Easy Explainers – DHFL

  August 10, 2021

A Background of Dewan Housing Finance Limited (“DHFL”)

  • Dewan Housing Finance Limited (“DHFL”) is a Non-Banking Financial Company (“NBFC”), registered under the Reserve Bank of India Act, 1934 (“RBI Act”), engaged in providing housing loans to home buyers.
  • Around June 2019, DHFL defaulted on several debt repayments. Consequently, the shares of the company fell over 90% and the government had to launch a probe into its affairs.
  • It was the first Financial Service Provider (“FSP”) to be referred to insolvency proceedings by the Reserve Bank of India (“RBI”) in 2019, thereby making the case very significant and unique in India’s insolvency regime.

Timeline of the Corporate Insolvency Resolution Process (“CIRP”)

RBI superseded the board of directors of DHFL by invoking its powers under Section 45-IE(2) of the RBI Act, which empowers the RBI (“Appropriate Regulator”) to supersede the board of directors of an NBFC and appoint a suitable person as the “Administrator” in public interest; or to prevent the affairs of the NBFC being conducted in a manner detrimental to the interest of the depositors or creditors or of the NBFC itself, to improve the financial stability of the company. The RBI appointed Mr. R Subramaniakumar as the “Administrator”.

  • Press Release by the RBI to constitute an Advisory Committee (22 November 2019)

RBI, through its powers conferred under Section 45-IE 5(a) of the RBI Act, constituted a three-member Advisory Committee (“Advisory Committee”) comprising of Dr Rajiv Lall, erstwhile Non-Executive Chairman, IDFC First Bank Ltd, Mr. N S Kannan, Managing Director and CEO, ICICI Prudential Life Insurance Co. Ltd and Mr. NS Venkatesh, Chief Executive, Association of Mutual Funds in India, to advise the Administrator during the CIRP of DHFL.

  • Application for Initiation of CIRP of DHFL (29 November 2019; NCLT, Mumbai Bench)

RBI filed an application of CIRP against DHFL under Section 227 read with Section 239(2)(zk) of the IBC, and Rules 5 & 6 of the Insolvency & Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 (“FSP Rules”). {See: ¶ 2(iv) of the Order dated 7th June 2021}

  • Admission of the Application (3 December 2019; NCLT, Mumbai Bench)

The application was admitted by the Tribunal and CIRP was initiated by the NCLT vide its order dated 3 December 2019. Also, the Administrator was appointed as the Resolution Professional (“RP”).

On 4 December 2019, the Administrator issued a public announcement as per Regulation 6(1) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”). The Announcement specified 3 December 2019 as the Insolvency Commencement Date (“ICD”) and the date of admission of the application. Further, it invited the creditors and the public depositors of DHFL to submit their claims on or before 17 December 2019.

  • Issuance of the Request for Resolution Plan (“RFRP”) (2 March 2020)

On 2 March 2020, RFRP was issued inviting resolution plans for the Corporate Debtor by 16 April 2020. Throughout the course of 2020, the Committee of Creditors (“CoC”) time and again extended the last date for submission of the resolution plans. The extension was provided to ensure negotiation with the Prospective Resolution Applicants (“PRAs”) with a view to maximize the value of the assets.

  • Extension of the CIRP Period by NCLT (14 October 2020; NCLT, Mumbai Bench)

NCLT, vide its order dated 14 October 2020, extended the period of CIRP by 90 days.

  • Settlement Proposal by the Ex-Promoter of DHFL (December 2020)

Kapil Wadhawan, Ex-Chairman cum Managing Director (“Ex-CMD”) and ex-promoter of DHFL, made several efforts to re-acquire the company through settlement offers. His first settlement proposal was rightly rejected by the CoC, citing that he did not possess locus standi to offer such proposals. Further, in his second settlement proposal, Mr. Wadhawan proposed to pay 100% of the default amount, i.e., Rs. 91,000 crores to the creditors within 7-8 years, along with an upfront payment of Rs. 9,000 crores. However, considering the blunt rejection of the first offer by the CoC, he preferred an application before the NCLT, Mumbai Bench seeking deliberation and consideration of the second settlement offer by the CoC. {See: ¶ 6 of the Order dated 19th May 2021}

  • Extension of the CIRP Period by NCLT (6 January 2021; NCLT, Mumbai Bench)

NCLT, vide its order dated 6 January 2021, extended the period of CIRP by 60 days.

