Old Bottle. New Whine.

One of the oldest banks in India, Lakshmi Vilas Bank (“LVB”) was founded in 1926 by a group of seven businessmen of Karur (Tamil Nadu) under the leadership of Shri V.S.N. Ramalinga Chettiar, with an objective to cater to the financial needs of people in and around Karur who were occupied in trading businesses, industry and agriculture.

The bank was incorporated on 3 November 1926 under the Indian Companies Act, 1913, and obtained the certificate to commence business on 10 November 1926. Subsequent to introduction of the Banking Regulations Act, 1949 and Reserve Bank of India as the regulator for the banking sector, the bank obtained its banking license from RBI on 19 June 1958, and on 11 August 1958 it became a ‘scheduled commercial bank’ signifying capability to operate as a full-fledged commercial bank.

LVB has been in bad business shape for nearly 3 years and PCA for many months now and it has had regulatory extra-attention for long now. That the regulator wanted a new promoter group to come in, has also been known. That the various attempts to get a M&A deal happen did not appease the regulator, as the speed could not showcase intent-enough & material-enough. Apart from the suitors who announced their interest, market has been awash with names of private and public sector banks to whom the regulator was supposedly looking at a merger, just in case any suitor did not make the cut. Quite a few suitors got their own stock’s valuation corrected in the pursuit of this bank, while the bank lost its purse !

Amalgamation

When the Reserve Bank of India (RBI) announced few days ago that LVB would remain under moratorium till Dec 16th 2020 and mooted the concept of amalgamation of LVB with DBS Bank (India), it took the market (and potentially punters) by surprise. The proposed scheme of amalgamation is with the special powers of the Government of India and RBI under Section 45 of the Banking Regulation Act, 1949.

While the proposal shocked the shareholders of LVB, as it envisages complete write-off of the equity shares of LVB to zero and to merge it into DBS bank, the final scheme will be prepared by the RBI appointed-administrator, after factoring in the feedback from various stakeholders. Various media reports have cited that the shareholders, especially the current promoters of LVB (who have single digit shareholding) and some of the institutional shareholders might move courts to protect their equity value, if the final amalgamation plans proceeds with the construct as proposed in the draft plan. Technically, the shareholders of LVB will not have any say in the amalgamation decision in the General Body meeting under the Companies Act, as the Banking Regulation Act will override the provisions of Companies Act !

The push-back on the equity-write-off is understandable. But the financials of the bank was so precarious for so long. RBI and the larger economy can ill-afford a bank shutting shop in the current gloomy economic stress. LVB’s Tier-1 capital had plunged to -4.85% by Sep 30th 2020. In simple words, the bank has had negative net-worth for quite sometime now. And you cannot have a bank with capital adequacy ratio (CAR) of 1/75th of what the regulatory requirement is ! The bank’s credit rating was so low that anymore lower, it could have triggered panic of those from whom the bank had taken debt from !! That’s something that a bank can’t afford.

Musical chair - but no music to anyone’s ears

To put it in perspective, it is the shareholders who in the last AGM, did not agree with reappointment of some of the directors and voted against their appointment and that of the then-acting-CEO.

Then, RBI appointed a committee of independent directors to run the bank. And within few weeks of that, RBI superseded the board that it itself had asked to run the M&A process. And purportedly as the media reports state, those independent directors were not even aware of the conversation with DBS bank.

Now the bank unions have also questioned why DBS bank was chosen to amalgamate LVB with. Of course the question of “foreign bank” is a narrative that we choose to use when it does not suit our objective.

But the larger question is this : what’s the process that RBI uses to decide on anything around a sick bank ?

Would those processes be transparent enough that they can be communicated to the external world ? Can there be a set of guidelines on how to deal with various types of sick banks?

The industry experts have been wondering about the different approaches that RBI has adopted for different sick banks in the past and recently as well. To be fair to the debate, are the stressed public sector banks dealt differently than the stressed private banks ? It’s fair to expect the regulator to have yardsticks that are fair & transparent to all parties.

Why this suitor ?

But let’s face it. In any M&A process involving a sick bank, it’s the ability of the incoming promoter to infuse “upfront capital” that’s a critical measure. In that count, DBS bank scores hands down.

The DBS bank was set up by the Government of Singapore in 1968 to take over the industrial financing activities of the Economic Development Board, also owned by the Singapore government.

DBS bank (India) has been one of the 2 foreign banks which have adopted the RBI guideline (and not a regulation) around foreign banks having the Wholly Owned Subsidiary (WOS) structure for their India holding. The WOS structure of the Indian operations would even ring-fence the local operations from being affected, if there had to be a crisis at the parent entity.

DBS bank (India) has a robust balance sheet with total regulatory capital of over Rs 7,000 crores. It’s Tier-1 capital is very healthy and can absorb a bank with poor CAR levels. And DBS Bank has kept its NPAs under control and have been prudent in providing for bad-loans. More importantly, they have wisely invested heavily in digital framework for serving banking consumers. . These aspects would provide comfort to any regulator.

The Singapore government’s investment arm - Temasek - is a key shareholder in DBS Bank. Temasek has a net portfolio value of over $300 billion as of end-March-2020. In the Indian banking space, Temasek has dabbled with investments in ICICI bank, HDFC bank. It also holds stakes in AU Small Finance Bank and the NBFC - Fullerton India Credit Company. ( Its another subject for discussion as to how the regulator will look at single entity like a Temasek or IFC having exposures across multiple Indian banks or non-banks, some with board seat nomination rights).

And let’s not forget that India & Singapore are strategic partners with deep mutual respect for each other - both at governmental level and at the heads of government level. So a deal involving Singapore government’s investment arm into a sick Indian bank (that has been hogging media coverage), surely would have had all the conversations at the highest levels, required to provide comfort for a deal-closure and for smooth transition. 

All the cribbing about cultural mismatch are all unconfounded. The leadership at DBS bank understands the issues & the prime need to get their Internation correct. If they don’t get the act right, it’s their capital at stake.

Scripting this scrip 

One would assume that the banking regulator has been in touch with securities regulator (SEBI) as this involves a listed bank entity, whose equity is proposed to be extinguished. The question of minority shareholder rights protection is crucial, even if the total amount is low. It’s a “case of curious buyers” since the draft scheme of amalgamation was announced. Ideally one would expect no trades happening on the scrip in the stock exchanges. Very surprisingly, this scrip has been busy. That’s for the securities regulator to check.

Any prolonged dispute on this M&A will only hurt all stakeholders. And further dampen the sense about India’s ability to deal with stressed assets, even if those assets have now turned into liability !! So until then, let’s not second-guess the “match-making at Mint Street”.