Kapil Wadhawan and DHFL: Pushed into the deep sea with no land in sight

Kapil Wadhawan

The fall of Kapil Wadhawan, whose family built one of the most fascinating mortgage businesses in India, came much quicker than his rise. Even if one sets aside the criminal element to the story, DHFL’s collapse is an important case study on how promoters can destroy even successful businesses by growing too big and too fast.

"An NBFC is always at the mercy of its financiers. It needs be careful at all times. Somewhere, DHFL forgot this cardinal rule," said a senior analyst who have been tracking the firm for years.

For almost two decades, DHFL was an enviable story in India’s booming housing finance space. With total assets under management of over a trillion rupees, and an aggressive approach to the fast-growing affordable housing market, DHFL was able to stand apart from the new crop of competitors, and even some of the established ones.

Banks and investors once queued up before Wadhawan’s office for business. The firm’s shares hit a peak of Rs 690 on September 3, 2018 valuing it higher than some of the competing full fledged banks.

Kapil, who nearly two decades ago, inherited the legacy of the firm--set up by his father Rajesh Wadhawan back in 1984--was a sought after man in Mumbai’s financial world.

All of it collapsed like a pack of cards soon. The first shock came in September, 2018 when DHFL plunged into a deep liquidity crisis and began defaulting to investors. But, that was only one side of the story. Not long after that, stories of Wadhawans sailing to the forbidden waters flirting with Mumbai’s underworld surfaced.

“When I took up my first day, it was like being put into the deep sea with no land in sight but when I look back, the last 20 years have not only been challenging but also satisfying.” Kapil Wadhawan had told The Economic Times in an interaction just the month before the shares hit their peak. That was probably the last time Wadhawan made it into the press for the right reasons.

DHFL’s liquidity crunch triggered fresh defaults and panic in markets. As in the case of any housing finance company, the biggest funding sources of DHFL were banks and mutual funds. Both began to shut doors to DHFL one by one in the following weeks. Rating agencies flashed warning signals to investors, adding to the woes.

The IL&FS crisis, which occurred following years of mismanagement and dangerous over-leveraging by Wadhawans, weighed down DHFL heavily. When the mess deepened, the RBI finally superseded the board on 20 November, 2019 and later pushed the firm to the NCLT for insolvency resolution ten days later. The company was admitted for IBC proceeding on 3 December.  The writing on the wall was clear by now.

But DHFL’s misery wasn’t confined to its financial situation. There was more than meets the eye. The Wadhawans -- Kapil and his brother Dheeraj -- were allegedly engaged in a web of unlawful transactions involving the underworld.

According to the Enforcement Directorate, Wadhawans had real estate dealings with gangster Dawood Ibrahim’s aide and drug trafficker Iqbal Mirchi whom they allegedly met in London.

Kapil allegedly created a string of shell companies to facilitate illicit financial transactions and purchase prime real estate properties belonging to Mirchi’s family in Mumbai’s Worli area. Wadhawans also routed money from DHFL to the shell companies in which Kapil Wadhawan had shared. DHFL, at one stage, was used like a piggy bank by Wadhawans, who had unquestionable control over it.

On Monday, the ED arrested Kapil Wadhawan in connection with the Mirchi real estate transactions. The fate of DHFL is now up to the bankruptcy court. With its share price nosediving to Rs 15 apiece, the market capitalisation of DHFL is just about Rs 470 crore, making it an easy buy for any prospective bidder.

But question is if even that price is worth for taking over the mess. With a total debt of Rs 80,000 crore and half of it to commercial lenders, banks are a worried lot and, sure, wouldn’t be mute spectators as the process progress.

Total collateral, banks can claim from DHFL, is worth only a few billion rupees against a debt of Rs 40,000 crore. Whoever buys the DHFL, if it comes to that, will have to have a deep pocket to set the course of the ship in rough waters. For the second time in his life, Kapil Wadhawan has been pushed into the deep sea with no land in sight.