Shareholders question valuation of LVB

The valuation of troubled Lakshmi Vilas Bank in the proposed amalgamation with DBS Bank is being questioned by shareholders, though a legal redress may not be possible, say analysts.

Amalgamation or slump sale?

“The proposed scheme is not clear on as to what the shareholders of LVB will get. It looks like a transfer of business rather than an amalgamation. While the title to the scheme is mentioned as amalgamation, it is more a slump sale. More clarity will be required on this,” said KR Pradeep, former promoter of LVB.

In an interaction with BusinessLine , he noted that if the amalgamation is a slump sale, it has to be done based on valuation, an issue on which he is making a representation to the Reserve Bank of India.

“Our request is for a proper valuation from an internationally reputed valuer as it would clear the air. DBS Bank is a foreign bank and the norms to be adopted are for international valuation,” Pradeep said, adding that, alternatively, the RBI can also appoint a merger expert to advise on how this can be dealt with.

He noted that DBS Bank is a good bank, but said that giving a bank free-of-cost can only be solution for a crisis. “But where was the crisis in LVB,” he asked.

The draft scheme of amalgamation by the RBI has proposed that the entire amount of the paid-up share capital and reserves and surplus, including the balances in the share and securities premium account of the transferor bank, shall stand written-off.

The RBI has invited suggestions and objections on the proposed draft scheme until November 20 and Pradeep is planning to send in his suggestions.

Another shareholder of LVB also questioned the draft scheme and said they are sending their views to the regulator. “We are supporting all the shareholders in approaching the RBI. What has happened is not fair. We can’t hand-over an Indian asset to a foreigner without any bidding process or valuation. Why has only one entity been favoured?” he asked.

‘Why merge?’

Another investor pointed out that the bank had been working on ways to raise capital through a rights issue and follow-on public offer, as well as was looking for a strategic investor. “The bank continued to function well with satisfactory liquidity position,” he noted.

However, shareholders and investors are hopeful that the RBI may review the issue and look into their concerns even though experts say that a legal redress may not be possible.

In the larger interest

“All shareholders are the same as far as the regulator is concerned. There is no appeal against Section 45 of the Banking Regulation Act. The RBI has given a regulatory solution. For the regulator, stability of the banking system and interest of depositors is more important than that of bondholders and shareholders,” said JN Gupta, founder, SES, a shareholder advisory firm.

However, he also questioned how the valuation has been done.

“How were the parameters decided and how was the valuation done? Has DBS Bank paid the right price? If DBS wanted to expand its operations to this extent, it would have taken time or if it was negotiating with a bank, it would have had to pay a premium. One does not know how the RBI has valued this. Whether the premium that DBS Bank would have paid is adjusted in the premium or not, we don’t know. What if tomorrow NPAs are recovered? The residual mechanism has not been built in,” he said.

“Although the extinguishment of capital and reserves and merger with an unlisted bank will be negative for minority investors in LVB, the larger interest of depositors has been protected,” said Emkay Global Financial Services in a report. It added that the merger of LVB (563 branches) with DBS Bank (33 branches), which is trying to expand its base in India, will be a long-term positive for the latter, while putting to rest concerns around a potential merger with a healthy large private bank, as it has been the case in the past.