India Ratings and Research (Fitch Group): No Immediate Impact of Mutual Fund Transfer Incident on Dalmia Cement (Bharat)’s Ratings

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New Delhi, March 28, 2019: India Ratings and Research believes that the illegal and unauthorised transfer of INR3.44 billion mutual fund units by the depository participant from the demat accounts held by the erstwhile subsidiaries of Dalmia Cement (Bharat) Limited (DCBL; ‘IND AA+’/Stable) would only marginally impact DCBL’s liquidity and credit profile, even in case of a complete write-off. The erstwhile subsidiaries, OCL India Limited and Dalmia Cement East Limited, have been merged with DCBL, notes Ind-Ra from the statutory disclosures by Odisha Cement Limited (ODCL), which is the holding company of DCBL.

In case of the complete write-off, India Ratings and Research (Fitch Group) estimates that DCBL’s net leverage (FY18: 2.46x) could deteriorate by 0.15x-0.17x over FY19-FY20. However, its net leverage is likely to remain below 2.5x from FY20 in view of the announced capex plans for the eastern region and an improvement in the operating performance. Also, DCBL’s business fundamentals remain intact with the expectation of robust volume growth through higher capacity utilisation of acquired assets/new capacities and a margin rebound due to operating leverage, cost efficiencies and premiumisation of the product mix. Nonetheless, Ind-Ra will continue to monitor the developments in the case.

DCBL has scheduled repayments of INR10 billion and INR14 billion in FY20 and FY21, respectively. The company has maintained a high cash and equivalent buffer sufficient to meet debt repayment obligations in the next 12-18 months (around INR19 billion, excluding the transferred mutual fund units). It also has fund-based limits of INR7.48 billion, along with the non-fund-based limits of INR0.37 billion interchangeable with the fund-based limit.

ODCL has reported the matter to National Securities Depository Limited, the National Stock Exchange and The Securities and Exchange Board of India (SEBI,) as well as filed a criminal complaint with the Economic Offences Wing (EOW), New Delhi. According to the company, the case is under investigation by SEBI and EOW, and appropriate actions are being taken, including keeping the transfer/redemption of the said units on hold.

SEBI has also issued an ex parte ad interim order, restraining the depository participant, Allied Financial Services Private Limited, and its directors and certain associated concerns from access to the securities market and prohibiting dealing in securities in any manner. The order was passed on the basis of the findings of irregularities by the National Stock Exchange, pending completion of a forensic audit.

In its press release dated 6 March 2019, ODCL further clarified that it never authorised the depository participant to transfer, use or pledge these securities. It reiterated that the depositary participant fraudulently transferred the securities without consent, knowledge or mandate.

According to the management, the rest of the treasury portfolio is secure and it is maintaining high standards of internal controls. Nonetheless, it is reviewing the processes and controls to further refine them.

Corporate Comm India(CCI Newswire)