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The story of the Wadhawan brothers. How they built a solid business only to run it aground

The Wadhawan brothers sparkled with success till the tinsel deserted them 

Taloja is 50 km away from Mumbai and, often, the first association with the location is its jail. It has housed the likes of gangsters such as Abu Salem and Arun Gawli. One of its more recent occupants is Kapil Wadhawan, former promoter of DHFL, who has been there since this April. The CBI has charged Kapil and his brother Dheeraj with siphoning off money from the housing finance company, with the help of Rana Kapoor (Yes Bank’s co-promoter).

This is how their quid-pro-quo arrangement seems to have worked. The bank invested, CBI’s FIR alleged, Rs.37 billion in DHFL’s short-term debentures and Kapil paid a kickback of Rs.6 billion in the form of a loan given by DHFL to DOIT Urban Ventures, a Rana Kapoor group company. A similar favour seems to have been returned to Kapil’s family from Yes Bank: The bank had sanctioned a loan of Rs.7.5 billion to RKW Developers, DHFL’s group company and beneficially owned by Kapil and family. This loan was for DHFL’s Bandra reclamation project in Mumbai, but the investigating agency believes the entire amount was siphoned off by Kapil (and his brother Dheeraj) through their shell companies.

After the IL&FS crisis that shook the entire NBFC sector, the Yes Bank probe sounded the death knell for Kapil’s empire. Under pressure, he has had to sell much of what he owned just to stay afloat. Today, the core housing finance business that he created is on the block while he has landed in prison.

To Kapil, who is fighting hard to prove his innocence, this must seem like a nightmare. His grand story of creating a robust financial services conglomerate has diminished fast into a tragedy, with value erosion at all levels.

Outlook Business sent emails to DHFL and Kapil’s communications agency, and neither of them responded.

Swashbuckling days
What Kapil said around fifteen years ago still rings loudly in the ears of this financial-services professional. Kapil had said, “We will make a lot of money and so will you.” This was at a meeting to get the professional to join Dewan Housing Finance Corporation as CEO.

Narrating the story, the person does confess to having been impressed with the sales pitch. “Kapil can be very convincing when he wants to,” says the man, who today is an independent consultant. At that point, Dewan had just acquired Vysya Bank Housing in mid-2003 for Rs.230 million — a small change in today’s context as Dewan’s total housing loan portfolio would eventually reach Rs.9.5 billion. A few months prior to this, IFC, a World Bank affiliate, had given Dewan a loan of Rs.700 million. Known to be conservative with its lending decisions, this was viewed as a big breakthrough moment for Dewan. 

Much as the person gave the lucrative offer a good, hard thought, he decided to turn it down. “Kapil was slick. It’s hard to beat him when it comes to being suave or wearing the right labels, but there was also a sense of discomfort about the business,” says the consultant. According to him, there was always unease in the market about the company’s source of funding, and its proximity with the government and bureaucrats. Interestingly, that opinion about Kapil is unanimous in conversations with anyone who has known him as an employee, business associate or an acquaintance.

Kapil has always lived a hallowed life, in a sprawling apartment in Bandra, an upmarket Mumbai suburb. He owns several floors in the same building. Always surrounded by gun-toting security guards sourced from Israel (some of them are rumoured to have worked for Mossad) and Ukraine, Kapil’s existence was that of a film star, politician and a businessman all rolled into one. Ostentation was the name of the game. Many who knew him say he lived it up with a car fleet that had the likes of Rolls-Royce Phantom and Bentley, apart from owning a luxury yacht. “Kapil’s reputation was always ahead of the business. Nothing interested him more than access to the rich and powerful,” remarks a prominent Mumbai-based real-estate developer.

Right after acquiring an MBA from Australia’s Edith Cowan University, Kapil joined the family business of affordable housing in the mid-1990s, when his father Rajesh ran the business with brother Rakesh. When the two senior Wadhawans started out, in 1984, it was only the second housing finance company (then known as Dewan Housing) in the country after HDFC and they focused on Tier-II and Tier-III locations.

Dewan became a player of serious consequence and Rajesh Wadhawan (he passed away in 2000 after going through a period of poor health) had always dreamt of growing it beyond housing finance. In time, Kapil got into areas such as insurance, asset management and education, both organically and through acquisitions. A close associate reveals that Kapil’s grand desire was to get into banking at some point in time.

