How a high court order on LVB poses challenges for the RBI
Last week, the Madras high court directed the Reserve Bank of India (RBI) to conduct a comprehensive valuation of shares and assets of DBS Bank India (DBIL) and Lakshmi Vilas Bank (LVB) before their amalgamation in November 2020. Based on this valuation, the regulator is expected to reassess its decision to write down shares and tier 2 bonds of LVB. This decision follows a lawsuit by LVB bondholders and minority shareholders, challenging the write-down of their investments. Mint explains the significance of the latest order and what it means for the RBI.
What is the order about?
In December 2020, bondholders and minority shareholders of erstwhile Lakshmi Vilas Bank filed a suit against the write-down of their investments in tier 2 bonds worth ₹320 crore after the bank’s merger with DBS Bank. They argued that Centre-approved merger scheme was silent on this write-down and accused RBI of acting arbitrarily.
Last Friday, the Madras high court passed a final order refusing to interfere with the RBI’s decision.
However, it directed the RBI to reassess the shares and assets of DBIL and LVB before the amalgamation and reconsider the reduction in value of shares and the write-off of tier 2 bonds. The court gave RBI four months to complete this assessment.
mWhat were the observations made by the court?
The Madras high court criticized the RBI’s lack of transparency in selecting DBS for amalgamation. It noted that 12 proposals were considered, but their terms and conditions were not disclosed, ostensibly to maintain confidentiality.
“Even if the decision has to be taken secretly in the interest of the banking sector, the RBI has to maintain files. The decisions are to be recorded. Such decisions are liable to be placed before this court while it calls for Judicial Review,” it noted in the order.
The court also criticized the RBI for not protecting shareholders’ interests, failing to determine a swap ratio, and not conducting a comparative valuation of LVB and DBS shares. RBI only considered LVB’s negative net worth before writing down its shares to zero, without accounting for the market value of its assets.
What is RBI likely to do?
The central bank plans to appeal against the order in the Supreme Court, saying that its actions were necessary to protect depositors. Complying with the order would require appointing an official valuer to reassess the shares and assets of DBS and LVB.
How does RBI approve amalgamations?
There are two types of amalgamations in the banking sector: compulsory and voluntary. Compulsory amalgamations are induced or forced by the RBI under Section 45 of the RBI Act to protect depositors and the public interest.
When a bank faces financial distress, the RBI places it under moratorium and frames a merger scheme to transfer its assets and liabilities to a stronger bank.
This scheme is sent to the banks concerned, depositors, shareholders, and others for feedback. After considering the inputs, the RBI finalizes the scheme and sends it to the Union government for approval and notification in the official gazette. The RBI usually keeps the process of selecting a suitor confidential to protect public depositors.
How is this different from the Yes Bank order?
In the case of Yes Bank, the Bombay high court had questioned the writing off of additional tier 1 bonds worth ₹8,415 crore after the bank’s reconstruction. The Supreme Court put this order on hold after the RBI argued that it would render Yes Bank non-viable.
In the case of LVB, the Madras high court questioned the procedure followed by the RBI in amalgamating LVB and DBS and subsequently writing off shares and bonds.
The court directed RBI to revalue the shares of LVB and DBS, noting that unlike Yes Bank, both shares and tier 2 bonds were written off for LVB due to its negative net worth.