New Voting Process Started in DHFL Case, Making a Mockery of the Law Protecting Secured NCD-holders
Maya M 21 June 2021
Updated at 10.30 am on 22 June 2021 to add clarification from Catalyst Trusteeship
 
Lenders to DHFL are now voting on the revised distribution mechanism which seeks to allocate higher sums to small investors in fixed deposit and also full repayment for retirement funds related to armed forces and defence personnel. In an order, which came out late evening on 12th June, the National Company Law Tribunal (NCLT) had asked the lenders to consider distributing a higher amount to smaller investors and full repayment (Rs39 crore) to Army Insurance Group Fund. 
 
The fresh voting process seeking vote on two resolutions kicked off last night at 9 pm. The voting will end at 5 pm on Tuesday 22nd June.
 
Between the approved distribution mechanism (approved in January 2021) and the current proposed distribution mechanism, the incremental contribution by large secured financial creditors is approximately Rs1,853 crore which is close to 5.4% of the resolution plan value.
 
 
Resolution 1 proposes to pay the Army Insurance Group Fund, Air Force Group Insurance Society and The Navy Children’s School in full as suggested by the NCLT.  This will entail an  additional  cash outgo of Rs80-crore  for lenders. As per the proposed revised distribution:
 
1) The entire admitted claim of (a) Army Group Insurance Fund aggregating Rs39 crore; (b) Air Force Group Insurance Society aggregating Rs72.93 crore; and Navy Children School aggregating Rs2.54 crore (collectively, the Defence Forces Investors) be paid in full in cash; 
 
2) All FD-holders shall be paid such additional amounts in cash such that the entire amount payable to such FD-holders is equal to approximately 40% of their respective admitted claims, similar to the recovery of the secured financial creditors (who have voted in favour of the resolution plan);
 
3) All unsecured NCD-holders shall be categorised series-wise as shown below, on the basis of principal as per BENPOS and their outstanding debt shall be provided by the  DHFL (Issuer) or / its registrar and transfer agent (RTA) with inputs as may be required form the debenture trustee based on which the distribution will be carried out: 
 
 
All unsecured NCD-holders in Category 1, Category 2 and Category 3 and unsecured NCD holders which are Retirement Funds (i.e. pension funds, provident funds, gratuity fund, superannuation funds, etc) be paid in an amount in cash which is equal to approximately 40% of their respective admitted claims, similar to the recovery of the secured financial creditors (who have voted in favour of the resolution plan). 
 
FD-holders to receive 40% of the admitted claims ( and treated at par with secured creditors) in cash, entailing an additional cash outflow of almost Rs965 crore.
 
This effectively means that while large FD-holders  (also unsecured) with even over 10 crore will also strangely be given 40%; secured NCD-holders will now have to take an additional haircut (over the approved RP of January 2021) to accommodate them. 
 
More importantly, there is no mention of the bucket-wise distribution for secured NCD-holders in the revised resolution plan. In fact, the resolution plan says “Secured NCD-holders are already receiving ~40% recovery of admitted claims hence no further adjustments are being made.”
 
This has set the alarm bells ringing for many secured NCD-holders. Does this mean that even those secured NCD holders who had invested less than Rs2 lakh (across tranches and series) will also not be getting the committed 100% recovery (as per the already approved resolution plan) and will they now get only 40% of their invested amount if the current resolution 1 gets passed? 
 
While as per the proposed resolution, secured NCD holders might now get lesser refunds, unsecured FD-holders will get additional money back compared to the already approved resolution plan which is making a mockery of the term 'secured'. 
 
The revised distribution plan appears to be looking to pit the secured NCD-holders against the fixed deposit investors—a tussle between retail investors vs retail investors.
 
There is zero clarity on the detailed revised distribution proposal which is full of intense legalese and retail investors are thoroughly confused. Has this been done on purpose? It leaves the investors wondering - after all whose interests is the debenture trusteeship safeguarding? 
 
