Piramal Enterprises Ltd (PEL) appealed in March 2022 against the NCLAT (appeal tribunal) order reversing its right given to it by the NCLT to retain for itself recoveries made from avoidable transactions entered into by Dewan Housing Finance Corporation Ltd (DHFL), in the process of sanctioning its takeover of the embattled mortgage lender in September 2021.
On September 21, 2021, Piramal formally acquired the Bankrupt DHLL by making the cash payment of Rs14,700 crore to the creditors in accordance with the resolution plan.
DHFL had been acquired by PEL for a total consideration of Rs 34,250 crore which included an initial cash component of Rs 14,700 crore as above and the issuance of debt instruments of Rs 19,550 crore (10 year NCD at 6.75% per annum on a semi-annual basis) . DHFL had accumulated debts of around Rs 91,000 crore.
The DHFL resolution has been a rare feather in the ceiling of the nascent IBC law when in most other cases significant haircuts, often in the 90% to 95% range, had to be taken willy-nilly. by the banks.
What emerges now is the NCLT order also awarded for a token consideration of one rupee, or Rs 38,000 crore of avoidable transactions that DHFL had entered into. Simply put, these can be termed as fraudulent transactions or non-compliant transactions. In other words, Piramal would pocket, so to speak, any recovery large or small from these rogue or recalcitrant loans.
There were some 63 ‘moons’ — people who had invested Rs 200 crore or more in DHFL debentures — who were exasperated by this apparent largesse to Piramal and alleged a love affair. Equally persuasive was the defending Defense Committee of Creditors (COC) argument that these were portfolios of failed DHCP loans and that no value could be attributed to them, let alone forcefully on Piramal.
The assignment of failed loans almost free was actually a PEL sweetener that was showing up to rehabilitate DHFL.
The appeals court ruled out this aspect of the NCLT order, i.e. whether PEL could pocket future recoveries from avoidable transactions. Injured, PEL in turn appealed the order of the Court of Appeal to the Supreme Court.
We must appreciate the position of PEL. It practically became the ‘bad bank’ by accepting the assignment of failed loans totaling Rs 38,000 crore.
Bad banks have to work extremely hard to shoot rogue or recalcitrant borrowers, who for good measure hide behind dodgy front companies sometimes in secret and clandestine foreign destinations on the OECD list of tax havens. Their success rate at the event is very low.
It is easy to allege an amicable agreement by COC in favor of PEL. At the same time, one cannot ignore the plight of the DHFL debenture holders who hold on to the box even as the banks whose interests are normally served by CoC have gotten something.
The 50:50 arrangement could be a solution
The Goldilocks solution is to induce the PEL not to monopolize everything it collects, but a good part of it. Why not a 50/50 arrangement? If Piramal were told that they have to deal with avoidable transactions as a labor of love, they would completely lose interest in this unpleasant work which, moreover, would not benefit them in any way.
In a 50/50 arrangement, they would keep a good portion of the recovery and the other creditors would get something thanks to Piramal’s efforts. This should be a win-win, Goldilocks solution.
It would be interesting to see what the honorable Supreme Court has to say about this, but it has sweeping powers, including that of section 142, to dispense complete justice traveling beyond the four corners of the BAC . In his infinite wisdom, he could order a 40:60 formula or a 45:55 formula, but whatever he does, he must entice Piramal as much as he does to cheer up other discouraged DHFL creditors, including debentureholders who naively believed the moon would shine on them little realizing that the debentures guaranteed by DHFL were bound to be of suspect security.
It is axiomatic that no one does a job unless he has rewards for his effort and work. The NCLT thought the reward should be 100%. This is where it went too far. She should have tempered her concern for PEL with an equivalent concern for DHFL’s other creditors. It is surprising that the Court of Appeal, instead of correcting this undeserved bias in favor of PEL, threw the baby out with the bathwater.
DHFL promoters must be brought to justice
That said, we must also ensure that the promoters of the DHFL are brought to justice. DHFL’s resolution should not mean absolution for their sins of omission and commission, including accusations of embezzlement through dodgy companies, euphemistically described as avoidable transactions.
Vijay Mallya, the first fugitive, is shot. The same goes for the DHFL promoters. Only the successful disgorgement of the ill-gotten wealth of these crooks would restore confidence in the Indian judicial and banking system. Otherwise, the fatalistic and pessimistic banking joke—you borrow in lakhs, you have problems with the bank; you borrow in crores, the bank has problems with you— will continue to resonate with people and haunt the powers that be.
Unfortunately, the IBC has been obsessed with dethroning crooks from their saddles, leaving the more difficult task of retrieving their loot to others. Comprehensive justice also requires horizontal justice. Home borrowers repay every rupee of their loan with interest. They feel offended when they see industrialists thumbing their noses at the banks.
PS: By the way, is it possible that Piramal has stumbled upon something that could give them the power to unravel avoidable DHFL trades ultimately leading to some takeover? This is why they appealed the order of the Court of Appeal to the SC. Far from blaming themselves, the other creditors must be happy because they would get something if the SC called on Piramal to fairly share the spoils 50:50 or 40:60 or whatever.
(S Murlidharan is a seasoned columnist and tweets @smurlidharan. Views are personal)
(To receive our daily E-paper on WhatsApp, please Click here. We allow the PDF of the document to be shared on WhatsApp and other social media platforms.)
Posted: Friday, March 4, 2022, 12:59 PM IST