IL&FS scam: Government to seek ban on Deloitte, KPMG

Government moves NCLT to seek 5-year ban on Deloitte, KPMG affiliate BSR

The proposed ban, could prevent the two firms from auditing any listed or unlisted company for five years.

The central government on Monday took the unprecedented step of seeking a ban on auditors Deloitte Haskins & Sells and BSR & Co for their alleged role in helping hide bad loans at the bankrupt IL&FS Financial Services.

The government sought a five-year ban under Section 140 of the Companies Act, the first time it has invoked this provision to debar an auditor. The proposed ban, if accepted, would prevent the two firms from auditing any listed or unlisted company, including banks and non-banking financial companies (NBFCs), for five years.

The National Company Law Tribunal, where the application was moved, asked the government to dispatch the 800-page chargesheet filed by the Serious Fraud Investigation Office to the audit firms.

This, after the lawyers representing the audit firms and some of their executives accused in the case said they have not been served with the documents including the chargesheet and that they need time to prepare and respond to the ministry of corporate affairs’ (MCA) allegations.

The government lawyers conceded that they had served an electronic version of the chargesheet to BSR & Co on Monday morning and that they are yet to send the documents to Deloitte. The NCLT gave the audit firms 10 days and set the next date of hearing on June 21.

The Allegations

There have only been a few occasions where an auditor has been barred from practicing. Last year, the Securities and Exchange Board of India (Sebi) banned PwC for two years after it found the auditor guilty in the Satyam Computer fraud case. However, the ban did not extend to unlisted companies.

Last Monday, Reserve Bank of India banned EY member firm SR Batliboi from auditing commercial banks for one year starting April 1, 2020, citing lapse in statutory audit
Government representatives told the NCLT that it was the auditor’s duty to ensure that the loans and advances of an NBFC are properly secured.

They alleged that in IFIN’s case, the divergence between the net worth of the borrower and the amount borrowed was huge. For instance, one company which had borrowed Rs 385 crore had a net worth of only Rs 85 crore, while another with a net worth of Rs 9 crore had managed to borrow Rs 223 crore.
The lawyers argued that the auditors were aware of funding of defaulting borrowers for principal and interest payments.

“The loans were transferred by mere book entry and resulted in the closure of old loans. The new loans didn’t require provisioning or recognition as NPA (non-performing asset). Hence the assignment of the same was prejudicial to the interest of the company. The auditors having the knowledge of the same had not reported the same in the audit report,” the SFIO chargesheet alleged.

The Serious Fraud Investigation Office alleged that the auditors suppressed the information of various loans, inflated profits and presented a rosy picture.
“Investigations revealed that the auditors, along with their engagement teams of IFIN did not perform their duties diligently. The auditors, despite having the knowledge of the funding of the defaulting borrowers for principal and interest payments, failed to report in the auditors’ report for FY 2013-14 to FY 2017-18,” the agency alleged.

The lawyers representing Deloitte, however, argued that the firm was no longer the auditor of IFIN and hence the Section 140 of the Companies Act does not apply to them.

IFIN was audited by KPMG affiliate BSR & Co in 2018-19 and jointly by BSR and Deloitte Haskins & Sells in 2017-18. Deloitte was the sole auditor of IFIN in 2015-16 and 2016-17.

The government has also made the Reserve Bank of India (RBI), Sebi and the Institute of Chartered Accountants of India (ICAI) as respondents in the case. This, said the government, was to make sure that if these auditors are banned, the execution of the order is done effectively by the respective regulator.

Some of the senior executives in Deloitte and BSR who were part of the IFIN audit are also respondents in the case.
Sanjay Shorey, joint legal director in the ministry of corporate affairs, represented the MCA while Janak Dwarkadas, senior counsel, appeared for Deloitte.

DHFL repays Rs 45 crore in debt; completes stake sale in Aadhar Housing

DHFL paid Rs 10 crore in interest on four non-convertible debentures and a principal of Rs 35 crore on one of them.

Dewan Housing Finance Ltd (DHFL) has paid about Rs 45 crore in interest and principal on certain debt instruments due on Monday.

DHFL paid Rs 10 crore in interest on four non-convertible debentures (NCD) and principal of Rs 35 crore on one of them. DHFL share closed seven per cent higher at Rs 89.5 per share on BSE.

