Mumbai: The Reserve Bank of India on Wednesday superseded the board of Dewan Housing Finance Corp. Ltd (DHFL) and appointed an administrator in its place, in a step towards referring the debt-laden mortgage lender to a bankruptcy court.

The regulator named R. Subramaniakumar, a former managing director and chief executive of Indian Overseas Bank, as the administrator for DHFL.

With this, DHFL is set to become the first non-bank lender to be referred to the National Company Law Tribunal (NCLT) under new rules notified by the government on 15 November. RBI cited governance concerns and payment defaults by DHFL as the reasons for superseding the board.

RBI said that it intends to shortly initiate the process of resolution of the company under the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019. It would also apply to the NCLT for appointing the administrator as the insolvency resolution professional.

The supersession of the board and a subsequent referral by the regulator to a bankruptcy court will allow lenders to take swifter decisions regarding DHFL without the fear of being questioned about them by investigative agencies. It will also give potential investors more comfort to invest in a company where serious allegations of funds diversion have surfaced.

A banker at a state-run bank said that lenders were expecting this to happen anytime and it would certainly lead to a quicker resolution of DHFL’s stress. “It was quite evident that the new rules would help resolve stress in the financial sector companies and since DHFL is at the epicentre of these troubles, the RBI has likely decided to take it up first," he said.

Under the new guidelines, only a regulator can refer a financial services provider to the bankruptcy tribunal. Mint reported on 20 November that DHFL is likely to be among the first set of financiers to land up in bankruptcy courts.

The intent of the new regulations was to bring important financial services firms within the ambit of the Insolvency and Bankruptcy Code (IBC), said Karan Mitroo, partner at law firm Luthra & Luthra.

“IBC provides some level of comfort and confidence to investors of a resolution taking place. I believe that with DHFL going to NCLT and with the right investor interest, we would hopefully see a faster resolution which would be in the interests of all stake holders," Mitroo said.

According to the RBI order cited by DHFL in a regulatory filing, a statutory inspection of DHFL conducted by National Housing Bank with reference to its position as on 31 March 2018 revealed serious deterioration in its financial position.

In September, RBI had also superseded the board of crisis-hit Punjab and Maharashtra Cooperative (PMC) Bank Ltd and appointed Jai Bhagwan Bhoria as the administrator of the bank.

An earlier plan that banks were working on to reduce the debt burden of DHFL and convert a part of the debt into a 51% stake in the mortgage lender was scuppered after the corporate affairs ministry ordered a probe by the Serious Fraud Investigation Office into suspected fraud at the shadow lender.

DHFL has also been dragged to the Bombay high court by a set of mutual funds that had purchased non-convertible debentures (NCDs) sold by the company. Fixed deposit holders and retail NCD holders are also trying to recover their money.

On Wednesday, DHFL told the Bombay high court that it intends to repay its depositors and sought modifications to an earlier order that restricted it from doing so. The court has adjourned the case till 28 November.

Appearing on behalf of DHFL, senior advocate Aspi Chinoy said the firm has the ability to repay depositors. He added the company received a directive from the National Housing Bank (NHB) about two weeks ago advising it to seek modification of the high court order.

The Bombay high court on 10 October barred DHFL from making any payment to unsecured creditors, which included deposit holders. A modified order on 13 November that allowed DHFL to make payments in lieu of securitization deals did not bring any relief for fixed deposit holders.

DHFL had public deposits of ₹6,188 crore as on 6 July, down from ₹10,166.72 crore at the end of March 2018. Its total debt stood at ₹83,873 crore, of which ₹38,342 crore was owed to banks.

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