Author – Sukriti Chaudhary, Student at National University of Study and Research in Law, Ranchi
ABSTRACT
The DHFL fraud is India’s biggest financial scandal where the company is accused of misappropriating more than ₹31,000 crores by diverting funds, making false financial statements, and using shell companies. While the scam devastated the country’s housing finance behemoth, it also sent systemic shockwaves in banking, auditing, and regulatory circles. This analysis covers the legal violations made, the authorities involved, statutes and case laws applicable, and the larger implications for corporate governance.
TO THE POINT
The DHFL scam is a prime example of large-scale corporate financial fraud. Once a well-respected non-banking financial corporation (NBFC) in the housing sector, DHFL became embroiled in serious misconduct. The company’s promoters manipulated financial statements to show inflated profits and a healthier asset quality than what was actually the case. They diverted public funds raised through banks, debentures, and market borrowings through a tangled web of 91 shell companies, many of which were connected to the promoters themselves. This deception misled credit rating agencies, regulators, and investors, allowing them to maintain a false image of solvency and profitability. The scam’s execution involved inflating loan books and intentionally underreporting Non-Performing Assets (NPAs). A fake set of loan accounts, notoriously known as the “Bandra Book,” was created to conceal non-existent or fraudulent loans. These entries showed disbursements to various shell entities and related parties, lacking any real security, borrower identity, or intention of repayment. This pattern of deceitful fund diversion and financial manipulation went unnoticed for years, thanks to weak regulatory oversight and failures in audit processes.
USE OF LEGAL JARGON
Siphoning of Funds – Misappropriation of public money.
Forensic Audit – Independent financial investigation (KPMG).
Mens Rea – Criminal intent established via structured fund diversion.
Breach of Fiduciary Duty – Directors failed to act in the best interests of the company.
Wilful Defaulter – Declared by banks under RBI norms.
THE PROOF
Journalists first uncovered the DHFL scandal in a 2019 Cobrapost expos, reporting that roughly 31,000 crore had been shifted through 91 shell firms linked to the Wadhawan clan. The story sparked formal probes, the most prominent being a 2019-2020 forensic review by KPMG ordered by a Union Bank-led lender consortium. That work validated massive accounting abuses, fake loan books, and a secret ledger dubbed the Bandra Book. In 2022 the Central Bureau of Investigation filed a First Information Report, naming DHFL as the architect of Indias biggest bank-funding cheat, pegged at 34,615 crore. At the same time the Enforcement Directorate moved under the Prevention of Money Laundering Act, slapping attachments on assets worth 2,203 crore as crime proceeds. Mumbai’s National Company Law Tribunal, working under the Insolvency and Bankruptcy Code, cleared Piramal Capitals rescue plan and handed over the firms day-to-day business after it fell into bankruptcy.
UNETHICAL PRACTICES
One of the key unethical practices followed by DHFL was the systematic manipulation of its books of accounts. The firm fudged its financial performance by over declaring income, exaggerating asset quality, and hiding the true level of Non-Performing Assets (NPAs). This manipulation was a breach of Section 447 of the Companies Act, 2013, which criminalizes frauds relating to the business of a company, and Section 12A read with Section 24 of the SEBI Act, 1992, which prohibits fraudulent and unfair trade practices in the securities market. These skewed disclosures deceived shareholders, credit rating agencies, and market experts, thus perpetuating an impression of financial soundness and bringing in additional investments.
Another major offence was the diversion of funds. DHFL had mobilized funds through Non-Convertible Debentures (NCDs), bank borrowings, and public borrowings, which were routed into 91 shell companies where there was no genuine business activity. This diversion was a clear contravention of Section 420 of the Indian Penal Code, cheating and dishonest inducement of delivery of property, and Section 36(1)(d) of the RBI Act, read with Master Circular on Frauds (RBI/2015-16/100), which requires transparency in fund utilization as well as risk management.
The Enforcement Directorate (ED) identified the operation of spurious invoices, dummy directors, and interconnected shell companies to layer and integrate the illicit money. The operation was in violation of Sections 3 and 4 of the Prevention of Money Laundering Act, 2002, which provide for and penalize the concealment, possession, and utilization of proceeds of crime.