DHFL also completed sale its 9.15 per cent stake in Adhar Housing Finance Ltd to entity controlled by private equity group Blackstone. The value of DHFL stake in Ahdhar is in excess of Rs 200 crore. DHFL will use proceeds from sale of stake in Adhar Housing Finance to repay dues on debt instruments.

Wadhawan Global Capital Limited and other sellers including Kapil Wadhawan, and Dheeraj Wadhawan all forming part of Promoter & Promoter Group of DHFL have completely exited Aadhar with effect from today.

Two major credit ratings agencies – ICRA, an affiliate of Moody’s, and Standard & Poor’s local unit Crisil – last week categorised DHFL’s commercial paper at default levels for missing bond payments.

Micro housing finance companies choke on acute fund crunch post DHFL crisis

In the last few months, many micro housing companies had already shrunk their lending operations by 40-45% in the absence of funding

Micro housing finance companies are finding it increasingly difficult to raise funds with the crisis at Dewan Housing Finance Limited (DHFL) worsening.

During the past few years, the push for affordable housing has led to the mushrooming of several micro housing finance firms, which mostly provide loans to the informal sector. The average loan size varies between Rs 5-10 lakh.

After the crisis at Infrastructure Leasing & Financial Services (IL&FS) in September 2018, the cost of funds for micro housing companies had gone up by around 100-150 basis points. And now, after the DHFL crisis, banks and financial institutions have almost stopped lending, according to the companies.

“After the IL&FS crisis, it was tough to get funding, but now it has become impossible. The problem is acute for those who are not capitalised strongly and widely leveraged,” said Anil Mehta, MD and CEO, India Shelter Finance Corporation.

In the last few months, many micro housing companies have already shrunk their lending operations by 40-45 per cent in the absence of funding.

“The immediate impact of the present crisis is further increase in cost of funds. However, the bigger problem is that the banks are not coming forward for lending,” according to C V Rao, managing director (MD) and chief executive officer (CEO), Nivara Home Finance, a recent entrant in the micro home loan market.

According to data from the National Housing Bank (NHB), there are about 100 housing finance companies (HFCs) operating in India currently. Within the past two to three years, close to 15-20 companies have come up with a focus on lending to the informal sector, where borrowers typically don’t possess the requisite documents to avail of loans from banks or bigger financial institutions.

According to a senior official at a micro housing finance company, a number of new entrant, who are not well capitalized might have to shut shops in the next six months, if the liquidity situation doesn’t improve.

In the past one year, there has been a particularly steep growth in micro housing loans, giving loans to people engaged in informal sector, and who do not possess adequate documents to avail loan from banks. A typical borrower could be an artisan, driver, domestic help or daily wage-earner. What differentiates the loan from normal housing loan is the monthly repayment cycle, along with tight monitoring of the portfolio through personal contact — a model similar to microfinance. However, unlike the microfinance model, the loan in the micro housing sector is generally granted with collateral. The interest rates charged in the loans are about 5-6 per cent higher than the prevailing market rates.

Jaypee Infra insolvency: Lenders reject NBCC bid — key details

A majority of Jaypee Infratech’s lenders are understood to have voted against NBCC’s bid but most homebuyers wanted the state-owned company to take over the bankrupt realty firm, sources said.

Bankers had reservations with the NBCC’s bid because of certain concessions sought by the state-owned firm related to future tax liabilities and approval from development authority YEIDA for transfer of land and Yamuna Expressway.

The development comes hours after the National Company Law Appellate Tribunal (NCLAT) on Monday clarified that it has not barred lenders from voting against NBCC’s resolution plan.

While the exact percentage of votes in favour and against the NBCC’s resolution plan was not disclosed due to the order of the NCLAT, sources said the bid possibly has not mustered the requisite nod of two-thirds of lenders and buyers.

The voting result is to be placed before the NCLAT.

In most bankruptcy proceedings, lenders have the right to vote for or against a resolution plan for a debt-laden firm. In the case of realty firms, homebuyers also have voting rights at par with lenders.

As many as 13 banks and over 23,000 homebuyers have voting rights in the committee of creditors (CoC) of Jaypee Infratech. Homebuyers represent 59.26% of voting rights, while banks have the rest. For approval of any resolution plan, at least 66% votes should be in favour.

Earlier on Monday, the NCLAT clarified that it has not barred lenders from voting against NBCC’s resolution plan.