Resolution 2 (which has been put up for voting) is even more controversial. It is seeking “to authorise State Bank of India, Union Bank of India and Catalyst Trusteeship Limited (acting in its capacity as Debenture Trustee for debenture holders of DHFL) to act on behalf of the Committee of Creditors.”  
 
Resolution 2 states: “RESOLVED THAT in addition to and without prejudice to earlier resolution (i.e. “Voting Item #5”) passed at the 18th meeting of the Committee of Creditors held on 24-25 December 2020, (and any actions taken pursuant to such resolution), for purposes of representation of the Committee of Creditors of DHFL, State Bank of India, Union Bank of India and Catalyst Trusteeship Limited (acting in its capacity as Debenture Trustee for debenture holders of DHFL) shall each be empowered and authorised to: (a) take any actions that may be required by the Committee of Creditors on account of any order or judgement of the NCLT, National Company Law Appellate Tribunal, High Courts of India and Supreme Court to take decisions where required on behalf of the Committee of Creditors where directed by the NCLT, National Company Law Appellate Tribunal, High Courts of India and Supreme Court and to do all things necessary to comply with such orders and representing and binding the Committee of Creditors as shall be deemed necessary or advisable in relation to the legal proceedings connected with the corporate insolvency resolution process of Dewan Housing Financial Corporation Limited before various judicial fora, including the NCLT, National Company Law Appellate Tribunal, High Courts of India and Supreme Court; (b) act on behalf of the Committee of Creditors to give effect to and implement the resolution plan of the Successful Resolution Applicant, including but not limited to acting as the nominee on the Monitoring Committee constituted under and in terms of the resolution plan submitted by Successful Resolution Applicant and in general to do all such acts, deeds or things for and on behalf of the Committee of Creditors, as may be required or considered necessary under or in connection with the implementation of the resolution plan of the Successful Resolution Applicant.” 
 
Does this mean retail investors who represent almost 66% of the votes on CoC have no mandate?
 
More importantly, why is resolution 2 (under voting currently) referring to a backdated resolution- “passed at the 18th meeting of the Committee of Creditors held on 24-25 December 2020?" Here is the background to this controversial resolution and what it seeks to cover up. 
 
After checking all the past details in the Smartroom portal, it is clear that a vote was not taken before approaching the NCLAT (while challenging the NCLT order on 24th May 2021 ). Instead it was falsely claimed (in the appeal challenging the NCLT decision) by the large secured lenders that they are representing and are authorised by 'all the creditors' to approach the NCLAT.
 
Union Bank of India had filed an appeal in NCLAT against the 19th May NCLT order on behalf of the CoC. This is grossly misleading.
 
Did Catalyst vote on the decision to appeal the NCLT order dated 19 May 2021 and if so, what was the position taken by Catalyst regarding the issue of appealing the order? 
 
Moneylife had earlier written to Catalyst Trusteeship (the debenture trustee for bond-holders) on 11th June raising this question but we have received no response so far. We have followed up with another email asking detailed questions and this story will be updated as and when we hear from them. 
 
Catalyst Trusteeship as the debenture trustee has the responsibility to report this to the NCLAT -that a vote was not taken and that the retail investors are not represented in the said appeal. No formal voting was conducted to take into account the views of the FD and public issue debenture-holders who represent at least 1/3rd of the votes on the CoC. It needs to be seen if they have the integrity and do the right thing. 
 
In all this the poor retail investors suffer. As pointed out by Ms Sucheta Dalal, (managing editor of Moneylife), in her recent column, collective action is the need of the hour. Until retail investors realise that they need to get together to fight for their rights, they will continue to pay the price.
 
Updating this story on 22nd June at 10.30 am to include the response from Catalyst Trusteeship:
 
Catalyst has sent out a separate email (which clarifies the proposed revised distribution along with a comparison chart) to all bond investors late evening on 21st June - almost a full day after the current voting process was already underway and after we had sent them an email asking specific questions on the revised distribution mechanism. 
 
