Piramal, DHFL merger: The road ahead remains bumpy due to legal hurdles

Former promoter moves Supreme Court, debt investor 63 moons vows to move court to recover dues

Even as Piramal Enterprises is all set to merge its latest acquisition, Dewan Housing Finance Corporation (DHFL), with its own financial services business, its fight to buy the bankrupt company is far from over.

The acquisition, awaiting the market regulator’s clearance, will create a financial services giant with total assets of Rs 1.27 trillion and revenues of  Rs 16,000 crore (see chart). The acquisition has already received the green signal from the Reserve Bank of India, the Competition Commission of India and the National Company Law Tribunal (NCLT).

But legal experts said the road ahead remains bumpy because there are still a few important legal hurdles that Piramal needs to clear. This, however, may not be a big dampener for the Piramals as they already fought a bitter bidding war with US fund house, Oaktree.

Ajay Piramal, chairman of Piramal Enterprises, said the DHFL acquisition fits well into its overall retail strategy because it will enable the group to achieve scale and leverage the platform to cross-sell, significantly change its loan mix and lower cost of borrowings. “Lower acquisition borrowing costs as well as the benefit from loan book diversification will result in a possible ratings upgrade post completion of the acquisition,” he said in a post-March quarter results analyst conference.

By diversifying its loan book, Piramal Enterprises is bringing down its wholesale portfolio, which has reduced by 23 per cent since March 2019 to Rs 39,000 crore. “Our top 10 exposures have reduced 28 per cent since March 2019 from Rs 18,400 crore to Rs 13,300 crore,” Piramal said.

With a clear focus on retail customers, DHFL will be the right fit for Piramal Capital. DHFL also has a larger wholesale book, including loans to builders and real estate companies. “None of the accounts (of Piramal Capital) is now greater than 15 per cent of net worth and only four accounts are greater than 6 per cent of the net worth. The second half of last year played out better than what we had envisaged,” Piramal said. This gave the group the confidence to make a Rs 36,000-crore bet on DHFL.

The acquisition comes at a time when the real estate sector has witnessed a revival since October 2020 driven by pent-up demand, changing customer preferences and government initiatives, especially in Maharashtra’s stamp duty cuts.

Once Piramal Enterprises merges DHFL with its financial services arm, Piramal Capital, it will hive off the entire company as a separate listed entity, banking sources said. The entire plan will take another nine to 12 months to fructify owing to litigation, with former DHFL promoter Kapil Wadhawan moving the Supreme Court because he wants DHFL’s lenders to consider his offer for the company which was filed under 12A of IBC (Insolvency and Bankruptcy Code) that gives promoters an option to retain the company — provided 90 per cent of the lenders agree. While NCLT asked the DHFL resolution professional to table Wadha­wan’s offer before the Committee of Creditors (CoC), the resolution professional moved the National Company Law Appellate Tribunal, which stayed the NCLT order. Wadhawan has now moved the Supreme Court where the matter is pending.

Legal experts said it will be difficult for Wadhawan considering that the commercial wisdom of the CoC has been accorded importance and recognised through a series of Supreme Court judgments. In several other cases in the past where the promoters have litigated, it has only caused delay and they have not been successful. “The only way the lenders could have accepted the promoter’s plan was to not approve a resolution plan and cause withdrawal of the corporate debtor under section 12A,” said Ajay Shaw, partner of DSK Legal.

Legal experts said the NCLT has set a dangerous precedent by giving Wadhawan the opportunity, given that he stands accused of fraud involving DHFL. The order has already triggered a similar settlement offer from Jaypee Infratech promoter, Manoj Gaur, which the CoC has rejected.

“From a realistic standpoint, the NCLT's order invariably paves the way for more errant promoters to get back their business for a cheaper price through settlement offers, as is the case with the DHFL debt resolution. However, this order dilutes IBC’s Section 29A that prevents promoters from taking back their companies after running them aground. Given the lapses found in the firm's balance sheets and Wadhawan being in prison, we have all the more reason to believe that Wadhawan’s offer of selling his assets for the settlement could be misleading in the absence of any financial proof and is merely a tactic to beat Piramal group's resolution plan,” said Sonam Chandwani, managing partner at KS Legal & Associates.

Another fight, however, is brewing at 63 moons, a Mumbai-based company that has threatened to move the tribunal against the NCLT clearing the Piramal deal. 63 moons had invested Rs 200 crore in DHFL’s non-convertible debentures and was set to lose 65 per cent to 75 per cent of its investments under Pira­mal’s debt resolution plan.

According to 63 moons, the administrator of DHFL has filed applications for recovery of almost  Rs 45,000 crore under Section 66 of the IBC against DHFL's promoters and other persons on account of their fraud against the creditors. This amount of Rs 45,000 crore, says 63 moons, must come to the defrauded parties that are creditors and not to the Piramals. Ascribing a value of only Rs 1 to the recoveries of fraud where claims are in excess of Rs 45,000 crore creates unjust enrichment of Piramal at the cost of creditors, the company argued.

Piramal has bid only for the current value of DHFL, which does not include these amounts that were taken away fraudulently. Hence, the recoveries must come to the creditors only. With several provident fund investors from Uttar Pradesh government corporations also awaiting their dues, this argument may find favour with the courts.