Lvb-Dbs Amalgamation: A Stratergy to Enhance ‘Phygital’ Presence of Foreign Banks In India

Avantika Banerjee
School of Law, Pondicherry University

 Lakshmi Vilas Bank Limited was an Indian private sector bank established in 1926 in Karur, Tamil Nadu. It is founded in 1926 by a group of seven businessmen in Karur under the leadership of VSN Ramalinga Chettiar. As of November 2020, the bank has 566 branches in 19 states and 1 union territory. On 27th November LVB is now merged with DBS Bank.[1] The bank has a dominant presence in Tamilnadu with 40% exposure. In the last five years, the banks share prices were rose to Rs 185 in 2017 and slipped to even Rs 10 in March 2020.

Trouble for LVB started after it shifted its focus from small and medium enterprises to large businesses, in 2016-17. It loaned Rs 720 crore to Malvinder Singh and Shivinder Singh, former promoters of pharma major Ranbaxy and Fortis Healthcare, against fixed deposits of Rs 794 crore which turned the bank turtle. That turned out to be a bad loan.
In 2018, Religare Finvest, an arm of Religare Enterprises Limited, sued a Delhi branch of LVB to recover fixed deposits worth about Rs 800 crore that the bank invoked to recover loans to the Singh brothers. After the case was filed, RBI put LVB under prompt corrective action in September 2019 due to which the bank was not able to issue fresh loans or open a new branch anywhere. The PCA has not been revoked till date. Currently, the case is sub judice and two employees of the bank have been arrested. In September 2020, at the second quarter LVB reported a widening of its net loss at Rs. 397 crores.

A large section of shareholders of ailing Lakshmi Vilas Bank (LVB) voted against the reappointment of the managing director and chief executive, as well as seven directors and auditors, at the recent annual general meeting . After the losses of the banks seemed to go off the charts.

The Reserve Bank of India, which prepared the final scheme of amalgamation, has given DBS India the right to close down or merge LVB branches. DBS India, the local subsidiary of Singapore’s DBS Group Holdings, will invest Rs 2,500 crore while the equity, reserves and surplus of the 94-year-old LVB will be extinguished.

DBS bank was incorporated on 16th July,1968 in Singaporean government. It has the largest share of registered assets in South -East Asia and has capital of over five billion dollars. Thamesak holding holds 29% of DBS shares.

On November 17th 2020 RBI proposed the merger of DBS Bank and Lakshmi Vilas Bank.The merger came into effect on 27th November 2020. All LVB employees will become part of DBS India at the same terms. The power to regulate and supervise banks has been provided to RBI under the provisions of the Banking Regulation Act, 1949.

The Reserve Bank of India (RBI) has placed Lakshmi Vilas Bank (LVB) under a one-month moratorium till December 16, 2020. During the moratorium period, withdrawals for depositors have been capped at Rs 25,000.

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Power of RBI to amalgamate banking Companies

Section 45 of the Banking Regulation Act, 1949 empowers RBI to apply to Central Government for suspension of business by a banking company and to prepare scheme of reconstitution of amalgamation.

First of all, if RBI believes to have substantial reason it can apply to the Central Government for an order of Moratorium for a banking company.

The Central Government, after considering the application made by the Reserve Bank under sub-section (1), may make an order of moratorium staying the commencement or continuance of all actions and proceedings against the company for a fixed period of time on such terms and conditions as it thinks fit and proper and may from time to time extend the period so however that the total period of moratorium shall not exceed six months.[2]

 During the period of moratorium, if the Reserve Bank is satisfied that—

(a) in the public interest; or

(b) in the interests of the depositors; or

(c) in order to secure the proper management of the banking company; or

(d) in the interests of the banking system of the country as a whole, it is necessary so to do, the Reserve Bank may prepare a proposal for said amalgamation

(i)for the reconstruction of the banking company, or

(ii) for the amalgamation of the banking company with any other banking institution (in this section referred to as “the trans­feree bank”).[3]

Conclusion

In the past few decades Corporate restructuring has proved to be a powerful tool for sustaining businesses in India. The recent trend of mergers in the banking sector has seen a spike. The increasing rates of NPA’s (Non- performing Assets) and lower economic growth are the main reasons for the decline of the banking companies in India. The LVB -DBS merger is an example of expansion of foreign banks in India. Before the Merger DBS had 33branches in 22 cities across the nation only. Whereas, LVB had 563 branches in India. This merger has established the phygital presence of DBS in India.

The following are the few demerits of merger in banking sector:

  • The loss of job in the transferor company.
  • Loss value of equity for the shareholders
  • Distrust among the investors.

The amalgamation has the worst affect on the shareholder and debentures. Before the arrangement was announced LVB had around 98000 shareholders whose rights were written off. This caused huge loss to the shareholders. The RBI has not provided any relief for the shareholders after the delisting of LVB they will no longer be the shareholder of the bank.

The RBI and the banks must work together to ensure to reduce the amount of non-performing assets. Also, there must be appointed monitoring authorities to track the performance of the banks and also their loan distributive mechanisms to strengthen the banking system of India.


[1] DBS Bank Ltd is a Singaporean multinational banking and financial services corporation headquartered in   Marina Bay, Singapore.

[2] Section 45 (2) of the Banking Regulation Act,1949

[3] Section 45 (4) of the Banking Regulation Act,1949

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