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Why shareholders of Lakshmi Vilas Bank get nothing after the merger with DBS


In a bid to protect interest of depositors of the beleaguered Lakshmi Vilas Bank, the RBI superseded the board on Tuesday and has proposed a scheme of amalgamation with DBS Bank India. While depositors’ money is safe, existing shareholders of LVB have been left high and dry.

Also read: RBI places LVB under moratorium until Dec 16

According to the draft scheme proposed by the RBI, ”On and from the appointed date, the entire amount of the paid-up share capital and reserves and surplus, including the balances in the share/securities premium account of the transferor bank, shall stand written off…..the transferor bank (LVB) shall cease to exist by operation of the scheme, and its shares or debentures listed in any stock exchange shall stand delisted.”

While the final scheme is awaited, the draft scheme suggests that the existing shareholders in the LVB stock will get nothing, post the merger with DBS.

Also read: AIBEA decries ‘long rope’ given to LVB

Stakeholders

The fast deteriorating finances of LVB over the past two to three years was well-known. The stock price has decimated in value over the past year. Yet individual shareholders in the bank are notable in number. As of September there are about 97,200 individual shareholders —96,380 are small shareholders with share capital upto ₹2 lakh. These individual shareholders hold a tidy 46.7 per cent stake in LVB as of September. Foreign portfolio investors (FPIs) hold 8.65 per cent, while LIC holds 1.6 per cent stake in the bank. Aditya Birla Sun Life Insurance (1.8 per cent) and Pramerica Life insurance (2.7 per cent), Srei Infrastructure (3.3 per cent) and Indiabulls Housing Finance (4.9 per cent) are other key shareholders in the bank.

Overall 93.2 per cent stake is held by public and 6.8 per cent by promoters in LVB.

The stock price of LVB fell 20 per cent and the hit the lower circuit on Wednesday, reacting to the RBI’s merger scheme. The stock trades at ₹12.4 per share currently.

Also read: RBI places Lakshmi Vilas Bank under moratorium: Are your deposits safe?

History repeats

This is not the first time that shareholders in a crisis-hit company have been handed a raw deal. In the case of YES Bank, not only did shareholders witness steep deterioration in the value of their investments in the run up to the debacle, but also saw huge dilution in their equity post the capital infusion of ₹10,000 crore by SBI and other lenders.

Additionally the reconstruction plan for YES Bank had imposed lock-in for existing investors. It had mandated a three-year lock-in for existing shareholders (up to 75 per cent of their holding) who held shares of 100 and above in the bank. Hence, such investors were left with little option but to hold on to the stock and see how the proposed plan panned out.

In the case of LVB, the merger into the unlisted DBS Bank and the writing off of the entire amount of the capital and reserves, leaves nothing on the table for existing shareholders.

The fate of shareholders in crisis-hit companies have mostly been same. In most of the IBC cases too, a steep reduction in capital as part of the resolution plan and fresh infusion of capital by the new investor have hurt minority shareholders—leaving nothing on the table for them.



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