KPMG forensic audit finds fund diversion from DHFL to promoter-led entities

A forensic audit conducted by KPMG on Dewan Housing Finance (DHFL) has confirmed siphoning of funds from the beleaguered non-banking financial company (NBFC) to a host of promoter-led entities. The forensic audit report will make it difficult for banks to clear a resolution plan till the company clears itself of these charges, said a banker.

The report, reviewed by Business Standard, says KPMG was asked to conduct a special review for the period between April 2015 and March 2019 of DHFL’s books to ascertain end-use of loans taken from public sector banks and identify diversion of funds, if any.

The forensic audit report said DHFL could not provide a robust and well-defined tracking mechanism for end-use of funds disbursed by the company.

The auditor found evidence that of the 40 entities related to DHFL, 25 had reported minimal operations in terms of net worth, income, and profit before tax of less than Rs 1 lakh. But were disbursed loans and inter-corporate deposits (ICDs) amounting to Rs 14,361 crore, with the outstanding at Rs 13,714 crore till the end of the audit.

“These entities may not qualify as related parties under the Companies Act, 2013, and hence, such transactions may have not required clearance from the audit committee. However, these transactions should be examined further,” the forensic report said.

Citing an example, the report said Sudhakar Shetty of Sahana Group was a shareholder in four out of these 40 entities and received loan disbursements of Rs 2,912 crore and an outstanding of Rs 2,895 crore. These entities were also disbursed ICDs worth Rs 1,572 crore and an outstanding of Rs 1,217 crore.

Of the 40 entities, six companies (with commonalities to DHFL promoters) had invested Rs 2,885 crore in the entities owned by Shetty. Loan disbursed to these six entities was Rs 3,850 crore and ICDs were issued worth Rs 355 crore. There was an outstanding of Rs 3,849 crore from these six entities.

When contacted, a DHFL spokesperson said the company is committed to working with its lenders on a debt resolution plan and did not specifically answer a question on the KPMG audit report.  A KPMG spokesperson declined to comment.

The report said DHFL offered preferential disbursement terms to 13 entities, with disbursements amounting to Rs 7,491 crore, with an outstanding of Rs 5,549 crore.

Preferential repayment terms of principal moratorium was offered to 21 entities, with disbursement at Rs 11,313 crore and an outstanding of Rs 9,318 crore. Interest moratorium of up to 15 months was given to 17 entities, with disbursement at Rs 8,970 crore and an outstanding of Rs 8,227 crore.

Though 15 companies defaulted on loans to DHFL for more than 90 days, these entities were still classified as standard assets by the NBFC, as on December 2018. Classification of these companies as on March 2019 could not be ascertained due to non-availability of data. Loan outstanding to these 15 companies was Rs 7,639 crore.

The ICDs issued to another three entities with principal amount of Rs 653 crore, with receivable of Rs 456 crore as on December 2018 rolled over from two months to 18 months. But these accounts were not classified as sub-standard.

The report said repayments of 28 entities amounting to Rs 1,941 crore could not be traced in DHFL’s bank account statements and it may have implications on the adequacy of non-performing asset provisioning for relevant accounting years. The repayment issue was also raised by the auditor and it raises suspicion on the completeness of information provided by the company for review. “DHFL did not provide any appropriate explanation for ‘non-traceable’ payments,” the report said.

Will review KPMG report: DHFL

The board of directors of DHFL took cognizance of the key observations from the draft report prepared by KPMG, who were appointed by Union Bank of India, the lead banker of the consortium, on behalf of all the members of the consortium. “The board has directed the company to review key observations and also present a detailed response to the said observations before the audit committee. The board also directed the company to share the responses with the lenders,” the company said.

Report findings

• The report says KPMG was asked to conduct a special review by Union Bank of India for the period between April 2015 and March 2019 of DHFL’s books to ascertain end-use of loans taken from public sector banks and identify diversion of funds, if any
• The forensic audit report said DHFL could not provide a robust and well-defined tracking mechanism for end-use of funds disbursed by the firm
• The auditor found evidence that of the 40 entities related to DHFL, 25 had reported minimal operations in terms of net worth, income, and profit before tax of less than Rs 1 lakh