Money & Banking

LVB shareholders believe merger with DBS negates bank’s inherent strengths

K Ram Kumar Mumbai | Updated on December 02, 2020

It appears the exercise was done based on simple arithmetic of financial assets versus liabilities, says a banking expert

The legal tug-of-war between the shareholders of Lakshmi Vilas Bank (LVB) and the Reserve Bank of India (RBI) regarding valuation of their shares, which have been marked down to zero following the amalgamation of the financially-stressed bank with DBS India Ltd (DBIL), is unlikely to end soon.

May move Supreme Court

Each party to the case, currently on in the Bombay and Madras High Courts, expects the other to seek relief in the Supreme Court should they lose the case in the High Court.

 

While depositors’ interest has been safeguarded by merging the troubled LVB with a healthy bank (DBIL), shareholders of LVB are disappointed. As per a clause in the scheme in ‘The Lakshmi Vilas Bank (amalgamation with DBS Bank India) Scheme2020’, 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

LVB shareholders have challenged this clause that reduces their shareholding to zero. LVB shareholders are concerned that the merger negates the bank’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. In the Madras High Court, the RBI’s Senior Counsel Ravi Kadam emphasised that to protect the interest of 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.

Financial position declines

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 yearseroding 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.

Published on December 02, 2020

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor