* No evidence to support Cobrapost allegations - auditor
* Stock rises as much as 21 pct
* Monitoring of use of loans inadequate - auditor (Adds Cobrapost comment, DHFL declined to comment, updates shares)
By Sudarshan Varadhan
March 6 (Reuters) - An auditor has dismissed a media allegation that India’s Dewan Housing Finance Corp (DHFL) created shell companies to divert funds, but said the firm’s monitoring of loans was inadequate, raising the risk that some of them would turn sour.
The home loan provider has been under scrutiny since media outlet Cobrapost alleged in January that DHFL diverted loans from Indian state-run lenders to shell companies, including those linked to its controlling shareholders. Its stock has since lost a quarter of its value.
DHFL at the time said the Cobrapost report was unfounded and malicious, and that it had engaged lawyers to defend itself.
Investors on Wednesday welcomed the report from the auditor, T.P. Ostwal & Associates LLP, which said it found no evidence to support Cobrapost’s allegations, sending DHFL’s shares soaring as much as 21 percent. They closed 11 percent higher.
A Dewan spokeswoman declined comment, and did not answer emailed questions seeking a response to criticism from the auditor.
Aniruddha Bahal, the editor-in-chief of Cobrapost and the author of its report, said the auditor’s report was not trustworthy.
“It is noteworthy that a listed company has to wait for a month to answer questions of Cobrapost. And when it does it doesn’t answer each specifically but hides behind a CA (auditing) firm,” Bahal said in a WhatsApp text reply to a Reuters query.
India’s shadow banking sector has been under a regulatory cloud since last year when lender Infrastructure Leasing and Financial Service Ltd (IL&FS) witnessed a string of defaults.
“There are no indications to confirm the allegations that the Company has created shell companies to divert funds,” T.P. Ostwal & Associates said in the report that was filed by Dewan to India’s National Stock Exchange late on Tuesday.
But the auditor found departures from standard procedures and internal company policies, and said DHFL’s monitoring of the use of funds by borrowers owing 74.85 billion rupees ($1.06 billion) was inadequate.
“These lapses point to deficiency in adherence with policies in several instances - the risk of which needs to be examined by the company,” the auditor said.
Sameer Kalra, an analyst at Target Investing, said the auditor report might help positive sentiment, but “other findings raised a lot of concern”.
“We see any bounce as a good exit point for minority investors,” Kalra told Reuters in emailed comments.
Shares of DHFL, one of India’s largest home loan lenders, have fallen dramatically from their record high in September, and investors have lost over 150 billion rupees of value since.
The auditor cautioned that the lender’s largest shareholders had significant influence in the loan sanctioning process, adding it was “highly probable” that loans to some real estate companies may have been used to buy shares in entities alleged by Cobrapost to be linked to significant shareholders in DHFL.
The auditor, however, said the decisions made by such shareholders were within the framework of related Indian regulation.
The auditor also dismissed as baseless Cobrapost’s allegations of political considerations while disbursing loans.
($1 = 70.5925 Indian rupees)
Writing by Sudarshan Varadhan; Additional reporting by Tanvi Mehta; Editing by Christopher Cushing, Sayantani Ghosh and Mark Potter