DHFL Auditors Raise ‘Significant Doubt’ On Going Concern Status, List 6 Qualifications

The joint auditors of home financier Dewan Housing Finance Corporation Ltd. have listed several qualifications and disclaimers to the company’s annual financial statement and said its ability to continue as going concern is in “significant doubt”.

“The ability of the company to continue as a going concern inter alia is dependent upon its ability to monetise its assets, secure funding from the bankers or investors, restructure its liabilities and recommence its operations, which are not wholly within control of the company,” said the auditor’s report signed by partners at Chaturvedi & Shah LLP and Deloitte Haskins & Sells LLP.

The company’s results were first released on July 13 were unaudited. The board today approved the audited results and the accounts carry a list of six qualifications of which at least three have a material impact on the financial statements.

Unsecured Inter-Corporate Deposits

The auditors found significant deficiencies in the grant and rollover of Rs 5,652 crore of inter-corporate deposits including lack of commercial rationale for granting the ICDs and non-availability of evaluation of credit-worthiness of the borrowers.

While the company said it was working towards remediating these and hence no adjustment was required in the carrying value, the auditors said they did not have sufficient evidence to evaluate the recoverability of the ICDs.

Loans And Pass-Through Certificates

DHFL has earlier disclosed that there were instances where cheques received from borrowers (project and mortgage loan customers) were not banked at the instance of the borrowers but the receipts were accounted for. According to the company, this impacted Rs 1,875 crore in collections. The auditors have noted that the gross value of such loans aggregate Rs 16,487 crore.

BloombergQuint had earlier asked the company why these loans had not been labelled as “stressed”.

Of these, for loans worth Rs 13,112 crore and an additional set of Rs 10,964 crore loans, the auditors did not receive sufficient information and explanations regarding credit, legal and technical evaluation and evidence for end use monitoring. They have also raised doubts on whether these loans have been properly secured. In its earlier filing DHFL had stated there were “lacunae” in loan documentation of over Rs 20,750 crore in loans.

The company had also stated there was a mark-down in the fair value of wholesale loans which the company intends to sell resulting in a fair value loss of Rs 3,190 crore. The auditors said they have also not received sufficient evidence regarding fair value changes:

• of Rs 3,253 crore on loans worth Rs 31,628 crore
• of Rs 68 crore on pass-through certificates of Rs 257 crore

Deferred Tax Credit

A net deferred tax credit of Rs 442 crore as on March 31 had helped the company limit its losses. But the auditors said they did not receive sufficient evidence “to validate the company’s assessment about the carrying value of the deferred tax asset”.

The other audit disclaimers include:

CobraPost Allegations, Subsequent Review
News platform Cobrapost had made several allegations against DHFL regarding divergence of funds. The audit committee appointed an independent firm to investigate the allegations but the auditors says their suggestions on the scope and coverage of the investigation were ignored. Also, the firm’s report has not been adopted or approved by the audit committee.

The auditors said it was not clear what impact the allegations would have on the financial results and whether any adjustments or restatements would be required.

NHB Observations
DHFL had earlier noted that its capital adequacy ratio has been pegged down due to observations made by the National Housing Bank, to 10.24 percent compared to the 17.74 percent as of December 2018. The regulator’s observations have not been disclosed.

The auditors said they were unable to determine the impact of these observations, if any, on the financial statements.

Expected Credit Loss Model
As part of its transition to Ind AS DHFL said it was implementing an expected credit loss model. The company said deficiencies had been identified in the historical data used for this but stated the resultant impact would not be material.

The auditors said they were unable to comment on assumptions made in the ECL model and its impact, if any, on the financial statements.

Going Concern Status

The auditors have raised doubts about the company’s going concern status due to the following...

• Rs 1,036 crore loss for the financial year 2018-19
• Net current liabilities of Rs 754 crore as on March 31, 2019
• ‘Default’ credit rating which may impair the company’s ability to raise funds and repay obligations
• the various audit qualifications made in the report

And while they’ve noted DHFL’s efforts to monetise assets, restructure borrowing and promoter stake sale, these are not wholly in the control of the company.