The story goes that the senior Wadhawan had told his son to look for opportunities in roti, kapda aur makaan (food, clothing and shelter). With housing already in their kitty, Kapil, then 32, ventured into grocery retailing. The first outlet of Spinach was opened in 2006. In less than two years, he acquired Sangam Direct from Hindustan Unilever followed by Sabka Bazaar, then owned by Delhi-based Home Stores. Officials, who worked with him then, recollect Kapil as being fascinated by scale but also being a bit of a flawed boss. “He would give the professionals room but would listen only to those who were close to him. Unfortunately, most of them were not very competent. Kapil was sophisticated to the world but a lala (intent only on making money for himself) deep down,” says one of them. The grocery business struggled after the first three years and was sold to Kishore Biyani. Kapil then allegedly planned a fashion retail foray but dropped the plan after being advised against it by those around him. All his attention was now back on housing finance and he was intent on other opportunities in financial services. That was 2011.

From 2014, there was thrust towards lending to developers. Then, no more than 10% of the book came from developers. In three to four years, with the new strategy, that percentage almost doubled. But, in smaller centres, the quality of developers cleared for loans was dubious (See: Lack of prudence). This compromise did nothing to temper Kapil’s burning ambition.

Someone who worked with Kapil for years recalls a strategic meeting in 2016, little more than a year after DHFL’s application for a banking license. “Kapil spoke passionately about the opportunities in digital. He wanted DHFL to create a super app where every consumer’s financial service requirement would be satisfied. The intention was great but we had no idea then that he was associated with Rana Kapoor... that came as a shock, later,” he says. To this colleague, this obsession for growth was good for DHFL, “however, Kapil’s way of chasing it, by working with dicey builders and getting whatever he wanted done through his network, was questionable.”

In January 2020, Kapil was arrested (and later released on bail) in connection with a money-laundering probe. This was traced back to Iqbal Mirchi, a close aide of Dawood Ibrahim. The charge was that a loan of Rs.21.86 billion, that DHFL lent to Sunblink Real Estate, had been routed to Mirchi.

Glamour comes unstuck

Kapil’s younger sibling Dheeraj has been a stark contrast to his brother and is described by former employees as “being rough around the edges”. If Kapil was a sartorial delight, Dheeraj, who went by the nickname of Baba, was always seen in casuals (jeans and a shirt left untucked was the staple attire) with a stubble. “That is how he dressed to work or even to meet people outside. He possessed no understanding of the DHFL business and could be an embarrassment,” says a former DHFL employee, who closely worked with the brothers.

Responsibilities between the two were demarcated and Dheeraj had little to do with the financial services company. His time was spent in the entertainment world for both pleasure and business. The two brothers had set up a company called Kyta Productions in 2016. Headed by Ajay Kapoor, an old T-Series hand, it co-produced films such as Baazaar (a Saif Ali Khan-starrer released in 2016 and ironically positioned as “a thriller about money, power and the stock market”) and Romeo Akbar Walter (starring John Abraham, which hit the theatres last year).

Both brothers had close friends in Bollywood and having spent much of their life in Bandra, it brought them into proximity with the film folk in that area. They hosted lavish parties (they were also in the restaurant business which they sold), pictures of which were liberally splashed in the entertainment pages of newspapers and glossies.

Film production was Dheeraj’s brainchild and he launched it with much fanfare. Today’s reality is markedly different — details sourced from the Registrar of Companies shows that Kyta has not filed its financial numbers after FY18. For that fiscal, it was in the red by Rs.280 million and the buzz in film circles is that the company has all but shut down.

On rare occasions, Dheeraj attended meetings of the financial services company. A public sector bank official recalls one such encounter in 2017 and Dheeraj being dressed very casually for the meeting. “He was sent by Kapil and we were a little surprised,” he says. It was meant to be a routine meeting for a loan and a few questions on the business drew unconvincing answers. “There was clear lack of awareness and he kept fumbling. By that time, there was already some nervousness about DHFL, and we did not go ahead with the lending.” The banker says Dheeraj was perhaps sent “to test me out”, that is, to see if the banker was amenable to cutting deals.

That sense of discomfort was not restricted to just the lenders. What also stands out is the unwillingness of any of the international property consultants to do serious business with DHFL, barring a valuation exercise which the group did. A top official at one of them, who knew Kapil socially, describes him as someone with “a supreme level of confidence and giving you the message that anything can be managed”. According to him, dealing with them was an eye-opener. “You were talking to a bunch of cowboys,” he says wryly. Opening up a bit, the person says the three components of the real estate business are politicians, municipal corporations and the police. “Many businessmen manage one or at best two. The brothers had all three in their pocket,” says the property consultancy official.

That did not always work out. The proposed buyouts of IDBI Home Finance and PNB Housing, for instance, came a cropper. The buzz in financial circles was that it would have helped DHFL get closer to the top slot in housing finance, but Kapil did not have connections in New Delhi as he did in Mumbai. “Delhi is what mattered in these two acquisitions and that was beyond his control,” says the official.

