Cases

Probe former DHFL Loss to Lenders: Union Bank

CBI has been receiving requests from the Union Bank of India has written to it to effectively probe the promoters of Dewan Housing Finance Corporations. Other than the promoters, the Union bank has called from a probe in the management of the Dewan Housing Finance Corporation Ltd. The ultimate reason for calling such a probe is the fact that Dewan Housing Finance has caused a total loss of Rs 40,623.36 crores. What makes this debacle all the more concerning and debilitating is the fact that the loss was caused to the consortium of the bank, which is led by the Union Bank of India.

The basis of inquiry
The appeal to scrutinize dewan housing finance is based on the ultimate findings by the KPMG, the esteemed audit firm, that deviation of laid down norms and procedures have been committed seriously through manipulation of accounts and concealments. Dewan housing finance has been primarily accused of clandestine activities that were committed by it in terms of undisclosed bank accounts and misrepresentation.

given the seriousness of the claim at hand, the CBI has been actively probing the promoters namely Kapil and Dheeraj Wadhawan in the Yes Bank scam. According to the reports, given the pieces of evidence, there is a heavy case of fraud or loss of public money.

But even though the claims of the consortium of banks seem legitimate, the federal agency effectively and emphatically cannot register a fresh FIR. This is merely due to the fact that there is a need or a want of general consent which needs to be accorded by the Maharashtra government.

Last year, in the month of August, in the aftermath of the infamous probe into the Dewan Housing Finance debacle, attempts were made for the manipulation of television rating points (TRP), the state government had effetely withdrawn consent that had been accorded to the CBI.

This was done under Section 6 of the Delhi Special Police Establishment Act. Thus, given the turn of events that had taken place in the case last year, it was made mandatory that general consent is a must for the federal agency, namely CBI, to register an offense in the state, in its absence. Thus, in totality due to the events of the past, the federal agency now has to effectively approach the state government. This will help them get access to permission to conduct the investigation on a case-to-case basis.

but is Maharashtra the only state to withdraw its consent? Apparently, many non-NDA governments, claiming serious vendetta by the center, have withdrawn their consent. These states mainly include Kerala, West Bengal, Rajasthan, Chhattisgarh, and Punjab.

The woes of the CBI have been aggravated as even after the portrayal, communication, and representation that has been effectively presented to the state government, consent hasn’t been still accorded. This brings to the forefront, the dreadfully awful state of the politics that tend to delay the process of recognition and effective addressal of the inconsistencies and corporate felonies at hand.

What makes this political deadlock all the more debilitating is the fact that the loss due to mismanagement and clandestine, illegal activities caused a loss of public money of over Rs 40,000 crores. Given the threat to social and public welfare, effective and immediate investigation is needed, which cannot go through due to the political deadlock.

To analyze the fraud, it is to be noted that the illegal tampering was found to have been conducted on a large scale as it was found that DHFL disbursed loans and advances totaling a total of Rs19,754 crores to 35 entities with commonalities to DHFL promoter. In fact, what made the whole process surreptitious and unnoticeable was due to DHFL promoters’ tight control of multiple entities. The control was so extensive that even the appointment of directors and auditors was carried out by the DHFL promoters.

It is no news that much of the debacle in the lending business is due to noncredit-worthy disbursement by the lender. The same was the case in the DHFL lending debacle, where it was found that humongous loans and advances to the tune of Rs 25,595 crores were disbursed to 65 entities that effectively and efficiently had various deficiencies.

These discrepancies and deficiencies included inadequate loan documentation and inadequate mortgage security valuation which form the very basis of the debacle. Similarly, to corroborate this claim, various loans can be found missing in the DHFL finance sheet that never made it back to the bank.

in fact to cover up the surreptitious activities of the corporations, the “Bandra Book entity” had been created which effectively and wrongly maintained the details of non-existing retail loans. This was created using dummy names which were maintained in a separate accounting system.

Thus, in totality, it can be argued that the DHFL debacle brings to the forefront the fact that a strong regulatory environment is needed to end clandestine activities that are conducted craft fully under the authorities’ eyes.

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Understanding IBC Code For State Discoms in India

In a turn of recent events, the Tamil Nadu government’s response to IBC proceedings against the discoms has brought to the forefront the discrepancy prevailing between the electricity act and the Insolvency and bankruptcy code.

