The curb on withdrawals from accounts held with Lakshmi Vilas Bank affected its account holder but it also led to a fall in the share prices of LVB. The depositors may be relieved by the news of the bank merging with DBS and they know this process may take some time. The RBI-appointed administrator has assured that Lakshmi Vilas Bank has enough liquidity to repay depositors money. Despite the assurance, the account holders are going through the same experience as that of Yes Bank & PMC Bank depositors but they at least know that their money is safe.
But, the same cannot be said for shareholders. According to the draft terms of the merger, the bank's paid-up share capital, reserves and surplus will be written off. The bank will no longer exist, hence the shares of the banks will be delisted. This means that shareholders of the bank will get nothing and lose the entire value of their shares.
This situation is not a sudden development. The Lakshmi Vilas Bank crisis has been long time in making as the bank's non-performing assets (NPAs) kept surging along with the losses. The Prompt Corrective Action (PCA) initiated by the RBI last year clearly indicated things were not going well for the private lender.
It always works for retail investors to track the fundamentals of stocks on a regular basis. In case of Lakshmi Vilas Bank, there were sufficient red flags raised at regular intervals that prompted investors to exit long time ago. Some investors often get attracted by the low-price point of the stock, which is not related to its valuation or quality.
In case of Lakshmi Vilas Bank, the share prices were constantly falling from the peak price of Rs 179.95 in last three years along with all the negative news. The price of the share hit around Rs 10.50 on March 30, 2020 and went up to Rs 24 by June 29, 2020. Such instances appear lucrative to some retail investors but fundamentally the company was struggling for the last few years and that aspect should not been ignored.
Moreover, behavioural investing suggests that investors tend to rapidly accumulate stocks of companies that are hit by bad news, hoping to reap super-profits from an expected (or imagined) revival.
Though this can happen at times but in most cases, it's a matter of letting hope beat logic, especially if the fundamental deterioration is evident over an extended period of time.
Lot of people invested in Yes Bank with the same hope despite knowing the problems, there at least the bank continues to exist, but in case of Lakshmi Vilas Bank the writing is very much on the wall.
(Harshad Chetanwala, Co-Founder of MyWealthGrowth.com.)Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.