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Lakshmi Vilas Bank moratorium: LVB shareholders will get nothing after merger with DBS

According to the draft scheme of amalgamation, the entire paid-up share capital of the LVB will be wiped out.

November 17, 2020 / 11:10 PM IST
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As per the draft scheme of amalgamation of the Lakshmi Vilas Bank (LVB) with DBS Bank India, the entire amount of the paid-up share capital will be written off. “On and from the appointed date, the entire amount of the paid-up share capital and reserves and surplus, including the balances in the share/securities premium account of the transferor bank, shall stand written off,” according to the draft scheme published on the RBI website.

“As it appears in the draft scheme, the value of the equity capital will be zero,” said JN Gupta, former executive director and Co-founder and MD of proxy advisory firm Stakeholders Empowerment Services (SES).

However, this is only a draft scheme. The final scheme will be prepared after factoring in the feedback from various stakeholders.

“On and from the appointed date, the transferor bank shall cease to exist by operation of the scheme, and its shares or debentures listed in any stock exchange shall stand delisted without any further action from the transferor bank, transferee bank or order from any authority,” according to the draft scheme of amalgamation.

LVB shares last closed at Rs 15.60 apiece on the BSE.


Investors unaware about RBI move

Both the government and the Reserve Bank of India (RBI) kept the LVB-DBS merger plan top secret till the last minute and, according to a person close to the development, not even the LVB top brass had an idea of what’s coming till the last minute.

“None of us had a wind of it. It was a total surprise,” said one of the institutional investors of Tamil Nadu-based LVB after the bank’s draft scheme of amalgamation with DBS Bank came into effect on Tuesday evening.

The first announcement came from the central government on a one-month moratorium on the bank citing its deteriorating financials and failure to come with a revival plan on its own.

This was soon followed by two separate notifications by the RBI on superseding the Board of the Bank and about the draft scheme of amalgamation of LVB with DBS Bank.

“The bank management had indicated to the Reserve Bank that it was in talks with certain investors. However, it failed to submit any concrete proposal to Reserve Bank and the bank’s efforts to enhance its capital through amalgamation of a Non-Banking Financial Company (NBFC) with itself appears to have reached a dead end,” the RBI said in its statement on LVB.

Not the first time

The RBI has resorted to forced mergers in the past on a few occasions. The last one was when the RBI announced a scheme of amalgamation for IDBI-United Western merger in September 2006 and in the amalgamation of the Global Trust Bank Ltd. with Oriental Bank of Commerce.

In both cases, the financial position of the target banks had deteriorated beyond a chance of redemption. In the case of LVB too, there was no chance of recovery and the survival capital was not coming. DBS is a win-win solution for both, said the former chairman of a leading state-run bank on condition of anonymity.

“DBS will get the branch presence and the LVB depositors their money back,” said the banker. “At least, in this case, the government didn’t bring in public sector banks. It is a foreign bank which has come to the rescue,” said the banker.

Rescue attempts fail

The LVB has been trying to clinch a deal with Clix Group for a merger but this fell through as both couldn’t come with a concrete scheme to take to the discussion table with the regulator.

Last year, LVB had tried for a merger with Indiabulls, which didn’t get the RBI’s nod. There were also informal talks with another NBFC. That, too, fell flat. In the case of Clix Group, both parties had completed the larger due diligence. In October, it has received an indicative non-binding offer from Clix Group for the proposed merger. But, both parties couldn’t take the merger ahead.

While the uncertainty on the merger was continuing, the financials of the bank were worsening. In the second quarter, gross non-performing assets (GNPAs) continue to be too high at 24.45 percent, even the net NPAs stay too high at 7.01 percent. The bank’s capital levels are at precarious levels.

Going by the auditors’ note, the bank's Tier 1 Capital ratio has turned negative; the overall Capital Adequacy Ratio (CAR) as per Basel Ill guidelines was at negative 2.85 percent as of September 30.

The bank’s business has shrunk over the year. The total business of the bank was Rs 37,595 crore at the end of September 2020, as against Rs 47,115 crore at the end of September last year. Net loss after tax is Rs 396.99 crore for the quarter ended September 30, 2020, as against a net loss of Rs 357.18 crore for the year-ago quarter.

While a merger with DBS will safeguard the depositors of the bank, the fate of equity investors hangs in balance.
Dinesh Unnikrishnan
first published: Nov 17, 2020 09:52 pm

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