Crash of the titans

Within DHFL, September 21, 2018 came to be known as Black Friday. It was when the contours of the company were to change forever. It would be the harbinger of more bad news.

When the company’s stock crashed 60%, even the usually unflappable Kapil was flustered. It was straight after the IL&FS crisis and the buzz that it would be hard pressed to meet its loan obligations played havoc. Amit Tandon, founder and managing director, IIAS, a proxy advisory firm, says the speed with which IL&FS impacted the other players or “the rapidity in the way the contagion spread” was disconcerting. “With the benefit of hindsight, we can say the issues that were simmering at Yes Bank combined with the developments at IL&FS explained the size of the impact,” he says.

Recalling that day with anguish, one of his core team members recalls how Kapil, out of the blue, called for a meeting at 12:15 pm. “It was otherwise a very packed day and we got together in the conference room. It was a tense moment and Kapil said he had no clue what was triggering the freefall,” narrates the person. Work was quickly apportioned and the task on hand was to reach out to all stakeholders — be it banks, mutual funds or ECB holders. Right after that 20-minute briefing, Kapil was live on television allaying fears on the future of DHFL. “His typical work schedule prior to this was come in around 11 am and leave by 4 pm. Kapil delegated very effectively and that was the good part about working with him,” says another top official. All that changed right after this day and, for the next few months, he would start his day at 9 am and was at work till midnight. “We had never seen him so hands on ever. It was a revelation but also a sign of the company becoming very shaky,” says the team member.

It was much later that fateful day, when news of DSP BlackRock having sold DHFL’s short-term debt paper trickled in. In a chat with his team a couple of days later, Kapil is said to have remarked, “I wish they had communicated this during market hours. Much of the damage could have been avoided.” DSP BlackRock sold DHFL’s AAA-rated debt paper worth Rs.3 billion. Later, it clarified that the decision to sell was to mitigate interest rate risk and not credit risk. The market viewed it as an indication of default. From September 1, the DHFL stock had been falling and the news development around DSP BlackRock exacerbated the fall.

A former associate of Kapil says there was still a chance that things could have been turned around, but a knockout punch was delivered soon after. Four months after its stock price crashed, Cobrapost wrote that DHFL’s promoters had siphoned off over Rs.310 billion. Terming it the biggest scam in Indian history, the article claimed it was pulled off with the help of shell companies to whom loans and advances were made. “That just killed us and we knew it would be impossible to recover from that point,” says the associate.

Prior to this, Kapil, between that November and December, was in discussion with some of the largest private equity funds to invest in DHFL. An official at a large PE fund, who met Kapil then, says the company’s retail book was still good. “The problem was with the wholesale book (loans given out to developers). It was terrible and that’s why he was looking to raise money. No sensible investor would touch it,” he says. What stands out in this person’s mind was Kapil’s demeanour. “Looking at him, you could never guess that he was in the middle of a mess. He just seemed so cocksure about everything.”

Once the IL&FS crisis broke out, the big lenders feared (and rightly so) that more NBFCs would be in a soup (See: Crisis of confidence). They tightened their lending norms. Take the case of SBI, which can lend up to 15% of its capital to a single entity and up to 20% at a group level. The downgrade saw it bring down the number to 10%. Once SBI acted tough, the other state-owned banks took the cue and cut back on its lending.

Things took an even sharper turn for the worse. When Kapil walked into SBI’s headquarters in July 2019, he thought it was for a routine meeting to discuss the way forward for DHFL. However, he was confronted with an aggressive bunch of lenders. The consortium made it clear that Kapil had to step down and a new CEO had to be brought in to run the business. “The bankers told Kapil that their debt would be converted into equity. The promoters holding was to reduce from 40% to just over 20%,” says a banker who was closely involved in the process. The plan was to get a strategic investor to buy the holding that the promoters would dilute. 

Assuming it was his job to find a replacement, Kapil’s team began scouting for the right candidate and, over the two months, three to four individuals had been shortlisted. Unknown to them, the lenders had made their move behind the scenes. It was a couple of days before DHFL’s annual meeting on September 28, 2019, when the lenders told Kapil that a CEO had been chosen. The person was Vajinath Gavarshetty, a former SBI hand, and it was clear that Kapil was now running short on time and friends. In November 2019, the RBI referred DHFL to the National Company Law Tribunal. It became the first financial services firm to be taken to the tribunal.

The story of DHFL and the Wadhawan brothers presents a case of a company that grew on unbridled ambition, aided by powerful friends. But, when things began to get uncomfortable, both aspiration and friendships proved hollow. The company is also an illustration of all that is wrong in India’s NBFC story, in which lenders always have to take the hardest hit. When will India Inc and its regulators tire of this oft-repeated farce?