All eyes and ears in the financial sector are on the NCLT Mumbai branch which has started hearing the insolvency proceedings in the case of Dewan Housing Finance Limited, DHFL. The reason for this is DHFL is the first case of a financial service provider (FSP) being hauled to the NCLT for corporate insolvency resolution process under the IBC Act. The same section 7 of the Act that is applied in the case of normal companies is being invoked here as well. Reports say, the jurists in the Tribunal were themselves a little curious to know how the whole thing will pan out.
The Reserve Bank of India had taken this decision to refer DHFL to NCLT. The fact is DHFL has a total liability on its books of ₹92,715.45 crore. Of this liability, an amount of ₹73,833.46 crore is owed to secured creditors. One of the major creditors of DHFL is State Bank of India. The bank’s Singapore branch alone has an exposure of $240 million with DHFL. This is an external commercial borrowing and the interest on this borrowing is $2.1 million remaining unpaid by DHFL and is in default.
It was RBI that seized the initiative in the case of DHFL and appointed an administrator from its side and a three-member committee to assist the administrator. The person chosen to oversee DHFL is R. Subramaniakumar, former MD and CEO of Indian Overseas Bank. This is seen as a major decision in the financial circles since the understanding so far was that the FSPs weren’t covered under the insolvency resolution process and have to be dealt with separately. RBI has taken the stance that if any financial services provider borrows funds from banks and other sources and fails to repay the banks and the other lenders, it must be given the option to approach the NCLT.
The trickiest part is that in the case of other corporate entities, the resolution professional would search for a buyer for the assets in possession of the defaulting company and out of the proceeds received by selling the assets even at a lower value, the creditors can expect to recover at least part of the amount owed to them. In a typical financial services company, this process is going to be dicey since there may be very little in terms of tangible assets. Even the personal assets of the promoter of the FSP may not amount to much.
As mentioned in the beginning, the DHFL case at the NCLT Mumbai will be keenly watched.