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Lakshmi Vilas Bank-Indiabulls Housing Finance proposed merger gets a clear No from Mint Road

FP Staff

Lakshmi Vilas Bank Ltd (LVB) said on Wednesday the central bank had not approved its merger with non-banking lender Indiabulls Housing Finance Ltd (IBHF) making it the latest bank to face struggles in an already troubled sector.

The Reserve Bank on Wednesday rejected the IBHF proposal to merge with the capital-starved private sector lender based in Tamil Nadu.

The country's banking industry, which is going through a tumultuous time, plagued by issues including high levels of bad loans, took a big hit last year after a major infrastructure conglomerate collapsed, straining liquidity in the sector, Reuters said.

"RBI vide their letter dated October 09, 2019, informed the application for voluntary amalgamation of Indiabulls Housing Finance Limited and Indiabulls Commercial Credit Limited with The Lakshmi Vilas Bank Limited cannot be approved," LVB said in a statement to exchanges on Wednesday.

In a similar exchange filing, IBHF said it has also been informed by the RBI about the same and added that the decision ends the uncertainty of the past five months.

To push the prospects of getting the Reserve Bank nod, the IBHF promoters led by Samir Gehlaut and Gagan Banga, had also offered to pare their holdings to the levels of regulatory comfort from day zero of the merger and get it down further eventually and even also eschew Indiabulls branding from the new banking entity.

In the run-up to the merger, Indiabulls had sold 15 percent stake in Indiabulls Real Estate to the Bengaluru-based Embassy Group. IBREL also sold various properties to US-based private equity firm Blackstone as part of its exit plan, according to a PTI report. They had also promised additional capital infusion along with the merger, to take care of LVB's fragile buffer situation due to the high bad loans.

The low capital buffers had last month prompted the monetary authority to put LVB under restrictions called the prompt corrective action framework, which puts curbs on large size lending and branch expansion. The decision to put it under PCA had led to speculation that the RBI has decided to deny the permission, but governor Shaktikanta Das had last week clarified nothing should be read into the move.

Both LVB as well as IBHF informed the bourses late on Wednesday evening about the RBI decision, but did not specify the reasons for the same which, however, for many was in the offing given the regulator's stated opposition to corporates and realty-focused entities entering the banking arena.

The merger proposal had already received all other approvals, including those from the fair trade watchdog. Since the central bank has been opposed to the idea of bank promoters hailing from real estate and corporate sector for long, the regulatory call on the merger had assumed greater interest.

The application for a merger was made in May after both the parties agreed to the merger in April.

For FY19, LVB's net NPAs stood at 7.49 percent, capital adequacy ratio was at 7.72 percent and its return on assets was a negative 2.32 percent. It had reported a net loss of Rs 894.10 crore in FY19.

Complaints against LVB, IBHF

During the past five months, a complaint was also filed against LVB with the Economic Offences Wing of the Delhi Police for cheating and misappropriation of funds. Recently, the South-based lender's managing director and chief executive Parthasarthy Mukherjee had also quit midway through the merger process, leading to question marks over the merger.

Indiabulls Managing Director Gagan Banga last week tried to assuage investors, saying the Reserve Bank of India's action on Lakshmi Vilas Bank "does not shut the door on the merger".

Separately, IBHF is facing public interest litigation in the Delhi High Court which had alleged that monies loaned by Indiabulls to various companies were routed back to its promoters through other entities. The group had called such allegations baseless which were leveled with the intent of stopping the merger process. The high court on 1 October issued a notice to the Citizens Whistle Blowers Forum, which filed the PIL against Indiabulls, in a perjury plea against it by Indiabulls. The matter will be next heard on 24 October, Mint said.

However, despite these setbacks, both the parties had sounded confident of pulling through.

Share prices react

Entering the banking space would have given IBHF access to cheap deposits and saved it from crisis like being faced by the shadow banks now, while the promise of capital infusion would have helped revive the fortunes of the Tamil Nadu-based lender which was last month put under the prompt corrective action framework which puts a lot of curbs on its operations.

The news could pressure the shares of LVB and Indiabulls, both of which have fallen to multi-year lows after being hit by allegations of misconduct.

In its statement, IBHF said its board will be meeting next Monday to consider a share buyback.

"The company will focus on its growth of the core business of housing finance," IBHF said, adding it will resume with its policy of paying quarterly dividends from here on. It has a net worth of approx Rs 19,000 crore, healthy liquidity and cash balances of over Rs 18,000 crore as on date, Indiabulls added.

Lakshmi Vilas Bank is also being investigated by police for alleged misappropriation of funds by its directors.

The IBHF counter had closed the session on Wednesday with gains of 2.34 percent at Rs 240.30 on the BSE, while the LVB scrip shed 4.93 percent to close at Rs 27 while the benchmark rallied close to 650 points.

--With agency inputs

Also See: Lakshmi Vilas Bank shares drop 5% to hit lower circuit; Indiabulls Housing plunges over 30%

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