The email sent to all debenture holders of DHFL says “The resolution plan and distribution mechanism has been approved by creditors of DHFL, including debenture holders, with 94% and 86% respectively. As per already approved plan, secured financial creditors are to get minimum 44% of their claims. While approving the resolution plan, Hon. NCLT has suggested / directed to reconsider distribution mechanism, as it relates to fixed deposit holders, employees trust funds etc. so that they get around 40% of their claim”.
 
As per the email, “To seek the decision of debenture holders on the suggestion / direction of Hon. NCLT, by way of voting, the resolution is placed for their consideration, along with a copy of order dated 07.06.2021 of Hon. NCLT, present approved distribution pattern and the distribution pattern, if suggestion of Hon NCLT is considered favourably. The explanatory note at the end is also given separately. However, for the sake of convenience of debenture holders, we give below the comparative chart, to enable them to take a considered view, while voting on the proposed resolution”.
 
The mail adds that the said table (which explains the claim settlement percentage as per both approved and proposed resolution) is just indicative and debenture holders are requested to consider the minutes, notes attached to resolutions before voting.
 
a. For Category 4, component of Cash & NCDs will be decided at later stage. Further, terms of NCDs are mentioned in resolution plan and page no 41 of order as well.
 
a. All Unsecured NCDs which are Retiral Funds (pension funds, provident funds, gratuity fund, superannuation funds etc.) are entailing an additional cash outflow of ~ Rs 540 crore.
 
a. Between the approved distribution mechanism and proposed distribution mechanism there is incremental contribution by large Secured Financial Creditors of Rs.1853 cr. (including an additional cash Outflow of Rs.540 cr.) which is 5.4% of Resolution plan value.
 
 
Further in a separate (official) response to us, Catalyst said “..all decisions are taken by Creditors of DHFL, including Debenture Holders, through a voting process.  The Debenture Trustee merely casts vote on behalf of Debenture Holders or takes necessary steps, as per mandate received from time to time”.
 
The debenture trustee also states: “The necessary action of filing of appeal against order dated 19.05.2021 of Hon. NCLT, is as per the resolution passed in 18th meeting of Creditors, including Debenture Holders. As such, it is categorically denied that there has been any attempt to circumvent any legitimate requirement and there is neither any reason to do so”.
 
Catalyst’s response to us adds “The proposed resolution starts with words as ‘in addition to and without prejudice to earlier resolution’. You will appreciate that this clause cannot be ignored while arriving at correct implication of the proposed resolution. As reflected in it, the proposed resolution is by way of an enabling empowerment to named COC members to meet unforeseen exigencies in the future. The intention is to ensure smooth implementation of the resolution plan that has been approved by a massive majority and has been supported by Debenture Holders. Also, it may be noted Hon. NCLT has approved the resolution plan”. 

 

Comments
m.gurdasani
3 months ago
SECURED NCD HOLDERS MUST BE PAID, BEFORE UNSECURED NCD AND FD HOLDERS. RATING AGENCIES BE PUNISHED ? WE ARE SECURED NCD HOLDERS. HAVE WE TO PUT OUR CLAIM OR OUR NAMES ARE AUTOMATICALLY TAKEN FROM THE REGISTERS ?
gsreenat
3 months ago
Hi team Moneylife
Thanks and appreciation for yr efforts in highlighting the events for the DHFL resolution process
Iam a retail investor in their secured NCD but have not recd any communication from the trust or the Reolution Professional till date.
I wd appreciate it if u cd provide some relevant contact details - mail I'd or ph nos in this connection.