The power ministry has released its say and has stated that state-owned discoms also effectively known as the electrical energy distribution corporations, don’t have any immunity from company insolvency lawsuits. The ministry has also cleared the air around the narrative that there is a discrepancy between the electricity act of 2003 and the Insolvency and Bankruptcy Code of 2016 on the solution of economic claims.

These claims were effectively maintained after the Tamil nandu government had stated that the IBC insolvency doesn’t follow to discoms. The rationale behind such a statement was that discoms have immunity since they have been discharging services for public purposes as an extension of the state executive. This had also led to the cropping up of the conspiracy that there is a struggle or discrepancy between the IBC and the Electrical energy Act.

Discoms in India & The Sense of False Safety

It is to be noted that such revelations by the ministry have brought to the forefront the discrepancy that had prevailed amongst the electrical energy distribution corporations that they were immune to the proceedings of the Insolvency and bankruptcy code. Given that such a false sense of immunity persists in government units, it tells us a lot about the mismanagement that prevails in such units due to the nature of it being government.

One can also state that this episode brings to the forefront the rationale that plays out in the public sector units that have the largest number of NPAs, Given the sense of immunity that such units feel due to their governmental nature. With the government’s needless recapitalization, one can also state that it reinstates or fosters the attitude of mismanagement due to a false sense of safety. Such attitude is detrimental to the efficiency of the banking sector and the discoms as well.

thus, the newer clarification that has been released by the ministry maintains to get rid of a false sense of safety in opposition to insolvency lawsuits for discoms. This effectively and emphatically offers borrowers contemporary prison ammunition for improving dues. Given the recent clarification, it can be seen that the government wants to increase accountability and efficiency in the sector.

The Story of India’s Weak Indian Power Sector

It is to be noted that it would be an understatement to argue that the power distribution is the weakest link in the entire value chain of the Indian power sector.

In fact, severely ailing state-owned power distribution companies also known as discoms emphatically continue to severely hamper the efficient functioning of the transmission and generation sectors. Given the fact that by 2020, discoms had accumulated massive overdue payments amounting to Rs116,340 crore, an effective immunity from IBC will only help the government lose efficiency and revenue.

This will also help create an immense liquidity crunch across India’s power sector, given the deplorable state of the discoms.

Though, it is worth mentioning here that various government reforms have been repeatedly initiated in the sector to effectively improve the sector’s commercial and performance but, it cannot the fact that it is yet to make a sizable impact cannot be denied.

On the other hand, as the case unravels, the discoms continue to incur humungous financial losses which is a clear reflection of massive subsidies and ineffective government funds. From time to time, cases of bailout by the governments, to help state-owned discoms to pare their mounting losses have come forward. But what exactly is leading to such humungous losses in the discoms other than the government’s inefficient methods to bail out?

It is to be noted that the absence of economically inefficient tariff setting processes, healthy competition, and unsustainable cross-subsidies, economically inefficient tariff setting processes, infrastructure development, and technology are severely adding to discoms’ losses.

The Case of Discoms in India Being an Extension of The State Executives

1. In the case of the Tamil Nadu government, the government’s letter used to be precipitated by means of a writ petition for initiation of lawsuits below IBC filed within the Madras top courtroom by means of South India Corporation Pvt. Ltd.
2. But on November, 8, the ministry had effectively and positively cited that the apex court had in its ruling announced that state-run discoms are arranged below the Corporations Act and are no longer below statute just like the NHAI.
3. Therefore, they strategically aren’t an extension of the state executive. It was additionally stated, to clear the matter, that the subject has been “settled” by means of the Ideally suited Courtroom. In fact, the dichotomy surrounding the IBC and Electricity Act has been settled. It has been stated that there effectively used to be no dichotomy between the provisions of IBC and the Electrical energy Act, which applies to other operational problems with discoms.

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Insolvency Resolution Plan and Resolution Applicants

In the case of Ebix Singapore Pvt vs. Committee of Creditors of Educomp Solutions Ltd., the government has granted its judgment.

The judgment has bargaining provided the much-needed clarity which was highly overdue on the contentious status of resolution applicants that comes under the Insolvency and Bankruptcy Code 2016.

The judgment has been provided for the series of events after the resolution plan has been approved by the Committee of Creditors. This is the time between the approval by the COC and the pending approval of the National Company Law Tribunal.

