The once-sprawling chawls of Mulund have mostly made way for skyrises. This neighbourhood, however, home to many Punjabi refugee families who came to India in the wake of the bloody Partition of 1947, has remained a quaint middle-class settlement with a clutch of standalone houses. Nearly everyone here has an account with the local branch of the Punjab and Maharashtra Cooperative Bank (PMC), which stands less than a kilometer away.On Thursday evening, when all of Mumbai was still bedecked in Diwali lamps, basking in the cozy overhang of festivities, this colony felt like an island of misery. “Forget celebrations, we haven’t lit a single diya,” says Bina Bhagtini, a 58-year-old retiree who lives with her mother and two siblings. She had to get an ulcer removed from her stomach. She had to borrow Rs 1 lakh and raise another Rs 50,000 from family for the procedure. She has Rs 20 lakh in deposits at PMC Bank, but is unable to access it, as the banking regulator has restricted withdrawals from the fraud-hit bank.A few houses from hers, mourners have lined up outside the residence of Murlidhar Dhara, an 83-year-old PMC customer whose family says they couldn’t raise money for his heart surgery in time due to the restrictions. Dhara is survived by his wife and children. His heartbroken family is occupied with the rituals surrounding his death. They aren’t hopeful they’ll ever see their money.“What’s the point in joining these protests? We have already lost our loved one and managing the daily expenses will itself be an uphill task,” says his daughter, dressed in a white salwar-kameez as she garlands her father’s picture kept on the ground in the centre of their living room, where visitors have gathered to pay respects. Dhara’s is one of the six deaths in the city that have been attributed to PMC depositors’ inability to access their life’s savings.PMC Bank has 1.6 million such depositors. The Economic Offences Wing of the Mumbai Police says Rakesh Wadhawan and his son Sarang Wadhawan, aka Sunny Dewan, promoters of realty firm Housing Development and Infrastructure Ltd ( HDIL ), defrauded the bank to the tune of more than Rs 4,500 crore, in collusion with bank officials.Once a middle-class Mumbai neighbourhood dotted with textile mills, Worli is now an upscale enclave with sunny, windswept promenades dotted with some of the city’s most sought after apartment complexes, home to billionaires and movie stars.Along the seafront here, not too far from the revered Sufi shrine Haji Ali Dargah, is a plot of land that is at the heart of a high-voltage investigation into underworld financing by the Enforcement Directorate. Investigators are focused on three buildings that stood here in the 1990s—Sea View, Marium Lodge and Rabina Mansion. These belonged to Sir Mohammad Yusuf Trust, named after the early 20th century Kutchi Memon businessman whose family is one of Mumbai’s largest private landowners. It was, however, illegally occupied by Iqbal Memon, a notorious drug smuggler also known as Iqbal Mirchi, because his family owned a spice business. He was a close aide of Dawood Ibrahim Kaskar, India’s most wanted terrorist and the alleged mastermind of the 1993 Mumbai serial blasts that killed 317 people.ED is interested in how Mirchi was compensated by a company that later developed the plot of land where the buildings stood. This money, it believes, might have been used to fund underworld activities. Investigations led them to the door of a company named Sunblink Real Estate, which had negotiated a deal with Mirchi with the help of a middleman named Ranjit Bindra, according to the agency’s submissions before a magistrate. A deal was apparently struck for Rs 225 crore and Bindra was paid Rs 30 crore for brokering the deal.The little-known Sunblink was funded by Dewan Housing Finance Ltd (DHFL) via a loan of Rs 2,186 crore. According to an official who spoke with ET Magazine on the condition of anonymity, the agency believes Sunblink was a front propped up by DHFL ’s Dheeraj Wadhawan, known in Mumbai’s social circles as Baba Dewan.The underworld-related investigation has added to the woes of DHFL, once counted among India’s largest housing finance companies, which has fallen on bad times and now represents a systemic risk to the financial system, with plummeting asset value and more than Rs 80,000 crore in debt. Since September last year, the company has lost 97.3% of its market capitalisation.DHFL was a deposit taking shadow bank. This means quite apart from lakhs of stockholders whose investments have evaporated, the its troubles could potentially affect lakhs of customers who have fixed deposits with them and holders of bonds and debentures, apart from banks that have lent very large sums. State Bank of India, for instance, has an exposure of Rs 11,000 crore to DHFL.A draft forensic audit into the books of DHFL by auditor KPMG has