The erosion of LVB’s capital and the fact that bad loans comprised a quarter of its total loans mean that the central bank was left with very little choice in the matter, experts said.
RBI’s decision also came after it had exhausted all options. It had provided a long rope to the LVB management to come up with a viable plan that provides for losses and capital for growth. But that did not happen.
The regulator can also take comfort in the Supreme Court verdict in the case of Global Trust Bank in 2004 where the judgment backed RBI’s action of wiping out shareholders in the merger with Oriental Bank of Commerce, the experts said.
“Considering RBI’s conservative stance in the past, we are pleasantly surprised by this. However we note there were many suitors or investors for LVB where RBI wasn’t comfortable and hence DBS India could be one of the few options available for RBI in our view which was mutually beneficial for both parties (DBS India as well as RBI),” said Suresh Ganapathy, analyst, Macquarie India Securities.
LVB’s equity investors have demanded they be compensated with a share in the merged entity that would provide Singapore-based DBS a wide canvas and make it the largest foreign bank by branches and spread.
Second Rescue in a Year
They also said that there should have been bidding.
Shareholders said they would move court if RBI does not consider their plea of giving some value for their investment.
The RBI had waited for years for the management to come up with a concrete plan to revive the bank. It rejected a plan to merge it with Indiabulls Housing and waited for Clix Capital to present a plan. But the LVB management dragged its feet, forcing Clix founder Pramod Bhasin to threaten a walkout.
The central bank has also quietly abandoned the choice of merging troubled lenders with state-owned ones because of the poor health of PSU banks. Given the limited choice, it had to choose DBS because its finances were among the best and it showed keenness to expand in India. "This is a change from the traditional way of dealing in distressed banks," said Kuntal Sur, partner and leader, financial risk and regulations, PWC India. "They have given two important messages. The direct message is to foreign banks to convert to a local subsidiary and they can take over weaker Indian banks. The indirect message is that RBI is not yet ready to allow NBFCs to own a bank," Sur added.
This is the second bank rescue in a year, the first being Yes Bank’s bailout by a group of lenders led by State Bank of India. But what has raised questions is why RBI chose to wipe out shareholders in this case while it did so only for AT-1 bondholders in the case of Yes Bank.
"That is what is confusing," said a large institutional investor in LVB. "RBI has used two very different ways to deal with similar banking problems. The regulator can use its extraordinary powers but there has to be some consistency. Yes Bank bondholders are still fighting in court and this matter could also be clubbed with it. But the larger point is whether the regulator is answerable at all."
The difference may have to do with the size and availability of instruments. Yes Bank’s asset size was 10 times LVB’s. Also there was the quasi equity of AT-1 bonds available in Yes Bank to take losses whereas it was only equity in case of LVB. The central bank, in the GTB case, had argued that depositors’ interest take primacy and others come later, which had convinced the Supreme Court.
In other instances of bank failures, RBI has mostly merged the sick bank with a larger peer. For example in 2006, IDBI Bank was selected from a long list of suitors, including Canara Bank, ICICI Bank, Citibank, Standard Chartered Bank and a consortium led by HDFC that included the Maharashtra government, to take over the distressed United Western Bank (UWB).
Despite it being a distressed sale, IDBI Bank had to pay UWB shareholders Rs 150.55 crore at Rs 28 a share, a 31 per cent premium over UWB's closing price that day.
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9 Comments on this Story
Prasad Popuri57 days ago
Investors only are losers.No value for shares of LVB.
P Sellamuthu57 days ago
In the case LVB , the investors thrown 7 directors & CEO . Why the same investors not interested in getting solution immediately. At the cost of depositors these investors want to enjoy. RBI decision is right.
Shankar Srivastava58 days ago
Without getting proper evaluations getting done by any competent valuer, the handing over of bank to a foreign bank with all assets and without any liability smells a foul play by RBI authorities for their vested interests. The deal should be made public with transparency and needs to be thoroughly investigated to ensure that there is no under the table deal happened before the final deal inked by RBI