LVB amalgamation with DBIL
Amalgamation of LVB with DBS Bank India
Important: While I finished this article, I received some pertinent questions in
one of the whatsapp group comprising directors and top officials from reputed
companies and banks. I gave my views on them.
I have reproduced them after this article. One or two responses therein might have figured
in this article also. I did not want to
edit either the article or my responses. Request you to please go thro’ both
Reserve Bank of India (RBI) superseded the board of Lakshmi Vilas Bank (LVB) and proposed a draft scheme of amalgamation with DBS Bank India (DBIL). The bank is placed under moratorium for a period of 30 days and the depositors can withdraw in cash up to Rs.25000 during the moratorium period. As per the draft scheme, RBI ensured protection of
a.
All the
depositors of the bank (Rs.20,000 cr)
b.
Investors
in lower Tier II Bonds (Rs.348 cr)
c.
Employees
of the Bank from job losses
However,
the same cannot be said about shareholders, since the entire amount of paid up
capital including reserves and surplus of LVB (transferor Bank) will be written
off from the date of notification of the amalgamation by the central
government. Naturally, the shareholders are disappointed that their entire
investment in LVB being wiped out without any offer to participate in the
equity holding of DBIL (transferee Bank).
Some are of the view that Yes Bank shareholders got a better deal, when
the reconstructing exercise of Yes Bank was done with investments from PSBs and
private banks. Some have also commented
that the shareholders’ interests could have been protected had the regulator
acted in time. My views are as under:
1.
Yes Bank shareholders got a better deal
o
When
the reconstructing exercise was done in March 2020 and the audited financials
were done for 31st March 2020, financials for December 2019 was
recast. Even after that recast, Shareholder’s funds were positive at Rs.9,218
cr. and the book value per share was Rs.36.1 as on 31.12.2019. In the case of
LVB, the shareholders funds turned negative in March 2020(Rs.116 cr) which went
up with subsequent losses in June and September quarters. With a negative CET1
at Rs.626 cr., the book value per share was nil.
o
In
the case of Yes Bank, provision of Rs.24766 cr. (Rs.1336 cr. in Sep 2019
quarter) and a loss of Rs.18560 cr. were declared for the quarter ended
31.12.2019, as part of the restructuring scheme done in March 2018. So the element of surprise on the level of
NPAs/provisions required thereon, was very high for the shareholders of Yes
Bank, which is not the case with the shareholders of LVB
o
This
is an amalgamation exercise, while in the case of Yes Bank investments were
made by the investors in equity without getting themselves into the rights and
obligations on the assets/liabilities of the bank
2.
The Regulator has not acted in time, which
resulted in erosion of the entire networth and thereby affected the interests of
shareholders
·
GNPA
jumped from 2.67% in Mar 2017 to 10% in Mar 2018 and the bank reported a huge
loss of Rs.584 cr. in Mar 2018.
Statutory auditors qualified the financials as they were not comfortable
with the bank’s action of having adjusted third party deposits of Rs.794 cr.
towards loan outstanding. Though these factors in March 2018 were fit reasons
for immediate intervention by the regulator,
the first public action on the bank was seen only in Sep 2019, when the
bank was placed under Prompt Corrective Action (PCA)
· The
merger proposal with Indiabulls Housing Finance could not succeed as RBI turned
down the proposal. Though the regulator might have had every reason to not to
consider the scheme of merger, there was a feeling that there was delay in
conveying the decision.
· CET1
was depleting fast and turned negative for the last 8 months. However the bank
was allowed to function normally, with only restrictions on account of PCA in
place.
Though the regulator can be faulted on the above scores, the other stakeholders are equally guilty. The substantial loss and other problems disclosed in the audited financials of Mar 2018 was immediately after the bank raised Rs.784 cr. in Jan 2018. Neither the shareholders nor the employees appear to have raised these issues in any forum. Even when the bank was reporting losses every quarter, CET1 turning negative and the bank placed under PCA, efforts on the part of the directors or shareholders is not visible in the public domain.
While the failure of Yes Bank and LVB can be traced to huge exposures to the corporate sector, in the name of diversifying risks, some private banks and SFBs are increasing their exposure to high yielding but high risk Credit Card, Personal Unsecured, Micro Finance and LAP. Delinquency risk and default on account of liquidity constraints might be the issues with these sectors. RBI may do well to supervise banks who have grown their credit books by an average of 30% in the last three years and who have increased their exposures to the above high risk retail credit portfolio in a big way.
