Amalgamation of LVB into DBS

In continuation of the article published https://sipfund.com/blog/Moratorium-on-Lakshmi-Vilas-Bank.html

On 25th November 2020, The Cabinet had approved the amalgamation of assets and liabilities of Lakshmi Vilas Bank with DBIL, a wholly owned subsidiary of DBS Group Singapore.

Lakshmi Vilas Bank has been delisted from the Stock Exchanges as it ceased to operate from 27 November 2020. The amalgamated entity is operating as DBS bank India. All the branches of Lakshmi Vilas bank will operate as DBS India branches although DBS can close some branches or merge them with others.

The entire amount of paid up share capital, surpluses, reserves, balances in the shares and securities of LVB has been completely written off. What left people astonished is the writing off BASEL III tier 2 bonds of INR 318 crores which was a rare of rarest events in banking history. RBI has taken this move to minimize the costs of bailouts to taxpayers and it is considered credit positive for bank depositors. RBI has made investors cautious as BASEL III instruments can also get completely written off if bank becomes nonviable. BASEL III is an internationally accepted accord which was introduced by a set of 28 countries in the year 2009 and India adopted these standards in 2010. These are the global banking standards set by Basel Committee on Banking Supervision (BCBS). These norms are based on three pillars namely minimum capital requirement based on Risk weighted Assets, supervision and market discipline. As per BASEL III norms, banks must maintain a minimum capital Adequacy ratio of 9% along with a capital conservation buffer of 2.5% of risk weighted assets in the form of equity. These standards are set to strengthen the banks’ ability to absorb the economic shocks prudently.

However, depositors do not have to rush now as their money is safe and they can withdraw as per their requirement as the cap of INR 25,000 has been lifted.

“All employees of LVB shall continue in service and be deemed to have been appointed at the same remuneration and on the same terms and conditions of service as were applicable immediately before the close of business on 17 November, 2020”, the gazette notification issued by the Department of Financial Services said.

What is DBIL getting in return?

DBIL is infusing INR 2,500 crore capital in amalgamation to support the credit growth and in return DBIL will penetrate the Indian market with more branches and ATMs. DBIL is operating with just 27 branches in India, however the numbers would grow as it has 563 branches of LVB from 27 November 2020. The entry of DBIL will also increase competition amongst Private sector banks. If adopted good practices it could lead to a more effective and efficient functioning of private sector banks. This stance by RBI and Government is praiseworthy as they both worked in tandem for the swift resolution of ailing LVB.

Why RBI was silently observing this?

Lakshmi Vilas bank had taken some of the audacious decisions in the past few years. We are mentioning one of them here- Bank was filled with huge amount of NPAs by the end of 2019 and still it went for rights issues with a very high premium which left its peers in shock. A complaint has been sent to Securities and Exchange Board of India (SEBI) about this. Additionally, complaints about mismanagement and lack of governance were also sent to the prime minister and RBI during 2019 but no relief came from the authorities. Reserve bank of India had all the rights to know the matter in deep, but it did not bother RBI much as no tangible results came after so many complaints. There were lot of appointments and terminations in a span of 10 years which could not be possible without the consent of RBI. Intentionally or unintentionally, RBI allowed the crisis to prolong.

Shareholders’ concern

The group which is challenging the amalgamated scheme is the existing stockholders and original promoters. The promoter group has challenged the final scheme and filed a petition in Bombay High Court against Reserve Bank of India, Government of India and DBS. The institutional investors of LVB includes Indiabulls Housing Finance Ltd with 4.99 percent stake in the bank as of September 2020, Prolific Finvest Private Ltd (3.36 percent) and Srei Infrastructure Finance (3.34 percent) among others. This objection is a result of all their money being lost as all equity has been written off. Experts believed that Stockholders were taking a speculative bet on the stocks despite knowing the poor fundamentals of banks.

Stockholders knew that some big player will come to the rescue of the ailing LVB and the prices of LVB will go up resulting more profits for them. RBI has been observing this for long and it gave a shocker to shareholders by completely writing off the equity and bonds of LVB. It is a clear message for shareholders that RBI has learnt from the past and is being quick in taking action.

Petitions filed in four different courts

The petitions are filed in four different courts namely Bombay, Madras, Delhi and Karnataka high courts against the merger of LVB-DBS. RBI and DBS have approached Supreme Court for moving all the matter related to merger to one court.

Why is LVB under SEBI scanner?

Capital markets regulator Securities and Exchange Board of India (SEBI) has probed an investigation into Lakshmi Vilas Bank (LVB) for not following disclosure norms. This move has come after when one of the stock exchanges suspected unfair trade practices in the functioning of LVB. LVB is charged for tweaking insider trading norms and carrying out unfair trade practices.

Evident from past governance issues

Over the period of 10 years between 2010 and 2020, LVB has changed five chief executive officers (CEOs). Neither of outgoing CEOs has told the accurate reasons for leaving. It shows continuous interference of few directors (having a large chunk of shares) on the functioning of LVB. RBI remained silent spectator when Gross NPAs of LVB shot from 1.765% in 2017 to 25.39% in 2020. It has also been charged with the suit of distributing fraudulent loans which also brought it under the eye of Delhi police. All these events proved that LVB has not bothered about the corporate governance in its greed to become corporates’ favorite bank.

Bottom line

Government and Reserve Bank of India have made it clear that they have learnt form the past banking crisis and this time they are swifter in resolution. It has also been hinted that GOI and RBI will punish whoever were at the bottom of this crisis. There would be more rules in place for bringing transparency in appointing higher officials in banks. The emphasis would be on making the management more efficient and responsible. The amalgamation of Lakshmi Vilas Bank into DBIL can be considered as an experiment in banking industry. It is the first time that ailing bank is not dumped on the shoulders of any public sector bank but a foreign player is welcomed to rescue the ailing bank. If this model turns out to be efficient then we can see more amalgamation in the near future.