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How DHFL Pulled off India’s Biggest Banking Scam

Logo photo of Dewan Housing Finance Corporation

DHFL scam simply cannot be referred as just any other scam. The magnitude and the scale of this scam is so huge that it will simply blow your mind into pieces. The DHFL Bank, which is the main architect of this massive scam, has pulled off a scam that is worth Rs 31,000 crores. Yes, you’ve heard it right. This scam is worth whopping Rs 31,000 crores. This astronomical amount makes this scam bigger than the ABG Shipyard Scam, a scam that was unearthed only a few months back and is estimated to be around Rs 22,000 crore. This also means that the DHFL Scam is now India’s biggest ever banking scam.

In this special story, we will cover all the important details as to how DHFL went about pulling off such a huge scam so brazenly and openly. By the way, we are not using these terms ‘brazenly’ and ‘openly’ casually here. That’s because the DHFL Bank managed to pull off the Rs 31,000 crore scam right under the nose of every important regulatory body – be it the RBI, SEBI or even Finance Ministry. Interestingly or – should I say – quite magically, none of these regulatory bodies were not even remotely aware when this scam was being enacted.

In fact, the scam would have continued to remain a ‘great secret’ – at least for few more years – if the news portal Cobrapost had not exposed this scandal in 2019. For all those who don’t know, Cobrapost is a popular news website that specializes in investigative journalism. Now before I start sharing important details about this explosive scam, I’d like to share some important information about the DHFL Bank. What is this bank all about, what does this bank do and who are its promoters?

DHFL Bank stands for Dewan Housing Finance Corporation. It was established in 1984 as a housing finance limited company. This company was established with an aim to provide home financing loans to middle income groups living in semi-urban and rural regions of India. Technically speaking, DHFL was an NBFC or non-banking finance company. This meant it was a non-depositary bank. Non-depositary bank means that it was not allowed to take deposits from common people but was allowed to provide loans to people on a commercial basis. But the question is if NBFC are not supposed to take deposits then how do they finance their loans? Well, the answer is that NBFC are legally mandated by the RBI to take loans from depositary banks. Now what are these depositary banks? Depositary banks are banks where common people like you and me stash their money as deposits, this include banks like HDFC banks, SBI, ICICI Bank, Axis Bank and many other popular commercial banks. After taking loans from such depositary banks, NBFCs then divert these loans to their customers at a higher interest rate. These higher interest rates is actually what accounts for their profit margin.

Now let’s again divert our focus on the DHFL Bank by talking about the promoters of the company. DHFL Bank is owned by the Mumbai based influential business family the Wadhwan family, with Kapil Wadhwan being the main driving force of the company. Kapil Wadhwan was the MD and Chairman of the company when this massive scam was pulled off. On other hand, Kapil Wadhwan’s younger brother Dhreej Wadhwan and another family member Aruna Wadhwan were also main promoters of the company.

Let’s now finally talk about the DHFL scam, which is obviously the main theme and topic of our story. The genesis of this scam was laid in 2010 when consortium of banks led by India’s largest bank SBI Bank granted a loan of Rs 34,000 crores to DHFL. Other nationalized banks like Bank of Baroda, Union Bank of India, Canara Bank and few international banks were also part of this consortium. Some viewers might now ask me why DHFL took this loan. Remember a few moments back I had explained that NBFCs like DHFL mainly financed their business by taking loans from commercial banks. These loans are then diverted to their end customers at higher interest rates.

Now technically and conventionally speaking, DHFL should have pumped the entire Rs 34,000 crore into its business operation, which means that this entire money should have landed into the accounts of millions of its end customers. And most of DHFL’s end customers are obviously home loan customers. However, according to Cobrapost, the company’s promoters siphoned off almost 95% of the money, which is equivalent to nearly Rs 31,000 crores, and stashed this money into dozens of shell companies. Now apparently the Wadhwan family had extensively used shell companies to pull off this huge scam. Hence it is important to understand for the readers what are these shell companies and why they are so popular with scamsters and fraudsters.

