DHFL case: RBI okays Piramal Group’s takeover plan

Piramal Capital & Housing Finance Limited (PCHFL) is a non-deposit taking NBFC, unlike DHFL which accepts public deposits. “Piramals wanted to convert PCHFL into a deposit-taking NBFC after they acquire DHFL but RBI has turned down that request,” said a person directly in the know. However, this is not a deal-breaker, and Piramals are expected to go ahead with the proposed merger once all approvals are in place, added the person quoted above.

RBI’s nod brings Piramal Group one step closer to the acquisition of DHFL, pending the final clearance from the National Company Law Tribunal (NCLT).

“We will file the resolution plan with NCLT for its approval soon now that RBI has cleared the plan,” added a senior executive from one of the large lenders to the company.

The resolution plan was approved by the committee of creditors on January 17, with almost 94 percent of the lenders voting in favour of Piramal Capital & Housing Finance Limited’s (PCHFL) plan. It involves a total payment of Rs 37,250 crores, CNBC-TV18 had reported earlier. This includes debt Instruments amounting to Rs 19,550 cr with a 10-year tenure, and Rs 17,700 crore as upfront cash, which factors in Rs 3,000 crores entitled to financial creditors from the cash on DHFL’s books.  The plan also involves de-listing DHFL and then merging it with Piramal Capital & Housing Finance Limited, a wholly-owned subsidiary of Piramal Enterprises.

DHFL is the first financial services firm to have been sent to NCLT under the Insolvency and Bankruptcy Code (IBC) and will set the precedent for other stressed financial sector entities. The entire resolution process has been mired in controversy, with unsolicited offers, bickering between suitors, conflict of interest issues with legal advisors to the firm, and the promoter facing allegations of fraud.

DHFL is facing claims of Rs 87,031 crore from financial creditors under NCLT. Its large lenders include State Bank of India (including SBI Singapore) with Rs 10,083 crore exposure, Bank of India Rs 4,125 crore, Canara Bank Rs 2681 crore, NHB Rs 2,434 crore, Union Bank of India Rs 2,378 crore, Syndicate Bank Rs 2,229 crore and Bank of Baroda Rs 2,075 crore, Indian Bank Rs 1552 crore, Central Bank Rs 1389 crore, IDBI Bank Rs 999 crore, and HDFC Bank Rs 361 crores.

In a research note released in January, ICICI Securities had said, “Few positive synergies emerge for the business model, if the deal consummates: 1) Strategic portfolio diversification intent (towards 50:50 wholesale to retail mix) will be achieved sooner; 2) reduced dominance of wholesale portfolio can help ease the borrowing cost; 3) multi-asset retail digital lending can get a further fillip from the existing DHFL franchise; and 4) unallocated net worth of ~Rs50-60bn can now command some optional value (utilised towards retail business ramp up).”

The key risks, ICICI Securities had noted, would emerge from any litigation by other contenders on bidding outcome which could defer the process, and a higher mark-down on the acquired portfolio.

DHFL had loan assets of Rs 60,800 crores as of September 2020, of which the wholesale portfolio is fairly valued at Rs 28,000 crores. The retail book of Rs 32,000 crores is relatively more granular with better potential to sell-down/securitize.

DHFL’s net worth is negative Rs 7,600 crores due to high provisioning made on account of bad loans, declared frauds. It carries Rs 9060 crores of cash on its books and investments of Rs 4,800 crores.

In September and October 2020, DHFL reported details of fraudulent transactions for outstanding sums of Rs 14,000 crores, Rs 12,700 crores and Rs 1,800 crores.

ICICI Sec in its report noted that DHFL has not provided interest of Rs 6150 crores accrued or payable on borrowings since the commencement of insolvency proceedings – some part of it will be reimbursed as a part of the deal.

DHFL has a pan-India network of 182 branches, with 25 percent of the branches in Maharashtra, 10 percent in Tamil Nadu, Karnataka, and UP each. It also has 99 micro branches with penetration in tier 2/3/4 cities. It had a deposit base of Rs. 5,350 crore as of March 2020.

PCHFL was incorporated in February 2017 as a subsidiary of Piramal Finance Limited and received its housing finance licence in September 2017. With effect from March 31, 2018, Piramal Finance Limited and Piramal Capital Limited merged with PHFL (name changed subsequently to PCHFL), which became a direct subsidiary of PEL.

As per an ICRA note from October 2020, the entire financial services business of PEL, including real estate lending, housing finance, the corporate finance group (CFG) and ECL, is housed under PCHFL and PHL Fininvest, a fellow subsidiary. In FY2020, PCHFL reported a net profit of Rs 30 crore on a total income of Rs 5,623 crore compared to a net profit of Rs 1,443 crore on a total income of Rs 5,572 crore. PCHFL accounted for ~79 percent of PEL FS’ net interest income in FY2020.

ICRA research showed that as on September 30, 2020, PCHFL had on-book liquidity in excess of the debt repayment obligations (including interest and revolving lines) in Q3 FY2021. PCHFL’s liquidity profile is, thus, adequate. As on June 30, 2020, PCHFL had on-book liquidity of Rs 3,162 crore and unutilised bank lines of Rs. 526 crore compared to debt repayment obligations (including interest) of Rs 2,662 crore in Q2 FY2021.