This article is written by Soumi Ghose, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.com. She is a Legal Counsel in ICON PLC. Here she discusses- “Interesting points of the Indiabulls Housing Finance – Lakshmi Vilas Bank merger (cover rationale for both parties and deal structure)”.

Introduction

Corporate restructuring is a deep-rooted concept in the present corporate era across the world. The corporates intend to undertake restructuring with a dream of shaping their business in the most beneficial way, either in terms of its size (maybe expanding or limiting their presence) as well as profit earning.  

If the outcome or the requirement from the proposed restructured arrangement is crystal clear for the respective corporate, then the restructuring process is much more organised, smooth and leaves the possibility of happening within the desired timelines. Therefore, it becomes increasingly important for any corporate to choose such a type of corporate restructuring, which adheres to all its desires as well as needs and requirements while complying with all the laws applicable from time to time. 

Section – 230 and 232 of the Companies Act 2013 lay down provisions towards Mergers and Amalgamations. Mergers and Amalgamations of corporate bodies depend on various factors like:- 

1. Expansion and Diversification;
2. Optimum Economic Benefit;
3. De-risking Strategy;
4. Scaling up of operation for competitive advantages;
5. Increase the Market capitalization;
6. Cost reduction by reducing overheads;
7. Increasing the efficiencies of operations;
8. Tax benefits;
9. Access to foreign markets.

For this instant matter under discussion, the proposed merger between Lakshmi Vilas Bank and Indiabulls Housing Finance Ltd. was the first-ever attempt by a non-bank lender or a non-banking financial company to merge with a bank in India. The application for voluntary amalgamation of lndiabulls Housing Finance Limited and lndiabulls Commercial Credit Limited with Lakshmi Vilas Bank was made before the Reserve Bank of India (RBI) and pursued for six (6) months before the same was rejected by the Central Bank of India.
This rejection had been confirmed after RBI had put Lakshmi Vilas Bank under the Prompt Corrective Action (PCA) framework due to a high level of bad loans, lack of sufficient capital to manage risks and negative returns on assets for two (2) consecutive years. This decision of RBI has come in shape after Delhi Police’s Economic Offences Wing registered a complaint against the board of Lakshmi Vilas Bank alleging cheating and misappropriation of funds.

On the other hand, details available for Indiabulls clearly states that prior to this plan of getting merged with Lakshmi Vilas Bank, IndiaBulls Housing Finance Ltd. had already submitted an application as it wanted to start a bank of its own, however, its proposal was rejected by RBI. The reason as confirmed by RBI for this rejection has been apparently that Indiabulls does not come under the fit and proper category to be granted a banking licence. 

In addition to the above, this proposed merger plans between Lakshmi Vilas Bank and Indiabulls Housing Finance Ltd. had been viewed by many experts as a backdoor entry of IndiaBulls Housing Finance Ltd. as a Non-banking Financial Company into the banking sector and to make this arrangement (i.e merger with Lakshmi Vilas Bank) as an alternate channel for Indiabulls to fulfil their desire of nurturing the banking business. Amongst several other reason for rejection, which the central bank of India- RBI would have high-lighted, it can also be construed under the Doctrine of Colorable Legislation, one of the very core doctrines laid down under the Constitution of India, which indicates that what can’t be done directly, cannot also be done indirectly. To interpret this Doctrine of Colorable Legislation in this present context, it can be rightly said that this doctrine forms a touch base for Indiabulls when it did face rejection in obtaining the banking license, so, from a completely different perspective, Indiabulls wanted to get into the new arrangement with Lakshmi Vilas Bank. 

