Can Lakshmi Vilas Bank shares drop to zero?

Mumbai: Shares of Lakshmi Vilas Bank (LVB) looked up on Wednesday after staying locked in lower circuit limits for six consecutive days. Analysts say the stock value could erode closer to zero, thanks to the Reserve Bank of India’s (RBI) move to wipe out shareholder’s equity in the merger plan with DBS Bank.

The Union Cabinet on Wednesday okayed DBS India’s plan to take over capital-starved Lakshmi Vilas Bank with effect from November 27, paving the way for the first such rescue by a foreign lender

The LVB stock eroded more than 53 per cent value in six sessions since November 16, and closed at a record low of Rs 7.30 on Tuesday. The stock had touched a 52-week high of Rs 25.18 on June 30, and is down 71 since then. But on Wednesday, the stock rose nearly 5 per cent to close at Rs 7.65.

“It can go as low as possible until the stock is suspended. The deal has nothing in it for shareholders. Whoever is buying it, would be uninformed investors. This also shows how vulnerable retail investors can be at times,” said independent analyst Ambareesh Baliga.

“This reminds me of Global Trust Bank, which went bust in 2004, and later got merged with Oriental Bank of Commerce (OBC), What did the shareholders get in that deal? Nothing,” he said.

At the end of September, some 12 foreign institutional investors (FIIs) held 8.55 per cent stake in the lender. They have consistently reduced their holdings in it in last five quarters from 16.45 per cent at the end of June quarter. Mutual funds, on the other hand, hiked their stake in the lender to 6.40 per cent in the September quarter, from 4.78 per cent in the quarter before.

Retail investors had been consistently raising their stake in the lender so far this year, and own nearly 23.98 per cent stake at the end of September, compared with 21.14 per cent they had held at the end of December 2019.

All of the bank's equity, including the shareholding of Indiabulls Housing Finance (4.99 per cent), Srei Infrastructure Finance (3.34 per cent), LIC (1.62 per cent) and promoter ownership of 6.8 per cent, as well as stakes held by retail investors, are set to be extinguished as the draft scheme of amalgamation says that the entire paid-up capital of the bank will be written off.

The scheme suggested by RBI leads to a very raw deal to LVB shareholders. It's an 'amalgamation' of assets and liabilities, and not a conventional merger (involving exchange of stocks), which could have given LVB shareholders equity stake in the new entity. The deal structure is unfair for shareholders of the bank.

The bank's auditor had said urgent steps were needed to augment the lender's capital base in the FY21.

The writing was on the wall?

“The stock will most probably continue to erode value because in the resolution plan, they have said the equity will be written off. An investor will get almost nothing,” said Jaikishan Parmar, senior equity research analyst at Angel Broking.

Parmar said for last many quarters, LVB’s gross non-performing assets (GNPAs) were persistently high, and led to elevated credit costs. Eventually, the lender continued to report losses, which completely eroded its net worth and impacted their capital adequacy ratio (CAR).

Earlier this month, LVB said its net loss widened to Rs 397 crore in the quarter ended September, compared with a net loss of Rs 357 crore in the year-ago period. Its net interest income dropped 28 per cent to Rs 79.5 crore.

Gross NPA stood at 24.45 per cent as at end September, compared with 21.25 per cent a year ago.

Can shareholders do anything?

JN Gupta, co-founder and managing director of Stakeholders Empowerment Services, said while there is always a legal recourse available, it is very unlikely that there will be any outcome out of it in the case of LVB, even as there seems to be lack of transparency on the valuation.

Gupta said RBI had used its powers under section 35 of The Banking Regulation Act, and he believed RBI would have done its homework well, and prepared all the relevant documents to show the court that they had explored all possible options, and this was the most viable solution.

“Shareholders are at the lower end of hierarchy, in terms of protection of interests. There is a little bit of lack of transparency in terms of how the valuation has been arrived at,” said Gupta, who is also a former executive director at Sebi.

“In my opinion, Sebi will have to have a relook into the practice of suspension, and any stock if the value is wiped off, by virtue of a deal, there is no point in letting the stock trade on the bourses and it continues,” Gupta said when asked if the stock can be suspended on the bourses.