Are gullible retail investors driving this troubled shadow bank?

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The shares of Dewan Housing Finance Corp. Ltd (DHFL) hit upper circuit for the third consecutive day on February 16 even as Piramal Group is all set to wipe out the existing equity holding and delist the stock before merging it with its financial services subsidiary, Piramal Capital Housing Finance Ltd (PCHFL).

“It is really strange. The stock will not have any value once it is delisted. Gullible retail investors, who hope to make a quick buck, are buying into the stock,” said a stock market executive who heads the capital market strategy division of a leading brokerage.

For four consecutive days (February 12, 15, 16 and 17) the DHFL stock hit the upper circuit and rose 5% each day. On February 17,  the stock locked itself to the upper price band of Rs 17.20 per share while on February 12, the surge was aided by a volume of 1.4 crore shares, the subsequent days reported a volume of 18.9 lakh and 5.6 lakh, respectively.

This is despite the fact that on February 13, the troubled lender posted a consolidated net loss of Rs 13,095.38 crore in the third quarter ended December 2020 against a net profit of Rs 934.31 crore in the year ago quarter. Sequentially, the company witnessed widening of net loss from Rs 2,122.65 crore reported in the second quarter ended September 2020.

The beleaguered company, now being run by an RBI-appointed administrator, is being investigated by the Serious Fraud Investigation Office (SFIO). In the stock exchange filing, DHFL also said that an additional transaction amounting to Rs 1,039.84 crore was identified and reported during the quarter. The company said it has made provisions as per the National Housing Bank (NHB) guidelines on provisioning pertaining to fraud accounts.

A consultant working with the DHFL’s Committee of Creditors (CoC) said once the approvals from the Reserve Bank of India (RBI) and the National Company Law Tribunal (NCLT) are in place, Piramal will delist and take over 100% of its shares. The proposed plan does not envisage any offer to buy out the shares held by existing investors, which is a regular feature in delisting stocks. The CoC has okayed the plan for wiping out the existing shareholders as part of the resolution process, and it is a matter of time it gets a final clearance from regulators.

The promoters – Wadhawan family and Wadhawan Global Capital Ltd – hold 12.3 crore shares, accounting for 39.21% of the paid-up equity. Retail investors hold around 15 crore shares, amounting to 40% stake. LIC holds 3.44% and the remaining is held by NRIs, HUFs and corporate bodies.

For Piramal Group, the DHFL deal is valued at Rs 34,200 crore, comprising an upfront cash component of Rs14.700 crore (including cash on DHFL’s balance sheet) and a deferred component (non-convertible debentures of 10 years to the existing DHLF lenders) of Rs 19,550 crore.

The deal is expected to be concluded in next 2-3 months.