The Reserve Bank of India (RBI), which is India’s central bank, has earlier announced to merge the loss-making Lakshmi Vilas Bank (LVB) with DBS India. It has also allowed the entire amount of the paid-up share capital of LVB to be written off. That is to say, LVB’s equity will go down to zero and the original shareholders of LVB will get nothing.
Following the announcement, LVB shareholders filed a petition to the High Court in Madras demanding compensations. The Madras High Court then passed an interim order last Fri (27 Nov) directing DBS India not to take any further prejudicial action against LVB shareholders.
The High Court also asked DBS to furnish an undertaking to compensate LVB shareholders in case the Court rules so at a later stage.
In addition, the High Court mandated DBS to create a separate reserve fund in its books of account to the extent of the face value of shares of the transferor company (LVB) and to maintain the fund in preparation of further new orders from the Court.
“…completely reducing the shares is not an exercise which has happened in the public domain and the shareholders do not appear to be aware of the exact reasons why this is so,” the High Court observed.
Further, the Court added that even if the authorities have the power to reduce the share value during an amalgamation under Section 45 of the Banking Regulation Act, reducing it to zero or negative, prima facie, it cannot be done without very compelling reasons.
Expert: DBS-LVB merger deal unfair to LVB shareholders
Meanwhile, the Indian media has started interviewing “experts” to comment on the DBS-LVB merger.
When the DBS-LVB merger announcement first came out, the Economic Times of India took the opportunity to interview “expert” JN Gupta, who is the Managing Director at institutional advisory firm Stakeholder Empowerment Services.
Gupta said that the LVB shareholders have been forgotten by the RBI while arriving at its merger decision. In its decision, RBI promised DBS that LVB shareholders won’t get anything from the merged entity.
“While the merger of the Lakshmi Vilas Bank with DBS is warranted for the safety and security of the banking system, it seems unfair to the LVB shareholders. Unfortunately, the way the RBI functions, it does not look into the valuation done by other agencies,” Gupta said.
“It seems the regulator has been guided by the fact that the banking system must be saved. It has not taken into consideration the price DBS would have otherwise paid to LVB had it been to create a bank of such size or buy it out on a private basis.”
“The RBI’s decision is purely a regulatory diktat rather than a commercial solution. DBS has got the running bank without any equity value,” he added.
Gupta also criticised RBI, “RBI should wake up. There is a string of financial failures that have taken place in the last couple of years alone (IL&FS, DHFL, PMC Bank, Yes Bank).”
“Thousands of circulars, and regulations exist but the process-driven approach by the regulator is unlikely to yield results when dealing with weak lenders,” he commented.
Case may go to India’s Supreme Court
The Hindu, another Indian mainstream media, reported that LVB shareholders are unlikely to let the matter rest easily. Without quoting sources, it said that parties involving in the current High Court case are likely to “seek relief in the Supreme Court should they lose the case in the High Court”.
Quoting another banking expert V Viswanathan, The Hindu reported that LVB’s “inherent strengths” were not taken into consideration in the merger.
Viswanathan said he 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 and advances built over nine decades were taken into account for valuation purpose in the merger with DBS.
“Without factoring these ‘inherent strengths’, the whole exercise appears to have been done based on simple arithmetic of financial assets versus liabilities,” Viswanathan added. “Unless the valuation or acquisition cost is made public, one cannot be faulted, if he strongly feels that the amalgamation favoured DBIL.”
Hostile Indian media towards SIA potential deal 19 years ago
Nineteen years ago in 2001, SIA tried to bid for the loss-making Air India. It was later forced to pull out of the deal.
In explaining its decision at the time, SIA said it was “surprised by the intensity of opposition to the privatization of Air India from various quarters, including certain sections of political groups, trade unions and of the media.”
“In such an adverse climate, SIA is not confident that it can play a useful and effective role,” it added.
But just last week, it was reported that SIA is presently in talks with Tata Group again to jointly bid for the loss making Air India (‘After DBS “rescues” Chennai bank, SIA now in talks with Tata to “save” Air India‘, 28 Nov).
Air India has been incurring losses for quite some time now. In its latest quarterly report, Air India incurred a net loss of about Rs2,570 crore (S$465 million) in the first quarter of 2020-21 as compared to a net loss of Rs785 crore (S$142 million) in the corresponding period a year ago. Air India is also sitting on a debt of Rs58,000 crore (S$10.5 billion).
In any case, it’s not known how the Indian media will see the present DBS-LVB merger, especially when their LVB shareholders are not getting anything out of the merger deal.
