DFHL NCD Defaults: High Court Issues Notice to SEBI, the Company & Trustee

Source: moneylife.in

The Punjab & Haryana High Court has issued notices to market regulator Securities and Exchange Board of India (SEBI), and Dewan Housing Finance Corp Ltd (DHFL) and Catalyst Trusteeship Ltd among others for the company and trustee’s failure to safeguard interests of debenture holders.

The petition, filed by Jyoti Khemka through Advocate Shreenath A Khemka, had requested the Court to direct SEBI to take regulatory action against the market intermediaries by conducting an investigation involved in the DHFL non-convertible debenture (NCD) issue. 

Catalyst Trusteeship was the trustee for the debentures issued by DHFL in 2016. At that time, ratings agencies CARE and Brickworks had given their highest ‘AAA’ rating to the DHFL debentures that had a tenure of three year. However, upon maturity on 16 August 2019, DHFL defaulted in the payment. 

The petition says, “Catalyst failed to safeguard the interests of the Complaint, by completely failing to ensure realization of the Debenture amount that became due on 16.08.2019. The said debentures were ‘secured’, and the debenture trustee was supposed to hold adequate Security to secure the debenture amounts. Yet, Catalyst failed to secure and realize the amounts that became due.” 

While the credit rating agencies had given AAA rating to the DHFL debentures, during February to May 2019, it was downgraded to ‘D’ (default) when it had become apparent that DHFL being insolvent will default in its financial obligations. The consistent down-grading demonstrated that financial health of DHFL did not suddenly deteriorate due to external shock, Ms Khemka says in her petition. 

The petition says, “It is impossible for the credit rating of a housing finance company in the business of mortgage finance to fall so sharply overnight, especially for housing finance companies in the business of mortgage finance. Non-performing assets (NPAs) of a housing finance company is usually very low at about 1%-1.5%. Further, there are ongoing investigations by into the conflict of interest issues surrounding the credit rating agencies in the case of IL&FS and its subsidiaries, therefore vitiating the proposition of having acted in bona fide fiduciary capacity.” 

According to a whistle-blower, Catalyst Trustee has a legal duty to act on behalf of NCD and bondholders and it is legally bound to file a case against DHFL for liquidation in Debt Recovery Tribunal (DRT). 

“The rule says if DHFL defaults, the trustee should immediately file the case. Till date DHFL has defaulted on more than 100 instances for retail NCD on interest and principal payments. Yet, Catalyst Trustee has not yet filed any case, and still says that filing of a case is ‘under process’. This ‘in process’ status by the trustee is there for more than one or two months. Is the delay in case filling by Catalyst Trustee because of some undue favour by DHFL promoters to promoters of Catalyst Trusteeship,” the whistleblower alleged. 

In February 2019, ratings agency ICRA Ltd downgraded the Rs8,000 crore commercial paper (CP) issued by DHFL to A2+ from A1+ due to challenges faced by the lender in raising funds from traditional bank lines of credit and instruments.   

“The risk is further heightened by the moderate economic capitalisation levels, concentration risks arising out of 17% exposure (as a proportion of assets under management- AUM as on 31 December 2018) to the construction finance segment, a large part of which remains under construction/moratorium, and the reduced ability of DHFL to support fresh business,” ICRA, a unit of Moody’s, says. 

DHFL, however, expressed concern over ICRA’s re-rating of the company’s CPs citing it is not merit-based and is unwarranted. 

Earlier in September, a whistleblower had alleged that the resolution plan (RP) as proposed by financially stressed DHFL will allow the company promoters to continue with the previous lending malpractices for another 10-15 years as there are no substantial cash outflows for the next 10 years.  

The RP has also left several depositors and non-convertible debenture (NCD) holders high and dry as the return on investment (RoI) is shown as nil. Even other lenders like banks, NCD holders, including mutual funds, insurance companies, and pension funds, ECB and NHB will have to buy 2.3% stake each at Rs54 per share in the debt-ridden company. 

As per the RP, balance deposits after 31 October 2019 are proposed to be restructured over 10 years with nil interest rates. Even deposits payable till October 2019 end are assumed to be paid with existing interest rate.

Separately, the Bombay High Court on Tuesday extended its previous stay on further payments by DHFL to its creditors except for payments made parri passu (in equal proportion) to all secured creditors. According to a report by Mint, the extension was given after hearing a case filed by Reliance Nippon Life Asset Management Company or RNAM (now Nippon India Asset Management Company).

“The court noted that that DHFL owes around ₹74,000 crore to secured creditors and ₹10,000 crore to unsecured creditors and thus secured creditors formed the overwhelming majority. Some of the company’s lenders led by banks signed an Inter-Creditor Agreement (ICA) which provided for conversion of debt to equity and restructuring of DHFL debt. However the Court noted that the resolution plan provides ‘no respite in the short run,” the report says.