3. Is the action of writing down the paid up capital including reserves and surplus right? Is there a way out?
As per BR act, RBI is
empowered to give the above directions. Though the CET1 is negative on date,
there are two possibilities. One, the transferee bank might be left with
surplus if it is able to recover all the assets and meet its liabilities. Even if there is a shortfall in asset
realisation and DBIL had to meet some of the liabilities of LVB from its own
funds, the former gets the benefit of taking over a 90 year old bank with its
network of branches, experienced employees and loyal customers. In
fact, LVB network provides the ideal platform for DBIL to take off in India,
especially in the retail front. The “inherent strength” is immeasurable and
that is the reason DBIL is planning to invest Rs.2500 cr. into the Bank. This
“inherent strength” was built over decades and the shareholders who nurtured
LVB deserve some compensation for this. RBI and DBIL should take this into
account and allot shares of DBIL to the existing shareholders of LVB in
proportion to the net benefit that may accrue to DBIL in the near future.
20.11.2020
Annexure
Interesting Questions in a whatsapp group and my responses
1.
Why not merge LVB with PSU Banks
After the GTB merger, no private bank merger has taken place with PSBs. After 2014, there is a perceptible shift in merger policy. And it is not constant.
i. When things became very hot in IDBI Bank, no merger was proposed with a PSB. Instead LIC became a major shareholder. The govt is sure to dilute its stake at an appropriate time.
ii.
In Yes Bank again, no merger with a PSB. Instead a public sector pvt bank investment
partnership was established and they confined their liability only to the
extent of their investment. Management control and change in board achieved
seamlessly.
iii.
In PMC, since the size is bigger as compared to other co-operative banks and
again the policy to not to merge with any PSB, the limbo still continues.
iv.
Even when PSBs were merged among themselves - within state bank group, within
nationalised banks, the weakest two - central bank of india and IOB - were left
out along with two comparatively small players P&S and BoM.
So
in the present line of thinking, merging with PSB is not likely in future also.
2. Why so much Delay
LVB
was struggling ever since its Mar 2018 results were published. RBI even at the
cost of getting branded as inefficient regulator gave the bank's board &
management more than 30 months time. Indiabulls housing proposal could
not have been accepted and RBI was right. The proposal with Clix Capital took
quite long and instead of clinching the deal, the board and shareholders got
involved in unfortunate infights. With no end insight and depositors interests
getting compromised, RBI had to exercise its powers under sec 45 of BR.
3.Why DBS.
RBI
might have tried many players but could have zeroed in on DBS. If you look at
pvt players, ICICI, axis, HDFC have huge presence in LVB's area of operation.
SFBs are well present in TN and did not have that much capital/man power to
handle LVB. Indian Bank is in every nook and corner and IOB is too weak. Choosing DBS is
better any day than trying with any NBFC. As I said earlier, RBI might have
chosen DBS after conducting a thorough exercise on options available.
No
balance in equity now. If we look at the financials of LVB, since Mar 2020, the
core equity CET1 is negative and reached Rs.626 cr in Sep 2020. Even if NPA provisions
are excluded, the bank is making operating loss since 2019. The book value per
share is nil. Whatever is held against RBI is equally true against
shareholders. Immediately after raising Rs.784 cr by way of rights in Jan 18,
the bank reported a net loss of 584 cr and GNPA shot upto 10% in Mar 18. Mar 18
financials also carried a qualification of auditors for adjusting third party
deposits of Rs.794 cr towards a corporate loan. (It is under ED investigation
now). Whether these stress signals or the bank brought under PCA ever discussed
in the board, or the AGMs in 2018, 2019 or 2020. No evidence.
Regarding
whether regulator can act like a NCLT.
By this present arrangement, depositors are
fully protected employees are saved of their jobs, lower tier ii bond holders
breathe a sigh of relief. Unlike NCLT resolutions, no hair cut to any of the
above. If we look at shareholders plight here, in the case of YES Bank, AT1
bond holders, (holders debt instruments) were given a raw deal. And not this
much of hue and cry then. The case is still in the court.
5.What is the relief u expect from out of this deal. Better compensation. Control over management. Opportunity to Indian Investors. How the value is fixed.
Valuation
is the key to all the above issues. It cannot be pure numbers. Network of
branches/ATMs, experienced employees, loyal customers, nine decades of trust
are the strengths of LVB. Establishing in the retail in a big way and customers
and employees (in states known for diversified lending and high level CD
ratio) on a platter are huge opportunities to DBS. So valuation on these
inherent strength will fetch a better price and answer the questions of
shareholders - either as participating in DBS equity or better compensation.
Hence I gave my suggestion, in my capacity as a minority shareholder, to RBI on the above lines.
V.Viswanathan
20.11.2020
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