Govt launches probe against DHFL, issue may hit sector investment

The corporate affairs ministry has started inquiring into allegations of Dewan Housing Finance Corporation (DHFL) diverting Rs 31,000-crore loans and would seek more information from the housing finance firm, a senior government official said on Thursday. “We have started verifying them… we will also call for information from DHFL,” the official said.

But will the enquiry or the allegations severely affect DHLF’s business? Analysts said the chances are slim, though the macro effect on the sector could be more pronounced.
DHFL is in the eye of a storm after a report by Cobrapost that the company, through layers of 45 shell companies, allegedly siphoned off Rs 31,000 crore out of the total bank loans of Rs 97,000 crore. The promoters allegedly bought assets overseas and even a cricket team in Sri Lanka. 

The management has denied the allegations. In a clarification to the exchanges, DHFL also said it has not received any communication from the corporate affairs ministry “in relation to any probe against the company”. The company’s shares on the BSE fell 15.9 per cent on Thursday to Rs 135.85 a piece from Rs 161.6 per share on Wednesday.
Analysts said the alleged amount might be an exaggeration, and that several things were going in favour of the company.

First, it has never defaulted on loan payment; it paid back Rs 17,876 crore between September 24 and December 31 last year. This includes commercial papers, bank loans, external commercial borrowings, and bonds. Their liquidity status is good and they have deep credit lines. 

They also have a good asset base, focused on semi-urban and rural areas. This generates good revenue. They would find buyers easily for these.

Macro impact

The effect of the allegations and enquiry could be macro, said analysts.

 DHFL is the second-largest non-banking finance company (NBFC) for mortgages. Allegations of mismanagement against it, close on the heels of the IL&FS crisis, does not bode well for the sector. Raising funds is a challenge; this could damage the confidence in the eco-system further.

NBFCs, struggling to raise money from institutions, have successfully tapped the retail segment. DHFL itself has raised Rs 10,000 crore through retail bonds. Even though they are unlikely to default, when they return to the bond market, mobilising funds will be very difficult, said analysts.

“If a single company hits the confidence channel, it becomes difficult for others to raise funds, too. The DHFL issue may stifle retail bond participation, which was coming up nicely,” said an executive at a rating agency who did not want to be named. 

Established in 1984, DHFL’s business interests range from real estate financing, SME loans, housing construction loans, loans against properties etc. It has an “AAA” rating.

DHFL and the NBFC crisis

In September last year, DSP Mutual Fund tried to sell a DHFL bond in the secondary market, but buyers were few. DSP sold Rs 300-crore papers at a yield at 11 per cent. 

This was about 100 basis points higher than what the papers were sold at before September and created an impression that the housing finance company was suffering from liquidity issues. 

The stocks were hammered, falling to Rs 350.55 per piece on September 21 to Rs 610.55 per share on September 19 — a fall of about 43 per cent. But, the stocks recovered after the management assured investors that all was well.
Analysts said in the light of the Cobrapost report, it seems that the group of investors who hammered the DHFL stock then could have already known about it. They also said defaults by the IL&FS triggered a crisis in the NBFC sector; DHLF was the worst hit.

This is the not the first time DHFL management has come under the scanner. In December last year, Moneylife noted that the company used poor disclosures to boost its valuation.

The company borrowed from two mutual funds and indirectly injected the money into DHFL to boost net worth. The company wrote a put option for the promoters without disclosing it properly, despite being a publicly listed company, according to Moneylife. “DHFL is not transparent, but not insolvent either,” said an analyst tracking the company. “They have probably lent to their real estate arms as the sector is not getting ready finance. The understanding could be that the money will be returned with interest upon completion of the projects. In the worst case scenario, it is round-tripping of funds, but not necessarily siphoning off.”

The road ahead

 There is a difference between IL&FS and DHFL. In the case of the former, cash flow had stopped and debt-servicing stopped. DHLF looks like it can still manage its financial obligations. The risk of default does not seem too high.
But the company will have trouble raising funds till the cloud of uncertainty clears, said analysts. The company has enough liquidity to fund its operations for the next four-five months. 

In the meanwhile, DHFL has become averse to lending to maintain balance sheet liquidity, said analysts, adding that this is potentially a bad move.

“NBFCs can leverage up to 10 times and banks can leverage 15 times of their net worth, but the option for banks is to remain afloat through their treasury operations, but an NBFC scaling back on lending is a potential red flag, though conservatism is good for your liabilities,” said an analyst. 

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