The Indian public sector banks have voted in favour of Piramal’s debt resolution plan for Dewan Housing Finance Corporation (DHFL) today thus paving the way for the turnaround of the bankrupt housing finance company which was in bankruptcy court since December 2019.
A banker said US-based fund Oaktree’s offer was too “complicated” and there were too many holes in its plans including misleading information on ratings of the future bonds to be issued to banks. Piramal plans to merge its financial services business with DHFL and retain all employees. With all the PSU banks voting in favour of Piramal’s plan, it succeeded in getting the requisite 66 per cent voting, the source said.
DHFL was sent to bankruptcy court in December 2019 after the company defaulted to its lenders on debt worth Rs 90,000 crore. The promoters of the company are currently in jail and are facing money laundering charges.
Piramal’s plan will lead to recovery of Rs 37,250 crore over the next five years for DHFL’s lenders which includes provident funds, fixed deposit holders and foreign note holders. Of its total payout, Piramal will give Rs 12,700 crore as upfront cash to the lenders. The higher upfront cash tilted the scales in Piramal’s favour and was scored higher by the CoC.
As per Piramal plan, the existing shareholders of DHFL will get zero value. The fixed deposit holders have not voted for both plans. The third bidder, Adani’s offer was too low and was not considered.
Oaktree, which had offered an additional Rs 1,700 crore after the bidding deadline, did not find favour with the lenders.
The CoC will submit the Piramal’s plan for the approval of National Company Law Tribunal (NCLT). Piramal Capital and Housing Finance merger with DHFL will be effective from the date NCLT approves the plan, thus adding 4,500 employees to Piramal stable and investing Rs 10,000 crore of Piramal Capital’s equity in the merged entity.
For Piramal, the merger with DHFL makes sense as it would give it stable cash flow from retail customers at a time when its own corporate loan portfolio is finding it tough due to real estate sector slowdown.
Lenders are now waiting for Oaktree’s next move considering that it warned that it would take legal action if its offer was not approved. In a letter to the lenders just before voting, Oaktree had said its offer is being undervalued by Rs 2,700 crore by the CoC and its advisors thus giving an upper hand to the Piramal group.
This includes Rs 1,000 crore set aside by Oaktree from the future sale of DHFL’s life insurance venture for the lenders and Rs 1,700 crore of additional interest income which was offered by the US firm to the lenders two days after the deadline to submit bids ended on December 22.
But a lender said Oaktree’s offer was under cloud as it will not get the insurance regulator’s approval to hold stake in an insurance venture as the acquisition will breach foreign direct investment (FDI) ceiling as 51 per cent stake is already owned by a foreign partner – Pramerica. Besides, Enam backed out of AIF (alternative investment fund) structure proposed by Oaktree after the bid was submitted thus spooking the lenders.
At the same time, as the offer of additional Rs 1,700 crore came after the bid submission deadline, the CoC had not considered it while scoring the offers but mentioned it as a footnote in the scorecard.
Oaktree also said based on a fair market valuation, the fair market value (FMV) of its financial proposal against the proposal of Piramal is higher by Rs 4,503 crores.
But Piramal raised objections to Oaktree’s plan saying it will not be able to meet the capital adequacy norms prescribed by both the National Housing Board (NHB) and the Reserve Bank of India (RBI), Ajay Piramal, chairman of Piramal group, and a bidder for DHFL, wrote in a letter to the Reserve Bank of India.
Piramal said a housing finance company is required to comply with the capital adequacy requirements in terms of both Tier one and Tier two capital and CAR is one of the important parameters from the point of view of solvency of HFCs and their protection from untoward events which arise as a result of liquidity risk as well as the credit risk that the HFCs are exposed to.