made disturbing revelations. The company has made large loans to entities related to promoters and it has no system to track repayments on those loans, leaked portions of that report says. A fund diversion amounting to Rs 20,000 crore is suspected, ET reported last week.A septuagenarian depositor from Bardhaman (west) in West Bengal, says he rues the day he decided to deposit a large sum of money (more than Rs 20 lakh) with DHFL fixed deposits in 2016. The retired metallurgist, who asked not to be named, feels he has no options but to wait, after the company said it will have to stop paying out interests following an order of the Bombay High Court. “I do not know what to do and how to manage my finances. Neither do I know how to approach the courts for relief,” he says. He says he draws solace from a recent Kapil Wadhawan interview where he has promised to pay back all depositors. “My advisor here says the court may lift its stay on November 10 and I hope and pray he is right.”DHFL and HDIL are realty and housing finance businesses run by two branches of a family. Rakesh Wadhawan of HDIL is the younger brother of the late Rajesh Wadhawan, whose children Kapil and Dheeraj now run DHFL. Their father Dewan Kuldip Singh Wadhawan, who came to Mumbai from Lahore after Partition, started the business and built the foundations of a vast realty development and housing finance operation. The two sides of the family split in 2008 and a 2010 agreement formalised their separation.Just how the two companies, run by families that loved the high life — Bollywood stars for party guests, a phalanx of luxury vehicles, private jets and yachts, vaunted thoroughbreds to signal status, and Russian and Israeli body guards to avert harm — plunged lakhs of ordinary depositors into despair and ruin, is a familiar tale that inspires a sense of déjà vu. We have seen this movie before. The location and principal actors change. But the plotline and characters stay similar— collusion, inept regulators, mute board members, celebrities in bit roles, court cases that drag on and vigorous passing of the buck. The climax is usually the same—the small guy loses.Office of the Economic Offences Wing of Mumbai Police, Crawford Market, Mumbai Please keep us in your custody, Rakesh Wadhawan requests Rajvardhan Sinha, head of the Economic Offences Wing (EoW). The request has a logic. EoW premises have centralized air conditioning. Whereas in police lock up, mosquitoes gave him and his son Sarang sleepless nights. The duo is currently lodged in the high security Arthur Road prison in Mumbai.This exchange, relayed to an ET Magazine reporter by a witness, is a far cry from the more combative relationship that Wadhawans once shared with Mumbai Police. A few years ago, as part of a security review, Mumbai Police axed the name of the Wadhawans from a list of builders who had police security.The Wadhawans, for whom the police escort was a key insignia of their political capital, secured a court order to restore their security, claiming there was imminent threat to their lives. Mumbai Police appealed the order, and got it quashed. Not to be outdone in a staring match, Wadhawans got creative. They got a jeep painted with blue and yellow stripes to resemble a Mumbai Police vehicle, loaded it up with beefy private guards clad in safari suits, and got the vehicle to drive ahead. The onlooker would never know they no longer had police security.This tendency to outfox and find a way is now evident in the circuitous transactions being probed by various agencies in both Wadhawan groups. In the case of PMC Bank, police says that HDIL management colluded with bank officials to create 44 fraudulent borrowers (companies with crisscrossing shareholding pattern and a common pool of directors) who in turn funneled money to HDIL promoters through 21,000 fraudulent accounts.In the case of DHFL, agencies as well as auditors are finding numerous companies linked to one another doing little business but making and receiving loans, creating a maze of shell businesses that seem designed to cloak the source, origins and destinations of funds.Speaking on the probe, EoW chief Rajvardhan Sinha told ET Magazine that the city police is in the process of gathering evidence to file a ‘solid’ chargesheet that will stand the scrutiny of the courts. “Services of a forensic auditor has been engaged to help us in gathering evidence against the arrested accused (in the HDIL-PMC case). The audits will reveal the larger game of how the red flags were not raised by the erring directors, auditors and even the regulators. This will become the starting point to connect to the evidence we have gathered on the larger criminal conspiracy between the arrested promoters and the accused bankers, which will be detailed out in the chargesheet,” Sinha said.It’s not unusual for Mumbai’s elite social circles to