It was reported earlier that after the merger of the loss-making Lakshmi Vilas Bank (LVB) and DBS Bank India was announced last month, angry LVB shareholders immediately filed a petition to the High Court in Madras demanding compensations (‘Indian court directs DBS to give undertaking to compensate LVB shareholders in case it rules so later‘, 2 Dec).

As part of the merger deal, the central bank of India, Reserve Bank of India (RBI), has allowed the entire amount of the paid-up share capital of LVB to be written off to the advantage of DBS. That is to say, LVB’s equity will go down to zero and the original shareholders of LVB will get nothing.

With the filing of the petition, the Madras High Court passed an interim order on 27 Nov, proceeding to protect the interests of LVB shareholders. The High Court directed DBS that no further prejudicial action should be taken against the LVB shareholders and asked DBS to furnish an undertaking to compensate LVB shareholders in case the Court rules so at a later stage.

The High Court further directed DBS to create a separate reserve fund in its books of account to the extent of the face value of LVB shares to stand-by in case the compensation proceeds. “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 judge 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.

LVB bondholders also file petition

Following the court filing by LVB shareholders, LVB bondholders also proceed to file petition against the writing-off of LVB bonds (‘LVB bondholders file petition in Madras HC against tier 2 write-off‘, 1 Dec).

LVB bondholders filed their petition at Madras High Court early this month, stopping RBI to similarly write-off LVB’s tier 2 bonds valued at Rs320 crore (S$58 million). They accused RBI of making ‘arbitrary’ decision and said that because the bonds only mature in 2024-25, there is no urgency on the a part of the regulator to write-off these bonds.

“Through the writ, we are arguing that the regulator’s move is unreasonable; if it had put some effort to look into the investor profile of the people who have bought these bonds, it would not have taken such a move. We are just trying to correct a big wrong,” said a bondholder.

A bunch of elderly bondholders additionally petitioned the Indian Finance Minister Nirmala Sitharaman to intervene on the matter. In a letter to the Minister, the bondholders argued that they will be in peril if the write-off is to proceed.

“This amount may be negligible in view of the merger from the point of view of the government of India, RBI or DBS,” the letter acknowledged. “However, it is a major chunk of the investments of the senior citizens, who had purchased the bonds in good faith, owing to the reputation of LVB. We fail to understand the compulsions, if any, for the government to take such a drastic decision which is patently unfair and unjust to us and investors like us, who can only appeal to your sense of fair play.”

LVB wrote-down the Basel III-compliant tier 2 bonds on 26 Nov, one day before the official merger of LVB and DBS Bank India. It was done at the direction of RBI, as part of the deal with DBS. LVB ceased to exist from 27 Nov with all its branches now come under DBS. The bonds pay coupon rates of 10.70-11.80%.

Meanwhile, it was reported on Monday (14 Dec) that RBI and DBS Bank India are planning to ask the Supreme Court of India to transfer of all lawsuits related to the merger of LVB and DBS to one location. At the moment, petitions challenging the merger were filed in 4 different high courts in India: Madras, Bombay, Karnataka and Delhi.