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DHFL scam decoded: Fake borrowers, shell companies, and billions lost

The scam involved accusations of loan fraud, money laundering, and a web of fake borrowers and shell companies.

Kapil Wadhawan, DHFL

Sunainaa Chadha NEW DELHI
The Dewan Housing Finance Corporation (DHFL), a prominent housing finance company in India, has been embroiled in a massive financial scandal worth over Rs 34,000 crore (approximately $4.3 billion). The scam involved accusations of loan fraud, money laundering, and a web of fake borrowers and shell companies.

Who was involved?

DHFL: A prominent Non-Banking Financial Company (NBFC) that provided housing loans in India. The primary function of the NBFC is to issue home loans to lower and middle-income Indian groups. DHFL is considered one of the earliest housing lenders in India.

Wadhawan brothers: Kapil and Dheeraj Wadhawan, the former founders and promoters of DHFL. The Wadhawan brothers commanded important roles on DHFL’s board, with Kapil being the Chairman and Managing Director, while Dheeraj was the non-executive Director of the company.

Multiple banks: A consortium of 17 Indian banks had loaned money to DHFL.

The Unraveling:

The cracks in DHFL's facade began to show in 2019 when media reports surfaced alleging irregularities in loan disbursements.  The allegations prompted a closer look, leading to a special audit by KPMG for the period 2016-2019. What the audit unearthed was a scheme of colossal proportions.

In 2022, the Union Bank of India, part of a consortium of 17 banks that had loaned money to DHFL, filed a First Information Report (FIR) alleging a conspiracy to cheat and manipulate financial records.  The bank claimed DHFL had borrowed Rs 42,000 crore, with over Rs 34,000 crore outstanding.

A special audit by KPMG from 2016 to 2019 revealed shocking details:

Fake Borrowers, Real Fraud:  At the heart of the scam lay a systematic manipulation of loan disbursements. The audit revealed that DHFL allegedly disbursed over Rs 29,000 crore to 66 entities that were connected to the company's promoters, the Wadhawan brothers. These loans bypassed standard loan appraisal processes, lacked proper scrutiny, and often lacked adequate security.  Essentially, the money was being lent to entities controlled by the promoters themselves, raising serious questions about conflict of interest and potential self-dealing.

Shell Game: The investigation further exposed a network of 87 shell companies allegedly created by the Wadhawan brothers. These companies existed only on paper, with no active business operations.  Their sole purpose, investigators believe, was to siphon off funds from the fraudulently obtained loans.  Over Rs 11,000 crore was reportedly transferred to these shell companies, diverted for personal or business use by the promoters.  Reports suggest the diverted funds were used for extravagant purchases, including expensive paintings by the Wadhawan brothers themselves.

Virtual Branch, Real Theft: Adding another layer of deceit, the investigation uncovered a fictitious "Bandra Branch" within DHFL's software system.  This branch, existing only in the digital realm, was allegedly used to channel funds towards the shell companies.  The existence of a fake branch within the company's own systems further demonstrates the elaborate and premeditated nature of the scam.

Fake Borrowers, Government Scheme Abuse:  The CBI investigation alleges the creation of lakhs of fake borrowers using real customer data. These fake accounts were not only used to borrow over Rs 14,000 crore but were also allegedly leveraged against the Pradhan Mantri Awas Yojana (PMAY), a government scheme aimed at providing affordable housing for the underprivileged. By manipulating the system with fake borrowers, DHFL is suspected of illegally claiming Rs 1,880 crore in interest subsidies from the government. 

Money laundering: The diverted funds are suspected to have been used for various purposes, potentially including investments in real estate and other assets.
Impact of the scam:

Impact: This elaborate scam resulted in massive losses for the bank consortium and eroded trust in the Indian financial system.  The Wadhawan brothers have been arrested and are facing trial. Investigations and efforts to recover the lost funds are ongoing.

Loss to Banks: The scam resulted in a loss of over Rs 34,000 crore (approximately $4.3 billion) to the consortium of banks that had loaned money to DHFL.
Impact on borrowers: Borrowers who had taken legitimate loans from DHFL faced uncertainty due to the company's financial woes.

Current Situation: Following the revelations, the CBI arrested the Wadhawan brothers in 2022 on charges of criminal conspiracy and fraud.  They are currently facing trial.  Efforts are underway to recover the lost funds, with authorities attaching assets belonging to the Wadhawan brothers.  The Securities and Exchange Board of India (SEBI) has also imposed penalties on the company and its promoters for non-compliance with disclosure norms.

What is the latest? The Central Bureau of Investigation (CBI) arrested Dheeraj Wadhawan in May 2024 in connection with the Rs 34,000 crore bank fraud case. He was already chargesheeted by the CBI in 2022 for his alleged involvement in the scam. It's important to note that Dheeraj Wadhawan was previously arrested in connection with the Yes Bank corruption probe. This development signifies continued action from the authorities in the DHFL case. However, it's important to remember that the overall investigation and legal proceedings are still ongoing. 

 Here's how you can be aware of such scams and protect yourself:

Beware of easy loans: If a loan offer seems too good to be true, with minimal paperwork or unusually low-interest rates, it probably is. Do your research and compare loan terms from multiple lenders before committing.

Understand the loan agreement: Read and understand all the terms and conditions of the loan agreement before signing. Don't hesitate to ask questions if anything is unclear.

Verify loan disbursement: Ensure the loan amount is deposited into your designated account directly. Be wary of requests to disburse funds to a third party.

Maintain credit awareness: Monitor your credit report regularly to ensure no unauthorized loans are taken in your name, as seen with the DHFL fake borrower case.

Choose reputable institutions: Do your research and choose established and well-regulated financial institutions with a good track record.

Verify Information: Double-check all information provided by the financial institution. Be wary of inconsistencies or discrepancies.

Report suspicious activity: If you suspect any fraudulent activity, report it immediately to the financial institution and relevant authorities.

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First Published: May 16 2024 | 4:12 PM IST

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