discover that a friend has defrauded a bank. It has happened before. But the Dewans’ troubles, especially on the HDIL side, indeed have inspired disbelief. Nobody is willing to speak on the record, and there’s an eagerness to underplay links.When India Couture Week started in Mumbai in September 2008, a day after Lehman Brothers collapsed in the US in the throes of the sub-prime crisis, Sunny Dewan and his wife Anu were the cynosure of all eyes, as sponsors and hosts. The four-day event saw Anu wearing designer clothes from labels such as Alexander McQueen, Dolce & Gabbana and Oscar De La Renta, pairing them with Bottega Veneta and Louis Vuitton clutches. In the off chance that you are not closely familiar with them, know that these brands offer fabulous fashion products that cost a small fortune.“Sunny and Anu fashioned themselves as an ‘it’ couple. They wanted to be seen as a core part of the Bollywood circuit, without being a part of the industry. Their home in Alibaug was almost built exclusively to entertain their filmi friends. They would ferry these ‘friends’ on sail boats, fly them there in choppers—anything to get them there. In fact, the Dewan house in Alibaug was available to their Bollywood friends 24/7. If someone wanted to throw a party, the venue was ready. All you had to do was make the call and Sunny and Anu would take care of the arrangements,” said a well-known Mumbai-based socialite, familiar with the circuit, speaking on the condition of anonymity.“It’s common to see glamorous wives of rich businessmen hang out with Bollywood actors today. But Anu may be the one who kickstarted the trend more than a decade back, throwing lavish parties, hanging out with everyone from Abhishek and Aishwarya Bachchan to the Kareena Kapoor-Karishma Kapoor girl gang. She is a predecessor to the current crop of rich housewives snuggling up to Bollywood starlets,” said another source.Anu Dewan’s verified Instagram account chronicles her fabulous life and proximity to Bollywood idols. She hasn’t posted since August 19. Rakesh Wadhawan was into horses and was an influential thoroughbred owner till about 2013, when he owned about 150 horses, according to people familiar with the racing scene in Mumbai. Between 2008 and 2012, several of his thoroughbreds registered first-place finishes and even won derbies. Wadhawan filly Moonlight Romance won the Indian Derby in 2011, while stable compatriot Ocean & Beyond finished second.“For a long time, he dictated how Mumbai’s Royal Western India Turf Club (RWITC) is run... He would throw tantrums at management decisions that were not favourable to owners,” recalled an influential member of the RWITC. On the DHFL side, Kapil is the professional, sober face of the company, and can be seen fielding questions on business television and analyst calls. Younger brother Dheeraj Dewan is well known in Mumbai as Baba Dewan, for his close friendships with Bollywood stars and among auto enthusiasts for the fabulous cars he is seen in, also flanked by body guards.Baba Dewan’s parties — for Diwali, New Year and his birthday, typically—were attended by a galaxy of Bollywood heavyweights. “Baba has come for Baba’s birthday,” a smiling Sanjay Dutt is heard telling a reporter at one such party, in a video of the celebrity coverage on YouTube. Dutt is also known by the moniker Baba.The related development that has also surprised many affluent Mumbaikars is the arrest of Ranjit Bindra on charges that he brokered the property deal between Mirchi and Sunblink. Bindra is the promoter of one of Mumbai’s most trendy restaurants—Bastian— a chic haven loved by actors and models who post photos of the establishment’s mud crab benedict or bulgogi bowl on Instagram. Actor Shilpa Shetty and husband Raj Kundra bought an equity stake in the restaurant earlier this year. ED questioned Kundra for nine hours last week about his transactions with Bindra and Wadhawan companies. Bindra’s brother-in-law is the influential Mumbai politician Baba Siddique, who has been elected as MLA from Bandra West thrice.The graph of the housing demand in Mumbai is closely tied to the graph of Wadhawans’ fortunes. HDIL, for instance, was born a year after Maharashtra government changed its approach to the long-standing problem of Mumbai slums. These settlements took up space in prime land and proved politically volatile to vacate. In 1995, the state changed its approach, brought in new legislation and created a new body called the Slum Redevelopment Authority.HDIL was born the very next year and plunged headlong into slum redevelopment. This means resettling slum dwellers in an apartment complex built elsewhere, usually in the outskirts of the city, vacate the prime land the slum occupied, and redevelop that area. The scheme proved successful and HDIL came to be counted among the top 5 listed real estate developers. It raised nearly Rs 