A tale of the Reserve Bank of India’s (RBI) rescue operation for the troubled Lakshmi Vilas Bank & what it means for the bank’s shareholders.
After the Punjab and Maharashtra Co-operative (PMC) Bank and Yes Bank, Lakshmi Vilas Bank (LVB) will be the third bank to get rescued by the central bank in a span of just a year. Though, the rescue operation is a bit different here as it is choosing a foreign bank as the shield.
To the rescue
The Indian government on Tuesday imposed a month-long moratorium on Lakshmi Vilas Bank and capped the cash withdrawal limit at ₹25,000 for depositors. The RBI said that the deteriorating financial position of LVB relating to liquidity, capital and the absence of any credible plan for infusion of capital has necessitated to take immediate action in the interest of the depositors.
The bank incurred continuous losses over the last three years, eroding its net-worth. It has not been able to raise adequate capital to address issues around its negative net-worth and continuing losses.
Soon after the moratorium announcement, the RBI released a draft of proposed scheme of amalgamation of LVB and Singapore’s DBS Bank’s Indian unit. The amalgamation scheme comes after the recent proposed merger between Clix Capital and LVB was getting delayed and hitting a dead-end. Last year, the bank’s proposed merger with Indiabulls Housing Finance was rejected by RBI.
The central bank said that DBS Bank India Ltd (DBIL) has the advantage of strong parentage with a healthy balance sheet and strong capital support. If the merger scheme gets the nod, DBIL will bring in additional capital of ₹2,500 crore upfront, to support credit growth of the merged entity.
Terms and rights
If the deal goes through, it may turn into a win-win for DBS Bank as it will get to expand its footprint in the country, for LVB to come out its distress and for depositors as their interests will be protected as claimed by the RBI.
However, it won’t be a win situation for LVB’s shareholders as they will lose complete value of the shares they own with the bank’s equity being completely wiped out.
As per the terms of the scheme of amalgamation announced by RBI:
- “On and from the appointed date, the entire amount of the paid-up share capital and reserves and surplus, including the balances in the share/securities premium account of the transferor bank, shall stand written off.”
- “On and from the appointed date, the transferor bank (LVB) shall cease to exist by operation of the scheme, and its shares or debentures listed in any stock exchange shall stand delisted without any further action from the transferor bank, transferee bank or order from any authority.”
This isn’t surprising as shareholders always stand in the last when it comes to getting money when a company goes insolvent as stated in the companies act.
All in all, the central bank believes that the merger will provide stability and better prospects to Lakshmi Vilas Bank’s depositors, customers and employees following a period of uncertainty.
Though, it all depends on the success of the merger and how it pans out for all the parties.
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