Corporate accountability of DHFL scam – a story of greed and fraud

Abstract

Non-bank finance companies are in the businesses related to loans and advances, and other types of economic activity. NBFC plays an important role in providing affordable financial services and indirectly stimulates the economy. It deals with Asset Mobilization, loan syndication, leasing, hire-purchase, insurance business, employment generation, expansion of the financial market, and raising living standards. NBFC is significantly more significant for a developing economy like India. Since there is currently no independent regulator for NBFCs in India, they are governed by the Reserve Bank of India. As on March 31, 2019, there were 9,659 NBFCs registered with the Reserve Bank of India, of which 88 were NBFC-D and 263 systemically important NBFC-ND. The leading financial daily, Economic Times, stated, “Demand for everything from cars to cookies has waned as India’s lingering shadow banking crisis weighs on private consumption, which accounts for almost 60% of the gross domestic product". India’s NBFCs, broadly constituting the less-regulated shadow banking sector, were plagued with scams, triggering a domino effect in the Indian money market. Major corporate governance issues were highlighted in NBFIs with the unfurling of the ILF&S fraud which was followed by the meltdown of Dewan Housing Finance Limited (DHFL). The funds that DHFL had sanctioned and were invested in unsecured and dubious loans. Loans of thousands of crores of rupees were granted to newly incorporated shell companies. Due to poor Corporate Governance concerns, the RBI superseded the board of debt-laden DHFL. Post uncovering of the scam, the company’s credit ratings of commercial papers and non-convertible debentures were downgraded; non-payment of interests led to the enforcement of a resolution plan, with the board of directors acceding to nationalized banks. The company’s reputation had crashed with its share prices, amidst allegations of a lookout notice issued for its promoters for siphoning funds through shell companies.