Strategic Robbery 👥

Roti, Kapda, aur makaan (food, cloth, and shelter) are the three basic needs of every person. 

In the Indian context, owning one's own makaan or house is definitely an indicator of economic well-being. Helping folks achieve this dream was indeed one of the reasons that DHFL came into existence. The late Mr. Rajesh Kumar Wadhawan, promoter of Deewan Housing Finance Corporation Limited (DHFL), was convinced that no country could expect to progress sustainably if a large proportion of its population continued to be financially excluded. The solution was DHFL, which entered the Indian housing finance industry in 1984 and became an early player in the segment. 

The company definitely did very well for the next twenty-seven to thirty years. Its revenues increased from Rs 103 Cr in 2001 to Rs 10,464 Cr in 2018, a CAGR of 31.2%, and its net profit increased from Rs 16 Cr in 2001 to Rs 2900 Cr in 2017, clocking a CAGR of 38%. Loan disbursements were Rs 161 Cr in 2001, which increased to Rs 44,800 Cr in 2018, clocking a 39% CAGR. 

The Indian housing finance industry crossed the Rs 7 lakh crore mark in December 2012 and was predicted to maintain a healthy annual growth of between 17 and 19%. Yet, the country remained extensively underpenetrated when it came to housing finance. Mortgage finance stood at 9% of GDP as compared to its Asian peers, such as China at 20%, Korea at 26%, and western economies such as the US at 80% and the UK at 83%. 

Brother Kapil and Dheeraj Wadhawan, the promoters of DHFL, were the toast of the Mumbai corporate circuit. Kapil joined in 1997 and, together with Dheeraj, oversaw a turnaround in the fortress and trajectory of the company. The brothers also expanded the business through a string of acquisitions and diversified it from a pure home loan company to a broader financial service company that extended loans for education and small and medium enterprises and entered the life and general insurance business, besides mutual funds. They also lived life the King size, owing a private jet, a yacht, and a fleet of luxury cars, including a Rolls-Royce Phantom and a Bentley, and moved around with gun-toting bodyguards. 

All was going well, but the company started facing problems after FY17–18. As Warren has rightly said, "Only when the tide goes out do you discover who's been swimming naked." After Infrastructure Leasing & Financial Services Ltd. (IL&FS), a systematically important NBFC, started defaulting on various payments (including bank loans and commercial payments) in August 2018, there was a cascading effect on the whole financial sector in an adverse way. Subsequently, credit rating agencies like ICRA, CARE, and Brickwork abruptly downgraded IL&FS and its subsidiaries from high investment grade to junk status. This event sent shockwaves across the country's shadow banking lending sector, which is the NBFC sector. The creditor rushed to tighten the laws against NBFCs, which crushed the sector more. 

Since 2016, IL&FS has been relying mainly on short-term loans for its funding requirements. But it extended long-term loans to infrastructure projects. This led to a class asset-liability mismatch situation. Short-term liabilities were used to finance long-term assets. This made the company vulnerable to a liquidity crisis as its assets generated returns only in the long term. In September 2018, DSP Mutual Fund sold Rs 300 crore worth of commercial papers of DHFL at a discount. (DSP Mutual Fund was one of the flagbearers of frontrunning trades and insider trading.) DHFL had major exposure to IL&FS. It had lent Rs 649 crore to IL&FS. Later, DHFL chairman Kapil Wadhawan clarified: "The stock fell due to an unfortunate panic in the systems following rumors of a liquidity crisis. Liquidity is not an issue. We have liquidity worth Rs 10,000 crore. DHFL has neither defaulted on repayments nor has there been any single instance of a delay in payments. We do not have any exposure to IL&FS.". 

DHFL Share fell 59% intraday, the sharpest fall among NBFCs. It lost nearly Rs 8129 Cr of market capitalization on single day. After the IL&FS crisis, bank became wary of lending to the NBFCs, which impacted DHFL. It had trouble raising further funds and the false liquidity that the management had informed about, never made it to the financial statements. DHFL investments suffered as a result of declining investments and raising demands to meet its obligations. Essentially since September 2017, DHFL had been playing catch up on its financial obligations, that to without money to count on and a worsening loans portfolio, GST, RERA, and demonetization had further compounded its problems as many fly-by-night operators/builders suddenly saw their businesses go under. This further dented DHFLs balance sheet and profits as DHFL was known to lend money to such entities. 