DHFL Main Modus Operandi – Shell Companies  

Shell companies are companies that neither have any active business or physical office and nor does it have any employees. In other words, shell companies mostly exist only & only on paper. But despite having existence only on paper, shell companies are still legally allowed to own bank accounts. Now many companies seek to misuse this legal loophole by using bank accounts of shell companies merely as pass-through entities. This simply means that money gets routed through bank accounts of several shell companies before it reaches the final destination. This invariably creates a complex web of transactions, which is actually meant to fool the tax authorities. Now since many companies use shell companies as merely pass-through entities, they have become notorious for promoting fraudulent activities like tax evasion, diverting money to tax havens or offshore locations and money laundering.  In a nutshell, today shell companies have almost become synonymous with illegal financial activities.

Coming back to the DHFL scam, the main modus operandi of this massive scam was very simple. DHFL had created dozens of shell companies and shifted almost the entire Rs 31,000 crores as secured and unsecured loans to the bank accounts of these scores of shell companies. Now since DHFL wanted to show to the world that the Rs 31,000 crore has been indeed diverted as loan, the company had to create fake borrowers accounts. According to unconfirmed reports, the Wadhwans created more than one lakh fictitious or fake borrowers accounts with the help of a special customized software.

Once these fake borrowers accounts were created, DHFL started diverting big tranche of funds into these fake accounts. Thereafter, DHFL transferred these big tranches of funds to dozens of shell companies with the help of their proxies. As the money got channelized through dozens of shell companies, it created a web of complex transactions, which – as I had already said in this video – is meant for fooling the tax authorities.

While the money kept circulating in the bank accounts of dozens of shell companies, all these money eventually landed into bank accounts of companies that are directly and indirectly connected to the Wadhwan family. This simply means that now almost the entire Rs 31,000 crore, which is actually public money and belongs to Indian taxpayers, has now been converted into private wealth of the Wadhwan family. Rs 31,000 crores, which is an astronomical amount and could have been used for India’s economic development, ended up becoming a private wealth of an influential business family.

Once the Wadhwans got hold of such an astronomical amount of money, they started splurging these money for buying expensive private assets. Cobrapost claims that DHFL bought private assets worth Rs 4,000 crores. Most of these private assets were located in offshore or foreign locations like Sri Lanka, Dubai, U.K and Mauritius. Furthermore, several years back DHFL promoters also bought a Sri Lanka Premier League team called Wayamba.

The Alleged Political Connection

Now the fascinating details about this scam does not end here. Whenever there is a massive scam there is always a political connection and DHFL scam is no exception. Cobrapost has made a shocking revelation that DHFL also made heavy political fundings. The money that was used for political funding was again apparently sourced from the huge pool of money that was stashed in several dubious accounts owned by the DHFL. By the way, almost all DHFL’s political funding allegedly went to the ruling party BJP.

According to Cobrapost, DHFL made a political funding of Rs 19.5 crores to BJP between the financial year 2014-15 and 2016-17. These funds were channelized through three companies – the RKW Developers PVT Ltd, Darshan Developers Pvt Ltd and Skills Realtor Pvt. LTD. All these three companies were again indirectly connected to the Wadhwan siblings.

DHFL Scam’s political connection does not end here. DHFL is believed to have advanced more than Rs 1,000 crores to several dubious companies located in the states of Gujarat and Karnataka. Interestingly, these funds were transferred to these dubious companies barely months before Gujarat and Karnataka went for state elections respectively in 2017 and 2018.

It is important to remember that these are only allegations and these allegations of political funding by DHFL has not been proved yet. However, if there is any truth in these allegations then it means that several top politicians may be involved in this multi-billion-dollar scam. And as we hinted before, a scam that is as massive as DHFL cannot be pulled off without powerful political connections.

The Angle of Accounting Fraud

It is also important to note that DHFL was a publicly listed company. This meant that the company was legally mandated to declare its financial results to investors after every quarter. And if one goes through DHFL’s financial statements in recent years then most people will be left absolutely shocked. That’s because barely two years before DHFL was officially declared insolvent and bankrupt, the company had shown pretty impressive & healthy revenue and profits on its balance sheet.

