Lakshmi Vilas Bank-DBS Amalgamation: Supreme Court Stays Madras High Court's Direction To RBI

The Supreme Court on Wednesday stayed the Madras High Court's direction to the Reserve Bank of India to conduct a fresh valuation for Lakshmi Vilas Bank Ltd. and DBS Bank India's assets before the amalgamation process is taken forward.

Notably, the amalgamation process has not been stayed by the apex court, but only the direction pertaining to a fresh valuation of the assets of the two banks has been stayed.

Arguing for the RBI, Solicitor General Tushar Mehta told the court that Lakshmi Vilas Bank's net worth was found to be negative by a statutory auditor.

This negative value was to the tune of nearly Rs 700 crore, Mehta said.

Mehta argued that the valuation exercise that has been mandated by the Madras High Court could very well lead to the Singaporean entity's arm walking out of the amalgamation process.

Opposing this, Senior Advocate Arvind Datar, who was representing LVB's equity shareholders, stated that the shareholders' shares have been reduced to zero without any valuation.

Datar argued that LVB's net worth has come out to be negative because the RBI has taken the deferred tax liability of LVB as Rs 1,148 crore. If this deferred tax liability is removed, then the valuation will be in the positive by Rs 464 crore.

Citing a top court ruling in the case of JK Industries, Datar said that the deferred tax liability is not a liability at all.

Observing that the case will need some consideration, Chief Justice of India DY Chandrachud issued notice to the parties involved and will likely take up the case for final disposal within a month's time.

In April, the Madras High Court asked the Reserve Bank of India to conduct a fresh valuation exercise so that a fresh decision could be taken on the reduction of the value of shares and writing off the tier-2 bonds.

The High Court's direction was issued keeping in mind the grievances of the shareholders and the bondholders on account of the scheme of compulsory amalgamation.

The central bank was given four months to conduct this revaluation exercise.

In November 2020, the RBI ordered the amalgamation of Lakshmi Vilas Bank with DBS Bank India, where shares and tier-2 bonds of the private lender were written down to zero, citing negative net worth.

While adjudicating the dispute, the high court stated that the RBI could have determined the swap ratio, and a comparative evaluation of the share prices of both banks should have been done.

If the comparative valuation of the shares of Lakshmi Vilas Bank and DBS Bank India had been undertaken, then a decision could have been taken with certainty about the swap ratio or whether the value of the shares had become zero, the court said. It does not appear that all these aspects were considered, it said.

Further, deferred tax liability can be interpreted as both an asset and a liability. In this case, the tax liability of Lakshmi Vilas Bank in the future could not have been wiped out without making the provision of Rs 1,185 crore. If this amount were available with DBS Bank India to set off against its tax liabilities, but for this DTA, the net worth of Lakshmi Vilas Bank would be positive at Rs 486 crore, the court said.