DHFL bonds downgrade

Reflects a larger underlying problem with NBFCs

Downgrade in bonds of DHFL and subsequent reaction of financial markets clearly indicates that one particular segment of financial markets, Non- banking finance companies (NBFCs), may once again coming under pressure.

One company’s bond getting downgraded is nothing new. But what makes DHFL downgrade significant is that it reflects a larger underlying problem with the NBFCs. It has the potential to destabilise financial markets, especially credit segment with negative impact on real economy. Delay on part of policy makers in responding to an issue could have serious consequences. IL&FS is a case in point. All warning bells were ignored while allowing the IL&FS issue to singe the markets. Only when things got out of control, government stepped in to salvage the situation.

IL&FS saga was the key to liquidity crisis during the festive season. Automobiles and consumer non-durable segments felt the heat of this crisis during the peak season for sales. Both the sectors continue to wriggle out of the tight situation. Hence, market regulator SEBI and Reserve Bank of India (RBI) may have to be very alert and take control of the situation spinning out of control with timely action.

In a conference call, DHFL had denied all allegations made in a media investigation. It claimed that promoters were not associated with any shell companies and denied reports on receiving notices from corporate affairs ministry on an inquiry. It’s but natural for a company to go on denial mode while it sinks under the weight of serious trouble. Denials notwithstanding, reports suggested that corporate affairs ministry was in the midst of an inquiry against DHFL.

While the drama unfolded, DHFL bonds traded at hefty discount to face value. There has to be a reason why debt markets are afraid of touching debt paper. It was the bond issued by DHFL sold at steep discount that triggered whole NBFC crisis in September 2018.

SEBI could have been vigilant about the DHFL’s conference calls and the claims made by management. These conference calls are normally investor relation exercise as part of damage control. In reality, these calls have the potential to mislead investors with no liability on the management at a later date. Similar calls were held last September when the crisis came to fore. While corporate affairs ministry would never come upfront to either confirm or deny reports on DHFL, the bourses could have stepped in and seek information from the company. Stock exchanges could have evaluated inputs from the company and disseminate the same. This could have helped ending the speculation. At this stage, Financial Chronicle is not making out a case either in favour or against the company. Minority shareholders and investors at large should know the facts.

Stock exchanges also seem to be shying away from their responsibility towards retail investors. When news reports hit the wire or hog headlines, stock exchanges are required to promptly issue notices seeking explanations on adversities that may impact investors.

In last one month, large companies that move the Sensex or Nifty were in news for wrong reasons. But, stock exchanges had not stepped in to seek explanation from concerned companies with minority shareholders becoming the casualty.    Written submissions procured by stock exchanges could instill fear on companies. Incorrect submissions could also lead to prosecution of directors.

Hence, companies may not risk providing incorrect information or data to stock exchanges. With a loan book of over Rs 1 lakh crore and liability spread across, regulators will have to take bond downgrades seriously.