Who is propping up the dead DHFL stock?

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Why does the stock market regulator allow such frenetic activity in the Dewan Housing Finance Corporation (DHFL) shares if the Reserve Bank of India (RBI) has already approved an insolvency plan that mandates wiping out the existing equity shareholding of the scam-hit shadow lender?

A clutch of retail investors, oblivious to the fact that their investments will turn zilch very soon, are rushing to the DHFL counter to buy the stock hoping to reap in good returns once the company is merged with Piramal Capital and Housing Finance (PCHFL) as per the approved resolution plan.

A quick look at the shareholding pattern reveals that retail investors (individuals holding share capital up to Rs 2 lakh) hold 39.12% stake in the company, up from 38.67% reported in March 2020 quarter. At current market price, their holding is worth Rs 232 crore.

On February 25, DHFL stock hit another upper circuit at Rs 18.90 per share.

Interestingly, even a nasty scam fails to impede investors. It is only last week Grant Thornton, a private auditor appointed by DHFL’s administrator, reported another fraudulent transaction of Rs 6,182 crore in DHFL. According to a regulatory filing made by DHFL, Grant Thornton in an initial report indicated that there are certain transactions which are “undervalued, fraudulent and preferential in nature”.

The estimated impact on the company amounts to Rs 5,381.90 crore towards outstanding principal, Rs 589.36 crore towards accrued interest and Rs 210.85 crore towards notional loss of interest on account of charging lower rate of interest. As per the report prepared by the transaction auditor, the concerned transactions occurred over a period of time, detailed in the report.

The administrator has filed an application with the NCLT Mumbai against 33 respondents, including its promoters Kapil Wadhawan and Dheeraj Wadhawan, and some entities such as Creatoz Builders, Ikshudip Fincap and Rite Developers, among others.

“This is not the first time when retail investors flock to such dead stocks and burn the fingers. For instance, months after Vijay Mallya reported absconding, the Kingfisher Airlines stock was going up, for no rhyme or reason. Obviously, some investors were playing a risky game,” said a Mumbai-based equity analyst. The question is if the regulator should really allow such activities on the stock exchange.

It is also not uncommon to see stocks reporting a sudden price spurt supported by substantial volumes even after stock exchanges announced delisting of certain stocks due to regulatory issues.

On February 18, RBI cleared the Rs 34,250-crore acquisition of DHFL by the Piramal Group. Piramal plans to merge DHFL with its financial services business as soon as the National Company Law Tribunal (NCLT) approves the transaction. On January 15, the lenders to DHFL voted in favour of Piramal’s debt resolution plan for DHFL, paving the way for the turnaround of the bankrupt housing finance company. Piramal had offered upfront cash of Rs 14,700 crore, including cash on DHFL’s balance sheet, and a deferred component (non-convertible debentures) of Rs 19,550 crore.