Everything you need to know about the Rs 31,000 crore DHFL scam

On Tuesday, January 29, 2019, Cobrapost, an investigative journalism company, held a press conference to debut its coverage of a huge banking and finance scam in India. Titled “The Anatomy of India’s Biggest Financial Scam,” the press conference held at the Press Club of India was led by Cobrapost Editor Aniruddha Bahal, who discussed the findings of the investigative report.

Yashwant Sinha, former minister of finance and external affairs in Vajpayee’s administration, Prashant Bhushan, public interest lawyer, Paranjoy Guha Thakurta, editor of Economic and Political Weekly, and Prem Shankar Jha, journalist, joined Bahal for the conference, as well.

Cobrapost’s allegations

The publication said on its website, “By closely scrutinizing public records available with government authorities and information available in public domain, Cobrapost has unearthed a financial scam to the tune of more than Rs 31,000 crore, though [sic] which the primary promoters of Dewan Housing Finance Corporation Limited (DHFL) and their associate companies have committed a systemic fraud in broad daylight to siphon off public money.”

Cobrapost explains that this scam was carried out by allocating huge amounts of money in loans to shell companies, that then re-routed the money back to DHFL’s promoters, Kapil Wadhawan, Aruna Wadhawan, and Dheeraj Wadhawan, through various associates and related companies. This siphoned money was then used to purchase equity and private assets in the United Kingdom, India, Dubai, Sri Lanka, and Mauritius, says Cobrapost.

How DHFL pulled off the scam

Simply put, loans are granted to companies only after they are able to mortgage their properties. Mortgaging means to use property you own, like real estate, as a guarantee or collateral for a loan. However, when DHFL lent money to shell companies or businesses, that are now inactive, it did so without any mortgages.

Cobrapost says, “DHFL ensured that the recovery of such dubious loans is impossible since the companies or their directors themselves do not own any assets.” So, when these companies faltered on repayment, no recovery process was initiated by Indian authorities under the SARFAESI Act or Insolvency and Bankruptcy Code of India.

Such a scam is no easy feat, given the number of moving parts. Cobrapost explains that 45 of these shell entities were divided into smaller companies with the same or similar addresses, directors, and, on some occasions, auditors who have aided this fraud. The loans were also disbursed in one single sum instead of in stages, as is the norm. To top this off, the shell companies concealed DHFL’s name as lender and the terms of repayment in financial statements.

However, Cobrapost claims that because of the Wadhawans’ influential position in Indian society, they were able to not only ensure that the stolen money ended up in shell corporations but also that those companies eventually funneled into companies controlled by them.

Of the Rs 96,000 crore-worth loans DHFL borrowed from other banks like State Bank of India and Bank of Baroda, it allegedly drained Rs 31,000 to these shell companies.

Consequences of this scam

Cobrapost brought to light the Wadhawan family’s involvement in the following: illegal insider trading, violating takeover regulations of the Securities and Exchange Board of India (SEBI), creating Rs 4,000 crore worth of offshore assets that can be used to avoid taxes legally or to launder money illegally, and buying a Sri Lanka cricket team, Wayamba, by using siphoned loan money. Cobrapost also identified three major companies—Galaxy, Silicon, and Hemisphere—as having been instrumental in carrying out this scam.

The Wadhawans have also been accused of other crimes like misappropriating public money, violating legal contracts and investors’ rights, defrauding investors, misrepresenting financial documents, and more.

After the scam became public, DHFL’s shares slumped by 11%. Yashwant Singh also demanded an investigation stating, “If the government fails to order an immediate investigation into the allegations into the aspects including political funding, it would raise a question mark on the intent of the government.”

Political implications and BJP’s role

Beyond personal controversy, the Wadhawans have also triggered serious political consequences with their scams. Cobrapost has accused Kapil and Dheeraj Wadhawan of sending this embezzled money worth thousands of crores to companies in Gujarat and Karnataka under the guise of schemes and programmes during state elections. However, these projects have either been suspended or are on hold from municipal corporations.

The publication also claims that the Wadhawans’ astronomical donations to the BJP comes from these loans. Citing a Rs 19.5 crore amount, Cobrapost says this donation was given to the BJP between 2014-15 and 2016-17 by RKW Developers Pvt. Ltd., Skill Realtors Pvt. Ltd., and Darshan Developers Pvt. Ltd.–– companies “linked to the Wadhawans”. Additionally, some of the previously mentioned shell companies belong to the Sahana Group, of which former Shiv Sena MLA Dalvi Shivram Gopal is a shareholder.

Impact on the average Indian

Cobrapost says that DHFL has misled the public and country’s financial institutions in a glaringly malicious manner. “There is a massive deviation both from the industry practice on the lending policy of the company and from good corporate governance norms of the company,” says the publication.

The scale of this scam calls into serious question the effectiveness and honesty of the government and other public bodies in checking corporations and private companies. Cobrapost says, “… all these violations have taken place right under the nose of the Reserve Bank of India (RBI), the SEBI and the Union Ministry of Finance, not to mention monitoring mechanisms of the banks, the auditing agencies, the Income Tax Department, the rating agency and so on.”

The company not only tried to defraud investors and loanees but also attempted to interfere in the democratic process of the country by unfairly influencing it.

DFHL’s response

Here is DFHL’s full statement on the matter:

DHFL is a publicly listed Housing Finance Company and is regulated by the National Housing Bank and the Securities and Exchange Board of India, amongst other regulators. This mischievous misadventure by CobraPost appears to have been done with a mala fide intent to cause damage to the goodwill and reputation of DHFL and resulting in erosion in shareholder value.

DHFL today received an email at 8.44 a.m. in the morning, with a follow-up reminder one hour later, seeking answers to 64 questions from Cobra Post, many of which were laced with political innuendos. We are shocked and surprised to receive this inquiry this morning, although Cobra Post had announced its press conference last Friday, i.e. 25 January 2019, to disclose an alleged financial scam. One would have expected as a responsible media house CobraPost would have asked these questions during their investigations and not on the day of the press conference.

Their entire approach raises serious concerns about the motivation of this so-called expose. It is necessary in public interest that if they believed in the genuineness of their issues to have given DHFL an opportunity to explain the facts that are in any case available in the public domain.

DHFL is one of the leading and most respected housing finance companies in India with over ?1,11,000 crores of assets under management and a large customer based across the country. Despite the recent liquidity regime, DHFL as a responsible corporate has met all its obligations to the lenders and has paid back to them in excess of ?17,000 crores in the last three months. DHFL has a strong corporate governance regime and has received AAA credit rating from leading credit agencies. The company is fully tax compliant and its books are audited by global auditors.

We understand, for the last several weeks, an anonymous note has been making the rounds with similar defamatory and scurrilous allegations. The real intent of this exercise appears to be to destabilize the company and the market equilibrium besides hampering our meeting the on-going obligations. We are also concerned about the timing and the holding of the press conference before the stock market close and days before the interim budget.

DHFL is a responsible and law-abiding corporate citizen and all loans are disbursed in the normal course of business in accordance with industry best practices and in compliance with all regulatory norms. The company’s financial statements are submitted to the Stock Exchanges and are in the public domain.

DHFL and its group companies are confident of meeting any scrutiny on any aspect of our operations and will pursue these frivolous allegations to its logical conclusion.

Newslaundry reports that Cobrapost reached out the Wadhawans for their perspective on the matter but has received no response to the specific questions posed by editor Bahal.

Rhea Arora is a Staff Writer at Qrius