The Reserve Bank of India’s draft plan for the amalgamation of The Lakshmi Vilas Bank Ltd. with DBS Bank India Ltd. includes a complete write-off of equity.
According to the scheme of amalgamation, the paid-up share capital and reserves and surplus, including the balances in the share/securities premium account of Lakshmi Vilas Bank, shall be written off. Shares of the bank will be delisted from exchanges once the merger is complete.
On Thursday, the Business Standard newspaper reported that equity shareholders may approach the RBI to review this decision. At least two large shareholders in the bank confirmed to BloombergQuint that they do intend to write to the regulator seeking a review. They spoke on the condition of anonymity.
Lakshmi Vilas Bank has a 93.2% public shareholding, which includes foreign portfolio investors (8.65%), insurance companies (6.4%) and institutional investors (30.82%), with non-institutional investors holding the rest.
Depositors Over Shareholders
In such situations the Banking Regulations Act would supersede the Companies Act, as it is a question of protecting depositors, said TN Manoharan, the RBI-appointed administrator for the bank. So unlike other companies, Lakshmi Vilas Bank would not need shareholder approval to delist its shares, he said addressing a press conference.
According to a person with direct knowledge of RBI’s thought process, the resolution of an insolvent bank would need to prioritise depositors over all other stakeholders. This is a stance the RBI has even taken in the past, when a private bank had become insolvent.
In the early 2000s, at least three private banks saw their net worth turn negative. To protect the depositors of these banks, the RBI announced amalgamation schemes with other lenders. In each of these cases, equity shareholders were eventually wiped out.
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