With the resolution of the Dewan Housing Finance Limited (DHFL) insolvency near completion, the market is waiting to see how the CoC will vote to resolve the first financial services to go through the IBC. There have been numerous arguments made by all the bidders and even with some chicanery on the part of some of the bidders and a fresh bid it seems now the CoC which has had over two weeks with the particulars to finally vote this Thursday.
Upon carefully studying the bids made by the bidders, the two that have stood out have been Piramal Group and Oaktree Capital. But in our opinion for maximum value the CoC should consider Piramal Group for the bid. We break down the why :
Piramal bid offers highest upfront cash and qualitatively the best bid
Piramal plan includes the highest upfront cash that allows the creditors higher liquidity in this option. Piramal’s bid also stands head and shoulders over the other bids basis the CoC mandated scorecard for evaluation.
Oaktree bid has multiple regulatory issues
The CoC should choose the option that is most beneficial to them and also does not languish in litigation for the next few years. The Oaktree offer has multiple regulatory issues and will no doubt attract legal challenges and regulatory hurdles.
The insurance business cannot be owned by Oaktree, a foreign player, as it violates FDI norms of India. While they have suggested an AIF solution this has no precedent in India across any of the 24 life insurance companies. IRDA is unlikely to approve the route that Oaktree is proposing. This is critical for Oaktree as the resolution will be incomplete if the insurance business remains unresolved.
Oaktree has also made claims about rating of their instruments, which could be in violation of SEBI norms and media reports that SEBI is investigating the matter.
RBI could also bring the Oaktree offer into question as it is infusing very little equity into the business, which leads to very low capital adequacy of DHFL post purchase.
Piramal has followed the process to the T
Piramal has followed all the process guidelines so far and has not violated any norms laid out by the COC: e.g. all final bids have been submitted within prescribed bid limits. As per media reports suggest that Oaktree sent out a letter two days after formal closure of bid, adding to their bid amount, a move that violates the laid down process and would be open to legal questioning.
Piramal is best placed to acquire the Insurance business
The Piramal bid has an implementable straight offer of Rs. 1,000 cr for the Insurance business, payable at DHFL level. This is unlike the Oaktree offer which is payable at the level of a subsidiary (DIL), with no clear path to extract that amount for the benefit of the DHFL lenders.
Piramal offers the best structure
Oaktree bid creates ~Rs. 9,000 cr of sub-debt to one of their subsidiary companies. This is expected to be paid out through cash flows of DHFL. The structure allows DHFL cash flows to be repatriated out of India before any DHFL credit starts getting repaid. There is no such sub-debt structure in the Piramal offer
Piramal is infusing the most equity
Piramal is infusing Rs. 3,800 cr of equity into DHFL, with another Rs. 16,000 cr available in the Financial Services business for future. Oaktree is only infusing Rs. 1. Lac now, with a promise of Rs. 1,000 cr of either debt or equity in the future. This is too low for a balance sheet of the size of DHFL.
Piramal’s bid most lucrative for retailer FD holders
The Piramal bid has offered Rs. 150 cr specially to FD holders, to be offered over and above the regular allocation that might be done to them by the COC.
The CoC must vote for the bid that is most lucrative, regulatorily compliant and most of all offers the fastest turn-around time for the creditors. The implementation of the Piramal plan is expected to be much shorter, as insurance related complications don’t exist. This reduces open ended commercial risk for lenders on interest income
At the end the Creditors should look to the legacy of Piramal as a strong Indian corporate with over 30,000 crore of equity invested in the Country. With strong fundamentals and a penchant for business turnaround. The decision for the CoC should be simple because there are clear advantages with the strongest bidder.
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