There are certain similarities between the Yes Bank rescue and Lakshmi Vilas Bank (LVB) bailout. If additional tier-1 bondholders (AT1 Bondholders) were the victims of the Yes Bank episode, equity shareholders have been left at the receiving end in the LVB bailout. Bank rescues have always come at a cost for investors.
In the case of Yes Bank, the equity holders were saved but the shock came for AT1 Bondholders whose Rs 8,400 crores worth papers were written off as part of the SBI-led reconstruction scheme in March this year. Since then those investors, including retail and institutional investors are fighting in courtrooms to fight their case.
Also Read: What LVB shareholders will get after merger with DBS
Both the Yes Bank and RBI have consistently maintained that the Yes Bank AT1 Bond write down was done in accordance with the Basel-III norms. Yes Bank was bailed out by a clutch of Indian banks headed by State Bank of India. Investors, on the other hand, have been complaining if misselling of these perpetual instruments.
In the LVB bail-out, the underdogs are equity holders. According to the draft amalgamation scheme, the entire paid-up share capital of the bank will be written off at the time of amalgamation and the shares will be delisted from the exchanges. Early this week, the RBI announced a draft amalgamation scheme between DBS India and LVB noting that the bank failed to come with a concrete resolution plan through a merger with an NBFC (Clix Capital).
Also Read: LVB rescue: How DBS edged out other suitors
As part of the scheme, 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.
Some of the aggrieved equity investors of LVB plans have said that they are exploring all options including seeking legal recourse to get their money back in the bank. One of the investors said they will request the central bank to appoint an independent valuer to arrive at a fair valuation.
“There are several options that can be considered. For instance, we have seen how a value maximisation is happening at DHFL through a transparent bidding process. A similar approach can be taken for Lakshmi Vilas Bank,” said one of the investors on the condition of anonymity.
DHFL, a prominent mortgage lender, faced a major crisis on account of alleged financial irregularities by promoters. The bidding process for a controlling stake in DHFL is currently on after the case was dragged to the NCLT court.
Institutional equity investors in LVB include Indiabulls Housing Finance, which had a 4.99 per cent stake in the bank as of September 2020, Prolific Finvest (3.36 per cent), Srei Infrastructure Finance (3.34 per cent), MN Dastur and Co (1.89 percent), Capri Global Holdings (1.82 per cent), Capri Global Advisory Services (2 per cent), Boyance Infrastructure (1.36 per cent) and Trinity Alternative Investment Managers (1.61 per cent).
“We hope that the regulator would opt for a solution that is fair and protects the interest of all stakeholders of the bank and does not discriminate one from another,” said the investor quoted above.
Investors are of the view that any move that hinders the principles of natural justice should be avoided. “The shareholders and investors have stood by the bank during its crisis period and their interest should also be protected,” said the investor.
“In fact, several old generation private banks, many depositors are also the shareholders. Hence we urge the RBI to reconsider the proposal of writing off the paid-up share capital and reserves which would affect both retail and institutional shareholders of the bank,” the investor said.
If the LVB rescue leads to erosion of wealth for domestic equity investors, it could deter investors from looking at smaller Indian banks in future, the investor said. The RBI has given time till November 20 for various stakeholders to give suggestions and objections for the draft scheme.
PMC resolution not in sight yet
While the RBI has moved swiftly in both Yes Bank and LVB rescues, a resolution for Punjab and Maharashtra Cooperative Bank (PMC Bank) is still not in the vicinity. On September 23, the RBI said it is yet to come up with a resolution plan for PMC Bank, and named a new administrator for the crisis-ridden lender.
While the central bank and the PMC Bank administrator have been exploring various options, "factors such as huge losses incurred by the bank resulting in its entire net worth getting wiped out, steep erosion in deposits, etc. continue to pose serious challenges in finding a workable plan for revival of the bank,” the RBI said.
Nevertheless, PMC Bank and the RBI are continuing to engage with stakeholders to find a viable and workable solution for the resolution of the bank, it added. The RBI appointed former Union Bank of India executive A K Dixit as the new administrator of PMC Bank, replacing J.B. Bhoria, who stepped down on September 22 due to health reasons. The Superseded PMC Board in September 2019 following a major fraud. All three episodes give key lessons to investors underscoring the importance of solid corporate governance, a well-diversified business and ability to generate capital.