According to DHFL’s annual reports, the company’s profit-after-tax (PAT) had grown at a CAGR (compound annual growth rate) of 21 percent and its loan books had grown at a CAGR of 22 percent from FY2013 – FY2018. What’s even more shocking, this company was valued at a whopping Rs 20,000 crores in 2018.  If one purely goes by DHFL’s financial statements and annual reports then it should be counted as one of the most profitable NBFCs and housing finance companies of India. However, as it turned out all these figures and numbers were either fake or were highly inflated. As the DHFL scam imploded in 2018-19, few auditing firms and investment consulting firms had carried out forensic audits of DHFL’s balance sheets. And the forensic audit proved beyond doubt that DHFL’s promoters and its auditors had indulged in fraudulent methods to inflate the numbers of its balance sheet. What’s even more important, the company’s promoters and its auditors also used fraudulent methods to hide several dubious transactions.

It is worth noting that many listed companies are known for cooking their balance-sheets. They do this to misguide and fool the investors as well as for hiding fraudulent transactions. And in the case of DHFL, investors actually got carried away by the company’s rosy balance sheet. The company’s stock was enjoying a fantastic run at the stock market until the scam started imploding in 2018. So much so that even ace investor Rakesh Jhunjhunwala had invested very heavily in the DHFL stocks. What’s really interesting, Jhunjhunwala refused to exit the DHFL stocks even after the company’s stock prices had started crashing in 2018. However, as it turned out Jhunjhunwala’s decision to take a leap of faith on DHFL stock proved to be a disastrous decision.

The Scam finally Implodes

By mid-2019, DHFL had started defaulting on its bond repayments. In June that year, the company missed on its bond repayments worth Rs 960 crores. This forced the rating agencies to immediately downgrade the ratings of the company. And when Cobrapost eventually exposed the scam, all hell broke loose for the company and its stock. Its stock prices had now started crashing at an unprecedented rate, wiping out crores of wealth of all its investors. India’s capital market regulator SEBI finally got into the act. Considering the huge magnitude of the scam, SEBI decided to delist the DHFL stock from BSE in June 2021.

During the same time, DHFL’s creditors dragged the company to the insolvency court, i.e. NCLT, in a desperate attempt to recover their huge loans. Eventually Primal Group acquired DHFL for over Rs 34,000 crores through insolvency proceedings last year. As per the NCLT order, Primal Group paid nearly Rs 14,000 crore as upfront cash to acquire DHFL. Almost the entire Rs 14,000 crore went into the pocket of the creditors including big commercial banks like SBI, Bank of Baroda, Union Bank of India and many other financial institutions. Thanks to the insolvency proceedings, these creditors managed to recover at least some amount of their loans. However, the biggest losers in the DHFL scam – as is always the case with such financial scam – were the small retail investors. Millions of DHFL’s small retail investors ended up losing all their money and investment.

As for the Wadhwans, today Wadhwan siblings Kapil Wadhwan, Dhreej Wadhwan and many other members of the Wadhwan family are facing multiple lawsuits on the charges of financial fraud. CBI, ED and many other law enforcement agencies are currently pursuing these cases against the Wadhwan family. In fact, both Kapil and Dhreej Wadhwan were arrested and put behind the bars before they got bail in May this year.

The DHFL scam raises many important questions. The most important question being what were the regulators doing. Why did SEBI and RBI wake up so late when they should have checked on this scam much earlier. The openness and brazenness with which the Wadhwan family pulled off this scam is simply shocking to say the least. As I said before, it is nothing short of a broad day light robbery.

But the most important thing to realize and acknowledge is that massive scams like DHFL scam can have huge ramifications for India’s financial sectors. If scams like DHFL and AGB Shipyard scam keep occurring frequently even in near future then this can seriously derail India’s financial sector. And this – needless to say – will have an adverse impact on India’s economy.

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