InvestorQ : I am holding shares of DHFL and wanted to understand the latest status on the company? Can we expect a bailout by the government?
Chandralekha Desai made post

I am holding shares of DHFL and wanted to understand the latest status on the company? Can we expect a bailout by the government?

Mitali Bhutta answered.
2 years ago

I think you should forget about a government bailout as that is unlikely to happen. The government has already indicated that it will not participate in DHFL bailout. This is despite the fact that in the last few months, there have been strident calls for the government to intervene and sort out the DHFL mess. The problems at DHFL started when IL&FS began to default in the middle of 2018. This not only led to bad investments for DHFL but it spiked the cost of funds for most NBFCs. The sharp spike in bond yields gave a clear indicate that default was a real possibility.

How and why should the government bailout DHFL? There are two ways to look at the DHFL case. Firstly, DHFL does represent a major systemic risk. It has total loans and bonds to the tune of Rs.102,000 crore. This includes banks, insurance companies, provident funds and even retail investors. Most banks have also been supported by the government through recapitalization and hence any further support looks unlikely. That may not warrant government intervention at this point of time. Of course, there is the case of clients of DHFL but these are builders and they will benefit when the real estate completion package is worked out. Like in the IL&FS case, the government wants resolve rather than bailout.

The bigger concern for the government is about creating moral hazard in this case. If the government intervenes to rescue DHFL, it may have to do the same for many more such cases that come along in future. To that extent, it would set a bad precedent in the market. Secondly, the problems at DHFL (like in the case of its sister HDIIL) appear to be a mix of bad business decisions and wilful fraud. The first priority of the government would be to use the ED, the SFIO and forensic teams to determine the extent of money that has been lost and the extent that has been siphoned out. Unless there is clarity on this front, the government would not be too keen on bailing out. After all, bailing out a private business that makes reckless business decisions is not a good idea and hence they are unlikely to bailout the company from the mess with public funds.

For the government, the best way may be to let losses happen. DHFL was fundamentally flawed but managed to leverage its market value over the years. That is hardly sustainable. The best option is to monetize the assets of the company, apportion to stake holders and take strict action against erring promoters. The government is right that it should set an example and not an unhealthy precedent for the future. You must not expect any bailout in the case of DHFL.