From AAA-Ratings to Haircut-Ashes: Rating and Auditing Gaps in the DHFL “Scam”

Posted on 20th July, 2025 (GMT 19:20 hrs)

ABSTRACT

The article discusses The DHFL scam, one of India’s largest corporate frauds (~₹34,000 crore), involved massive fund diversion through shell companies and fictitious borrowers, as exposed by a Cobrapost sting and later confirmed by KPMG’s forensic audit. Despite clear red flags, credit-rating agencies maintained high ratings, auditors overlooked accounting irregularities, and regulators like SEBI and RBI failed to act swiftly. DHFL defaulted in 2019, became the first NBFC under IBC insolvency proceedings, and was later acquired by Piramal Capital. The scam highlighted systemic failures in governance, auditing, and regulatory oversight, prompting tighter NBFC regulations, strengthened auditing standards, and enhanced corporate governance norms.

I. Introduction

“Fraud does not thrive in silence alone — it feeds on institutional betrayal.”

The DHFL scam, involving the alleged siphoning of crores of public funds, is not just a corporate fraud. It is a decade-long, multi-layered collapse of institutional ethics, where every “gatekeeper” — auditors, rating agencies, regulators — either looked away, kept quiet, or allegedly legitimized the crime.

We, the financially abused DHFL victims and concerned citizens, demand justice and full disclosure. This is our collective call for accountability.

This is an appeal to reclaim what was once considered a “AAA”-rated NBFC, boasting an allegedly impeccable track record! What went wrong? What was the watchful PM doing while the scam unfolded right under his nose? What were the Rating Agencies, Regulators, and Auditors doing during this time? Did they perhaps take some sleeping pills?

II. What Happened?

While regulatory bodies failed in their supervisory roles, the first line of defense—statutory auditors and credit rating agencies (CRAs)—actively enabled the deception. Their reports, assurances, and ratings lent a false sense of security to lakhs of depositors and investors, including senior citizens who were lured by the AAA-stamped instruments of DHFL.

A. Auditors’ Role in Facilitating the Scam

DHFL’s statutory audits were conducted primarily by Chaturvedi & Shah LLP, among others. These firms issued clean audit reports even as thousands of crores were being siphoned to shell companies, many of which were traced to entities linked to the promoters.
Auditors failed to detect—or willingly overlooked—multiple accounting anomalies, including:
- Evergreening of loans through circular financing;
- Dubious inter-company transactions;
- Inflated asset valuations and revenue recognition;
- Lack of risk provisioning against non-performing assets.

Under the Companies Act, 2013, statutory auditors have a duty to report fraud under Section 143(12). No such report was made until after the collapse was public.

Their conduct violates:

Section 447 and 448 of the Companies Act (fraud and false statements),
ICAI’s Code of Ethics, and
Fiduciary duties owed to investors relying on their reports.

Despite these failures, no action has been taken by the ICAI or the National Financial Reporting Authority (NFRA), the latter being the designated body for public interest audit regulation.

It is important to note that currently, most of the listed companies holding public deposits in one form or another are defaulting, going bankrupt, and facing rapid insolvencies. It has been observed that ‘Loss Reporting’ begins only after they are thoroughly exposed by the fourth pillar of democracy—mass media. Until then, the auditor of the respective company remains inactive. It is quite surprising that even when 100% of the net worth has eroded, the auditor signs the balance sheet with remarks such as “True & Fair View” and a “going concern.” It is only after disaster strikes that the auditor realizes, “Oh no, it’s a loss balance sheet!” It is embarrassing to note that such a deviation in the company’s assets is not known to the auditors, yet they mislead the public at large and conduct their profession with apparent dishonesty. If an auditor claims that it is not a willful mistake and that they are unaware of such erosion in assets, we regret to say that their competency as an auditor must be reviewed. Serious action should be taken against such auditors to ensure that a clear message is conveyed to the Chartered Accountant Association:

“That Audit means confirming/certifying the Books of Accounts based on which the Funds are being raised and misconduct should lead to pecuniary penalty in form of repaying to the sufferer either by the ICAI as an regulatory body or the member himself.”