These actions did not merely contravene statutory requirements but also evidenced a wilful and systematic disregard for financial ethics and norms of governance.
PROOF AND INVESTIGATION
The DHFL fraud came to light due to a series of investigations and regulatory actions that uncovered a troubling pattern of financial misconduct. Audit reports from the Comptroller and Auditor General pointed out ongoing and deliberate manipulation of accounts. This was further amplified by the Cobrapost exposé in 2019, which made public internal documents and evidence indicating that over ₹31,000 crore had been funnelled through a complicated web of shell companies. A thorough forensic audit by KPMG, commissioned by a group of lenders led by Union Bank of India, confirmed these allegations by uncovering fake loan accounts and questionable money movements. The Enforcement Directorate (ED) strengthened the case by filing charges against DHFL’s founders, Kapil and Dheeraj Wadhawan, for laundering criminal proceeds. Key regulatory and investigative agencies, including the ED, Central Bureau of Investigation (CBI), Securities and Exchange Board of India (SEBI), Serious Fraud Investigation Office (SFIO), Reserve Bank of India (RBI), and the National Company Law Tribunal (NCLT), were instrumental in exposing the fraud. A groundbreaking finding by the CBI revealed that DHFL was implicated in a ₹14,000 crore bank fraud, marking it as the largest bank loan scam in India’s history outdoing even the notorious cases of Nirav Modi and Vijay Mallya.
IMPACT OF STAKEHOLDERS
The DHFL scandal hit everyone involved-and then some-when the truth began to leak. The first people to bleed were investors and small shareholders, who watched in shock as the stock nose-dived after news of the dodgy books broke. Many had placed their faith in glowing ratings and slick disclosures that turned out to be little more than smoke and mirrors, so the damage went far beyond money and cut deep into trust. Employees felt the shockwaves next; thousands lost their jobs or were left hanging, a fate sealed when the National Company Law Tribunal in 2021 green-lit Piramals rescue plan.
Banks took a beating too, with big public-sector names such as Union Bank of India, Punjab National Bank and Bank of Baroda suddenly stuck with towering non-performing assets because DHFLs loans had stopped paying. The mess added fuel to the nations already swollen bad-loan pile and served up a fresh lesson about how dangerous it can be to lend to non-banking finance companies without proper guardrails.
Last, but by no means least, the episode bruised the regulators own reputation; SEBI, the Reserve Bank and the credit raters all faced loud questions about why they missed the warning bells and acted so slowly when the alarm finally rang.
RESOLUTION AND LEGAL PROCEEDINGS
The resolution of the DHFL crisis set a major milestone in Indian insolvency law, as DHFL became the first financial services firm to enter corporate insolvency under the Insolvency and Bankruptcy Code, 2016 (IBC). This case was presented to the National Company Law Tribunal (NCLT) in Mumbai, where Piramal Capital and Housing Finance Ltd. stepped up as the winning resolution applicant. The NCLT gave the green light to Piramal’s resolution plan, which was valued at ₹37,250 crore under Section 31 of the IBC. This plan effectively shifted DHFL’s assets and liabilities to the new management while doing its best to protect the interests of creditors. On the criminal side, the Central Bureau of Investigation (CBI) and the Enforcement Directorate (ED) kicked off proceedings against the promoters, Kapil and Dheeraj Wadhawan, who were later arrested. They faced detailed charges under the Prevention of Money Laundering Act (PMLA) and the Indian Penal Code (IPC), with allegations including cheating, conspiracy, criminal breach of trust, and laundering of illicit funds. Moreover, the Securities and Exchange Board of India (SEBI) took action by imposing fines on credit rating agencies like CARE and ICRA for not conducting proper due diligence when evaluating DHFL’s creditworthiness. SEBI also prohibited the Wadhawan brothers from accessing the capital markets, limiting their ability to raise funds or influence publicly listed companies. These combined efforts highlighted a coordinated approach by multiple agencies to ensure accountability and seek legal remedies in one of India’s most notorious financial fraud cases.
