corporate law

Published on 8 April 2025

The Rise and Fall of DHFL: Insights into India's First Major Insolvency Case

Introduction

Dewan Housing Finance Corporation Ltd (DHFL), once a prominent player in India’s housing finance sector, catered mainly to Tier-II and Tier-III cities, boasting a loan portfolio that exceeded ₹90,000 crore. However, its rapid growth was eclipsed by a significant downturn due to allegations of financial misconduct, regulatory actions, and a landmark insolvency resolution process. This article chronicles the DHFL crisis from its beginnings through the Supreme Court’s final judgment, highlighting the actions of its former promoters, particularly Kapil Wadhawan, in their pursuit to regain control.

Timeline of Key Events in the DHFL Crisis

2019: Allegations, Defaults, and Regulatory Action

  • January: Investigative reports surfaced accusing DHFL’s promoters of misappropriating funds through shell companies. DHFL firmly denied these allegations, yet they set off a chain reaction that led to the company's decline.

  • February: CEO Harshil Mehta resigned. Credit rating agencies like ICRA and CRISIL downgraded DHFL’s commercial papers, raising concerns about its financial stability.

  • June: DHFL defaulted on multiple debt repayments, leading to a panic among investors and creditors as the company's shares plummeted over 90%.

  • August: Faced with a mounting inability to meet obligations, DHFL's creditors began drafting a resolution plan. In an attempt to restore confidence, DHFL proposed an Inter-Creditor Agreement (ICA) to pay all creditors in full, yet it failed to regain trust.

What is an Inter-Creditor Agreement (ICA)?

An ICA is a binding agreement among lenders aimed at collectively resolving a borrower’s distress. It establishes timelines and recovery frameworks, allowing for coordinated efforts among banks and financial institutions.

  • October: A forensic audit by KPMG revealed that around ₹20,000 crore had been misappropriated via shell companies, with ₹14,000 crore lent to 25 entities generating negligible profits. DHFL's failure to classify these loans as Non-Performing Assets (NPAs) heightened the crisis.

  • November: The Reserve Bank of India (RBI) superseded DHFL’s board, citing governance lapses and defaults, appointing R. Subramaniakumar as the administrator. The RBI filed for the company's insolvency with the National Company Law Tribunal (NCLT).

  • December: The NCLT admitted the insolvency petition, making DHFL the first financial services company to enter the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC).

2020: The Battle for Resolution

  • March: Expressions of interest were garnered from 23 prospective resolution applicants, including notable entities like Piramal Group, Oaktree Capital, and Adani Group.

  • October-December: The bidding commenced. While four major bidders engaged in offers, Kapil Wadhawan proposed a settlement significantly higher than others, despite facing scrutiny over his eligibility under Section 29A of the IBC.

Background on Section 29A of IBC

Section 29A disqualifies defaulting promoters and their associates from bidding for their own companies during insolvency proceedings, aiming to prevent "phoenixing" — the act of repurchasing distressed assets at discounted rates following default.

  • December: The bidding competition escalated with Piramal Group and Oaktree Capital increasing their offers by 14-15%. The Committee of Creditors (CoC) was charged with evaluating all proposals, including Wadhawan’s, despite his ineligibility under the law.

2021: Acquisition, Legal Battles, and Promoter Maneuvers

  • January: The CoC approved a ₹37,250 crore offer from Piramal Group, combining upfront cash payments and issuance of non-convertible debentures (NCDs). This plan promised a recovery of approximately ₹38,000 crore for DHFL’s 70,000 creditors, equating to about 46% of their total dues.

  • February: The RBI provided in-principle approval for the acquisition.

  • May: The NCLT directed the administrator to consider Wadhawan’s revised ₹91,158 crore offer, which included an upfront payment of ₹9,062 crore for small investors and NCD holders. Nonetheless, the NCLAT stayed this order, invoking Wadhawan’s ineligibility under Section 29A and the advanced stage of the resolution process.

  • June: Wadhawan appealed to the Supreme Court; however, on June 7, the NCLT ratified Piramal Group’s resolution plan. Challenges by other parties, including 63 Moons Technologies, were dismissed, leading to the delisting of DHFL’s shares as part of the resolution.

