On November 17, 2020, the government announced a one-month moratorium on the Lakshmi Vilas Bank effective till December 16, 2020, citing its deteriorating financials and failure to come with a revival plan on its own.
Immediately after this RBI issued two separate notifications stating that it was superseding the bank's board and the draft scheme of amalgamation of LVB with DBS Bank.
As per the draft scheme of amalgamation published on the RBI website notifying the merger of the Lakshmi Vilas Bank (LVB) with DBS Bank India, the entire amount of the paid-up share capital will be written off.
This swift move by RBI has caught both retail and institutional shareholders of Lakshmi Vilas Bank by surprise.
“On & from the appointed date, the transferor bank shall cease to exist by operation of the scheme, & its shares or debentures listed in any stock exchange shall stand delisted without any further action from the transferor bank, transferee bank or order from any authority," stated the draft scheme of amalgamation.
Lakshmi Vilas Bank is the second bank after Yes Bank which has run into turbulence this year. Yes Bank which was placed under moratorium by RBI in March was swiftly rescued after government intervention through an SBI-led consortium.
The 94-year-old Tamil Nadu based Lakshmi Vilas Bank has about Rs. 6,070 crore as deposits in current account/savings account (CASA) and about Rs. 14,000 crore in term deposits.
The bank which had posted a net loss of Rs. 397 crore in Q2 of FY21 has witnessed its gross NPA rising to 24.45% in Q2 FY21 as compared to 21.25% in the corresponding period of the previous financial year.
Assuring the Lakshmi Vilas Bank's depositors, its administrator T.N. Manoharan issued a statement saying “LVB is also closely monitoring the availability of cash in the currency chest & coordinating with the regulator in an appropriate manner to ensure that at no outlet there is any shortage of money, even if a significant number of depositors turn up to withdraw the permissible amount".
The withdrawal for investors has been capped at Rs. 25,000 until December 16, 2020, across savings, current, fixed deposits, and other deposit accounts.
However, customers can withdraw up to Rs. 5 lacs in case of emergencies such as payment towards higher education, marriage or medical emergencies.
While depositors of Lakshmi Vilas Bank have at least something to rejoice, the same cannot be said about the bank’s shareholders as they may not get anything at all.
After hitting lower circuits from the past four days, the shares of Lakshmi Vilas Bank fell further to hit a new 52-week low of Rs. 9 on Friday.
According to the draft amalgamation scheme, the entire paid-up share capital of Lakshmi Vilas bank will be written off at the time of amalgamation, and the shares will be delisted from the exchanges.
The RBI has given time till November 20 for various stakeholders to provide suggestions and objections for the draft scheme.
Of course, shareholders have the option to take a legal recourse demanding a fair valuation for the shares held by them or a stake in the newly merged entity.
As Banking Regulations Act would supersede the Companies Act, when the merger takes place, the shareholders may be left high and dry.
Key takeaways for retail investors
- Always look at value of a company while investing instead of looking at just the price.
- Invest and forget, no longer works in today’s world. Keep a regular track of the companies where you have invested in.
- Never put all your eggs in one basket. Always diversify your portfolio by investing in multiple sectors and stocks.
- Always do your own research before investing. If you lack the time or expertise seek professional help as they can not only advise you one best investment opportunities but also help you rebalance your portfolio as when required.