Thanks
Sreenath.
MDT
Replied to gsreenat comment 3 months ago
Here are the details...
Catalyst Trusteeship
Windsor, 6th Floor, Office No - 604,
C.S.T. Road, Kalina, Santacruz (East),
Mumbai – 400 098
+91 22 4922 0555
[email protected]
gsreenat
Replied to MDT comment 3 months ago
Thanks. Let me contact them and get my position clarified
gsreenat
3 months ago
Hi team Moneylife
Thanks and appreciation for yr efforts in highlighting the events for the DHFL resolution process
Iam a retail investor in their secured NCD but have not recd any communication from the trust or the Reolution Professional till date.
I wd appreciate it if u cd provide some relevant contact details - mail I'd or ph nos in this connection.

Thanks
Sreenath.
wegupta
3 months ago
This big investor and small investor debate is utter garbage. I put my life savings to invest Rs 10 lacs. I have the most to lose as I lose 60% of 10 lacs. A person who just put 2 lacs will lose so little. Putting a small amount in a particular NCD does not mean he/she is a small guy. The people in NCLT are idiots!!!
wegupta
3 months ago
This big investor and small investor debate is utter garbage. I put my life savings to invest Rs 10 lacs. I have the most to lose as I lose 60% of 10 lacs. A person who just put 2 lacs will lose so little. Putting a small amount in a particular NCD does not mean he/she is a small guy. The people in NCLT are idiots!!!
deviprakash
3 months ago
They have messed up the whole matter. Secured NCD holders are also told they will will get only ABOUT 40%. Apparently, the powers to be are in liaison withe the new owners. How can such a major let down for "SECURED" NCD holders be blatantly allowed? Voting was done under false promise of full repayment, like our elections. Is there any rule of law in this land? Except for one investor, no one else seems to have received any letter recently about full payment to <2 lacs holders. This makes the comment suspect.

Will rejecting the proposals now carry any meaning, though it would be the right thing to do. When the old promoter has offered to repay the full amount to all, why is he barred from re owning the company, maybe conditionally? Obviously big hidden profits will accrue to the new owners, who are operating in tandem with the authorities.

deviprakash
3 months ago
They have messed up the whole matter. Secured NCD holders are also told they will will get only ABOUT 40%. Apparently, the powers to be are in liaison withe the new owners. How can such a major let down for "SECURED" NCD holders be blatantly allowed? Voting was done under false promise of full repayment, like our elections. Is there any rule of law in this land? Except for one investor, no one else seems to have received any letter recently about full payment to <2 lacs holders. This makes the comment suspect.

Will rejecting the proposals now carry any meaning, though it would be the right thing to do. When the old promoter has offered to repay the full amount to all, why is he barred from reowning the company, maybe conditionally? Obviously big hidden profits will accrue to the new owners, who are operating in tandem with the authorities.

deviprakash
3 months ago
They have messed up the whole matter. Secured NCD holders are also told they will will get only ABOUT 40%. Apparently, the powers to be are in liaison withe the new owners. How can such a major let down for "SECURED" NCD holders be blatantly allowed? Voting was done under false promise of full repayment, like our elections. Is there any rule of law in this land? Except for one investor, no one else seems to have received any letter recently about full payment to <2 lacs holders. This makes the comment suspect.

Will rejecting the proposals now carry any meaning, though it would be the right thing to do. When the old promoter has offered to repay the full amount to all, why is he barred from reowning the company, maybe conditionally? Obviously big hidden profits will accrue to the new owners, who are operating in tandem with the authorities.