The Indiabulls Housing Finance and Lakshmi Vilas Bank first proposed the merger saying that the amalgamated entity would create a large, healthy and diverse asset portfolio, which will benefit from stable low-cost funding in the form of public deposits and a wide distribution franchise. Subsequently, the two firms amended the structure of the merger deal which envisage.
the amalgamation of Indiabulls Housing and Indiabulls Commercial Credit into the bank. The Indiabulls Group also continued to reduce its exposure to the real estate sector, in order to meet the RBI’s rules for new bank licences. These rules state that an entity is only applicable to apply for a bank licence if the non-financial businesses contribute less than 40 per cent to the group’s business.
State of Indiabulls – pre-merger plan and post rejection of merger plan by RBI 

Since August 2016, the banking regulator RBI has laid down certain strict guidelines regarding licensing for new banks.  Under these guidelines, RBI permits Non-Banking Financial Companies to apply for a banking licence, subject to certain conditions.
It is often understood that Indiabulls being a Non-Banking Financial Companies, had chosen not to make a further attempt for the RBI’s guidelines to opt for the banking license after being rejected initially but had preferred to merge with Lakshmi Vilas Bank and in turn to get the license for banking business. 

State of Lakshmi Vilas Bank – pre-merger plan and post rejection of merger plan by RBI

RBI have placed Lakshmi Vilas Bank under its prompt corrective action framework. The restrictions were placed by RBI on Lakshmi Vilas Bank were due to the followings:-

1. high level of bad loans;
2. weak capital levels;
3. a negative return on assets; and 
4. high leverage.

The RBI said in one of its notification to the stock exchanges. As of the quarter ended June 30, 2019, the bank reported a net loss of Rs. 237 crore. Its gross non-performing assets ratio stood at 17.30 per cent, while net Non-Performing Assets stand at 8.3 per cent. The capital adequacy ratio for Lakshmi Vilas Bank stood at 6.46 per cent. The restrictions placed on the Lakshmi Vilas Bank was with a view that the bank would reduce its lending, particularly to the riskier loan segments. Even after laying down these restrictions, the Chennai based Lakshmi Vilas Bank was expected to look for ways to raise capital to help provide for its bad loans while improving its capital adequacy ratio.

Interesting points of Indiabulls Housing Finance – Lakshmi Vilas Bank – merger

There have been several discussions as to why RBI after pursuing the application for a prolonged period of six (6) months and despite Indiabulls being a white knight for Lakshmi Vilas Bank. There is always an air of doubt as to the actual rationale which brought these two institutes closer to each other, with the plan of merging with each other. 

From the scenarios prevailed prior to both Indiabulls and Lakshmi Vilas Bank have come up with their proposed plans for a merger, it can be well submitted that neither parties had a clean hand to commencement the relationship. In other words, both these parties were relying on the proposed merger with a certain ulterior motive. 

It is also being reported that “All India Bank Employees Association (AIBEA) has urged the Reserve Bank of India (RBI) not to give nod for the merger”. While requesting RBI not to give nod to the proposed merger plans of Indiabulls Housing Finance and Lakshmi Vilas Bank, All India Bank Employees Association (AIBEA) had also mentioned in their communication that “as it is already known that Indiabulls Housing Finance Ltd had applied for a banking licence to start a bank on its own but the same was not sanctioned by the RBI, ostensibly for the reason that the company does not come under the fit and proper category to be granted a banking licence”. 

The General Secretary of All India Bank Employees Association (AIBEA) has also stated that RBI is aware of Lakshmi Vilas Bank’s financial health, which has not been good at all, it has also suffered Gross Non-Performing Asset in the tune of 14% of its total of the total advances for the quarter ended on December 2018. 

The criteria of fit and proper were questionable for both parties i.e Indiabulls and Lakshmi Vilas Bank for the proposed merger. This has resulted in several rounds of discussion and understandings even amongst the people at large. However, these discussions were never free from the thought that the proposed merger might be rejected by the Central Bank of India at any point of India for the ambiguity and issues entangled with either party. 

The rejection of this proposed merger arrangement came in from RBI after pursuing the application for a prolonged period of six (6) months and despite Indiabulls being a white knight for Lakshmi Vilas Bank. After this rejection of the merger proposal by RBI, the future of Indiabulls Housing Finance had been pushed into an air of trouble and discomfort. This rejection further jeopardises the funding situation for Indiabulls Housing Finance.

Conclusion

In addition to all the above-stated facts and figures, it is noteworthy to mention that this proposed merger was also duly scrutinised by the
Competition Commission of India (CCI) and it had given its nod to the proposed merger. However, as the final decision of the regulator in the banking sector, RBI has decided to reject this proposed merger plan and the parties duly accepted the rejection too.  

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