Lakshmi Vilas Bank-Indiabulls Housing Finance merger plan shot down by RBI

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Mumbai: The Reserve Bank of India (RBI) on Wednesday rejected the proposed merger between Lakshmi Vilas Bank and Indiabulls Housing Finance Ltd, scuppering the first ever attempt by a non-bank lender to merge with a bank in the country.

“This is to inform that RBI vide their letter dated October 09, 2019, informed that the application for voluntary amalgamation of Indiabulls Housing Finance Ltd and Indiabulls Commercial Credit Ltd with The Lakshmi Vilas Bank Ltd cannot be approved,” the bank said in a filing to stock exchanges.

Uncertainty around the banking regulator’s approval has been an overhang on the two stocks, with shares of Indiabulls Housing losing 73.45% and Lakshmi Vilas Bank losing 71% since the all-stock merger was announced in April.

Last month, RBI placed Lakshmi Vilas Bank under prompt corrective action (PCA) owing to the high level of bad loans, insufficient capital adequacy ratio, negative return on assets (RoA) for two consecutive years and high leverage.

For the year ended 31 March, the bank’s net non-performing assets stood at 7.49%, capital adequacy ratio at 7.72% and RoA at -2.32%.

Under PCA, banks are mandated to cut lending to companies and focus on reducing concentration of loans to certain sectors. They are also restricted from opening new branches and paying dividends. Additionally, the bank requires prior approvals for entering into any material transaction other than in the usual course of business.

Lakshmi Vilas Bank will now have to independently explore options for raising capital to help lift the restrictions placed on it.

(Graphic: Sarvesh Kumar Sharma/Mint)
(Graphic: Sarvesh Kumar Sharma/Mint)

At its annual general meeting on 27 September, the bank’s shareholders approved resolutions authorizing the bank to raise further capital up to 1,000 crore by selling shares and 500 crore by way of bonds.

The rejection of the proposed merger comes despite several attempts by Indiabulls promoters to assuage RBI’s concerns over control of the merged entity and Indiabulls’ links to the real estate sector, a major cause of stress in the country’s banking and shadow banking sectors.

On Wednesday, Indiabulls Housing executive director Ajit Kumar Mittal said the company is relieved that the cloud of uncertainty is over.

“For us, it’s back to business as usual. We have surplus liquidity of 20,000 crore and we’d like to now deploy it in several ways like buyback of shares, etc. We have not applied our mind on applying for a small finance bank licence as it doesn’t fit in well with our business,”said Mittal.

Seeking approval for the merger, Indiabulls promoter Sameer Gehlaut had promised the regulator that he would relinquish all control and rights, have no say in the management, and bring the promoter group shareholding below 10% in the bank after the merger, The Economic Times reported on 9 August.

The group is also in the process of exiting its real estate business and has sold part of several of its assets to private equity firm Blackstone.

On 27 September, Mint reported that Indiabulls Real Estate Ltd has sold its remaining stake in some of its office assets in Gurugram and central Mumbai to Blackstone Group Lp for around 2,717 crore, paving the way for the New York-based investor to take full control of Indiabulls Real Estate’s commercial office portfolio.

The board of Indiabulls Housing Finance is set to meet on 14 October to consider a share buyback proposal. Other group entities too are expected to consider buybacks, with the boards of Indiabulls Real Estate and Indiabulls Ventures set to meet on 11 October to consider these proposals.

Indiabulls Housing is also fighting a public interest litigation (PIL) in the Delhi high court that is seeking an investigation by a special investigation team, alleging serious illegalities, violations and that funds were siphoned off by the promoters of the company.

The high court on 1 October issued 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.

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