B. The AAA Illusion: Rating Agencies’ Complicity

Credit rating agencies including CARE Ratings, ICRA, and CRISIL gave DHFL’s instruments ‘AAA’ ratings until early 2019—months before it defaulted. These ratings:

Ignored DHFL’s deteriorating asset quality,
Failed to flag promoter-level financial engineering,
Endorsed bond issuances that attracted vulnerable investors.

The CRAs benefitted from issuer-pays models, creating a conflict of interest that compromised their objectivity. These agencies have continued operating without public censure or financial liability, despite clear evidence of negligence.

The SEBI (Credit Rating Agencies) Regulations, 1999 mandate due diligence and timely updates on material risks. These were not followed. Even post-default, SEBI did not revoke their licenses or initiate any formal punitive proceedings.

C. Public Impact of Professional Misconduct

Thousands of depositors made investment decisions based directly on the credibility of auditor reports and the AAA ratings. These were not just misleading—they were instrumental tools of deception.

Had the auditors and CRAs discharged their duties diligently, red flags would have surfaced early enough to avert or minimize losses.

Hence,
The role of auditors and CRAs in the DHFL crisis was not passive—it was enabling. Their failure is not just a technical breach—it is a betrayal of public trust. Accountability must go beyond internal disciplinary hearings to include civil liability, blacklisting, and compensation to victims.

In a nutshell, during the period from 2010 to 2020, DHFL:

Received AAA credit ratings from CARE, ICRA, and CRISIL even as it disbursed loans to shell firms
Auditors signed clean financials, failing to detect massive fund diversion
Regulators like RBI, SEBI, NHB remained inactive, even as public funds and mutual investments sank
Supreme Court upheld a resolution plan that wrote off fixed depositors, silenced dissent, and erased the voices of over 1 lakh small savers
Victims were slapped with defamation cases, not protected by the system

III. Timeline of Betrayal: Who Failed When

2010–2015: Illusion of Credibility

CRAs (CARE, ICRA, CRISIL): AAA ratings, no scrutiny
Auditors: No flag on shell firms, promoter-linked transactions
RBI/NHB: No inspections despite abnormal growth

2015–2018: Fraud Peaks

₹31,000+ crore siphoned to shell companies
Auditors sign off books; CRAs affirm ratings
RBI, NHB, SEBI: Zero early warning, no forensic audits

2019: Truth Surfaces Too Late

Cobrapost exposé: Fraud becomes public
Rating downgrades happen after investor losses
RBI supersedes board only in Nov 2019
Auditors resign — no prosecution

2020–2021: CoC Bailout, Public Abandonment

Piramal resolution approved via IBC: Fixed depositors lose most of their life savings
CoC decisions secretive; no regulatory objection
Widows, pensioners, senior citizens erased from justice

2022–2025: Supreme Court’s Complicit Silence

Verdict by Justice Bela M. Trivedi and Justice S. C. Sharma upholds the plan
Ignores RTI responses that RBI, CAG, and IBBI cannot provide records of CoC expenditures when asked
Victims slapped with SLAPP suits for raising their voices
No dissent. No scrutiny. No justice.

V. Institutional Failure — A Legal and Moral Case

DHFL Scam in Numbers:
• ₹31,000 crore siphoned
• Over 1 lakh fixed depositors affected
• 3 rating agencies, 2 statutory auditors, 4 regulators failed
• 0 prosecutions. 0 compensations.

We believe agitational measures must be pursued against the following culpable institutions:

Auditors (Statutory Auditors of DHFL)

Negligence, misrepresentation, and false certification under Sec. 147–148, Companies Act
Can be potentially prosecuted via NFRA, civil suits, or criminal action under Sec. 447

Credit Rating Agencies (CARE, ICRA, CRISIL)

Wilful misrepresentation, violation of SEBI CRA Regulations
File complaints via SEBI SCORES, initiate class action under Sec. 245, Companies Act

Regulators (RBI, NHB, SEBI, CAG)

Dereliction of duty, misfeasance in public office
One may file writ petitions under Articles 226 or 32, citing violation of Art. 14 & 21 of the Constitution
RTI disclosures highlight systemic neglect concerning the auditing role in the DHFL CIRP, directed by the RBI-appointed CoC under the flawed IBC framework. When inquired about CoC expenditures during the resolution process, the relevant authorities failed to provide any responses or records. What implications does this hold for transparency and accountability?

