Mumbai: Dewan Housing Finance Ltd’s (DHFL) decision to sell its life insurance business to a wholly-owned subsidiary is being criticised for its complex structure and for allegedly being against the interests of minority shareholders.
In a stock exchange notification on 14 February, the housing finance company first said that it is seeking shareholder approval for selling its stake in DHFL Pramerica Life Insurance Ltd to DHFL Investments Ltd. To pay for this purchase, DHFL Investments will issue compulsorily convertible debentures (CCDs) to Wadhawan Global Capital Pvt. Ltd, with a conversion period of 100 months. Wadhawan Global is the promoter entity of DHFL.
The problem, as proxy advisory firm Stakeholders Empowerment Services points out, is that after encashing its ownership in the life insurance company, DHFL will continue to have an option in it which may result in the housing financier owning DHFL Pramerica Life Insurance once again.
Wadhawan Global would earn interest for the 100-month conversion period on the CCDs and if it finds itself in a position of positive return, will end up converting the securities and own the life insurance company through DHFL Investments.
“While details are not there in the notice, the drafting of notice indicates that, effectively in the entire transaction, DHFL ends up encashing its ownership of DPLI (DHFL Pramerica Life Insurance) into cash and converting it into option. In nutshell transaction is akin to a SWAP transaction,” SES said in a report on Tuesday.
DHFL currently owns a 50% stake in DHFL Pramerica Life Insurance and fully owns DHFL Investments. Once the conversion period on the CCDs ends, Wadhawan Global would own more than 50% in DHFL Investments and would thus end up controlling the insurance company as well.
According to the proxy advisory firm, this deal is not in favour of minority shareholders as only the promoters of DHFL seem to be benefitting from it.
SES believes that as per its understanding the ownership of the insurance company may come back to DHFL at a later date. When it will happen, under what circumstances and at what cost is not known, it said in its report. No further approval will be required from shareholders in respect of this related party transaction, the firm pointed out.
“SES is of the opinion that such unfettered discretionary powers with incomplete disclosure defeats the entire purpose of having the resolution approved by the shareholders and is against the principles of good corporate governance,” it said.
The home finance company said that there was nothing wrong with the deal it had proposed and that it is fully compliant with all applicable laws. Besides, DHFL says, the deal is also subject to regulatory approvals which are still pending.
“The Board and the company believes this transaction is in the best interests of all its stake holders,” a DHFL spokesperson said in an email response.
In the notification that the company released, it said the valuation of the insurance company is expected to be between Rs1,690 crore and Rs2,200 crore. DHFL has appointed Willis Towers Watson, a leading insurance sector valuer, to find out the value of DHFL Pramerica Life Insurance, the spokesperson quoted above said. The stake sale unlocks the value of the share by 55 times to its book value, amounting to Rs1,690 crore even at the lower end of the valuation.