A DHFL official said the company’s legal department is looking into the REDD report and allegations made against the company are not true. A Reliance Capital spokesperson did not comment.
Using an example, REDD Intelligence said the parent “fruit seller” NBFC creates three companies
investing $100 each in Company Apple, Company Banana and Company Orange. After these companies
are created they each have $100 in capital and $100 in cash and no other assets.
Company Banana then pays $100 for a 50 per cent stake each in Apple and Orange. Similarly, Apple pays $100 for a 50 per cent stake each in Banana and Orange. Lastly, Orange repeats the same, paying $100 for a 50 per cent stake each in Apple and Banana. Next, the box companies can also raise loans from a finance company and lend them to the fruit seller with the original loans from the NBFCs never traced to the fruit-seller. This could be useful to overcome single borrower exposure or companies that would be considered riskier investments.
The companies are no longer related to the fruit seller and the fruit seller gets his original $300 investment back and loans. This structure is the most beneficial when the fruit seller also owns the NBFC, circumventing capital requirements that would otherwise be triggered, should the NBFC lend directly to the fruit seller.
REDD Intelligence said the end result is that the fruit seller is left with an Apple, Banana and Orange in a box — and a lot of money.
In case of DHFL, three box companies — Hemisphere, Galaxy and Silicon — which owned 31.1 million shares in DHFL as of March 2018 or almost 9 per cent in DHFL sold 11.65 million shares, which did not appear in the register by March 2019.
REDD said when companies employ this structure, auditors looking at the books find it difficult to ascertain the true beneficiaries of the box.
The auditors can even hide behind the ownership not being traced to the related party, it said. As in the case of DHFL, after the Cobrapost expose, an independent auditor appointed by the company, TP Ostwal & Associates gave the company a clean chit in respect of loans with 26 entities. But REDD Intelligence’s research found that some of these companies have found an alternative to the concept of a rollover or evergreening with the use of box structure. Banks and NBFCs just lend to a new proxy/dummy entity, which advances funds to the borrower entity to repay the loan to banks/NBFCs, avoiding reporting non-performing assets and a knock-on effect on equity multiples, it said.
It said DHFL lent Rs 2,000 crore to four proxy companies: Earleen Real Estate Developers, Edweena Real Estate, Notion Real Estate and Prashul Real Estate. The proxies later purchased shares of Darshan Developers, a subsidiary of Wadhawan Realtors Pvt Ltd, a company owned by the founders.
As long as banks, mutual funds and investors were willing to keep the game going, DHFL companies could keep borrowing and booking profits on loans they never had to repay, only rollover.
On Reliance Capital, the REDD report said loans were given to at least six companies, whose only asset was a shareholder loan. The report names Adhar Projects, Reliance Land, Reliance Venture, Reliance Alpha, Reliance Advisory and Indian Agri as these “box companies”.
The report says these companies borrowed heavily from Reliance Group firms — Reliance Commercial and Reliance Home Finance — despite ostensibly having no ownership links to any group companies.
“The six companies owned stakes in each other to form a box. Reliance Home and Reliance Commercial extended a total of Rs 3,400 crore in loans to Indian Agri, Adhar Projects and four subsidiaries controlled by Adhar Projects,” the reported pointed out.
Further, from the Ministry of Corporate Affairs filings, the report cites that the number of loans to box companies showed an outstanding loan amount of Rs 13,700 crore. For FY18, Reliance Capital, in its annual report, reported related-party loans of Rs 1,180 crore.