CASE LAWS
1. Sahara India Real Estate Corp. Ltd. v. SEBI, (2012) 10 SCC 603
The milestone case highlighted the importance of strict regulation in situations of public fundraising and investor protection. The Supreme Court ruled that companies should not circumvent disclosure requirements, analogy being drawn from the deception in DHFL’s financial statements.
2. CBI v. Ramesh Gelli, (2016) 3 SCC 788
The Court held bank officials who had fraudulently released loans and money laundering could be prosecuted under both IPC and PMLA. The decision warrants analogous charges against DHFL’s promoters for conspiracy and embezzlement of funds of a bank.
3. State of Gujarat v. Mohanlal Jitamalji Porwal, (1987) 2 SCC 364
The Court noted that economic crimes undermine the confidence of the public in financial institutions and need to be treated severely. This rationale strengthens the seriousness of DHFL’s fraud, which caused instability in banking and investor confidence.
4. UCO Bank v. Dharmendra Bafna, (2018) SCC OnLine NCLAT 90
This ruling made the directors personally liable for their role in fraudulent transactions. It sets a precedence for making the senior management of DHFL liable for deliberately masterminding the financial malpractices.
5. ED v. FTIL (NSEL Scam Case)
The Court upheld the ED’s authority to seize properties obtained by proceeds of crime channelled through shell firms. This is directly parallel to DHFL’s utilization of 91 shell entities to launder and siphon public funds.
CONCLUSION
The DHFL scandal shows how deep corporate neglect, creative book-cooking, and sleepy watchdogs can add up to one of Indias biggest money crimes. More than 34,000 crore slipped through a web of fake firms, leaving obvious holes in auditing and rules and hurting investors, lenders, staff, and the wider market. Years of probes, courtroom battles, and an insolvency move under the IBC have given useful guidance on cleaning up messes at finance firms. Still, the saga proves we need clearer lines of accountability, constant oversight, and real safety for people brave enough to speak out. Moving on, India should get ahead of trouble by upping forensic checks, holding directors to account, and giving regulators smart tech that spots fraud early. The DHFL episode is not just a warning; it is a loud signal to fix and fortify the nation’s financial backbone.
FAQS
1. What was the DHFL scam about?
Ans. The DHFL scam revolved around the misappropriation of over ₹31,000 crore through a network of shell companies, bogus loans, and financial misreporting. Essentially, money was funneled away from public borrowings and bank loans, marking it as one of the largest financial frauds in India’s history.
2. Who were the main accused in the DHFL case?
Ans. The key figures in this scandal were Kapil and Dheeraj Wadhawan, the founders of DHFL. They were arrested and are currently facing serious charges under various laws, including the IPC, PMLA, and Companies Act. Investigations have clearly established their significant involvement in the conspiracy.
3. What laws were violated in this scam?
Ans. This scam violated several laws, including the Companies Act, SEBI Act, IPC, PMLA, and RBI regulations. The infractions ranged from fraud and money laundering to cheating and criminal conspiracy. Additionally, provisions under the IBC were also invoked.
4. What was the outcome of the insolvency proceedings?
Ans. DHFL was brought before the NCLT under the IBC, 2016, making it the first financial services company to undergo this process. The Piramal Group’s resolution plan, worth ₹37,250 crore, was approved, leading to the transfer of the company’s operations to the new owner.
5. How did the scam impact banks and investors?
Ans. Banks such as Union Bank, PNB, and BoB faced significant NPAs due to unpaid loans. Investors not only lost their capital but also their trust as share prices plummeted. The scam also raised concerns about the stability of NBFCs and the overall financial governance in the sector.
6. What actions did SEBI and RBI take?
Ans. SEBI took action by penalizing rating agencies and restricting the promoters from participating in market activities. Meanwhile, the RBI intervened by replacing DHFL’s board and appointing an administrator. Both regulators received criticism for their slow response.
7. How can such scams be prevented in the future?
Ans. To prevent similar scams, we need stricter audit standards, AI-driven fraud detection, and real-time regulatory oversight. It’s crucial to hold directors accountable and enhance whistleblower protections. Early intervention and transparency will be vital in deterring such fraudulent activities.
