance company, Infrastructure Leasing and Finance Services (IL&FS) after it defaulted on payments to lenders, the NBFCs faced an enormous liquidity crunch as the corporates lost faith in NBFCs and withdrew their money from mutual funds and put them in the banks. The NBFCs underwent a severe liquidity crisis, in turn squeezing lending to MSMEs and prompting the Government of India to step in to take control of IL&FS and try to contain the damage done to the financial ecosystem. While the RBI rooted for much stricter governance and the ministry looked for quick fixes by providing NBFCs with a special liquidity window.
If the ministry has its way, then NBFCs like DHFL, which are committing frauds can easily squeeze through this gaping hole by declaring bankruptcy or showing loans which are actually spurious transactions to shell companies as default. Ignoring the RBI’s warnings and the market’s dire state, Finance Minister Arun Jaitely even took to Twitter, declaring that “the government will take all measures to ensure that adequate liquidity is maintained/provided to the NBFCs”.
Former RBI governor Urijit Patel came under immense pressure from the government to toe the line, just as his predecessor, former governor Raghuram Rajan was at one point of time. The Centre has, since the later part of 2018, exerted immense persuasive techniques on the RBI to relax restrictions on weak banks to lend to small businesses and deploy the RBI’s capital reserves to generate additional liquidity and exempt power companies from the purview of a 12th February, 2018 circular on bad debts. The RBI has already ceded somewhat to the pressure from the Centre and declared that it will allow high-street lenders to part-support bonds sold by non-banking finance/housing companies, an approval that will ease fund-raising concerns at the shadow banks currently struggling to garner money from the debt market. A credit enhancement is a kind of support behind any bond sale, which helps improve good faith with investors. Banks are, therefore, already allowed to provide partial credit enhancement to bonds issued by the systemically important non-deposit taking non-banking financial companies (NBFC-ND-SIs) registered with the RBI and housing finance companies registered with National Housing Bank.
What is DHFL?
DHFL is a listed NBFC in the business of lending money especially to promoters who are apparently engaged in slum rehabilitation, housing development and other real estate businesses. However, any listed entity cannot, in any legal way, give away secured and unsecured loans to dubious shell companies, which can then be converted into private wealth for promoters.
To give the readers an idea of the scale of fraud, DHFL’s net worth is, according to its audited financials for 2017–18, Rs 8,795 crore. It has, however, taken loans from banks and financial institutions to the tune of Rs 96,880 crore, including Rs. 31,312 crore in the form of non-convertible debentures, Rs. 36,963 crore from banks, Rs. 2,965 crore from external commercial borrowings, Rs. 2,848 crore from the National Housing Board (NHB), Rs. 9,225 crore in public deposits and Rs. 13,567 crore from other sources. Out of this sum, the company has disbursed Rs. 84,982 crores in loans and advances to other entities. According to the annual report, DHFL has secured loans from at least 36 banks, including 32 nationalized and private and six foreign banks Cobrapost investigation has revealed that DHFL has lent substantial sums to shell companies, which have been created just to siphon money out of DHFL and channelize it elsewhere, mostly in companies wherein Kapil Wadhawan, Aruna Wadhawan and Dheeraj Wadhawan have personal interests.
To park public money into private accounts or create shell companies to convert that money into private wealth is completely illegal and in violation of a number of Indian laws. The list of violations, as already mentioned, is so varied and so outrageous that it puts any other scam of the same nature to shame. Compared to the DHFL, the Saradha and the Nirav Modi/PNB scam look like the work of amateurs.
WHERE HAS ALL THE MONEY GONE?
This is the most important question. How does a public listed company get away with siphoning thousands of crores and where has all that money gone? As Cobrapost has discovered, there has been a concerted effort at funneling money into dubious entities by extending to them secured and unsecured loans, illegal insider trading, tax evasion and creation of offshore assets, to systematically siphon off the public money in large corpuses to be finally converted into private wealth of the ultimate beneficiaries of the scheme, the Wadhawan Group. The Wadhawans have been so audacious and brazen in their misdemeanors that they have not even attempted to cover their tracks while working on their schemes.
LOANS TO COMPANIES HOLDING INTERESTS OF KAPIL, ARUNA AND DHEERAJ WADHAWAN AND SAHANA GROUP
As the table given below shows, there are 45 companies which were used as vehicles to siphon off funds from DHFL. In all, these 45 companies were given loans in excess of Rs 14,282 crore. Out of these, 34 shell companies, which are all within the interest of Wadhawan Group, the chief promoter of DHFL, have been given unsecured loans amounting to Rs. 10,493 crore. Of these, 11 companies belong to Sahana Group, which have been given Rs. 3,789 Crore in loans.
Companies 1 to 34 in the consolidated table are so dubious that most of them have no business or income. More often than not, they are audited by the same accounting agencies, such as Thar and Co, helping them hide all fraudulent transactions. Many of these companies operate from the same addresses and are run by the same group of initial directors. A large number of them are newly incorporated with nominal capital of around Rs. 1 lakh. Yet, these companies were extended unsecured loans, in single tranches, without any security and/or collateral.Many of these companies not only share the addresses but they also have the same email addresses. Of the 45 companies, 6 are using the same official email address inform2co@gmail.com, while four are using inform2ca@gmail.com and three are using Inform12com@gmail.com. Ten others are using sayalihs2102@gmail.com.
Interestingly, nearly 35 shell companies have not filed any charge documents for loans on the MCA website, which is a mandatory requirement. This suggests the loans are unsecured. Most of the companies have also ensured to hide the name of the lender company, DHFL. In turn, DHFL has also hidden the terms of loan and terms of repayment in its financial statement. Importantly, all the shell companies have zero or very negligible income from their business operations since their inception. Besides, more than a dozen companies have not filed balance sheets for FY 2017–18 in the RoC as of January 26, 2019.
Companies at numbers 35 to 45 belong to Sahana group. One of of directors these companies, Jitendra Jain, is being investigated by the Economic Offences Wing with respect to various projects for certain offences committed by him in his professional capacity and is currently in judicial custody. Another prominent shareholder of the group is former Shiv Sena MLA Dalvi Shivram Gopal. Most of the loans extended to Sahana have become NPA.
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