Both these lenders are represented in the Committee of Creditors (CoC) and both want their dues to be given preferential treatment and settled first.

DHFL insolvency FD bondholders spar over resolution
Money DHFL case Friday, February 28, 2020 - 12:54

There is practically a chaotic situation in trying to resolve the insolvency at Dewan Housing Finance Limited, DHFL, as per a report in Live Mint. Among the lenders to the beleaguered company are two categories, fixed deposit holders and bondholders. Both these lenders are represented in the Committee of Creditors (CoC) and both want their dues to be given preferential treatment and settled first. The argument put forth by the FD holders is that most of them are senior citizens and have healthcare emergencies and need the funds. The bondholders don’t agree. Incidentally, it turns out there are some individual bondholders as well apart from the institutional ones.

It is a tussle becoming difficult to resolve. In the centre of this controversy is the IBC Code, which lays down that when it comes to settling the dues of financial creditors, there will be no preferential treatment and all creditors will be treated as equal. Possibly, the lawmakers had not anticipated that a situation of the DHFL kind may also arise. In fact, the reality is the law was not meant to cover financial services companies and it was the RBI which went out of the way to take DHFL to the National Company Law Tribunal (NCLT) and appoint an administrator. The other aspect to be kept in view is that there is no provision for payment to any creditor during the insolvency resolution process. The CoC has to find a suitable investor or buyer who will bring in the funds and only that is meant to be sued to settle the debts.

Again, as mentioned, this is a peculiar situation. Though DHFL has some serious financial issues, the administrator, Subramaniakumar, has seen to it that where the housing finance company had healthy loan portfolios and the borrowers were making the regular loan repayments, the funds are received and kept separately. These depositors of FD are probably aware of this and are asking that their dues be paid. They appointed a legal advisor and went to the Supreme Court which asked them to go back to the NCLT.

The other perspective also is that of the ₹86,374 crore that DHFL owes to all classes of creditors, ₹5,207 crore is from over 66,000 fixed depositors, and ₹81,140 crore from banks and bondholders led by Catalyst Trusteeship Ltd (CTL), acting as their custodian. Purely from that narrow point of view, you may think if 66,000 persons, especially if they are senior citizens, can be paid of this less 10% of the overall dues, a huge issue can be resolved. However, laws are laws.

A lot may hinge on how quickly the CoC is able to find the suitors to DHFL and there are different options being worked out for the prospective investors to come up with their expressions of interest.

Option 1 covers the entire business of DHFL as a going concern. Option 2A will include retail assets, investments, unsecured loans and fixed assets etc. Option 2B includes construction finance loans, mortgage loans, corporate loans, and inter-corporate deposits, pass through certificates (PTCs) or security receipts and finally, Option 2C represents loans to projects relating to Slum Rehabilitation Authority (SRA), Mumbai.

The positive side to this whole story is there are already a number of entities interested in each of these options; 14 expressions of interest for Option 1; 21 for Option 2A, and 15 each for 2B and 2C.

Show us some love! Support our journalism by becoming a TNM Member - Click here.