Piramal contests US-based Oaktree Capital's offer for bankrupt DHFL

The possible acquisition of Dewan Housing Finance Corporation (DHFL) by US-based Oaktree Capital will not be able to meet the capital adequacy norms prescribed by the National Housing Board (NHB) and the Reserve Bank of India (RBI), Ajay Piramal, chairman of the Piramal group, has written to the central bank.

The scathing letter comes days before the lenders vote on the resolution plans submitted by Oaktree, Piramal, and the Adani group for the failed housing finance company. While Oaktree has proposed to keep DHFL as a standalone entity, Piramal plans to merge it with its financial services business, boosting the equity base of DHFL significantly. In the last meeting of the lenders, Piramal’s offer had scored higher than Oaktree’s. The voting will end on January 14.

In his communication to the RBI, Piramal said a housing finance company (HFC) is required to comply with the capital adequacy requirements in terms of both tier I and tier II 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 risks as well as the credit risk that HFCs are exposed to.

In June 2019, the NHB tightened the capital adequacy norms and said the minimum tier I capital adequacy must be maintained by HFCs. It was increased from 6 per cent to 10 per cent, while the overall capital adequacy requirement was increased from 12 per cent to 15 per cent in a graded manner by March 2022. These increased capital levels were to ensure HFCs are better placed to absorb asset-side risks in the future. The tier I capital of DHFL has already been completely written off and the existing lenders will be taking a substantial write-down on their loans. Therefore, Piramal said post the resolution process, DHFL will require substantial tier I infusion to build a sustainable business and truly comply with the capital adequacy norms.

Piramal said the resolution plan submitted by Oaktree suggested that it was proposing to infuse fresh capital of only Rs 1,000 crores over a period of 12 months after the approval of the National Company Law Tribunal in DHFL through either equity, non-convertible debentures (NCDs) or subordinated debt. 

Further, Oaktree’s resolution plan also provides that NCDs of Rs 21,000 crore will be issued by DHFL to financial creditors as senior debt. Oaktree’s resolution plan also provides that DHFL will have subordinated debt amounting to Rs 9,500 crore due to Oaktree.

With this, it is evident that Oaktree was undertaking only a balance sheet restructuring and there was no other concrete tier I capital infusion on day one to enhance ‘real’ capital adequacy for the business to meet true minimum capital adequacy requirements for the business, Piramal said. “Even the proposed infusion of Rs 1,000 crore seems to be only from a scoring perspective as provided in the evaluation matrix prescribed under the bankruptcy process. On this basis, it is clear that the capital adequacy requirements will neither be fulfilled in spirit or law upon implementation of the resolution plan submitted by Oaktree and this important aspect has been completely missed by the Administrator and its advisors,” Piramal said.

The failure to meet the capital adequacy provisioning requirements will result in the business of DHFL being in contravention of applicable laws and hence this makes Oaktree’s resolution plan non-compliant with the requirements of Sections 30(2)(e) of the Insolvency and Bankruptcy Code and cannot be presented to the CoC for its approval under Section 30(3) of the Code, Piramal said.

Earlier, Oaktree had raised objections, saying its offer was being undervalued by Rs 2,700 crore, thus giving an upper hand to Piramal. But a banker said Oaktree's offer was under a cloud as it would not get the regulator’s approval to hold a stake in DHFL’s insurance venture. Also, as the offer of additional Rs 1,700 crore came after the bid submission deadline, the CoC has not considered it while scoring the offers.

Spokespersons of both Oaktree and Piramal declined to comment.