[LVB-DBS Bank merger] Madras High Court grants Lakshmi Vilas Bank shareholders limited interim relief, no stay on merger [Read Order]

The Madras High Court passed certain interim directions for the legal protection of the shareholders of Lakshmi Vilas Bank (LVB) in the wake of the LVB-DBS Bank merger, considering that the entire share capital value of these shareholders had been reduced to zero following the merger.

. The Court, however, has made it clear that there would be no stay on the amalgamation scheme itself.

. The Bench of Justices Dr Vineet Kothari and MS Ramesh issued the following interim directions to protect LVB shareholders:

No further prejudicial action against the LVB shareholders by the Respondents.

DBS Bank should furnish an undertaking in the Court that in case the Court concludes and directs it to provide compensation to LVB, they will pay the same.

As security, DBS Bank should create a separate reserve fund in its books of account to the extent of the face value of shares of the transferor company (LVB) and maintain the same subject to further orders

. The Court is not interfering with the amalgamation scheme's operation, otherwise at this stage, it was clarified.

. The Bench was dealing with a petition moved by AUM Capital Market Pvt Ltd., a retail investor holding shares in LVB.

. "...c ompletely reducing the shares is not an exercise which has happened in the public domain and the shareholders do not appear to be aware of the exact reasons why this is so", the Court observed.

. It added that even if the authorities have the power to reduce the share value during an amalgamation under Section 45 of the Banking Regulation Act, reducing it to zero or negative, prima facie , cannot be done without very compelling reasons.

. Even if the power of reduction of their share value to a lower figure is given, reducing it to zero or negative, prima facie, cannot be done without very, very compelling reasons. Madras High Court . The Court also noted that the entire exercise of amalgamation had taken place in a fast tracked manner, in the space of a week between November 17 and November 25, while leaving the LVB shareholders in a blackout .

. This called for a review, the Court said while admitting the matter and issuing notice. Whereas both the RBI and DBS urged the Court to stay the order passed today for a few weeks, the Court declined to do so. The matter is likely to be heard next in January 2021.

. The development comes a day after the Bombay High Court refused to stay the operation of the merger on a different plea.

.Bombay High Court refuses to stay Lakshmi Vilas Bank-DBS Bank merger. The matter was heard at length on Friday afternoon by the Madras High Court after a mention was made Friday morning. Highlights of the submissions made today follow.

. Never been a case before where shareholders' value has been completely wiped out: Arvind Datar for AUM . Appearing for AUM, Senior Advocate Arvind Datar expressed grievance over the entire capital of over 97 thousand individual investors being wiped out overnight by way of the amalgamation scheme.

. He submitted that the draft amalgamation scheme itself was announced with three days notice, giving the shareholders little opportunity to present their objections. The Supreme Court has said that at least five days' notice should be given in such matters, he argued. He added that while objections were presented, not a comma was changed in the scheme.

. He added that in cases of amalgamations, Section 45 of the Banking Regulation Act, 1949 and Section 237 of the Companies Act provides for shareholders of the transferor company to be given corresponding shares and voting rights in the transferee company.

. Responding to the Court's queries, Datar also submitted that no defence or explanation was given as to why this was not done in this case. He added that there has never been a case before where the shareholders' value has been completely wiped out while carrying out an amalgamation under Section 45 .

. He added that in such matters, there should be a public bidding process involved, which was not done in this case.

. He went on to urge the Court for a stay on Article 7 of the amalgamation scheme. He clarified that he is not disputing the power of the RBI to take steps for amalgamation, but added that an interim stay should be granted so that the capital is not written off.

. " Are we living in a country without Rule of law? You give me three days, no public bidding.. What will happen if an interim order is not given?" Datar contended.

. Something startling ought to have happened for LVB's value to be reduced to zero: PS Raman for AUM . Senior Advocate PS Raman , also appearing for the petitioner, contended that the LVB was a healthy bank, save for some debts accumulated by it.