VI. Our Demands

Set up a Judicial Truth and Accountability Commission to investigate systemic failure across CRAs, auditors, regulators, and courts.
Amend the IBC and NBFC regulatory frameworks to protect small investors and fixed deposit holders.
Prosecute auditors and CRAs who misled the public with AAA ratings and clean certifications.
Demand transparency: CoC meeting minutes, RBI inspection reports, SEBI’s internal files must be made public.
Provide compensation and legal restitution to small depositors who lost everything.

Furthermore, we can explore avenues for targeting and holding institutions accountable for their responsibilities as follows:

Hold ICAI Accountable for Professional Misconduct

The Institute of Chartered Accountants of India (ICAI) cannot remain a silent spectator to one of the largest financial frauds in India’s history. The statutory auditors of DHFL stand guilty of professional misconduct under the Second Schedule of the Chartered Accountants Act, 1949, having failed to exercise due diligence and maintain audit integrity. ICAI must immediately initiate disciplinary proceedings, suspend their license to practice pending inquiry, and impose the maximum penalties prescribed under Section 21B of the Act. Anything less will further erode public confidence in the auditing profession. Moreover, ICAI must proactively disclose all DHFL-related audit working papers, peer review findings, and investigation reports under suo motu RTI compliance. Transparency is not optional when public trust has been so thoroughly betrayed.

NFRA Must Act Against Gross Negligence and Systemic Risk Exposure

The National Financial Reporting Authority (NFRA) was created to prevent exactly this kind of systemic failure. The DHFL scandal reflects gross negligence and failure to maintain mandated audit quality standards under Section 132(4)(c) of the Companies Act, 2013. NFRA must act decisively: launch a full-scale investigation under Rule 11 of the NFRA Rules, 2018, impose exemplary monetary penalties, and permanently debar the guilty audit firms from undertaking audits of listed companies. Anything less legitimizes regulatory capture and weakens India’s financial ecosystem. NFRA must also publish all DHFL-related quality review reports, inspection findings, and enforcement orders in the public domain via suo motu RTI compliance. Accountability demands full disclosure.

SEBI Must Blacklist Complicit CRAs Now

The role of Credit Rating Agencies (CRAs) in the DHFL debacle has been nothing short of scandalous. By misrating DHFL instruments, they violated Regulation 13 and Schedule II of the SEBI (Credit Rating Agencies) Regulations, 1999, misleading investors and enabling large-scale fraud. SEBI must move beyond symbolic fines—it must blacklist these CRAs under Regulation 29, impose maximum monetary penalties, and initiate criminal prosecution under Section 24 of the SEBI Act, 1992. Investor trust cannot be rebuilt without strict punitive action. Furthermore, SEBI must make all DHFL-related rating reports, internal correspondence, and enforcement orders public via suo motu RTI compliance, as required under Section 4 of the RTI Act, 2005. Secrecy only emboldens repeat offenders.

VII. We Are Not Just Victims. We Are Witnesses of an Orchestrated Charade…

Let history record that when institutions failed, we didn’t.

Hence,

You—statutory auditors, credit rating agencies, and complicit regulators—knowingly or negligently validated fraudulent financial statements, lending credibility to one of India’s largest financial scams. You issued AAA ratings or equivalent to DHFL instruments despite glaring red flags of fund siphoning and shell-company loans, misleading lakhs of unsuspecting public investors. You failed to discharge your statutory obligations under the Companies Act, the ICAI Code of Ethics, and SEBI Regulations, thereby enabling the fraud’s perpetuation. Your misconduct has indirectly caused irreversible harm to me and countless small depositors, who now stand uncompensated under a deeply flawed resolution process.

Your conduct is not merely unethical—it is unlawful. It constitutes negligence and misrepresentation under Indian tort law, fraud and false statements under Sections 447 and 448 of the Companies Act, 2013, deficiency in service and unfair trade practice under the Consumer Protection Act, 2019, and a breach of fiduciary and professional duties under binding statutory codes. These are not technical lapses; they are willful betrayals of public trust. Accountability is not a matter of choice anymore—it is a legal and moral imperative.

Demand the Truth. Defend the Constitution. Reclaim Democracy.

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