In the recent past, the economy of India has been hit by one corporate marauder after another. It is surprising how the people who are calling the shots in an economy on any given day suddenly disappear from the country and turn rogue. However, this same story has played out in India over and over again. Billionaire entrepreneurs like Nirav Modi, Mehul Choksi, Vijay Mallya and Lalit Modi have all defrauded the people of India. These are just a few hi-flying names. There are many promoters of small and mid-cap companies that are known to be involved in scams.

The Indian investors, as well as the general public, was hoping that the scams had ended and now business will continue as usual. However, it seems like they are in for a rude shock. A little-known media company called “Cobrapost” has made some surprising revelations against Dewan Housing Finance Ltd (DHFL) which is amongst the renowned Non-Banking Financial Corporation (NBFCs) in the country.

DHFL has alleged that there is no substance behind these allegations and that Cobrapost seems to have malicious intent. However, the articles being published by Cobrapost seem to be citing exact evidence. This is the reason that these allegations cannot be simply brushed aside even though they are not really coming from a credible source.

In this article, we will have a closer look at what this alleged DHFL scam is and how it is likely to affect the Indian economy.

The Allegations against DHFL

DHFL is a non-banking financial company. This means that all banks are supposed to lend a certain portion of their funds to companies like DHFL. This is the reason that money deposited by small depositors in bank accounts of State Bank of India, Bank of Baroda, etc. ends up in the hands of NBFC’s like DHFL. As per recent data, the Indian banking sector had invested at least $3 billion in DHFL. Along with this amount, DHFL has also borrowed heavily by issuing bonds and other debt instruments. These instruments are also largely held by the retail investor. Hence, if the allegations against DHFL are true, it could signify massive losses for the retail investor.

Let’s have a look at the alleged way in which DHFL was able to siphon off money which was provided to it by public sector banks for the purpose of lending to others.

• Loans to Shell Companies: Cobrapost has alleged that DHFL has made dubious loans to shell companies. Shell companies are pass-through entities. This means that they are not the final destination of the money. Instead, they are just a stop on the complex route which is generally created to confuse tax and other regulatory authorities. Cobrapost claims to have identified 34 such corporations. These corporations have indirect links to the promoters of the DHFL group, and reports indicate that DHFL has lent out close to $1.5 billion in unsecured loans to these companies.

  The problem is that DHFL has lent money to these companies without taking inadequate security. In the Indian banking industry, loans given to companies are secured via taking assets as collateral. Also, promoters are supposed to give personal guarantees to further ensure the safety of these loans.

  DHFL has not followed these processes. As a result, public money has been lent out to people without collateral. Since there is no collateral, this money cannot be easily recovered. Also, the promoters do not have any personal assets. Hence, they cannot be prosecuted either. Cobrapost has alleged that a lot of these loans given to shell companies have now become non-performing assets (NPA’s)

• Round Tripping: Loaning public money without following the proper process is just a part of the problem. The bigger problem is that the money which was loaned out has later flown back into entities which were owned by the DHFL group. In financial parlance, this is known as round-tripping. Hence, in effect, DHFL gave an unsecured loan to its promoters. The shell companies and other transactions were just paraphernalia which was used to cover up these blatantly illegal transactions. If Cobrapost is able to prove round-tripping, the problems of DHFL will be magnified. Without round-tripping DHFL is just guilty of negligence. With round-tripping, DHFL has a malafide intent and therefore becomes guilty of fraud.
• Purchasing Assets: Lastly, the money acquired by round tripping was used by DHFL in order to purchase assets in other countries. It is a known fact that DHFL has invested money in startup companies in the United Kingdom. It is also known that DHFL has purchased a cricket team in the Sri Lankan Premier League. It is alleged that the proceeds of these loans were used to make these transactions. Cobrapost also alleges that other personal assets have also been created in countries like Mauritius and Dubai by the owners of DHFL. Once again, this seems like a scam because all the assets have been created in other jurisdictions. Hence the Indian government or the tax authority will not be able to acquire the same.

The bottom line is that the allegations made against DHFL are explosive. A scam of this magnitude will cause a lot of damage to Indian investors. However, Cobrapost has made the allegations with a lot of conviction and seemed to have enough proof to back its claim. This revelation will ensure that the regulatory agencies will have to investigate the allegations thoroughly.