Banking Central | What makes HC order on Lakshmi Vilas Bank-DBS India merger important?

The scheme of amalgamation was implemented with the government approval considering the LVB case as a special situation.

On April 26, the Madras High Court refused to interfere in the merger of Lakshmi Vilas Bank (LVB) and DBS India. On a first look, the ruling is a part-victory for the central bank. The question of revisiting the merger has been ruled out completely. But that's only one part of it.

The court has directed the Reserve Bank of India (RBI) to carry out the exercise of valuing the shares and assets of both DBIL and LVB as on date before the amalgamation and, on that basis, take a decision afresh on reduction of the value of shares and writing off the Tier – II bonds. The RBI will now have to respond to this directive — either by appealing in the higher court or by complying with it.

The Madras HC has ordered that the central bank must complete the exercise within a period of four months, keeping in mind the grievances of the shareholders and bondholders and the hardship faced on account of the scheme of compulsory amalgamation and amelioration of the same to the extent possible. In a way, this judgment gives a ray of hope to investors. Both bond holders and equity investors of LVB got noting post the hurried amalgamation.

Does this mean, there is hope for the investors?

It is quite unlikely that the RBI will go back on its decision on the terms of the amalgamation mainly because if it does so, it could set a precedent in other similar cases as well where litigations are currently going on. One example is the Yes Bank AT1 bond write-off case where a final decision is

still pending. The RBI has made its grounds very clear with respect to the circumstances that led to the amalgamation of LVB with DBS.

The RBI has strong case here. The scheme of amalgamation was implemented with the government approval considering the LVB case as a special situation. During the arguments, the central bank has established the reasons that the amalgamation was necessary to save the interest of the depositors of the bank.

LVB had an extremely precarious financial position in its final days. In the second quarter of FY 2021, LVB’s gross non-performing assets (GNPAs) stood at 24.45 percent, while net NPAs stood at 7.01 percent. The bank’s Tier 1 Capital ratio has turned negative; the overall Capital Adequacy Ratio (CAR), as per Basel Ill guidelines, was at a negative 2.85 percent as of September 30. The bank’s business has shrunk over the year.

Thus, the RBI had pushed for the merger of LVB with DBS after the bank’s financial situation deteriorated and the bank failed to raise survival capital despite multiple warnings by the central bank. In this backdrop, the refusal of the Madras HC to intervene in the LVB-DBS merger is a victory for the central bank, although there is a possibility that the investors could take the case to Supreme Court to appeal against the judgment.

And, there are some critical questions staring at RBI.

Beyond these aspects, the HC has posed some critical questions to the RBI on the aspects of transparency in the process. The Madras HC, while acknowledging that the RBI is an expert regulatory body and the decisions of RBI are to be respected, said the process undertaken by RBI for amalgamation must be transparent. The HC observed that while RBI has stated that about 12 proposals were considered, but the terms and conditions put forth by those banking companies are not placed on record only on the ground of maintaining confidentiality. “The same is not acceptable,” the court said.

Here is what the HC further said: “We would expect RBI to be more transparent. Only because a letter is given by DBIL that the entire shares and Tier II bonds should be written off while taking up amalgamation, the same cannot be a reason to write off the shares.”

“We fail to understand as to how after the amalgamation has taken place, confidentiality is required to be maintained or that would affect the business interest of any banking company,” the Court asked.

The HC has held the central bank accountable for lack of transparency. “Transparency would be necessary to eradicate any suspicion and to allay the contention of the petitioners about favouring DBIL and giving LVB to DBIL on a platter. After the court had asked them to disclose the names, there was no reason for them to withhold it,” the HC observed.

The next big question is whether the RBI will do a re-evaluation of the assets and re-look at the decision on bond write offs and share value reduction. Going by the evidence in the past, such a scenario is unlikely. The LVB-DBS court room drama may not be over yet.

Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.