. Pertinently, he added that DBS Bank itself had shown interest in acquiring a 50 percent stake in the Bank, among other bidders, and that LVB had been valued at Rs 5,000 crores as a going concern . It is startling that this value has been set at naught overnight, Raman contended.

. While the acquisition could not take place owing to certain regulatory issues, the same bank i.e. DBS Bank has now been given the reigns of LVB, it was pointed out.

. " Today my Bank has been given for zero value! " Raman argued, adding that, " For it to become zero today, something starting should have happened."

. Will create chaos if stay is granted: Ravi Kadam for RBI . Leading the arguments for the RBI, Senior Advocate Ravi Kadam urged the Court against the grant of any stay, since the amalgamation scheme has already kicked in.

. Responding to Court's queries as to what the trigger was for the sudden amalgamation of the two Banks, Kadam responded that it was not a sudden action.

. For two years, LVB and its promoters have tried to bring in different parties to strengthen its financial position, Kadam submitted, adding that the bank was already financially troubled. In 2019, the RBI had also put a corrective action plan in place. He added that while it allowed a promoter, Kare to acquire 5% equity for Rs 180 crores, it was not enough to aid the bank.

. There was heavy deterioration in the last year, likely due to corporate misgovernance, Kadam said. By the end of September this year, the bank had a negative net worth of Rs 699 crores.

. " As on September 30, there was a negative net worth from what is pleaded as a positive net worth in March ", Kadam said.

. This prompted the RBI to impose a moratorium on November 17 and carry out the amalgamation scheme, in public interest and to protect the depositors, Kadam argued.

. The Court, however, sought an explanation as to why there was such a dip in the bank's performance when it had run successfully for years.

. Observing that the RBI ought to have known what was happening with the bank in the last quarter, the Court queried about what had triggered moratorium and the amalgamation scheme with three days notice.

. Why did you the RBI give a company which was already negotiating with Lakshmi Vilas Bank a backdoor entry , the Court asked.

. Kadam responded that he can give detailed reasons in an affidavit the RBI may file. He added that LVB had been negotiating with many, but had received no concrete offers in the last two years.

. He went on to assert that the Court should not grant an interim stay in the matter since the scheme has already kicked in. He argued that the petitioner's prayers relate to monetary compensation, which can be taken up at the stage of final hearing as well.

. Give due credit to the value judgment of the regulator (RBI), he urged the Court, adding that an early date may be fixed for the final hearing. A stay would create chaos, he contended.

. The Central Government, through Additional Solicitor General (ASG) R Sankaranarayanan , argued that the petitioner cannot be treated like an ordinary shareholder. Given the role they play in investment, they ought to have known of the bank's negative net worth and falling financials, which were recorded in audit reports, it was argued.

. Responding to the Court's query on whether there have been any Section 45 proceedings (amalgamation proceedings) where the capital of the shareholder has been wiped out, the ASG commented,

" Proudly, history begins today. "

. Entire scheme would be upset if stay is granted: ARL Sundaresan for DBS . Senior Advocate ARL Sundaresan contended for the DBS Bank that once the RBI frames an amalgamation scheme in public interest, there is a statutory presumption that everything has been done properly .

. He went on to point out that AUM only held 0.38% shares in LVB and that they had not made any case for a stay to be granted. Since the shares have already been written off, there is nothing more to be done and nothing to be stopped from being done.

. He added that since the amalgamation has kicked in, DBS Bank enters into it on the premise that old shareholders are not there. If a stay is granted there would be two sets of shareholders, those of LBV and DBS, which cannot be serviced by the bank.

. A stay would upset the entire scheme and affect the depositors as well, he argued. The larger shareholders had already gone to Bombay High Court where the Court ruled that there was no need for such interim relief, he added.

. [Read Order]

[LVB-DBS Bank merger] Madras High Court grants Lakshmi Vilas Bank shareholders limited interim relief, no stay on merger [Read Order]

Meera Emmanuel

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