A draft forensic audit report by KPMG into Dewan Housing Finance Limited’s (DHFL) books has raised suspicions of a possible fund diversion by the troubled financier. Union Bank of India, one of the key lenders to the company, had appointed KPMG to conduct a special review to ascertain evidence of utilization of funds availed from banks by DHFL for the period April 2015- March 2019.
KPMG has now submitted an unsigned, draft report to a few lenders, and is expected to submit the final report by next week, people aware of the developments told CNBC-TV18 on the condition of anonymity. This draft report has been reviewed by CNBC-TV18.
Key Findings of KPMG’s draft forensic audit report
The report findings reveal that DHFL had disbursed loans and advances to the tune of Rs 19,753 crores to 40 inter-connected entities/ individuals having commonalities with DHFL promoter entities between 2015 and 2019. Of these 40 entities, 25 reported minimal operations, with net worth and profits after tax of less than Rs 1 lakh, as per their filings with the corporate affairs ministry. Based on the commonalities, these entities appeared to have been working closely with DHFL, but would not qualify as related entities, the report noted. DHFL disbursed loans and issued inter-corporate deposits (ICDs) of Rs 14,631 cr to these 25 entities.
Further, one Sudhakar Shetty, a real estate developer and owner of Sahana Group, was found to be a shareholder in 4 of the 40 entities, with loan disbursements of Rs 2,912 cr & ICDs of Rs 1,572 cr. Another 6 entities out of 40 invested Rs 2,885 cr in other entities owned by Sudhakar Shetty, with loan disbursements of Rs 3,850 cr & ICDs of Rs 355 cr. The report showed that a sample fund flow analysis amounting to Rs 1,014 crores indicated that the source of funds disbursed was a redemption of mutual funds amounting to Rs 292 crores.
KPMG noted that DHFL could not provide a robust and well-defined tracking mechanism for end-use monitoring of funds. It found that 12 such entities utilized loan amounts to purchase preference shares, debentures amounting to Rs 4,010 cr in other entities having commonalities with DHFL. Another 17 entities provided loans amounting to Rs 4128 crore after disbursal of loans from DHFL as “advances given for JV under consideration”. Some 7 entities also invested in preference shares & debentures of Rs 733 crore after disbursal of loans from DHFL.
The report notes that DHFL offered preferential disbursement to 13 entities with disbursements of Rs 7491 cr, with 100 percent of the sanctioned amount being disbursed within a month. This despite NHB guidelines mandating disbursal based on physical progress of report, and no documents to evidence this progress were found in the audit.
KPMG has found that DHFL offered preferential repayment terms of the principal moratorium to 21 entities with disbursements of Rs 11,313 cr, and interest moratorium to 17 entities with disbursements of Rs 8,970 cr. Further, the company’s loan statements indicated 15 entities with outstanding of Rs 7639 cr were in default of over 90 days- but these assets were classified as standard by DHFL as of December 31st , 2018. Another Rs 653 crores of ICDs granted to 3 entities were rolled over, without being classified as sub-standard.
Among other instances, the report also cites the example of DHFL sanctioning loans of Rs 6,335 cr to 13 Slum Rehabilitation Authority (SRA) entities in FY17, based on 10-17 percent property price rise over 5 years in Mumbai.
What banks made of the audit report
Senior banking executives from banks with exposure to DHFL spoke to CNBC-TV18. One such senior official said that once the final forensic audit report is submitted by KPMG next week, banks will share it with DHFL and give the company a chance to respond to the findings of the report. Another banking executive said that banks have already secured an undertaking from the promoters of DHFL that if they are found guilty of any misdeeds, they will not be granted immunity from the law of the land.
As far as the resolution plan itself is concerned, this banker added that the final action will be taken based on what the creditors' committee decides after examining the final report and the company’s response to it. Irrespective, steps would be taken to protect the assets of the company, as per this banker, as lenders will have ownership rights over them. However, some aspects of the plan will now have to be tweaked. For instance, the promoters may not be allowed to hold any stake in the company if found guilty of fund diversion, and the unsustainable debt amount would have to be examined based on these findings, a banking executive told CNBC-TV18.
Along with its quarterly results, DHFL had released details of the proposed resolution plan for the company earlier this month, where it had said over Rs 32,000 cr of debt was unsustainable. DHFL owes Rs 83,873 crore to banks, National Housing Board, mutual funds and bondholders. As of July 6, its secured debt was Rs 74,054 crore and the unsecured debt stood at Rs 9,818 crore.
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