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LVB-DBS merger: More investors to join legal battle, make case for a fair valuation

In multiple petitions, investors have requested that a fair valuation may be arrived for the Chennai-based bank, a demand the promoters of the bank too have made in the past.

November 27, 2020 / 04:40 PM IST

Four more investors plan to file separate petitions in the Madras High Court, seeking judicial intervention against certain provisions in the Lakshmi Vilas Bank (LVB)-DBS Bank amalgamation scheme, mainly the clause that writes off all equity investments.

These investors include one institutional investor (two firms representing the same group) and two retail investors, according to people familiar with the development. All declined to be named at this stage saying the petitions will be filed soon.

In multiple petitions, investors plan to request that a fair valuation may be arrived for the bank considering its assets, a demand the promoters of the bank too have made in the past.

Valuation disagreement

It is learned that one of the investors has arrived at a Rs 5,250 crore valuation figure for LVB. While this is as per the calculation of only one investor, it is understood that some among the LVB promoters may also seek the help of an independent valuer, most likely an MNC.

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This is part of the plan to strengthen their legal argument against the nature in which the LVB-DBS merger scheme as formulated by the RBI and equity capital was written off. Promoters feel the structure of the scheme was unfair to LVB investors.

Some of the promoters are already in touch with a few international agencies and will finalise a name soon, said one of the persons quoted earlier.

Besides writing off the equity capital, the RBI scheme also invalidated the Tier-11 bond capital of about Rs 318 crore. The LVB-DBS merger came into effect from today (November 27) as per the scheme announced by the RBI last week.

In the petitions, investors are likely to make Singapore DBS as a party, said one of the persons quoted above. LVB is amalgamated to DBS' Indian arm. Also, investors may request the Court to mandate the acquirer deposit some sort of security in an escrow account or with the regulator.

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.

Promotes’ argument is that in just two years after this, the bank is being handed over to a foreign lender at ‘free of cost’. These points could be made part of the legal arguments.

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.
Dinesh Unnikrishnan
first published: Nov 27, 2020 01:58 pm

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