Why some don't deserve a second chance

Last week saw two of the country’s once-upon-a-time celebrities in the corporate world make a renewed bid to pull their companies out of the insolvency process. While Venugopal Dhoot, the promoter of bankrupt Videocon Industries, offered to pay over Rs 31,000 crore to lenders, Kapil Wadhawan of Dewan Housing Finance Corporation Ltd (DHFL) offered his rights, title and interest in at least 10 projects that he claimed were valued at close to Rs 44,000 crore. In his letter to the administrator appointed by the Reserve Bank of India, Mr Wadhawan, who is currently in jail, said this would enable proper and complete resolution of DHFL and will maximise the value of the properties.

The offers were strange, as they came from people whose reputation has taken several hard knocks over the past few months. In any case, why did somebody who now claims to have Rs 44,000 crore worth of personal properties refuse to pay back his lenders for so long? And, both Mr Dhoot and Mr Wadhawan can be held responsible for driving their companies, bankers and the employees into a big black hole.

Surprisingly, however, their proposals have found some backers who say “phoenixing” is legitimate. Phoenixing is the practice whereby the management puts a company into resolution or liquidation solely to buy the same business back and set up a new “phoenix” company in the same or similar business, shorn of the debts of the old company. 

Backers of phoenixing also say the Ruias of Essar group were unfairly not allowed to buy back Essar Steel’s business during the insolvency resolution. And the government, they say, should not repeat the mistake just because legal proceedings are going on against Mr Dhoot and Mr Wadhawan. In India, there is mixed opinion on whether promoters should be allowed to take back their companies. While some say it is allowed in countries such as the UK with conditions, others say phoenix transactions allow connected parties to use information to which only they are privy in order to negotiate a better deal for themselves. 

These are larger debates, but can any country allow this privilege to people who have little credibility left?

Let’s take Videocon first. 

Mr Dhoot, who often credits the Bhagavad Gita for his “never-say-die spirit”, has set a perfect example of companies recklessly borrowing to expand but failing to repay. It was the first company to get a licence to make colour televisions in India and gradually become one of the most iconic brands in the consumer electronics and home appliances segment in India. But then greed took over in early 2000s, with the group diversifying from its core business into a raft of sectors such as oil and gas, telecom, retail and in direct-to-home services. This led to aggressive borrowing but the company’s capacity to pay back to the lenders started deteriorating. With his back to the wall, Mr Dhoot tried to sell off some of his assets, but the efforts were clearly too little, too late.

The knockout punch came in 2018 when the Central Bureau of Investigation booked him on charges of corruption, cheating and criminal conspiracy in a case involving ICICI Bank CEO Chanda Kochhar and her husband. Finally, Videocon was referred to the National Company Law Tribunal (NCLT) for insolvency proceedings as claims against the group’s various entities had soared to nearly Rs 85,000 crore and its net worth had turned negative. 

Mr Wadhawan’s track record is even worse. While his letter to the RBI-appointed administrator talks about external forces out to finish him and his company, the fact is that the RBI referred DHFL, the third largest pure-play mortgage lender, to the NCLT for insolvency proceedings in November last year after total debt crossed Rs 80,000 crore. DHFL’s collapse is yet another case study on how promoters can destroy even successful businesses by growing too big too fast.

The list of charges against the Wadhawans is astonishing. According to a report by transaction auditor Grant Thornton, fraudulent transactions worth hundreds of crores were reported at DHFL during 2006-07 to 2018-19, and fund diversion by the promoters resulted in lenders classifying the DHFL account as “fraud”.

The Enforcement Directorate argues the Wadhawans had real estate dealings with gangsters, and the Securities and Exchange Board of India (Sebi) barred DHFL promoters from the securities market over fraudulent transactions and releasing false financial statements for several years. 

The fact is that the total collateral that banks can claim from DHFL is worth only a fraction of the debt of Rs 40,000 crore, as most of the assets Mr Wadhawan has mentioned in his letter to the administrator are allegedly tainted properties under investigation. 

Banks apparently are yet to make up their mind on the fresh offers made by the two gentlemen and are still evaluating them. They shouldn’t waste their time, as the key question is whether such people with questionable background and who let down their companies, employees, lenders and other stakeholders so badly deserve a second chance. The answer should be obvious.


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