LVB-DBS amalgamation: Madras HC's interim order gives some relief to LVB shareholders

Besides, as security, DBS Bank should create a separate reserve fund in its books of account to the extent of the face value of shares of the transferor company (LVB) and maintain the same subject to further orders. A bench comprising justices Dr Vineet Kothari and MS Ramesh issued the interim directions.

The Court was hearing a petition filed by AUM Capital Market Pvt Ltd., one of the investors.

"...completely reducing the shares is not an exercise which has happened in the public domain and the shareholders do not appear to be aware of the exact reasons why this is so," the Court observed.

Further, the court added that even if the authorities have the power to reduce the share value during an amalgamation under Section 45 of the Banking Regulation Act, reducing it to zero or negative, prima facie, it cannot be done without very compelling reasons.

On Thursday, Moneycontrol first reported that four more investors plan to file separate petitions in the Madras High Court, seeking judicial intervention against certain provisions in the  LVB-DBS Bank amalgamation scheme, mainly the clause that writes off all equity investments.

What has irked the investors and promoters is the valuation part of the scheme.

In 2018, DBS had approached LVB to acquire at least 50 per cent of the stake in LVB for a much higher valuation, Rs 100-Rs 150 per share. At that point, LVB had appointed J P Morgan to scout for investors for the bank. But, when the DBS approached the RBI with the proposal, it sought an exemption from the stake dilution norms The RBI didn’t agree to this and subsequently rejected the proposal.

On Thursday, the Bombay High Court refused to stay the DBS-LVB merger scheme while considering a petition filed by investors and promoters. The court however said the promoters’ claim, being a monetary claim, can be considered at the time of disposal of petitions. Promoters are hopeful that their plea will be heard on account of the monetary loss following equity write off.

Major shareholders in the LVB include Indiabulls Housing Finance (4.99 per cent), Prolific Finvest Private Ltd (3.36 percent), Srei Infrastructure Finance (3.34 percent), MN Dastur and Co Pvt Ltd (1.89 percent), Capri Global Holdings Pvt Ltd (1.82 percent), Capri Global Advisory Services (2 percent), Boyance Infrastructure Pvt Ltd (1.36 percent) and Trinity Alternative Investment Managers (1.61 percent).

Earlier, the RBI had said that all the branches of LVB will function as branches of DBS Bank India with effect from November 27. This is after the Cabinet cleared a scheme for the amalgamation of the LVB with DBS Bank India. LVB has been a stressed entity for long, logging net losses for several quarters on end. The bank tried to engage with Clix Capital and Indiabulls for a possible merger in the last two years but nothing progressed beyond the regulatory scrutiny.

LVB was founded in 1926 by a group of businessmen in Karur in Tamil Nadu. The bank rose to prominence lending to small businesses. But the fall came quick. Before it could complete a century of existence, DBS got knocked out by its own doing—an aggressive shift from retail to wholesale loans.

According to the website of the bank, it was seven businessmen who came together to form the bank.

Subsequent to introduction of the Banking Regulations Act, 1949, and the Reserve Bank of India as the regulator for the banking sector, the Bank obtained its banking licence from the RBI on June 19, 1958, and on August 11, 1958, it became a ‘scheduled commercial bank’ signifying capability to operate as a full-fledged commercial bank.

LVB has been incurring losses for the past 10 quarters and the RBI initiated Prompt Corrective Action (PCA) in September 2019, which inter alia prescribes the bank to bring in additional capital, restrict further lending to corporates, reduce NPAs, and improve the Provision Coverage Ratio to 70 percent. In the second quarter, LVB’s 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 years. Total business stood at Rs 37,595 crore at the end of September 2020, as against Rs 47,115 crore at the end of September 2019. The net loss after tax amounted to Rs 396.99 crore for the quarter ended September 30, as against a net loss of Rs 357.18 crore in the year-ago quarter.