First insolvency resolution in the financial services space

In the first insolvency resolution in the financial services space, Piramal Group has concluded payment of Rs 34,250 crore to take over Dewan Housing and Finance (DHFL). The deal is likely to help banks that had been hit by the companys collapse.

The payment will bolster the finances of banks that have written off loans to DHFL, whose promoters are accused of fraud. Overall, financial creditors will receive close to Rs 38,000 crore, including the liquid cash with DHFL and Rs 19,550 crore of bonds.

The amount received by creditors will be around 46% of their admitted claims. SBI, Bank of India and Union Bank will be among the beneficiaries. Fixed Deposit holders will, however, get less as they had voted against the resolution plan, which entitles them only to liquidation value. As a result, they get only Rs 1,241 crore, or 23% of their admitted claims of about Rs 5,400 crore.

Piramal Capital and Housing Finance (PCHFL) will merge with DHFL, and the merged entity will be renamed PCHFL. Piramal Group chairman Ajay Piramal said in the short-term the group would rebalance its loan book to 50-50 between retail and wholesale, but retail would be two-thirds of the book in the medium-term. Currently, its dominated by wholesale exposure.

He said the company would offload the wholesale book of DHFL soon. When asked whether the group would continue to look at acquisitions, Piramal said post-integration, the company would have a debt-equity ratio of 3.5:1, giving enough headroom to acquire if an opportunity presented itself.

With this deal, the Ajay Piramal-led group has made a decisive shift in focus to retail lending. The group had earlier brought in Jairam Sridharan, a senior executive from Axis Bank, to grow the retail portfolio. Piramal, who made his fortunes in pharma, changed focus to real estate and diversified into lending. Six years ago, the group had looked at IL&FS before the collapse of the infrastructure and finance group. Piramal Enterprises had also parallelly picked up a stake in Shriram Capital with an eye on synergies but chose to exit when things didnt work out in 2019.

Going forward, the group would evaluate the insurance business but had no plans to get into asset management, Piramal said. The acquisition is in line with our road map to transform our financial services business over the last two years. We raised Rs 18,000 crore of equity and strengthened the balance sheet to take advantage of such large opportunities. We have significantly reduced debt-to-equity creating headroom for significant growth in the merged entity, said Piramal.

The combined entity will have 301 branches, 2,338 employees and over 1 million lifetime customers. We have built a technology platform with an advanced analytics engine and AI/ML capabilities, which can be deployed across a larger base of customers, said Piramal Group executive director Anand Piramal.

Q 1. What is your analysis on the strategy used by Piramal Group?

Q2. How banks are involved in this case?

Q3. Give your comments on first insolvency resolution in financial services space?