While giving a clean chit to Dewan Housing Finance Corporation Ltd (DHFL) on news portal CobraPost's allegations that it promoted shell companies that were borrowers, perpetrated tax fraud, and promoters concealed their shareholding and resorted to insider trading, an independent audit firm has raised several red flags, including significantly inadequate monitoring in respect of 15 large borrowers and certain instances of deviations and non-adherence to the terms of sanction of loans.
The independent auditor's report on the allegations by news portal CobraPost against DHFL has concluded that it has neither sanctioned/disbursed loans to 40 entities aggregating Rs 10,304 crore nor promoted any of the alleged 26 "shell" companies that are borrowers.
Chartered Accountants firm T.P Ostwal & Associates LLP's examination of the allegations, however, has indicated "significantly inadequate" monitoring in respect of 15 borrower accounts (loans aggregating Rs 7,385 crore), highlighted that composition of the finance committee suggests that promoter-directors "can be said to have significant influence" on sanctioning loans over Rs 200 crore; and records indicating that the risk management committee did not undertake ongoing monitoring of compliance with the regulatory exposure ceiling.
The allegation
On January 29, 2019, CobraPost had accused the primary promoters of DHFL of siphoning off more than ₹31,000 crore of public money through secured and unsecured loans and advances to shell companies, round tripping, tax avoidance and insider trading.
The audit firm, in its report which was placed before DHFL's audit committee on Wednesday, observed that no loans were sanctioned/ disbursed by DHFL during the review period (April 2015 to December 2018) to the 40 entities (aggregating Rs 10,304 crore) referred to by CobraPost.
In the case of 4 entities, project loans disbursed (aggregating Rs 2,365 crore against the newsportal's figure of Rs 2,211 crore) have been repaid up to December-end 2018.
Underscoring that a major portion of the allegations pertain to loans extended to entities that are undertaking Slum Rehabilitation Authority (SRA) projects, the firm said DHFL sanctioned loans to 15 SRA projects aggregating Rs 7,485 crore (CobraPost's said this number was Rs 7,525 crore). Loans sanctioned for other projects was Rs 3,475 crore (Rs 3,997 crore).
Audit report
The audit firm said the company has not promoted any of the alleged 26 "shell" companies that are borrowers. Further, it does not have any directors in common, including members from the promoter group, with any of these alleged "shell" companies and the company or promoters do not have any shareholding in these entities, nor are these entities shareholders of the company.
Accordingly, there are no indications to confirm the allegations that the company has created shell companies to divert funds, the report added. “We were unable to find evidence to support the allegations that the promoters have concealed shareholding in the company neither did we find any evidence to support the allegation of insider trading,” said the report.
The firm said certain lapses and departures from the SOPs (standard operating procedures) and policies laid by the company have been identified. These lapses, point to deficiency in the adherence with the policies in several instances - the risk of which needs to be examined by the company, it added.
The report elaborated, “Though the company is required to monitor post disbursal end use of funds by the borrowers, our examination indicates the monitoring in respect of 15 borrowers (loans amounting to Rs 7,485 crores) is significantly inadequate. The records do not indicate that the Risk Management Committee undertook ongoing monitoring of compliance with exposure ceilings prescribed by the regulator. However, compliance with prudential norms for exposure is tested at the time of sanction of loans by the operational teams.”
Finance Committee
Referring to the composition of the Finance Committee (consisting of Kapil Wadhawan & Dheeraj Wadhawan -- both promoter-directors, and one independent director) which sanctions loans that exceed Rs 200 crores, the report observed that the promoter-directors can be said to have significant influence in the loan sanction process for loans exceeding Rs 200 crores.
"In absence of any evidence to suggest influence, we believe that their decisions are within the framework of the provisions of the Companies Act, 2013 and National Housing Bank ("NHB"). It should also be noted that the minutes of the Finance Committee's meetings are placed before the Board in subsequent meeting, for taking on record," the firm said.
The report observed that there are certain instances of deviations and non-adherence to the terms of sanction of loans having major risk implications, especially in relation to post-sanction monitoring of fund use by borrowers. As such, non-compliances with the terms of the borrowing and possible diversion of funds, if any, by the borrowers would have escaped attention of the Company, it added.
"There are also adverse implications resulting into invalidity of the charges created on assets of 4 borrowers (loans amounting to Rs 2000 crores) due to non-registration of such charges. Under the provisions of the Companies Act, 2013, such delayed registration of charges is not possible," the firm said.
Pertaining to allegations in respect of loans worth Rs 14,282 crores to 45 borrower-companies that are alleged to be part of Sahana group and/ or Wadhawan group, the firm did not find merit in these allegations.
Further, loans were disbursed during the firm's review period to only 10 entities of the alleged 45 entities amounting to Rs 4,715 crores, of which Rs 1,640 crores have been repaid by the borrowers up to December-end 2018. No loans were given to any of the other 35 entities during the period of review, it added.
No political consideration
The firm found the allegation of political considerations in connection with certain lending to be baseless and without merit - there was no nexus between loans sanctioned and timing of the elections. All of such loans were, in fact, not sanctioned before or during either the Gujarat (December 2017) or Karnataka (May 2018) state elections.
The firm did not find evidence to corroborate or support allegations of tax fraud perpetrated by the Company or violations of various other statutes (Income-tax Act, 1961, Companies Act, 2013, FEMA,2019, etc.) - prima facie also; "it can be concluded that the Company could not have been party to such frauds since there was no role for the Company to play in the perpetration of any such fraud," it added.
The Company has sanctioned and disbursed loans aggregating to Rs. 2,000 crore to Notion Real Estate Private Limited, Earleen Real Estate Developers Private Limited, Prashul Real Estate Private Limited, Edweena Real EstatePrivate Limited as project loans for SRA development.
Further, the firm's examination of available financial statements of Darshan Developers indicates that the shareholding has indeed undergone a change during the period of our review and it is highly probable that certain amounts lent to the four companies may have been used to purchase shares of Darshan Developers aggregating to Rs 1,424.16 crore from Kyta Advisors and other instruments worth Rs 299.28 crore (total Rs 1,723.44 crore).