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Men in Suits


The non-banking financial sector in India is a shadow banking sector that leaves a lot of scope for the occurrence of corporate governance fraud. Lack of regulations plagues this sector, due to which the corporate governance norms are weak. One such case which highlights the plight of governance in NBFIs is the DHFL scam whose case study is unfolded below.


DHFL (Dewan Housing Finance Corporation Limited) was incorporated in 1984 and was registered under the Companies Act 2013 as a non-banking financial company. As the name suggests, the primary role of a NBFC is wealth creation and facilitation of credit in an accessible manner. The founder of DHFL was Mr Rajesh Kumar Wadhawan. Later, its promoters included Aruna Wadhawan, Kapil Wadhawan and Dheeraj Wadhawan. Kapil Wadhawan was the Chairman and MD of DHFL. The company was headquartered in Mumbai whose branches were spread across India. DHFL majorly catered to providing home loans to lower- and middle-income groups in rural and semi-urban areas. It was regarded as one of the most successful housing finance companies with its AUM (asset under management) valued at ₹1.01 trillion in 2017.

The wrongdoings of DHFL were unearthed when Cobrapost, a small media company, revealed evidence-backed allegations against DHFL in January 2019. It revealed a financial misdeed to the tune of a whopping ₹31,000 crore. The explosive allegations against DHFL alerted investigation agencies to step into the matter. Below is a detailed story on how the promoters of DHFL carried out the scam in a systematically planned manner.

It is also a sorry state wherein the hard-earned money of common people deposited in nationalised banks ends up as part of a massive scam. The public money is siphoned off in cases of such fraud. Because DHFL is an NBFC, Indian banking companies like the State Bank of India and Bank of Baroda had lent funds to the company. In fact, a sum of around $3 billion was invested by the banks in DHFL. The company, later on, misappropriated the funds, leading to huge losses for the lenders who ultimately house the money of the common public. Thus, corporate marauders like these impact not only the economy but also the pockets of the general public.

Advancement of Loans to Shell Companies

A shell corporation is basically a company which exists on paper and has a legal identity but it does not have any active business operations or employees or assets of its own. A shell company by itself is not an illegal entity but using it as a medium to commit illegalities is prohibited. However, it can often be observed that shell companies are used as vehicles to facilitate financial manoeuvres. It is used to trick the regulatory and taxation authorities.

Similarly, in this case, DHFL had lent loans worth ₹31,000 crore to many shell companies. It was later found out that 45 such shell companies to whom loans were advanced had the same addresses and directors. The pattern of loan disbursement was also quite dubious. Loans were disbursed in a single go rather than in instalments.

The real issue was that DHFL had granted loans to these shell companies without any collateral security. According to the guidelines of the Reserve Bank of India, a loan can be granted to a company only if it is in a position to mortgage its property. DHFL had advanced loans to numerous shell companies without any mortgages. This itself is a reason to raise a lot of suspicions.

If shell companies failed in repayment of loans, money recovery would be a Herculean task since these companies and their promoters do not own any assets. Neither did the loans have any collateral security nor there was any personal guarantee of promoters. And something which was feared happened. Shell companies failed to repay and the recovery process could not be initiated against unsecured loans and against promoters of shell companies who had no personal assets. The loans turned into NPAs (Non-Performing Assets) for DHFL.

Was this just negligence on part of DHFL or did the promoters have mala fide intentions?

Round tripping

Advancement of loans to numerous shell companies and that too without mortgage points us to a well-planned mala fide strategy of the DHFL promoters. Shockingly, these pass-through entities were revealed to have indirect connections with the promoters of DHFL. Once the loan was given to shell companies, the money from a shell entity’s bank account would later flow to DHFL-owned entities. This is termed round-tripping. If observed carefully, the entire process is an indirect circulation of money to DHFL’s promoters. The promoters later used the money for their personal benefit. They purchased assets in several countries like Dubai, the UK, Mauritius, India and Sri Lanka and were also alleged to have purchased a cricket team in Sri Lankan Premier League using such proceeds. They shrewdly purchased properties in other jurisdictions to escape legal action from Indian authorities and as a gimmick to evade huge taxes. Dheeraj and Kapil Wadhawan also made political donations during the election period. They transferred crores to companies in Gujarat and Karnataka under the guise of schemes.


