That is, when shares of DHFL have become worth literally ‘zero’.
According to the existing resolution plan approved by the National Company Law Tribunal (NCLT), Piramal Capital would delist DHFL’s shares from the stock exchanges post acquisition as per the IBC guidelines and Sebi delisting norms.
Simply put, the existing equity shares of beleaguered DHFL will be extinguished and investors are likely to lose every single penny invested.
DHFL shares rose 10 per cent to get locked at Rs 22.85, the upper circuit limit on Tuesday. The stock has gained over 50 per cent in less than a month.
Once the resolution plan is enforced, the company may merge itself with DHFL, for which a call will be taken after all legal and regulatory clearances are obtained. The Reserve Bank of India and Competition Commission of India (CCI) have already approved the resolution plan.
Market veteran Deepak Shenoy, Founder of CapitalMind, has cautioned investors about the same in a tweet. He has warned investors not to fall prey to hearsay on DHFL.
Be careful if you hear tips asking you to buy DHFL. The nclt has approved the resolution plan, where I believe the plan is for the shares to be written off to zero. Piramal will then get new shares. Today’s shares will have zero value, beware.
— Deepak Shenoy (@deepakshenoy) June 7, 2021
Market veterans point out that when a company becomes insolvent, existing capital is written off to zero. As such, existing shareholders’ money in the form of capital that they had had invested gets eroded due to the losses. Thus, existing shareholders get nothing. There have been reports that Piramal Group would write off the capital, which means the existing shareholders will get no money.
In several similar cases in the past, such businesses have written off existing capital. But there have also been a few instances where some part of the capital was written off and the remaining was made ‘good capital’ and restructured. So, if one held 100 shares, and the capital was written down by 95 per cent, the shareholders still got five shares.
This is generally done in case of companies that have physical assets where the replacement value is high. The new management, in such cases, decides that it would make better sense to give something to the existing shareholders. In case of financial companies, since there is not much physical assets, capital has to be written off completely.
Discount broker Zerodha has also alerted investors about the same, and warned that they risk losing the entire investment made in the stock.
The Mumbai Bench of the NCLT approved Piramal Group’s resolution plan for DHFL, which has been going through the insolvency process since 2019. The plan was put forward by Piramal Group, which has offered to pay Rs 37,250 crore.
Lenders led by Union Bank of India in January this year cleared the bid by Piramal Capital and Housing Finance to take over the beleaguered housing finance firm.
