Will the DHFL insolvency end up in a legal dispute?

After Piramal Enterprises and Oaktree Capital, the two leading bidders for the ailing DHFL, sweetened their respective deals, a virtual data room (VDR) has been set up, albeit with a delay, for creditors to vote for their preferred bidder. The committee of creditors (CoC) has approved the resolutions, running into seven plans and five combinations, and uploaded them on the VDR.

The resolutions, prepared with the help of administrator advisor, EY India, and legal advisor, AZB & Partners, include comparisons of the bidders, both in terms of absolute numbers and upfront cash component, and in qualitative and quantitative formats. The resolutions also include proposals for splitting the proceeds using one of the available options—waterfall mechanism, pari-passu, or a fixed percentage share for unsecured creditors.

According to the waterfall mechanism, the proceeds from the sale of the liquidation assets in respect of a corporate debtor could be distributed in a certain order of priority. Under the scheme, secured creditors have to be paid fully before any payments can be made to unsecured financial creditors, who in turn have priority over operational creditors. In the pari-passu distribution mechanism, the charge holders are equally placed and thus receive the proceeds in proportion to their debt.

“For the third option, we have fixed 5% to be allocated for unsecured creditors,” said sources close to the bidding. Whichever proposal gets the majority vote will be chosen as the final plan.

“The resolutions have been uploaded on the VDR. All those who are voting will have to prepare notes and discuss the resolutions internally before they come to vote. There are 29 large lenders who will need their board approvals,” said sources. Since the administrator has given time till January 14, it is unlikely that anyone would vote anytime soon. “They all are likely to vote on January 14.”

Debenture holders and fixed deposit (FD) holders will vote separately and will be appended to the main voting by the administrator. “This is to avoid confusion since there are thousands of FD holders as creditors. A large majority of NCD holders are banks and the retail portion there is very small,” the sources said.

Of the total claims, debenture holders have 37% exposure followed by banks’ term loans having 31%. Public deposits contribute 7% of the overall borrowing mix of DHFL. For instance, the lead lender, State Bank of India (SBI), has the highest term loan and cash credit exposure of ₹8,328 crore (as on September 30, 2018). DHFL is facing claims of ₹87,031 crore from lenders including SBI, along with SBI Singapore, (₹10,083-crore exposure), while other lenders such as Bank of India (₹4,125 crore) and Canara Bank (₹2,681 crore), have substantial exposure too.

People close to the bidding believe it is going to be a tight fight, after Oaktree and Piramal both sweetened their respective bids.

A fresh letter written by Oaktree’s legal counsel and director, Frederik Grysolle to the CoC seemed to have delayed the process of finalising the resolutions. Concerned by “a consistent campaign to misrepresent information on Oaktree’s bid and favour the second highest bidder”, he listed out a summary of key points. He has also threatened to go the legal way if Oaktree’s bid was evaluated incorrectly.

Oaktree, in its letter dated December 24, 2020, alleged that the equity infusion by the second bidder (read Piramal) was uncommitted. “We understand that the bidder has suggested that it will be making a fresh capital infusion for improving operations and enhancing the operations of DHFL of ₹3,800 crore in the first 12 months post-implementation of the resolution plan, in its business plan, without a binding commitment or a firm commitment letter. Oaktree has, on the other hand, committed to providing a fresh capital infusion of ₹1,000 crore as a cushion to DHFL lenders, by way of a firm commitment letter,” the letter said.

It also claims that DHFL’s lenders may not benefit from Piramal’s equity infusion which may go to a “co-mingled entity that is burdened by other liabilities”. Oaktree clarified in its letter that its infusion would benefit the business and its stakeholders, including creditors, without any contagion from other liabilities.

It made another critical clarification regarding the upfront cash component. “Crucially, we understand that the CoC is discounting the upfront cash amount in Oaktree’s bid by ₹2,700 crore. We want to categorically state that the total cash amount that would be received by the CoC immediately upon implementation of Oaktree’s resolution plan shall be ₹17,400 crore.”

A major hurdle for Oaktree is the insurance joint venture by DHFL. Piramal has made it amply clear that there are complications arising out of a foreign entity keeping the insurance arm of DHFL because the U.S.-based Prudential International Insurance Holdings already owns 49% in DHFL’s life insurance company. Foreign entities cannot have any stake or control more than the prescribed FDI cap of 49%. DHFL owns 100% stake in the intermediate entity, DHFL Insurance Limited (DIL), which in turn holds 50% in Pramerica Life Insurance Company. To circumvent the crisis, Oaktree had suggested that the interest in the insurance company can be housed in an alternative investment fund (AIF) without breaching the FDI norms.

According to its resolution plan, Oaktree has attributed ₹1,000 crore to DIL’s shareholding in Pramerica. In its letter, Oaktree has now clarified that this amount would be paid to the financial creditors on an unconditional basis by way of upfront cash prior to the implementation of the resolution plan.

It further explained in the letter that it retained the discretion in its resolution plan to attribute interest income between the approval date and the effective date for the benefit of the financial creditors (additional interest income). “We exercised this discretion in the December 24 email by providing additional interest income of ₹1,700 crore as upfront cash on a committed basis (irrespective of the amount of actual interest). This was made very clear in the email. We do not understand, therefore, how and why the CoC appears to be of the view that we are not providing the ₹1,700 crore as upfront cash recovery. We trust that this misunderstanding has now been fully clarified.”

Oaktree has promised to fight it out if its bid is evaluated based on unsubstantiated information. “If Oaktree’s bid were to be evaluated on the basis of incorrect information or an erroneous presentation of the financial proposal, such evaluation would almost certainly be subject to judicial, administrative, and investigative review. This is clearly not in the interests of financial creditors, fixed deposit holders, the broader Indian housing finance market or the reputation of the Insolvency and Bankruptcy Code (IBC),” said the letter.

On its part, Oaktree has reminded the CoC that as guardians of public money and representatives of a diverse group of individuals (including many retail depositors and investors who are very vulnerable), discounting or failing to consider the upfront cash amount to the extent of ₹2,700 crore would disregard the IBC’s objective of value maximisation, and be open to challenge.

Piramal believes that all bidders had the opportunity to submit bids subsequent to making their clarifications on December 22. It sweetened the bid by ₹1,000 crore and also improved its offer for a controlling stake in DHFL’s Pramerica Life Insurance Co. to ₹1,000 crore from the earlier proposed ₹300 crore. Piramal claims it will merge DHFL with an AA-rated entity, offer ₹10,000 crore-plus of equity immediately, and provide clarity on quality and secondary market valuation of NCDs.

A spokesperson of the Piramal Group said, “The Oaktree bid is short on upfront cash, short on NPV, short on overall score, un-implementable due to insurance related complications, and leaves lenders with weak debt paper due to the sub-debt structure offered by Oaktree to themselves.” The spokesperson further stated that the email from Oaktree appears to be under the mistaken belief that threatening CoC members with consequences is going to alter the facts and change the course of a legally-run, transparent process in our country.

The close fight between the two bidders has now narrowed down to foreign vis-à-vis Indian, making the choice difficult for creditors.

Being the first case of a finance company undergoing the Corporate Insolvency Resolution Process, everyone is keen to see it ends on a positive note. But one can’t rule out a legal challenge after the voting ends and a winner is chosen.