RBI announced a draft scheme for amalgamation of Lakshmi Vilas Bank (LVB) and DBS India Ltd (DBIL), wholly owned subsidiary of DBS Singapore in November. DBS will infuse Rs. 2500 Crore into DBIL as and when the scheme is approved. DBS is a major Singapore based bank.

The equity share value of the LVB shareholders was reduced to Nil as per the scheme of amalgamation. It read “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”

History:

LVB was found in 1926 in Tamilnadu by a group of businessmen under the leadership of VSN Ramalinga Chettiar to aid small businesses. They received banking license in 1958 and had over 550 branches in India at the time of takeover.

Troubles:

Bank in 2010s started focusing its attention to the large corporate book instead of small retail loans for faster growth. However, this strategy, while it gave short term gains, proved failure for the bank due to high risks associated with the corporate book.

Bank Non Performing Assets (NPAs) went steadily up and crossed 15% in FY 19. While the profits went up till FY 17 (Profit of Rs. 256 Crore), they nosedived from FY 18 (Loss of Rs. 522 Crore) and so did the share price and valuation of the company. (As can be seen in the following chart).

Further troubles came in 2018 when Religare Finvest Ltd. (RFL) accused LVB of liquidating FDs of Rs. 750 Crore and misappropriating the funds. As per the complaint, RFL had created FDs of Rs. 750 Crore with the bank to keep it free from any encumbrances. However, LVB transferred the funds to current account to set it off against dues from RHC holdings, which was earlier the parent company of RFL.

Recovery Efforts:

LVB was put in Prompt corrective action (PCA) in Sept 2019 by RBI due to continuously deteriorating liquidity position. Being in PCA meant that bank had to raise fresh funds, restrict lending, reduce NPAs and improve the Provision Coverage Ratio.

LVB started fund raising exercise to salvage the situation. It could raise equity multiple times with Rs. 168 Crore Qualified Institutional Placement (QIP) in January 2017 and Rs. 460 Crore through QIP In March 2019.

Bank had plans to raise further Rs. 1500 Crore to strengthen capital base, however that could not be managed.

LVB simultaneously also kept Mergers & Acquisitions (M&A) route open. First proposal came from India Bulls Housing Finance, which also took about 5% share of LVB on preferential basis. However, the merger of LVB and India bulls was not approved by RBI.

Bank till recently also carried out negotiations with Clix capital, but deal did not struck till late which necessitated measures from RBI.

Management Ousted:

In September 2020, in an exceptional move, the shareholders of LVB removed seven directors of bank from the company including MD S Sundar. The shareholders were unhappy with continuously deteriorating position of bank’s finances and took this extreme step. After this the bank’s control was effectively taken over by RBI.

RBI Action:

In November 2020, RBI announced that with rapidly deteriorating financial position of LVB relating to liquidity, capital and other critical parameters, and the absence of any credible plan for infusion of capital has necessitated RBI to take immediate action in public interest and particularly in the interest of the depositors.

Accordingly, LVB was merged with DBS. The share value of LVB shares and bonds was made Nil as per the scheme, which has been challenged by investors questioning the basis for such evaluation.  Examples of Yes Bank is also cited as the Yes Bank shareholders were protected in the scheme of merger.

However, with corporate governance of LVB in question with piling up of NPAs & losses in successive quarters, the RBI move has ensured protection of depositors and employees of LVB and stability of financial system.

 

Acknowledgements: RBI Bulletin (www.bulletin.rbi.org.in), SEBI Bulletin (www.sebi.gov.in), NSE (www.nseindia.com), BSE (www.bseindia.com)

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