The company started defaulting on loan repayments to the banks in May 2019. It was unable to pay interest. The company also borrowed from mutual funds and insurance companies through the issuance of Commercial Papers (CPs). DHFL defaulted on payments worth ₹900 crore, due to which its CP rating deteriorated to “D”. In total, DHFL owed around ₹83,873 crore to banking institutions, mutual funds, National Housing Board and all bondholders.

Given the fraudulent revelations and financial irregularities, DHFL was pushed into insolvency proceedings by the RBI in November 2019.

Auditor’s report

After the initiation of insolvency proceedings, auditor Grant Thornton was appointed to prepare a forensic report. The report prepared brought some shocking disclosures into the limelight. DHFL had created lakhs of fake home-loan accounts. Precisely, it created 2,60,000 fake accounts under the garb of PMAY (Pradhan Mantri Awas Yojna) and transferred thousands of crores to these accounts. The scheme was introduced by the government to uplift economically weaker sections of society for the construction and development of housing units. The government tied up with banks and NBFCs to provide loans to such eligible low-income members at credit-linked interest subsidies, which would later be reimbursed by the Central Government. DHFL misused the scheme to make personal, illicit gains. In addition to fake loan accounts, the report showcased that it also created imaginary and fictitious firms in Bandra to route its deposits. It routed ₹11,755.79 crore to these imaginary entities.

The report reaffirmed that the disbursed funds somehow travelled back to entities which were connected to DHFL’s promoters or their relatives, highlighting the corrupt intentions of the promoters.

Corporate Governance concerns

Lack of inspection

Inspection lapses are prima facie visible in the company’s procedure to grant huge loans. This can easily be observed from the fact that the address of many shell companies was the same as the registered address of DHFL. If due diligence had properly been conducted by the company’s concerned officials, this fact alone would have been enough to raise a voice, oppose the grant of loans and report the mala fide intention. However, the mala fide intention of the promoters seems to have manipulated the loan decisions completely.

Failure of Auditors

Auditors failed to spot the tricky transactions to shell companies. DHFL successfully concealed information about such loans in their financial statements and auditors could not catch the irregularities and publish them in their reports. It highlights the lack of effectiveness of the audit committee.

Business ethics

The principles of business ethics were completely shattered in this case. The way in which the promoters of DHFL smoothly pulled off the scam highlights the lack of an efficient internal control mechanism with no transparency and accountability in the company’s system. Stakeholders are hurt the most when business ethics are compromised because they lose all the money for having shown faith in the company.

Consequences of DHFL scam

The exposure of the scam led to a huge dip in the stock price of DHFL and investors lost huge amounts of money. Scams like these dent investors’ confidence badly and make the atmosphere of the stock market extremely negative.

The loans advanced to shell companies were pooled using the money of fixed deposits collected from depositors. Depositors were rightfully entitled to withdraw their money in fixed deposits along with interest. However, since loans were given to dubious shell companies, they were never repaid by these companies, leaving DHFL as a company with liquidity deficiency. And since DHFL was facing such a cash crisis, it did not have enough to give depositors their money back, severely affecting their withdrawals. Further, the accumulation of NPAs decreased the ability of DHFL to lend the needy borrowers.

It is a vicious circle. When a giant NBFC is unable to provide loans, it creates a capital deficiency in the market. It closes a significant window to borrowers who are in need of such loans to purchase or construct houses. And insufficiency of funds reduces the demand for housing units in the market, thereby impacting the real estate industry. And when a capital-intensive industry is affected, the economy of a country is also affected to a large extent.

It was a huge scandal that developed hesitance in the minds of common people in parking their money in banks and NBFCs. It tarnished the image of the financial sector of the country. It emphasises the importance of checks and balances in the corporate governance measures in NBFCs. The accountability of a Managing Director and transparency in the overall system must be ensured. The sanction of loans without thorough due diligence must be forbidden. The loopholes in the corporate governance of NBFCs should be repaired in order to reinstate the faith of investors.

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