This article is written by Muskan Gupta, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.
The amalgamation of Lakshmi Vilas Bank Limited (LVB) with the wholly-owned Indian subsidy of DBS Group Holdings Ltd. namely, DBS Bank India Limited (DBIL) has been much talked about as it is the first time that the Reserve Bank of India (RBI) has proposed and approved the taking-over of an Indian bank by a foreign company/ bank and allowing the Indian bank to become a part of a wholly-owned subsidiary of a foreign bank (DBS Group Holdings Private Limited) even though there have been several of such shocks coming into light since the shadow banking crisis started in 2018 and before this, only local banks were turned-to, to bring Indian Banks out of crisis and a controlling-shareholding of an Indian bank being given in the hands of a foreign bank was avoided. The reasons of RBI going ahead with such a deal are still unclear and the DBIS is already facing court cases because of the amalgamation which only happened in November, 2020.
Lakshmi Vilas Bank Limited was a private bank in India established in Karur, Tamil Nadu in 1926. The bank has been in financial trouble for almost a year, in the form of continuing losses, negative capital ratios and net-worth, and a continuous withdrawal of deposits. It had been looking for funding but had been unsuccessful in securing any and their troubles had only increased because of the drop in the economy due to Covid-19.
This is when RBI imposed a moratorium on the bank which lasted for a month and proposed the take-over of Lakshmi Vilas Bank Limited by DBS Bank India Limited, a wholly-owned subsidiary of a foreign bank namely, BDS. Initially the question regarding the interest of a foreign bank was brought up but the answer is simple- DSB Bank India Limited got a ready customer-base and infrastructure in multiple cities in India with just a single deal which would otherwise take DBIL years to build and as for the mode of operation of the two banks being different is concerned, companies have to alter their methods to enter into new markets and then make gradual changes from there. So, it was a good deal for DBIL given the fact that DBIL had been trying to expand its operations in India. But we can not say the same for the other parties involved.
Amalgamation of DBIL and LVB or Acquisition of LVB by DBIL
In an Amalgamation, there are a total of three entities involved in the transaction wherein the two existing companies come together to form a third company which is a new company and the old companies cease to exist and the shares of the new company are given to the existing shareholders of the two old companies.
On the other hand, in an acquisition, the (generally smaller) company (“acquired company”) is taken over by the larger company (“acquiring company”) and the acquired company ceases to exist and the transaction is completed by the acquiring company buying more than 50% shares of the acquired company. Even though the agreement between LVB and DBIL is termed as “Amalgamation,” the transaction between LVB and DBIL seems more like an “Acquisition” as after the agreement, Lakshmi Vilas Bank Limited ceased to exist with LVB being delisted from the stock markets and became a part of DBIL which happens in case of acquisitions as against amalgamations wherein the two companies come together and both of them form a new company and hold some stake in the new formed venture.
Moreover, the old shareholders were not given share-holding in the bank as held under DBIL and their share-value was simply written-off. Also, the amalgamation/acquisition was not negotiated properly as would be done by two companies dealing at an arm’s length and the proof of it is that LVB was not even valued properly to decide a fair compensation for LVB. Rather, the whole transaction was rushed into. Since DBIL had several benefits to gain from the acquisition, they might have agreed to a better deal for LVB had there been proper valuation of all the assets and liabilities of LVB and a proper negotiation between the parties independently without the interference of RBI and giving time to both the parties to strike a deal in their own time. Also, if the deal could be executed with a foreign bank, maybe other options for LVB could be looked into which would have given more negotiation leverage to LVB for striking a better deal to profit the investors as well.
Court Cases and their implication
Several people who held shares of LVB filed court cases against DBIL as mainly because of one clause in the agreement which states that “the entire amount of the paid-up share capital and reserves and surplus, including the balances in the share/securities premium account of the transferor bank, shall stand written off” from the date of the amalgamation.
Though the account holders in the back did not lose their deposits, all the shareholders lost all the money they had invested in the bank. Now, the shareholders are arguing that the “scheme of amalgamation was irregular, arbitrary, irrational, unreasonable, illegal and thus, void” because of this very clause. It is also argued that a liquidation procedure would have yielded a better result for the stakeholders. Currently, there is a petition in the SC to transfer all the cases against DBIL to the Bombay HC.
The pertinent question which arises now is if the court declares the clause to be void, would it affect the whole amalgamation or would it just save the share capital from being written off thereby affecting the financials of the new entity as under DBIL and thereby increase their losses? There is no ‘severability clause’ in the draft agreement between the two banks and neither is there one in the notification issued by the Ministry of Finance to execute the so-called amalgamation which means if any of the clauses is found void or not fulfilled, the contract in itself would stand void technically.
Moreover, since it is a public issue and the court might want to save the contract by severing the void clause from the rest of the contract, even in such a case, the clause might not be severable and even if it is severed, DBS might not be willing to liquidate its shareholding in BDIL by giving the old shareholders shares in DBIL in lieu of shared of LBV and also it would result in additional losses/expenditures for DBIL.
The Transaction between DBIL and LVB was able to save the deposits of the people in LVB but the deal did not make the shareholders of LVB very happy as they lost the amounts of their investment which encouraged some of them to file cases against DBIL saying that they were “left in the lurch” in hopes of getting at least a part of their investments back.
The future of expanded DBIL in the country would only be decided by the courts once they come up with a judgement which, as everyone knows, would take quite a lot of time to come. Till then, if DBIL still operates as the owner of all the assets of LVB with the access to its client-base, they may be able to establish themselves in the Indian market with a substantial client-base regardless of the decision of the Indian courts. However, the current situation is very bad for the shareholders of the now non-existent LVB as they lost all their invested money.
Though, it is not completely clear if they would have gotten any of the invested money back had the bank gone for liquidation instead of being acquired by the fully-owned Indian subsidiary of a foreign bank done without proper valuation and hence maybe for a lower consideration than what would have been fair. Though, it is also a fact that purchasing shares is one of the riskiest investments as shareholders are last in the list of priorities even according to the Companies Act, 2013, when it comes to paying back at the time of liquidation which implies that has LVB been liquidated and not enough funds were left, the shareholders would still have gotten nothing on their investment.
However, given the fact that making the contract void after a considerable time has passed, might not be beneficial for anyone and hence a better course of action for most of the parties involved would be to reach some kind of settlement between DBIL and the old shareholders of LVB.
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