LVB-DBS Merger: Bombay High Court Denies Interim Relief To Lakshmi Vilas Bank Promoters

The Bombay High Court has denied interim relief to the shareholders of Lakshmi Vilas Bank Ltd., who had sought a stay on its merger with the Indian subsidiary of Singapore’s DBS Bank Ltd.

The Reserve Bank of India had last week placed the Karur, Tamil Nadu-headquartered-bank under a 30-day moratorium while announcing the scheme of amalgamation, which comes into effect on Nov. 27.

On Thursday, the bank’s shareholders approached the Bombay High Court seeking interim relief. They have challenged the scheme on various grounds, including cancellation of their existing shares in the bank. Indiabulls Housing Finance had also challenged certain aspects of the scheme floated by the central bank.

A two-member bench comprising Justice Nitin Jamdar and Milind Jadhav observed that the reliefs sought by the petitioners are in monetary terms which can be considered at the time of final disposal of the petition. The high court will later pass a detailed order giving reasons for rejecting the interim relief, the court said in its order.

Counsel for the shareholders alleged that DBS Bank India had been given a “free gift” under the scheme and their suggestions on the draft scheme of amalgamation were ignored by the central bank.

Here are the key arguments made by the parties before the Bombay High Court -

DBS Bank Not Doing Philanthropy Or Public Service, Argue Shareholders

Darius Khambata, senior counsel representing various shareholders of Lakshmi Vilas Bank, argued that the scheme issued by the RBI is ultra-vires of section 45 of the Banking Regulation Act. The provision gives the RBI powers to apply to the central government for suspension of business by a banking company and to prepare scheme of reconstitution of amalgamation.

The steps taken by the RBI were in “utter haste” resulting in a scheme which wipes out the shareholders of the bank completely. He made a five-point submission challenging the scheme.

• The Supreme Court in a previous case had “unequivocally” held that a scheme under section 45 is an administrative act and not a legislative action. And that it requires the central bank to follow principles of natural justice.
• Shareholders were denied principles of natural justice as their suggestions on the draft scheme weren’t accepted by the RBI.
• There will be a positive net worth of more than Rs 700 crore, which is why DBS Bank is supporting the scheme. It isn’t doing philanthropy or a public service as it’s in fact seeking value.
• An amalgamation involves issuance of new shares in the transferee company or cash to the existing members. However, the present scheme is not an amalgamation as it results in a wipe out of shares.
• There was no “sweeping urgency” for the issuance of the scheme considering that the RBI itself had issued a moratorium of 30 days.

Dinyar Madon, counsel representing Indiabulls Housing Finance, argued that the company has challenged clause 7 of the amalgamation scheme which contemplates extinguishment of share capital and its delisting. Relying on the 63 Moons case, Madon argued that rights of every member or creditor have to be taken care of in a scheme of merger or amalgamation.

Not Being Given A Free Gift, Argues DBS Bank

Janak Dwarkadas, senior counsel representing DBS Bank, countered the allegation that it was getting a “free gift” under the scheme of amalgamation.

Citing the deteriorating financial condition of the lender and bleak recovery prospects, he argued that DBS Bank will have to discharge future liabilities of the resulting company post the implementation of the scheme. He argued that:-

• The RBI had initiated prompt corrective action on account of Lakshmi Vilas Bank’s high net non-performing assets, insufficient CRAR and a negative common equity tier capital. Further the position of the bank was deteriorating since March 31 last year.
• DBS Bank will have to ensure that salaries of more than 4,000 employees and the interest of depositors, who have deposits exceeding Rs 22,000 crore, is taken over and discharged.
• Equity shareholders are known to be aware that they can only get return on their shares in the form of dividend or contributory surplus dividend in case of winding up of a company. However, once there is a negative net worth, the interest of equity shareholders is wiped off.
• Petitioners who have reduced the company to zero cannot have any further right or claim. They are only indulging in a “speculative litigation” disguised as a Constitutional challenge.

RBI’s Counter

Ravi Kadam, senior counsel representing the RBI, opposed any interim relief favouring the shareholders arguing that the regulator has power to reduce the holding of shareholders to nil in the interest of depositors. He highlighted that:

• Nothing is left to be given to the existing shareholders of LVB in the transferee company due to the negative net worth.
• Lack of a moratorium could have resulted in a run on the bank jeopardising the interest of more than 20 lakh depositor accounts. This emergent situation necessitated the issuance of the scheme.
• Action under Sec. 45 of the Banking Regulation Act is a legislative action by the RBI. An interim relief on such legislative action is not envisaged in economic laws.
• RBI’s action was necessary to ensure continuity of the interest of depositors, public and the stability of financial system and economy. A stay on the scheme would mean that the moratorium will continue.
• And lastly, while the moratorium was intended for 30 days, a swift action was in the overall interest of all stakeholders.

Counsel representing Lakshmi Vilas Bank adopted the arguments of RBI and DBS while supporting the scheme of amalgamation stating that the central bank’s action is in the interest of the lender.

As of September-end, 93.2% of Lakshmi Vilas Bank’s shares were held by public shareholders. The promoters own only 6.8% stake. Among public shareholders, foreign portfolio investors own 8.65%, insurers own 6.40% (LIC: 1.62%), retail shareholders own 23.98% and high net-worth shareholding is at 22.75%. Other entities hold 30.82%, including Indiabulls Housing Finance Ltd. (4.99%), Srei Infrastructure Finance Ltd. (3.34%) and Prolific Finvest Pvt. (3.36%).

The court has directed the parties to file additional documents and will hear the matter on Dec. 14.