Legal tussle between LVB shareholders, RBI likely to reach SC

Irrespective of who wins the ongoing litigation arising from the amalgamation of LVB with DBS India Ltd (DBIL), it is more than likely that the losing side will escalate the matter to the Supreme Court.

LVB shareholders (the petitioners) have challenged a clause in ‘The Lakshmi Vilas Bank Ltd(amalgamation with DBS Bank India) Scheme, 2020’ in the Bombay and Madras High Courts, whereby the value of their shareholding became zero overnight.

The Reserve Bank of India (RBI), the main respondent in the aforementioned litigation, had prepared the draft scheme of amalgamation, which was sanctioned by the government on November 25.

As per the clause in the scheme, the entire amount of the paid-up share capital, reserves and surplus, including the balances in the share or securities premium account of the transferor (LVB) bank, shall stand written off.

Stay on amalgamation

While both High Courts have declined to stay the amalgamation of LVB with DBIL (a wholly-owned subsidiary of DBS Bank, Singapore), the hearing in the case continues. The case will come up for hearing in the Bombay HC on December 14and in the Madras High Court on January 5, 2021.

Both sides – LVB shareholders on the one hand and the RBI/ government (which sanctioned the scheme of amalgamation) on the other hand – are believed to be ready to approach the Supreme Court in case they get an unfavourable judgment from one or both High Courts, say people familiar with developments relating to the merger.

So, if the RBI wins the case in the HC, LVB shareholders may move the Supreme Court and vice-versa.

With the government sanctioning the scheme of amalgamation, LVB branches are operating as DBIL branches from the appointed date of November 27.

What about LVB’s inherent strengths? Banking expert V Viswanathan wondered if LVB’s inherent strengths – 563 branches and 974 ATMs/CDMs in about 16 States and 3 Union Territories, experienced staff, loyal customers, deposits (₹20,973 crore) and advances (₹13,505 crore) built over nine decades – were taken into account for valuation purposes for the amalgamation.

“Without factoring these ‘inherent strengths’, the whole exercise appears to have been done based on simple arithmetic of financial assets versus liabilities.

“Unless the valuation or acquisition cost is made public, one cannot be faulted, if he strongly feels that the amalgamation favoured DBIL,” he said.

RBI’s reasoning

In the Madras HC, the RBI’s Senior Counsel Ravi Kadam emphasised that to protect the interest of the depositors of the financially ailing LVB, the regulator considered it fit to frame a Scheme of Amalgamation, merging LVB with a healthy and financially sound bank (DBIL).

Therefore, invoking its powers under Section 45 of the Banking Regulation Act, the RBI framed the Scheme of Amalgamation and issued moratorium, supersession of board of directors order, upon a “fair and reasonable offer of investment” by the said fourth respondent company (DBIL) to the extent of approximately ₹2,500 crore.

When LVB was placed under Moratorium on November 17, the RBI observed that the bank’s financial position has undergone a steady decline, with continuous losses over the last three years eroding its net-worth.

“In the absence of any viable strategic plan, declining advances and mounting non-performing assets, the losses are expected to continue.

“The bank has not been able to raise adequate capital to address issues around its negative net-worth and continuing losses. Further, the bank is also experiencing continuous withdrawal of deposits and low levels of liquidity,” the central bank said.

The RBI underscored that LVB has also experienced serious governance issues and practices in the recent years, which have led to deterioration in its performance.