To add some salt on their wounds, Corbrapost, an Indian news website known for its undercover investigation journalism, made some allegations about DHFL. 

"Promoters of DHFL have siphoned off more than Rs 31,000 crores of public money. This scam has been primarily pooled off through grants of loans and advances to shell companies and by using other means. Money has also been routed through these dubious companies and parked outside India, to acquire assets." 

Then on 4th June 2019, the inevitable happened. DHFL defaulted on Rs 900 Cr worth of due payments. Its CP's rating was downgraded to "D" overnight, which sent its share price into a tailspin. Cases were filed against DHFL by depositors.  To add to DHFLs woes, allegations of dubious financial transactions continued to emerge. Finally on 29th November 209, the RBI initiated insolvency proceedings against DHFL, the first NBFC t ogo under a corporate insolvency resolution process. The Union Bank alleged the Wadhawan brothers in criminal conspiracy with others, mispresented and concealed facts, committed criminal breach of trust and abused public funds to cheat the consortium to the tune of Rs 34,641 Cr by defaulting on loan repayments from May 2019 onwards. 

The Wadhawa brothers also took advantage of the PM Awas Yojana which provides affordable home loans and gives subsidies to finance companies that promotes the same mission. Under this, the Wadhawa brothers created 14000 dubious accounts and availed Rs 1880 Cr in interest subsidy. This is the biggest bank fraud registered by CBI. The only case that comes close to this is of ABG Shipyard when it was booked for defrauding banks with Rs 23,000 Cr. A question should arise in your mind that how did an NBFC strategically fooled our banks for a few years? The answer is "Bandra Books". 

A scheme called the Bandra books was created to carry out this scam. DHFL set up a dummy branch that existed only in theory, or virtually. A bifurcation was in the internal loan management software, and they showed auditors that they distributed home loans worth Rs 2,60,000 Cr to individuals. But in reality, they disbursed an amount of Rs 11,000 Cr to 91 companies that were owned by themselves. As one would have guessed, this was far from money routing. The money flowed into the promoters' own companies. CBI found out in the investigation that the promoters enjoyed this money by spending it on expensive art, cars, and luxury properties. Even worse, some of this money allegedly found its way into the underworld, to dreaded gangster Chhota Shakeel. There were also allegations against DHFL hadn't made these fictitious entries to their promoter group and not lent to promoter entities through a maze of transactions, it would have shown a loss for 10 out of 11 years. 

To sum it all up, here's a really crisp summary. 

1. Loans to shell companies: The scrutiny of accounts shows that 66 entities having commonalities with DHFL promoters were disbursed Rs 29,100 crore, against which Rs 29,849 crore remained outstanding. 

2. Round tripping: an illegal way to inflate revenues by passing on assets to other promoter firms, usually on a no-profit basis, to show growth and then buying them back later. 

3. Purchasing assets: The last step of the scam was, of course, purchasing assets for personal gains. The list contained properties in Mauritius, Dubai, a cricket team in Sri Lanka, and some start-ups in the UK. 

After thousands of audits, investigations, and many more events unfolded, DHFL ceased to be an entity. Piramal bought some parts of the company. The late Mr. Rakesh Jhunjhunwala also suffered a loss as he started to collect DHFL shares at a price of Rs 135. At its peak, Raakesh held 1,00,00,000 shares of DHFL. The holding was worth Rs. 202 crore. Perhaps this was one of the biggest miscalculations of his career. Apart from that, many retailers who blindly followed him also lost a great chunk. Surely, the inequality of money is rising in India, but all of us have something in common. A goddamn brain to think. 

In the era of Sparta (a Greek city), the Spartans were allowed to steel things. When caught stealing, they were punished, not for steeling but for being caught for what they were doing. Similarly, there are so many companies out there steeling everyone under the name of "CAPITALISM.". Those who are good at hiding things are the ones who become powerful. The Hindenburg saga is still fresh. 

Capitalism is hard. It is brutal. It forces you to do things that you would regret later, but it gives us something that generates the highest amount of dopamine (at least it does for me): money. Late Billionaire investor Charlie Munger once said, "If the crooks only knew how much money they could make by being honest, they'd all behave differently."

Happy Investing.