2022-2025: Supreme Court Rulings and Finality

  • April 2025: The Supreme Court upheld the insolvency proceedings initiated against both DHFL and its former promoters, Dheeraj and Kapil Wadhawan, who acted as personal guarantors for the debts, affirming that personal guarantors are liable under the IBC.

  • April 2025: In a significant ruling, the Supreme Court reversed an NCLAT decision that questioned the valuation of avoidance transactions in the resolution plan, reinstating the original plan approved by the CoC and NCLT, which confirmed Piramal Capital and Housing Finance’s acquisition of DHFL for ₹34,250 crore.

How Kapil Wadhawan Attempted to Regain Control

Legal Loopholes and Section 29A

Kapil Wadhawan's efforts to regain control over DHFL illustrate a broader trend among Indian promoters seeking entry back into their firms post-default. Though barred under Section 29A of the IBC, Wadhawan submitted a settlement offer significantly higher than the winning bid, claiming compliance with the law since it was intended as a precursor to a Section 12A withdrawal application, which permits settlements if 90% of creditors consent.

  • NCLT’s Ruling on May 19: The tribunal instructed the CoC to assess Wadhawan’s offer, noting that it did not technically contravene the law. However, the NCLAT promptly stayed this decision, underlining Section 29A's aim to prevent defaulting promoters from regaining control and emphasizing the advanced status of the resolution process.

  • Supreme Court’s Position: The Supreme Court reaffirmed the essence of the IBC, supporting the prohibition against defaulting promoters’ participation in resolution or liquidation processes. It clarified that recoveries from avoidance transactions would benefit the new acquirer, not the former promoters.

Real-World Example

Similar attempts by original promoters in high-profile insolvency cases, such as the Essar Steel case, highlighted the importance of creditor rights. The Ruias, original promoters, proposed to settle debts outside the IBC, but the Supreme Court upheld the creditors’ right to select the most advantageous resolution plan, ultimately favoring ArcelorMittal.

Aftermath: DHFL’s Future and Regulatory Reforms

  • Piramal Group’s Acquisition: The newly merged entity, now entirely under Piramal Enterprises, integrates DHFL’s extensive distribution network with Piramal's financial capabilities, forming a robust presence in the affordable housing finance sector. DHFL is now categorized as a non-deposit-taking housing finance company and is prohibited from accepting new public deposits.

  • Creditor Recoveries: Creditors, including fixed deposit holders and NCD holders, received approximately 46% of their dues—a notably high recovery rate compared to significant insolvency cases like Videocon Industries, where creditors faced losses exceeding 90%.

  • Regulatory Changes: Recent amendments to the IBC and IBBI regulations have tightened restrictions on defaulting promoters, ensuring they cannot regain control through arrangements or asset purchases during liquidation. The Supreme Court has consistently supported these measures, reinforcing the IBC’s intent to assign distressed assets to new, competent owners.

Detailed Insights and Nuanced Points

Avoidance Transactions

The DHFL case shed light on the complexities surrounding avoidance transactions—loans or transfers aimed at defrauding creditors. The Supreme Court clarified that any recoveries from such transactions benefit the new acquirer, rather than the former promoters.

Role of Personal Guarantees

By affirming the insolvency proceedings against the Wadhawans as personal guarantors, the Supreme Court has established a precedent for holding promoters personally accountable for corporate debts, enhancing overall accountability within the financial system.

Impact on Financial Sector

The DHFL insolvency represented a pivotal moment in the financial services sector, marking the inaugural instance of a financial service provider undergoing CIRP under the IBC, paving the way for similar actions against other non-banking financial companies (NBFCs) and fortifying regulatory oversight.

Stakeholder Protection

The Supreme Court has emphasized that resolution plans must equitably treat all stakeholders, including fixed deposit holders and small investors, ensuring their rights are safeguarded throughout insolvency proceedings.

Conclusion

The DHFL crisis reflects a significant chapter in India’s insolvency landscape, showcasing the evolution of the IBC and the judiciary's dedication to upholding its fundamental principles. This case has not only spotlighted regulatory shortcomings but also led to substantial legal reforms, establishing new standards for promoter accountability and creditor rights. As the landscape settles, the journey of DHFL serves as both a cautionary tale and a framework for future insolvency resolutions in India’s financial sector.

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