History:
Lakshmi Vilas Bank was established by a group of 7 businessmen in the 1920s, received the license in 1958, and by 1970 had a PAN India presence. Somewhere around 2010, the company decided to shake things up and aim to transform into a bigger bank as opposed to merely serving customers of a certain region. Consequently, they expanded their business and were quite successful for a few years, generating a couple of hundred crores in profits in their peak stages. Though, the consequences of corporate greed and thirst for profits caught up with the company soon.
Reform plans:
Shareholders were concerned about the top-level management of the company. “Why?”, one might ask. For one, the financial performance of the bank was deteriorating and for another, the board was accused of siphoning funds from Religare Finvest and is battling lawsuits for the same. It is quite obvious now, why the shareholders voted out 7 of 10 directors from the board at the end of September.
But that was not the end of shareholder’s problems, in fact, almost 2 months later unprecedented news came their way. On November 16th RBI announced a merger of LVB and DBS, a subsidy of the Singaporean branch. The merger encompasses a lot of details that have enraged the investors to their core.
Investors’ grievances: In 2018, DBS approached RBI with the proposal to buy their shares at Rs100-Rs150 per share, which would have left the investors relieved and satisfied. Unfortunately, RBI rejected them, due to their usual skepticism and after many such proposals being rejected, they went back to DBS.
But this time the shareholders are disgruntled because their shares are being given away for free! The merger wipes out the entire equity share capital leaving nothing for the investors. Unlike a normal merger, the old shareholders are not offered any shares of the post-merger bank. For a simple reason that banks are not usual companies and cannot be treated like one.
Petitions by investors:
The primary issue of shareholders is the manner of valuation. The promoters themselves started a petition in hopes of getting a fair valuation and wished that the Union Cabinet would pay heed to their grievances. Sadly, the Union Cabinet approved the merger with no change in valuation, leaving the promoters completely shattered. Additionally, the regulator also invalidated the bank’s Tier-11 bond capital which amounts to Rs 318 crores.
At this point, many other investors started joining the promoters or initiating their own petitions and have decided to take their fight to the judiciary system. One of the investors even did their own calculations and found the bank to be valued at Rs5,250 crores. Though this is only one of the investors, the figure surely puts things in perspective. Investors are considering approaching a third party to conduct a proper valuation to strengthen their points for the legal battle.
During their legal battle, the promoters may also request the foreign subsidy to deposit a security amount with the regulator, possibly in the form of an escrow account.
On 26th November, exactly 10 days after the news of a merger broke, the Bombay High Court refused to stay the amalgamation. But they advised the investors to bring up their pleas at the time of ‘disposal of petitions’ as the nature of claims is monetary.
The impact on share prices:
After all the losses, voting out directors, and finally a merger, where do the shareholders of Lakshmi Vilas Bank stand? LVB stocks have declined by 53% since the news of the merger on November 16th and on 24th closed at a record low of 7.30. The shares hold no value now, consequently explaining the falling prices. The only ones buying these stocks are few uninformed retail investors, which is a concern to discuss some other time.
And on this note, the story of a bank concludes, but the fight from investors will go on. After reading their story, do you think the RBI could have looked into a different alternative to save the investors and promoters? Will the investors emerge successful and satisfied or disheartened by the end of their legal battle? Only time will tell..
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