DBS-LVB Deal: A hint to foreign banks, grim signal for shareholders

MUMBAI: A shotgun wedding of an odd pair in the middle of a pandemic, with the RBI governor -- recently recovered from Covid -- acting as the head-priest; and two overbearing Asian sovereigns blessing a deal after quiet backroom talks, mark the coerced matrimony between the Indian arm of the Singapore lender DBS and Lakshmi Vilas Bank (LVB), a sleepy, 100-year old shop in the south of Vindhyas.

The sudden announcement on Tuesday evening to impose a moratorium that restricts LVB customers from withdrawing money for a month is ostensibly aimed at facilitating the 'deal' and saving a failed bank. DBS, backed by the Singapore government, is a more eligible suitor than other investors snooping around LVB for a year. But the moratorium is inexplicable: loyal depositors of LVB have been unperturbed by the capital erosion of the bank since 2019; despite fall in stock price and inability of the LVB management to rope in new investors, they never pulled out money. Indeed, an announcement to merge with the DBS subsidiary, sans the moratorium, could have also given the old bank a new life. So, what changed?

A SIGNAL TO FOREIGN BANKS
What are the signals from the regulator and the government? First, it's a hint to foreign banks: we may let you take over a capital starved bank for a song once you set up a subsidiary in India. Make no mistake. The legal entity acquiring LVB is an Indian company, not branches of an overseas bank. 'Subsidiary or branches' has been a recurrent theme in banking regulation with RBI changing its stance with global crises. After the 1997 Asian financial crisis, RBI was keen that foreign banks run the Indian business as part of their main operations and balance-sheet -- a safeguard to ensure that they don't snap ties like fair weather friends at the hint of a trouble in Asia. That stand changed after the 2008 Wall Street meltdown: it was then felt that a ring-fenced, closely regulated Indian subsidiary is a better way to guard the Indian banking system as the parent's reckless, exotic bets would not backfire on India. Now that message is loud and clear: set up a local outfit if you are long on India; be 'desi' --- may not be through ownership, but legally.

GRIM MESSAGE TO SHAREHOLDERS, NBFCs
A stark feature of the transactions is the raw deal to LVB shareholders. It's an 'amalgamation' of assets and liabilities, and not a conventional merger (involving exchange of stocks) that would give LVB shareholders equity stake in the new entity. Not all LVB shareholders are epitomes of corporate governance. Indeed, a few of them have bought LVB shares from the open market -- either directly or through benami -- while harbouring fond hopes of owning a bank someday and transforming their existing business with the goodwill and access to cheaper funds a bank offers. But many LVB shareholders and families of local community members have been holding the stock for decades. This deal is unfair to them.

RBI has enough powers to freeze voting and dividend rights of dubious shareholders while letting normal shareholders receive shares of the amalgamated bank. These shareholders who are not responsible for the bank's owes could have been given some upside if the LVB stock is written down to say, one rupee a piece, instead of zero. Even with low capital and underprovided loan book --- dark spots DBS may have pointed out to drive a bargain --- LVB's 550-odd branches have a franchise value that is not fully captured by market capitalisation.

Probably, RBI ran out of patience. Perhaps, it would have slapped a moratorium at the beginning of the Corona lockdown but for an email in early March from a Singapore fund promising to invest $200 mn. A few months later, Clix Capital, a non-banking finance company (NBFC) led by former GE honcho Pramod Bhasin joined the race. Last year, LVB management had tried to cobble a deal with Tilden, a large US fund. More recently, an Indian business house with significant interest in real estate showed interest. What might off put off the regulator was the drama at the LVB annual general meeting, where a brewing feud between some of the old and new shareholders boiled over. Some of the new shareholders dropped loud hints that Clix was a poor choice. Oblivious how quickly the regulator can change its mood, these shareholders were playing with fire, trying to retain their hold on the bank. On the eve of the AGM a report by an 'independent' agency, belittling the existing LVB board, mysteriously founds its way to the mailboxes of shareholders. A congeries of events and conflicting signals probably led Mint Street to finally say ‘enough was enough'.

Indeed, before all this, there were signs that something was amiss. RBI, ET learns, had asked the bank to disclose the identities of ‘ultimate beneficial owners' of some of the foreign institutional shareholders of LVB. There were suspicions stoked by the overseas addresses of these offshore investors and alleged links with some Indian shareholders of the bank.

THE MINT STREET WAY
While laws allow the regulator to exercise a sweeping display of authority, the curious style and strategy to bail out weak private sector banks is coming to the fore. For years fragile banks -- like Global Trust and United Western -- were forced-merged with large PSU banks. The tack changed amid a clamour that taxpayers money cannot be misused to bail out failed lenders. But while taxpayers were spared, the rescue of Yes Bank and now the proposed move to save LVB, have a different feature: new shareholders make a killing while old shareholders are left with little or nothing. In Yes Bank, the price for recapitalisation was fixed before the bank's results; a handful of domestic investors were handpicked; the very announcement drove up the stock price, leaving money on the table for new investors; but existing shareholders could not participate as there was no rights offer. Now, DBS is being handed over a bank with a decent branch network and stable deposits.

Lastly, many NBFCs may note that a banking license will not come easy. After turning down Indiabulls, RBI told Clix Cap to take a walk. Or may be, it simply said nothing. When it comes to RBI, not replying is also a reply.