  • Approval of the Resolution Plan by the CoC (15 January 2021)

The resolution plan submitted by Piramal Capital & Housing Finance Limited (“PCHFL”) [“Resolution Plan”] was approved by the CoC during their eighteenth meeting held on 15 January 2021. After various meetings of the CoC and multiple resolution plans submitted by various applicants such as PCHFL, India Opportunities Investments Singapore Pte. Ltd., Adani Properties Private Limited etc., PCHFL emerged as the highest bidder with 93.65% votes of the CoC in its favour, as against the 45.62% votes in favour of India Opportunities Investments Singapore Pte. Ltd. {See: ¶ 2(xxvii) of the Order dated 7 June 2021}

  • RBI’s Issuance of “No Objection” to the Resolution Plan (16 February 2021)

The RBI issued its “No Objection” to the Resolution Plan in terms of Rule 5(d)(iii) of the FSP Rules on 16 February 2021, for a change of control/management/ownership to PCHFL. Thereafter, the Resolution Plan was placed before the NCLT, Mumbai Bench under Section 31 of IBC. 

  • NCLT, Mumbai’s Order to the CoC to Consider the Settlement Proposal of an Ex-Promoter of DHFL (19 May 2021; NCLT, Mumbai Bench) 

On 19 May 2021, NCLT Mumbai directed the CoC of DHFL to consider, decide, vote and inform the outcome on the second settlement proposal of Kapil Wadhawan within 10 days of the passing of the order.

It is pertinent to note that this direction was given by the NCLT after the resolution plan of PCHFL had already been approved by the CoC with a thumping majority and had been put up for approval of the AA.

  • Staying of the NCLT’s Order dated 19 May 2021 by the NCLAT (25 May 2021; NCLAT, Chairperson Court, New Delhi Bench)

NCLT’s order dated 19 May 2021 was challenged before the NCLAT by the CoC of DHFL, contending that the Ex-CMD Kapil Wadhawan had no locus standi to place such offers, as these are expressly barred by Section 29A of IBC (person not eligible to be resolution applicant). Further, they contended that Mr. Wadhawan was in judicial custody and was facing criminal investigations by the Central Bureau of Investigation, Enforcement Directorate and Economic Offences Wing on allegations of cheating, fraud and siphoning off of funds, and allowing him to present such offers would have amounted to permitting him to take advantage of his wrongs.

NCLAT, after due deliberation, stayed the order of the NCLT observing that the Resolution Plan had already been approved by the CoC and the Appropriate Regulator, and it was pending before the NCLT for approval and if such reversals were allowed, there would be no end to it. Further, NCLAT said that if a No Objection for the Resolution Plan is necessary from the Appropriate Regulator as per the FSP Rules, how could such measure be taken without any approval from the Appropriate Regulator. Mr. Wadhawan challenged the NCLAT order before the Supreme Court stating that the proposals offered by him are in the nature of Section 12A of the IBC and therefore, it must be considered by the CoC. The matter is pending before the Apex Court.

  • Approval of the Resolution Plan by NCLT (7 June 2021; NCLT, Mumbai Bench)

On 7 June 2021, NCLT approved the Resolution Plan submitted by PCHFL. The following are the key aspects of the Resolution Plan:

  • The Resolution Plan includes an upfront cash payment of Rs. 14,700 crore, Rs. 3,000 crore in interest income on DHFL’s books and non-convertible debentures worth Rs. 19,550 crore to be repaid over 10 years.
  • Delisting and cancellation of the entire equity share of DHFL, and PCHFL would subscribe to 100% equity of the DHFL and merge into DHFL as its parent company.
  • NCLT has specifically asked the CoC to consider paying more to the small fixed deposit holders.

NCLT directed that the dissenting financial creditors must be paid in cash only, and not in debt securities (modifying the treatment of the Resolution Plan that suggested offering cash or debt securities to the dissenting financial creditors).

(This Explainer is also available as a PDF.)

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