Madras High Court tells RBI to make a new decision on Tier-II bond write-off and declines to intervene in the LVB-DBS merger

Madras High Court tells RBI to make a new decision on Tier-II bond write-off and declines to intervene in the LVB-DBS merger

Chief Justice Sanjay V. Gangapurwala and Justice D. Bharatha Chakravarthy, on a bench, directed the central bank to finish the task in four months while taking the bondholders' and shareholders' complaints into consideration.

On April 26, the Madras High Court declined to intervene in the 2020 merger of Lakshi Vilas Bank (LVB) and DBS Bank India Ltd (DBIL), but it did order the Reserve Bank of India (RBI) to conduct a new assessment of the assets and shares of both companies in order to determine whether to reduce the value of shares and write off Tier-II bonds.

"We instruct RBI to proceed with the process of appraising the shares and assets of both DBIL and LVB as of the date prior to the merger, and based on that foundation, make a new determination regarding the decrease in share value and write-off of the Tier-II Bonds," the Madras High Court said.

Prior to this, a few investors had filed a lawsuit against the LVB-DBS merger and the write-off of Tier-II bonds.Since the RBI will now need to make a new determination about the write-off of Tier-II bonds, the finding has some favorable implications for investors in bonds and stocks.

A court made up of Justice D. Bharatha Chakravarthy and Chief Justice Sanjay V. Gangapurwala directed the central bank to finish the task in four months while taking the bondholders' and shareholders' complaints into consideration. The Supreme Court granted minority shareholders of Lakshmi Vilas Bank permission in March 2022 to move any litigation pertaining to LVB's merger with DBS Bank India Ltd to the Madras High Court.

"We believe that the actions taken would take into consideration the complaints of bondholders and shareholders, as well as the difficulties they have faced due to the plan of forced consolidation and any potential improvement of the same," the HC Bench said.

LVB-DBS combination

All of the paid-up share capital would be wiped off in accordance with the proposed merger plan between LVB and DBS Bank India. As stated in the amalgamation plan available on the RBI website, "On and from the appointed date, the entire amount of the paid-up share capital as well as reserves and surplus, including any amounts remaining in the share/securities premium account of the transferor bank, are going to be written off."

The RBI had instructed the bank to write off tier-2 bonds worth around Rs 320 crore after writing down LVB's entire equity share capital as part of the plan to merge with DBS Bank India.

The crisis-hit Lakshmi Vilas Bank (LVB) and DBS Bank India have approved their final merger plan, which will take effect on November 27, 2020, according to a statement from the Finance Ministry on November 25.

merger compelled by RBI

Shortly after declaring a one-month suspension for LVB, the Reserve Bank of India (RBI) presented a proposed plan to combine LVB with DBS Bank India Ltd. (DBIL) on November 17. When the RBI announced the unification plan, it said that DBIL will provide an extra Rs 2,500 crore in capital up front to assist the combined entity's credit expansion. This followed the bank's abortive effort to combine with Pramod Bhasin's Clix Group.

Following this, a few promoters and investors filed lawsuits in various courts against the government and RBI in an attempt to halt the merger, claiming it was done in a rush and against the investors' best interests.

Following the bank's financial decline and repeated warnings from the central bank about the need to increase survival capital, the RBI pushed for the merger of LVB with DBS.

LVB's gross non-performing assets (GNPAs) were 24.45 percent and net non-performing assets (NPAs) were 7.01 percent as of the second quarter of FY 2021. The total Capital Adequacy Ratio (CAR), in accordance with Basel Ill criteria, was at a negative 2.85 percent as of September 30, and the bank's Tier 1 Capital ratio has gone negative.

Over the last year, the bank's business has decreased. At the end of September 2020, total business was Rs 37,595 crore, compared to Rs 47,115 crore at the end of September 2019. For the quarter that ended on September 30, there was a net loss after tax of Rs 396.99 crore, compared to a net loss of Rs 357.18 crore in the same period last year.