SARANG WADHAWAN moved in Mumbai’s most-happening social circles and was known for throwing lavish parties—that were attended by the brightest stars of Bollywood—at his plush bungalow in the coastal town of Alibaug. Sarang and his father, Rakesh Kumar Wadhawan, owned a fleet of super-luxury cars, many speed boats, two private jets, a yacht and some hundred horses.
The wellspring of the Wadhawans’ riches was their real estate and housing finance companies. The family’s tryst with business began with a non-banking financial services company, Dewan Housing Finance Ltd (DHFL), in 1984. They later make it big in the real estate business with Housing Development and Infrastructure Ltd (HDIL), which went public in 2007, raising Rs1,485 crore. The money was used to acquire huge land parcels, development rights for new projects and construction of ongoing projects. In 2009, the Wadhawans restructured their businesses, with Rakesh gaining control of HDIL and his brother Rajesh and sons Dheeraj and Kapil taking charge of DHFL, which is a separate independent listed company.
In the recent years, though, the real estate business has been on the wane. Things particularly went downhill for HDIL when a key slum rehabilitation project in the Mumbai Airport area was cancelled by Mumbai International Airport Ltd following delays. HDIL initiated legal action, but the dispute was later settled by the two companies. The company had listed on the bourses at a price of over Rs500 a share. It closed last week at Rs2.13 a share. Its net profit in the year that ended in March 2019 stood at Rs106 crore on a revenue of Rs718 crore. In 2007-08, HDIL’s net profit was Rs575 crore on a revenue of Rs2,380 crore.
In August, the National Company Law Tribunal admitted HDIL under the insolvency and bankruptcy code, following an application filed by Bank of India. The company’s annual report shows it has six subsidiaries. Documents filed with the Registrar of Companies, however, show several other companies linked to Rakesh and Sarang Wadhawan, which had little revenue but had received loans in the past. The Enforcement Directorate is looking into some of these companies.
The Wadhawans ran into bigger trouble when Rakesh, chairman of HDIL, and Sarang, managing director, were arrested by the economic offences wing of the Mumbai Police on October 3 as the key accused in a multi-crore fraud at the Punjab and Maharashtra Cooperative Bank. The first information report says that between 2008 and 2019 HDIL had received loans from the PMC Bank’s Bhandup branch but never paid it back. “Even as the loans turned non-performing assets, PMC Bank’s managing director Joy Thomas and chairman Waryam Singh and other officials of the bank did not declare the loans as NPA and concealed the information from the Reserve Bank of India,” said the police.
The police said fictitious accounts with lower loan outstanding were created in a bid to hide the stressed accounts of HDIL and group companies, and these records were then submitted to the RBI. Some 21,000 dummy accounts are said to be created. “We found that there had been irregularities and this caused a loss to the tune of Rs4,355.46 crore to the bank,” said the police. Singh and Thomas have also been arrested.
The ties between PMC Bank and the Wadhawans go a long way back. The bank was started as a single-branch operation in 1984 with a capital of Rs10 lakh. But the capital had eroded within two years and the Wadhawans rescued the bank by pumping in Rs13 lakh. Again, when there was a run on the bank in 2004 following the failure of a few other cooperative banks, the Wadhawans deposited some Rs100 crore to help it tide over the liquidity crunch.
However, just as troubles started mounting for HDIL in 2013-14, the company started defaulting on its loans taken from banks. Thomas, in a confession letter to the RBI, said that the loans were never classified as NPA. The bank had opened separate accounts for various projects of HDIL. The dues were not reported to the bank’s board as well.
PMC Bank has 137 branches in seven states and deposits of around Rs11,600 crore. In the letter,Thomas said that in 2011, the bank’s advances were Rs2,000 crore, with the exposure to HDIL Group at Rs 1,026 crore. That has since grown and now reportedly is around Rs6,500 crore, around 73 per cent of its total loan book and four times the regulatory cap. RBI regulations say a bank cannot have exposure of more than 15 per cent of its total capital to a single account. For group companies, the limit is 20 per cent.
After a whistle-blower blew the lid off the matter, the RBI imposed restrictions on the bank under section 35A of the Banking Regulation Act, restricting it from doing any business for six months. The bank’s board was superseded and an administrator was appointed. Deposit withdrawals were also restricted to Rs1,000 per account, but later raised to Rs10,000, Rs25,000 and Rs40,000.
Though RBI Governor Shaktikanta Das claimed that the RBI acted “swiftly” and “promptly” as soon as the issue came to its notice and would not allow any cooperative bank to collapse, questions have been raised over how the regulator’s audits failed to detect a scam of this magnitude. Hapless depositors have been holding protests and meetings to try and get their money back. With the Central bank hiking the withdrawal limit to Rs40,000, about 77 per cent of the depositors will be able to withdraw their entire account balance. But, there are many who have fixed deposits worth significantly more. Under the current rules, depositor insurance covers only Rs1 lakh per bank account.
“A package can be worked out where in Deposit Insurance and Credit Guarantee Corporation, large institutional depositors and the government chip in to mitigate a part of the loss,” said corporate lawyer Mukesh Jain. “This will restore the balance of the balance sheet of PMC Bank and make it an eligible target for takeover by another commercial or a large cooperative bank, thus protecting the retail customers.”
HDIL, however, said that all its loans had enough security against them. The company has appointed real estate consulting firm Knight Frank to evaluate its properties that were secured with the bank. The value of these assets is estimated to be around Rs8,000 crore.
Unlike other scheduled commercial banks, cooperative banks in India are governed by dual regulation—the RBI as well as the Registrar of Cooperative Societies. The PMC Bank issue has highlighted the need for stronger regulations. For now, though, all eyes will be on the ED probe into the PMC Bank money laundering case and what the RBI would do to ensure that the bank does not go down.