Lakshmi Vilas Bank’s Shareholders To Get Nothing In Proposed Merger With DBS Bank

Lakshmi Vilas Bank’s entire equity capital will be written off and shares will be delisted after a proposed merger.

A stock broker  at a brokerage in Mumbai. (Photographer: Prashanth Vishwanathan/Bloomberg News)
A stock broker at a brokerage in Mumbai. (Photographer: Prashanth Vishwanathan/Bloomberg News)

Public shareholders of Lakshmi Vilas Bank Ltd. are set to take the biggest hit from the private lender’s merger with DBS Bank India Ltd. proposed by the banking regulator. The merger, a rescue effort, has been prompted by financial difficulties at Lakshmi Vilas Bank, on account of continuing losses, negative capital ratios and networth, and a continuous withdrawal of deposits.

According to the draft scheme of amalgamation put out by the Reserve Bank of India, the merger will result in the entire amount of paid-up share capital, reserves and surplus of Lakshmi Vilas Bank being written off.

In addition, the draft said that the transferor—Lakshmi Vilas Bank—shall cease to exist when the merger is operationalised. As a result, its shares and debentures on any stock exchange will be delisted without any further action.

That, essentially means shareholders will lose complete value of the shares they own. “Because of the write-off in paid-up share capital and reserves and surplus, the bank’s equity will go down to zero,” Kirtan Shah, chief financial planner at Sykes and Ray Equities, said. The depositors’ monies in Lakshmi Vilas Bank are safe, he said.

Shareholders losing their money was an expected outcome, according to Institutional Investor Advisory Services’ Amit Tandon. “The bank was pretty much insolvent and therefore it is no surprise that the equity investors have taken the complete hit,” the founder and managing director of proxy advisory firm IiAS told BloombergQuint.

“Of course, small shareholders are going to be screaming. They have been given the short end of the stick. But the writing has been on the wall for a while,” he said. Tandon said the RBI’s primary objective would’ve been to protect the depositors’ money and to achieve that the equity and bondholders had to take the hit.

Lakshmi Vilas Bank: A Stitch In Time

That’s how it ought to be as per law, said Ashvin Parekh. “I must admit that there aren’t many cases of this nature. But even if you go through the Companies Act, the last in line are the shareholders,” the managing partner at Ashvin Parekh Advisory Services said.

“In this particular case, when the net worth is zero, shareholders cannot really expect anything,” Parekh said. “Had it been done purely on a commercial basis as well, I am sure that the new buyer wouldn’t have given anything to the shareholders.”

As of September-end, 93.2% of Lakshmi Vilas Bank’s shares were held by public shareholders. The promoters own only 6.8% stake.

Among public shareholders, foreign portfolio investors own 8.65%, insurance companies own 6.40% (LIC: 1.62%), retail shareholders own 23.98% and HNI shareholding is at 22.75%. Other entities hold 30.82%, including Indiabulls Housing Finance Ltd (4.99%), Srei Infrastructure Finance Ltd. (3.34%) and Prolific Finvest Pvt. Ltd. (3.36%)

Lakshmi Vilas Bank: The Unravelling Of A 93-Year-Old Lender

Under the merger plan, Lakshmi Vilas Bank will be merged with DBS Bank India Ltd., which is a wholly-owned subsidiary of DBS Bank Ltd., Singapore.

According to RBI’s draft, DBIL will bring in additional capital of Rs 2,500 crore upfront to support credit growth of the merged entity.

In case of any debentures, bonds, or any other investments, DBS Bank India would have to pay creditors out of its own accounts, the scheme proposed.

Moments before releasing the plan, the RBI placed the private lender under moratorium for 30 days and capped deposit withdrawals at Rs 25,000.

The lender has seen a steady decline in its financials with it incurring losses over the last three years, according to the RBI. “In absence of any viable strategic plan, declining advances and mounting non-performing assets, the losses are expected to continue,” the central bank said. “The bank has not been able to raise adequate capital to address issues around its negative net-worth and continuing losses.”

Lakshmi Vilas Bank Q2 Results: Net Loss At Rs 397 Crore, Auditor Says Bank Needs Urgent Capital Infusion

The banking regulator has assured customers of Lakshmi Vilas Bank that their interests will be “fully protected” and that there was no need to panic.

This is the third such instance in recent months. In March, the RBI had placed Yes Bank Ltd. under a moratorium for two weeks. Earlier, PMC Bank had been put under a moratorium.

Shares of Lakshmi Vilas Bank closed 0.96% lower ahead of the announcement at Rs 15.5 apiece. The stock has fallen 90% from its peak of Rs 160.9 over the last three years.

Watch | What will Lakshmi Vilas Bank's share and bondholders get after the proposed merger with DBS Bank India? Ashvin Parekh and Amit Tandon weigh in with Menaka Doshi.