Hearing a batch of applications filed by banks seeking permission to vote against the NBCC bid, the NCLAT said, “We have not said do not vote against. We have said the CoC may not file final report on the decision, if it is rejected”.

The NCLAT also directed interim resolution professional (IRP) Anuj Jain to report the outcome of voting process directly to it.

This is the second round of bidding process to revive Jaypee Infratech, which went into insolvency in August 2017 after the National Company Law Tribunal (NCLT) admitted an application filed by an IDBI Bank-led consortium.

In the first round of insolvency proceedings conducted last year, the `7,350-crore bid of Lakshadweep, part of Suraksha Group, was rejected by lenders. Later in October 2018, the IRP started the second round of bidding process. Last month, the CoC rejected Suraksha Realty’s bid.

On May 30, the CoC decided to put on vote NBCC’s bid even as bankers had reservations against the proposal. The voting process, which started on May 31, concluded on Monday.

Last week, lenders filed a petition before the NCLAT to allow them to vote against NBCC’s bid in an ongoing insolvency process.

A three-member bench headed by chairman Justice S J Mukhopadhaya directed that the voting process should be completed.

“As the voting is on and is likely to be completed on Monday by 5 pm, we are not inclined to pass any order,” said NCLAT in its order earlier on Monday.

During the proceedings, senior advocate Salman Khurshid, who was representing the lenders, informed NCLAT about the conditions put by the NBCC in the resolution plan.

In their plea, lenders sought that secured financial creditors should be permitted to vote against NBCC’s resolution plan or bid. They also pleaded that the IRP and the CoC should be allowed to explore other alternatives such as inviting fresh expression of interest and considering bids that already have been submitted by other companies. The Adani group recently made an unsolicited and non-binding bid to acquire Jaypee Infratech. During the hearing, the appellate tribunal clarified that votes of the absentees would not be counted in the total voting percentage.

“We make it clear that if any of the financial creditors remain absent in voting, their voting percentage shall not be counted for the purpose of counting voting share in terms of decision already passed by this appellate tribunal,” it said.

Further, it directed the IRP to report about the outcome of the order directly to it instead of Allahabad bench of the NCLT, which is supervising insolvency resolution process of Jaypee Infratech.

The NCLAT has also advanced the date of next hearing to July 2 from July 17.

During the proceedings, NCLAT told the lenders that the process must go on as stake of 23,000 flat buyers are concerned.

The appellate tribunal told bankers that Jaypee Infratech is not the owner of the land and has taken it on on lease from the Yamuna Expressway Industrial Development Authority (YEIDA).

“We want a resolution. Somehow it should come,” NCLAT observed.

FPI investments in bond market hit $1.5 billion after May 23

FPIs invested $786.72 million into bonds in the first four trading sessions in June, taking the aggregate inflows to over $1.5 billion after the BJP’s win on May 23.

Foreign portfolio investors (FPI) continue to invest in the Indian bond markets after the Lok Sabha election results as they expect favourable economic reforms from the new government. FPIs invested $786.72 million into bonds in the first four trading sessions in June, taking the aggregate inflows to over $1.5 billion after the BJP’s win on May 23.

The benchmark government bond — 7.26% yielding notes maturing in 2029 – rose 10 bps to close at 7.07% on Monday, as the Brent crude oil prices rose to $63.29 bbl (per barrel) from $62.63 bbl the previous day.

The 10-year bond yield fell below 7% for the first time in 18 months and touched a low of 6.93% on June 6 after the Reserve Bank of India (RBI) announced a 25 bps cut in the repo rate, as anticipated by most of the market experts amid the worsening financial situation. The RBI also shifted its stance to accommodative, signaling no more rate hikes soon.

Rupee closed 19 paisa lower at Rs 69.65 on Monday due to the rise in crude oil prices.

“With the rupee being stable against the dollar and with the fear of inflation going away, we can expect the steady inflows in the upcoming sessions also,” said Ajay Manglunia, MD and head – institutional fixed income, JM Financial. US-China trade tensions could influence yields, he added. Bond dealers expect another 10-15 bps drop in yields if the favourable situations persist.

In May, the total inflow from foreign investors was $537 million, while in April, there was an outflow of $1.5 billion from the Indian debt markets. A day after the RBI monetary policy, global funds invested $316.48 million on Friday, which is the highest FPI inflow in debts in a single day in the last 16 trading sessions.