How To Look At Lakshmi Vilas Bank’s Proposed Merger With DBS
Trouble seems to upend the fate of Lakshmi Vilas Bank (LVB) lately.
While the trajectory of the soon-to-be zombie lender’s revival has been nothing short of dramatic, RBI, in a pleasant twist, has opted for an easy-to-digest solution.
What’s the Update?
RBI announced that LVB will be merged with DBS Bank India Ltd. (DBIL), a subsidiary of the DBS Group, also, Singapore’s largest bank. Here is the high level summary of terms:
- DBIL is expected to inject ₹2,500cr ($337m) of additional capital upfront.
- Shares of LVB will be delisted.
- A moratorium is placed till December 16th i.e. by when the resolution plan is expected to be finalised. A ₹25,000 ($337) depositor withdrawal cap is in effect until then.
- No write-downs on deposits or bonds. The principal and accrued interest will change to those of DBS rates post-merger.
What Led Us Here?
LVB has been under investigation by a number of regulatory agencies for their involvement in the misappropriation of fixed deposit receipts of Religare Enterprises which the bank used to sanction loans to the Singh brothers.
RBI’s efforts to find candidates stepping in for acquisition of LVB have yielded mixed results so far.
The rejection of Indiabulls’ offer was a setback in the process. Although no reason was given for the rejection, it seems like the RBI wasn’t too keen on the prospect of a NBFC acquiring a private sector bank.
Following that, Clix Capital emerged as the next white knight. The Committee of Directors was inclined towards the deal, due-diligence was done, markets were happy (shares of the bank rose by nearly 10%), so much so that both parties got down to signing a non-binding agreement for the merger.
Alas, the delayed negotiations and Clix’s reported scrutiny over the bank’s contingent liability of ₹720cr ($97m) from the Religare transactions was a sticking point. It seems LVB wasn’t too happy about the unsecured portion of Clix’s loan book either.
Consequently, Punjab National Bank was anointed as a holdout ready to go for takeover in case Clix drops the ball. PNB along with a few other public sector banks were directed by the RBI to take a look at LVB’s financials as a worst-case-scenario remedy.
New Draft Resolution
It would seem like after exhausting all domestic options, RBI decided to screen global candidates for the merger.
DBS Group is backed by the Singaporean Government and has a mammoth presence in Asia with total assets worth over $466bn.
It has a considerable presence in Indian metropolitan towns and this deal could help expand its presence in the reaches.
One of the surprising features of this proposal is the total erosion of LVB’s shareholders in the post-merged entity. Unlike a conventional merger which involves exchange of stocks, this is an “amalgamation” of assets and liabilities. It means the deposits won’t be written off but the shares would be frozen.
One of the possible reasons behind this move is perhaps the lessons learned from the past (Yes Bank, IDBI Bank etc) whereby it made sense to alter material configuration of bankrupt entity rather than permanently write off the bank’s liabilities and add to the woes of disgruntled bondholders and depositors.
(Deja vu: A similar amalgamation scheme was orchestrated by RBI in 2004 between Global Trust Bank and Oriental Bank of Commerce.)
Scenes on the Banking Horizon
DBS Bank is the first foreign bank in line to dive into the rescue and restructuring waters, a prospect that could turn out to be an opportunity to expand capital presence in smaller Indian towns and delve into the fast-evolving markets in India.
At the same time, DBS is looking at a $1.6bn franchise in retail liabilities to start with. With LVB’s negative CAR of 2.9%, 24.45% GNPA, 7.01% net NPA, DBS is looking at grim financials. But on the flip side, LVB is a rather small fish for DBS to swallow and spoil its pro forma numbers — so be it.
This also paints an interesting and maybe welcome picture for foreign banks opening up Indian subsidiaries that sooner or later, can become rescue-pods for domestic distressed banks.
(Originally published November 19th 2020 in transfin.in)