The apex court took a solemn view of the case and emphatically maintained that once a plan is effectively approved by the COC, it significantly becomes binding on the resolution applicant.

This means to say that the judgment and the approval of COC are all binding and it is little or no scope left for withdrawal, even while the plan is underway for approval from NCLT. Thus, it can be rightly stated that this effectively gives more executive powers to the Coc.

Though it is no news that the process is fraught with many inefficiencies and delays, the similarities have emphatically been acknowledged by the supreme court too. In fact, various reasons for such odious delays have been projected.

These include late bids that do not offer potential valuation or price or perhaps there can be various detestable bottlenecks in the corporation itself which can lead to delay in acknowledgment of the Corporate Insolvency Resolution.

If the delays are to be scrutinized in the light of the legal framework, it can be noted that multiplicity of litigation too fraught with the effectiveness of a case. Additionally, tenacity to grant approvals in light of the spirit of the Code too is an emphatic re3asons that adds to the arduous list of factors that delay the time crucial resolutions.

However, even though these reasons were acknowledged by the supreme court, it still emphatically maintained that these do not serve a purpose for the applicant to break free or effectively seek an exit from an approved resolution plan by COC.

The case that ushered the change.

According to the reports, the Supreme court was effectively dealing with a batch of 3 appeals. These were significantly filed by successful resolution applicants.

If the nature of the applications is to be scrutinized, the successful resolution applicant had sought emphatically beseeched for the withdrawal or at least modification of their resolution plans.

This appeal was being made for a plethora of reasons which effectively included reasons like an empathic impact of such investigations on the mighty resolution plan and financial hardship.

Additionally, the appeal was also based on the delay in the approval of the resolution plan. It was during this particular case when the apex court had held the demand of the applicant as inadmissible so as to be withdrawn or modified when Coc had already approved it.

T5his gives rise to a pertinent question given the intricacies of the resolution plan, what does this emphatically means for the stakeholders? It is to be noted that stakeholders are an important force that is invested in the resolution scheme.

With a wrong judgment and step, it is the stakeholders that have the most to lose. Thus, with the latest judgment, it can be stated that the Supreme court has bonded the faith and the destiny of the stakeholders to the resolution plan devised by the COC. This emphatically distinguishes the resolution plan from the bilateral contract.

Is modification allowed if circumstances are altered?

Taking a stern stance, the apex court has maintained that the framework would not allow withdrawals or modifications of resolution plans, even if the applicant applies for the same.

Thus, absolute power to discretion to the COC has been granted. However, under section 12A, withdrawal of insolvency proceedings is allowed.

This can be effectively carried out by following the procedure that is mentioned in detail under the section. Though there is a catch in this breather that has been provided under the procedure. ‘

A resolution applicant cannot unilaterally withdraw or modify the resolution plan. It would require successful negotiations between the applicant and the COC for the application of modification to the resolution plan.

Additionally, it is noteworthy to mention here that the COC should be willing to opt for a re-negotiation.

Thus, overall, immense power has been accorded to the COC to draft a well-suited resolution plan, keeping in mind the valuation and interests of the shareholders.

Also, another characteristic of the judgment that needs to be highlighted is that the judgment has provided much need clarity in the process.

Until now there was significant ambiguity in withdrawal and modification rights in terms of the resolution plan it was waiting for NCXLT approval.

But with the recent judgment, more clarity has been provided during the intervening period when a plan is effectively pending its approval from the NCLT.

However, have all the doors been closed for successful withdrawal and modification? It is to be noted that if the latest judgment is to be scrutinized, the apex court has emphatically left one door open.

This door has been left open for the legislature to successfully introduce a mechanism that will effectively permit the withdrawal of resolution plans. However, this will be opted for only when the committee will find or decipher a legitimate reason.

In a series of events to not make the judgment too red-handed, the supreme court has also immensely reflected on the suggestion to provide a 45 days timeline.

The 45 days timeline will be provided to invite various legitimate comments and claims from regulators or authorities.

This will be provided before a resolution plan is approved by NCLT. According to experts, this will emphatically expedite the approval process and plans of resolution plans.

Thus, one can quite rightly state that with clarity and certainty that has been infused into the proceedings and process, faster resolution and efficient decisions are on the table.

The only question remains will the clarity ease the woes of the industry or will it exacerbate the same? It is something only future resolution strategy can answer.

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