As the troubled housing finance company (HFC) heads for resolution under the Insolvency and Bankruptcy Code (IBC), one big question that still remains unanswered is what will happen to the public deposits of Rs 6,000 crore stuck in Dewan Housing Finance Corporation (DHFL).
According to experts, DHFL’s depositors need to gear up for a haircut after a long-drawn legal process. The haircut may not be much if the HFC is able to attract valuable bids from new investors. However, the ongoing fraud investigations may hamper the HFC’s value and keep bidders at bay.
DHFL had stopped accepting fresh public deposits, renewal of existing deposits and pre-mature withdrawals of existing deposits on May 21.
A month later, it defaulted on repayments and triggered a crisis for all stakeholders. Lenders to DHFL signed the inter-creditor agreement (ICA) as per regulatory norms but the resolution plan devised by them never took off due to non-participation of other creditors like mutual funds, fixed deposit holders and bondholders.
On November 20, the Reserve Bank of India (RBI) superseded DHFL’s board of directors and appointed former banker R Subramaniakumar as the Administrator. The central bank also appointed a three-member committee to assist the Administrator. This was facilitated by recent amendments in the IBC that paved the way for the regulators to initiate resolution proceedings for financial service providers.
Lenders are hopeful that the Administrator will approve the plan proposed by the Committee of Creditors (CoC) with some tweaks. “The Administrator and his team will talk to all stakeholders and finalize the plan. He may or may not agree with the plan that was proposed earlier by the CoC,” said a senior bank official, adding that the plan was devised after keeping in mind the best interests of all stakeholders.
“The success of the IBC process for DHFL would depend on the outcome and the value that prospective bidders propose in the proposed insolvency process of DHFL. There is a possibility that depositors and banks may have to take a haircut, depending on the value of the bids submitted,” said Karan Mitroo, Partner, Luthra & Luthra.
“Hence, unless we get bidders who provide enough on the plate, we may end up seeing elongated legal battles, with stakeholders including the depositors knocking the doors of the Supreme Court. If however, their interests are safeguarded, the process would move smoothly,” Mitroo added.
However, if DHFL goes into liquidation, the chances get dimmer for depositors to get any relief.
“In the IBC process, the waterfall mechanism is followed. If the depositors are willing to take a haircut, they can also come on board. The only difficulty is that it will be tough for them to continue with this kind of long-drawn repayment program that will also include a large haircut,” the banker said.
The waterfall mechanism gives priority to repayments of secured financial creditors like lenders over depositors that come under unsecured creditors. Also, deposits with NBFCs are not covered under the Deposit Insurance and Credit Guarantee Corporation (DICGC) that insures deposits up to Rs 1 lakh per customer as is the case for banks.
According to norms laid down by the National Housing Bank, HFCs holding public deposits are required to invest a prescribed percentage of their deposits in approved securities in terms of liquid asset requirement under Section 29B of the NHB Act, 1987.
However, once the case is admitted into NCLT, the interim moratorium will kick in and it will be difficult to utilise any such reserves to make repayments to depositors.
Since DHFL is first of its kind to be dealt under IBC, it remains to be seen how the process will take shape going forward.