amitramb
3 months ago
It would be prudent for secured NCD holder to reject the 2 proposal main reason being that unsecured cannot be treated at par with secured irrespective of the size of their investment. We are in legal process and hence distribution of liquidation proceeding needs to follow law and not voting process. Even if one secured NCD investor is objecting the proceeding the entire voting process mounts to a non-legal process. I have rejected both the proposal as a secured NCD investor.
amitramb
3 months ago
It would be prudent for secured NCD holder to reject the 2 proposal main reason being that unsecured cannot be treated at par with secured irrespective of the size of their investment. We are in legal process and hence distribution of liquidation proceeding needs to follow law and not voting process. Even if one secured NCD investor is objecting the proceeding the entire voting process mounts to a non-legal process. I have rejected both the proposal as a secured NCD investor.
amitramb
3 months ago
It would be prudent for secured NCD holder to reject the 2 proposal; main reason being that unsecured cannot be treated at par with "secured" irrespective of the size of their investment. We are in legal process and hence distribution of liquidation proceeding needs to follow law and not voting process. Even if one secured NCD investor is objecting the proceeding the entire voting process mounts to a non-legal process. I have rejected both the proposal as a secured NCD investor.
amitramb
3 months ago
It would be prudent for "secured" NCD holder to reject the 2 proposal; main reason being that "unsecured" cannot be treated at par with "secured" irrespective of the size of their investment. We are in legal process and hence distribution of liquidation proceeding needs to follow law and not "voting" process. Even if one "secured" NCD investor is objecting the proceeding the entire "voting" process mounts to a non-legal process. I have rejected both the proposal as a secured NCD investor.
amitramb
3 months ago
It would be prudent for "secured" NCD holder to reject the 2 proposal; main reason being that "unsecured" cannot be treated at par with "secured" irrespective of the size of their investment. We are in legal process and hence distribution of liquidation proceeding needs to follow law and not "voting" process. Even if one "secured" NCD investor is objecting the proceeding the entire "voting" process mounts to a non-legal process. I have rejected both the proposal as a secured NCD investor.
nukalapati123
3 months ago
The order of NCLT , as I Understand, is to increase the payments to Small investors. Under the earlier resolution plan and under new proposed plan, the benefit is going to big investors only and there is no extra benefit to small investors. Investors of less than Rs.2 lakhs will get back Principal under both the plans. There is no increase in the payments due to NCD investors of less than Rs. 10 lakhs. As per SEBI norms for NCD IPOs ,definition/ reservation for small investor is made for value of Rs.10 lakhs . But as per resolution plan, small NCD / FD investor is defined as someone with investment of less than Rs.2 lakhs ( Rs.2 lakhs is applicable for equity investor and not for FD/NCD investors ). In fact Individuals including Senior Citizens are loosing more than Banks and FIs, since Banks can enforce Personal Guarantees of Promotors and recover more money later . NCD holders are getting back part of Principal amount only, and have to lose their yearly interest due to them prior to the date of commencement of Liquidation proceedings whereas Banks have recovered most of their Interest on term loans till that date. Further there is no preference given to Publicly issued NCD holders where large number of small investors are involved. Though maximum dues are to NCD holders, it appears that Publicly issued NCD holder's interest is not being taken care of.
nukalapati123
3 months ago
The order of NCLT , as I Understand, is to increase the payments to Small investors. Under the earlier resolution plan and under new proposed plan, the benefit is going to big investors only and there is no extra benefit to small investors. Investors of less than Rs.2 lakhs will get back Principal under both the plans. There is no increase in the payments due to NCD investors of less than Rs. 10 lakhs. As per SEBI norms for NCD IPOs ,definition/ reservation for small investor is made for value of Rs.10 lakhs . But as per resolution plan, small NCD / FD investor is defined as someone with investment of less than Rs.2 lakhs ( Rs.2 lakhs is applicable for equity investor and not for FD/NCD investors ). In fact Individuals including Senior Citizens are loosing more than Banks and FIs, since Banks can enforce Personal Guarantees of Promotors and recover more money later . NCD holders are getting back part of Principal amount only, and have to lose their yearly interest due to them prior to the date of commencement of Liquidation proceedings whereas Banks have recovered most of their Interest on term loans till that date. Further there is no preference given to Publicly issued NCD holders where large number of small investors are involved. Though maximum dues are to NCD holders, it appears that Publicly issued NCD holder's interest is not being taken care of.
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