With a loan book of more than Rs. 1 lakh crore, The Dewan Housing Finance Corporation Limited (DHFL), which was established in 1984, quickly rose to become one of India's largest housing financing organisations. Cobrapost, a digital news outlet, claimed that DHFL had syphoned off funds through a network of shell businesses, which led to the company's problems coming to light in 2018. The business was also charged with lending money to fictitious businesses that then transferred the money to DHFL. The outcome was a significant decline in the company's stock price and increased scrutiny from both investors and regulators.
The DHFL Scam - What Went Wrong?
The DHFL scam is a classic example of poor corporate governance because the promoters and management of the company were charged with abusing their positions of responsibility for personal benefit. The Wadhawan family, the company's promoters, held major stock in DHFL as well as important executive roles. This made it easier for them to commit fraud because they had total control over the business's operations and money.
One of the primary ways that DHFL stole money was by lending money to phoney companies who then utilised that money to send cash back to DHFL.
The Wadhawan family and its accomplices controlled these shell firms, which were used to inflate the company's books and display a greater profit than was actually being made. As a result, the business was able to attract more investment capital, which it subsequently used to grow its business operations.
Inflating the worth of its assets was another way the business engaged in fraudulent activity. DHFL had a sizable loan portfolio, which it said was backed by assets including real estate and land. Later, it was discovered that many of these assets had either been overpriced or were nonexistent altogether. As a result, investors ran a larger chance of losing money since the company's loan book was not as secure as it had represented itself to be.
The DHFL Scam - Regulatory Failures
The DHFL scandal shows regulatory shortcomings that allowed such fraudulent actions to go unnoticed for so long in addition to highlighting an instance of poor corporate governance. The Reserve Bank of India (RBI), which is in charge of overseeing NBFCs like DHFL, was unable to spot the abnormalities in the business's operations. The Securities and Exchange Board of India (SEBI), which oversees the stock market, was unsuccessful in identifying the fraudulent actions at DHFL.
The DHFL Scam - Impact on Investors
Investors were severely affected by the DHFL hoax since many of them had staked their entire life savings in the company's stocks and bonds. The stock price of the corporation dropped precipitously, wiping out investor money worth billions of dollars. However, the corporation missed bond payments, putting many investors in a dangerous situation.
The DHFL Scam - Lessons Learned
The DHFL fraud makes clear that India's financial sector needs improved corporate governance and regulatory control. Regulators must make sure that businesses adhere to the highest standards of corporate governance and hold them accountable for their decisions. When making an investment in any company, especially one in the financial sector, investors must also exercise caution and complete due research.
In conclusion, the DHFL fraud serves as a warning about the damaging effects that corporate greed and regulatory lapses can have on investors and the economy as a whole. It serves as a reminder that the financial industry has to be tightly controlled and that businesses must be held accountable for their deeds. As investors, we must also be cautious and perform extensive due diligence.