1,500 crore through an IPO in 2007. The company says in the last decade alone, it has completed 100 million sq. ft of construction across various real estate verticals and has rehabilitated 30,000 families.Its problems started when the real estate market started falling and demand for its redeveloped properties vanished. For HDIL, the slowdown meant it could not sell the higher-end residential units it built, while it had to go on building smaller units for resettling slum dwellers. Its need for funds went up, after it was unable to see through the Mumbai Airport slum resettlement programme. Pushed into a debt trap gradually, it resorted to fraudulently seeking PMC funds.The company has been facing the wrath of homebuyers and its consumers for the last few years even before the emergence of recent Punjab & Maharashtra Co-operative bank scam. After approaching various forums including the Maharashtra Real Estate Regulatory Authority (MahaRERA), some aggrieved homebuyers of HDIL have even sought intervention of Prime Minister Narendra Modi to get possession of their apartments in various stalled projects across the Mumbai Metropolitan Region (MMR).These homebuyers are of the view that the chances of the company delivering their already delayed homes are bleak now given the promoters’ involvement in the PMC Bank matter. DHFL on the other hand was at the other end of the spectrum. As a deposit taking housing finance company, it had access to money sources through fixed deposits, non-convertible debentures as well as bonds. A look at DHFL’s lending shows only 57% of its loans were retail home loans, the rest being loans against property and ‘others’. The ‘others’ add up to almost 22% of the loan book and this is where DHFL seems to have got into trouble, lending to dubious entities linked to its own promoters and other related parties. A draft forensic audit report by KPMG indicated that much of the repayments could not be traced.DHFL’s troubles started after a Cobrapost sting operation alleged in January that the company had siphoned off money to related entities, and credit rating agencies started downgrading its paper in June 2019. DHFL started defaulting on its repayments in July. So far a couple of cases have been filed against DHFL by depositors. One was filed by IAS officer Ashok Khemka on behalf of his wife at the Chandigarh High Court while the other one was by Edelweiss AMC in Bombay High Court, with the latter asking DHFL to temporarily stop repayments of its deposits. A tussle between banks and other creditors of the company is on the cards. Both companies have denied wrongdoing. Neither responded to questions sent by ET Magazine for this story.“DHFL had funded certain projects of various companies,” the home financier said in a filing with the stock exchanges. “Due to market conditions, the borrowers had streamlined their internal operations whereby they have, by certain corporate actions undertaken recently, merged certain of their companies into Sunblink. As a result, as on date, Sunblink is mentioned as a borrower.” A source close to DHFL told ET Magazine that it was confident about a successful debt resolution. “DHFL is positive about successfully closing the resolution process at the earliest with its proposal of no principal haircuts to creditors and conversion of partial debt to equity offered to permissible classes of secured and unsecured creditors. This will greatly benefit not only the housing finance industry but the economy as a whole.”HDIL’s lawyer Subir Kumar, who also represents Rakesh and Sarang Wadhawan, told ET Magazine: “We have already given consent for the sale of depreciable assets immediately to protect the interest of the depositors of PMC Bank.We have repeatedly said there is no fraud and all the loans from PMC Bank are fully secured. In fact the title deeds of the assets are also with PMC bank. There is no intention of the promoters to run away from obligations. In fact, before their arrest, the Wadhawans were coming up with a resolution plan.”The developments, coming as they are a year after the collapse of IL&FS, has cast a shadow on the NBFC sector and the state of financial regulation. Nirmal Jain, chairman of financial services firm IIFL Finance, said he was hopeful the NBFC sector will emerge unscathed. But regulations need to change.“Many of us may not have realised that there are more than 5,000 cooperative banks, 15,000 NBFCs , and an uncounted number of chit funds in the system. All of them should be brought under the RBI’s regulatory rein. However, to make them viable for RBI to regulate, the tiny ones need to be shut down. Even a minimum capital requirement of Rs 500 crore will reduce the number dramatically. Once the storm blows over and the dust settles, the NBFC sector will emerge stronger,” he said.(With additional reporting from Shailesh Menon and Manish Yadav)