The Dewan Housing Finance Corporation (DHFL) deal needs to be celebrated. Its resolution has given us a template to resolve future stressed finance companies. It’s a path breaker of sorts. Here’s an attempt to see what worked in favour of the deal and what we can learn for the future.
First, the firsts: DHFL is the first finance company to be resolved under the Insolvency and Bankruptcy Code (IBC). At Rs 38,000 crore, it is also the second largest asset resolved under the IBC. And for the first time, the effective resolution professional (RP) was appointed by the Reserve Bank of India (RBI), and not the creditors in a process.
So let’s begin by giving credit where it is first due. The DHFL resolution is a feather in RBI's cap. When we were losing hope, the regulator defied the skeptic and sought a resolution under 227 of IBC (the provision for finance companies). And the RBI did it smartly.
First, it dissolved the board under Article 45 of the RBI Act, and appointed veteran banker R. Subramaniakumar as the administrator and then converted him into the RP. This turned out to be a smart move because the DHFL board members, even without an active role, could have pulled strings or represented some interests, during the resolution.
As Subramaniakumar told CNBC-TV18, dissolving the board, rather than merely suspending it, was a sagacious act. RBI did more. During the process of the resolution, it provided small but crucial low-key flexibility in the matter of paying ECB dues etc., thus shepherding the deal from falling prey to minor technical handicaps.
An equal measure of credit goes to the administrator, Mr Subramaniakumar. Almost all parties to the deal admired his in-depth knowledge of banking, his leadership in being able to boost the sagging morale of DHFL employees, ensure collection of dues even under COVID conditions and keep the firm as a going concern. It would have been easy, in mid or late 2019, for disillusioned employees to quit and that could have resulted in sheer implosion of the company. He stopped the hemorrhage in just 10 days of joining, say insiders.
Kumar’s efficiency and integrity has also come for all-round praise. He kept offers and negotiations tightly confidential. Video presentations were all password protected, he said. More importantly, as Piramal retail CEO Jairam Sridharan said, Kumar’s knowledge and known integrity and the backing of RBI, helped bidders trust the book that was disclosed to them.
The running of the investment banking process wasn’t easy under COVID-19 conditions. The EY team leader Abizer Diwanji said they went proactively to make presentations to bidders. Diwanji’s knowledge of the IBC process and banking nuances was a great help, as were AZBs appropriate legal advice at each stage.
Repeatedly, as bidders made a pitch between Rs 30,000 crore and Rs 40,000 crore, a note from Kapil Wadhwan, the erstwhile owner of DHFL, would announce an offer of over Rs 90,000 crore, leading to outcry from fixed deposit holders who were to lose more under the Piramal deal.
That was the toughest part of the negotiations, said lead banker Rajkiran Rai, MD & CEO of Union Bank.
The bankers formed the majority of lenders. NCD holders and public depositors also had substantial exposures. The IBC law is clear that in the waterfall, primacy is to be given to banks. But this required bankers to present a united front at all times, since they didn’t have the luxury of an overwhelming majority in the creditor group.
Most of those involved in the deal agree that the fact that the RP was appointed by RBI and not the creditors greatly helped in strengthening his hands to run a clean process. This can’t be replicated in non-finance cases under IBC. But for stressed finance companies, clearly the DHFL template will work and could perhaps be applied to companies like SREI.
Could RBI have run a similar process for Infrastructure Leasing & Financial Services (IL&FS)? Experts aren’t sure, but it would have been worth a try. IL&FS was a group of finance companies and the entire group would have to be taken under IBC. Perhaps some new rules need to be written for resolving group companies, say Diwanji and Baharam Vakil of AZB.
Likewise, selling the company piecemeal may have helped, says Diwanji. DHFL had a good retail book, while the wholesale book was contaminated with related party issues. If the IBC process allowed piecemeal sale, banks would have got their money earlier, and money in the bank even one year earlier would have meant a bigger gain for the creditors.
Incidentally, a parliamentary committee has also recommended that piecemeal selling be considered, though that may complicate things or give sub-optimal results in some cases.
But these are valuable suggestions that will be debated in the days to come.
Finally, the successful resolution of DHFL in reasonably quick time, given COVID, also restores faith in the IBC process.
All parties: bankers, lawyers, the NCLT tribunals, regulators, investment bankers and even bidders have become more adepts at the IBC process. The IBC process has settled, and that is perhaps one of the best outcomes of the DHFL deal.