21 August 2019: The resolution plan for Dewan Housing Finance (DHFL) that lenders are now examining is the best one under the circumstances, said Rajkiran Rai G, managing director and chief executive officer, Union Bank of India (UBI), the lead bank in the consortium of lenders to DHFL. Taking temporary control of the mortgage firm is an option banks are considering and they are still waiting for mutual funds (MFs) to sign the inter creditor agreement (ICA), Rai added.
“Even if the banks acquire equity, it will be a very short-term thing. If we are not able to get a good investor at this point of time, then maybe, but it will not be a long-term proposition. It may happen. It is one of the ideas,” he said on the sidelines of Fibac 2019, an annual event organised by the Federation of Indian Chambers of Commerce & Industry (Ficci) and Indian Banks’ Association (IBA).
Rai said the company has been counting stake sale among its options right from the beginning of the resolution process, but the process takes time because likely investors look for clarity. He said it is yet unclear if MFs will end up joining the resolution process formally. “As such, now we have no idea (about whether Sebi will allow MFs to sign ICA), but then definitely it is a regulator-to-regulator discussion,” Rai observed, referring to discussions between the RBI and the Sebi.
The resolution process in the case of DHFL is a complex one as it is the first financial company being resolved under the RBI’s June 7 circular and there are multiple categories of creditors involved — banks, insurance companies, MFs and pension funds. Rai explained that the way MFs are structured and the kind of investment they do, for them to implement a resolution plan to the satisfaction of their investors is not easy.
“For banks, it’s a very normal thing because our rules permit it, our regulator understands it. MFs are operating in a totally different area. Suppose, a resolution plan involves a payout over 10 years, how will a mutual fund handle it?” Rai said, adding, “The only thing I can say is that the resolution plan which is under discussion can be the best plan under the given circumstances.”
Some features of the June 7 circular are not applicable to the resolution process for DHFL as a financial company cannot be taken to the insolvency courts. For companies from other sectors, the circular prescribes either bankruptcy proceedings or a high provisioning requirement. “The 180-day stipulation does not apply here because it cannot go to NCLT. I think it may not go that far (of getting RBI involved after 180 days elapse),” Rai said.