After a lot of scrutiny, Reserve Bank of India (RBI) finally rejected the proposed merger between Chennai-based Lakshmi Vilas Bank (LVB) and Gurugram-based Indiabulls Housing Finance Limited (IBHFL). The proposed merger plan was crucial for Lakshmi Vilas Bank as it would have helped it raise capital, which is required to lift the PCA restrictions currently imposed on it by the central bank.
Indiabulls Housing Finance Ltd said in a statement that it will do a buyback of equity shares of the company, for which it has called a board meeting on October 14. In June this year, the Competition Commission of India (CCI) had given its nod to the proposed amalgamation.
In fact, RBI had placed Lakshmi Vilas Bank under prompt corrective action (PCA) due to a high level of non-performing assets of the bank. IBHFL and LVB had proposed a merger between the two in April in a share-swap deal under which LVB shareholders would get 14 shares of IBHFL for every 100 equity shares held in the bank.
Failed merger deal
Indiabulls Housing Finance Limited was keen on acquiring Lakshmi Vilas Bank as it could have helped the company to get retail customers. The merger was important to get access to the bank's low-cost deposit franchise, which had till now resorted to wholesale finance to fund lending operations. So, the merger would have helped IBHFL to raise cheap funds through the banking channel.
The housing finance company was facing liquidity issues and slowdown in loan disbursement. In order to get the merger on track, IBHFL had exited its real estate business by selling stake to a private equity firm Blackstone. The merged entity would had a stronger reach as IBHFL has a strong presence in the northern and western parts of the country and LVB has a strong presence in south India.
There were concerns that the promoters of IBHFL were connected with the real estate business, which was not in sync with the central bank's norms. The central bank's regulations require that a group to be a promoter of a bank must not have more than 40% of its income from non-financial businesses. The regulator's worry is that promoter entity should not use depositors' money to give cheap loans to clients of other business.
Though the promoters of IBHFL had exited the real estate business, the central bank was not too convinced and hence did not finally approve the merger deal. Had the central bank approved the merger deal, it would have thrown up likely interest from other corporate groups which always had intentions of owning a bank.
About Indiabulls Group
Indiabulls Group is one of the country’s leading business houses with interests in housing finance, real estate, securities, construction equipment leasing and facilities sector. IBHFL is the fourth largest housing finance company in the country and was established as a wholly-owned subsidiary of Indiabulls Financial Services, a leading non-banking financial company providing home loans, commercial vehicle loans and business loans was established in 2000. The company offers a broad suite of lending and other financial products to target client base of middle and upper-middle-class individuals and small and medium-sized enterprises.
About Laxmi Vilas Bank
Laxmi Vilas Bank was set up in 1926 by a group of seven businessmen of Karur (in Tamil Nadu) under the leadership of V.S.N. Ramalinga Chettiar. The objective was to cater to the needs of people in Karur who were occupied in trading businesses, industry and agriculture. The bank was incorporated on November 3, 1926 under the Indian Companies Act, 1913, and obtained the certificate to commence business on November 10, 1926. Subsequent to introduction of the Banking Regulations Act, 1949 and Reserve Bank of India as the regulator for the banking sector, the bank obtained its banking license from RBI on June 19, 1958, and on August 11, 1958 became a scheduled commercial bank. In 2014, the corporate office was shifted to Chennai. The bank expanded branch network beyond Tamil Nadu to neighboring states such as Andhra Pradesh, Karnataka and Kerala and gradually to more important financial centres such as Mumbai, New Delhi and Kolkata as well as in other significant business centres in Maharashtra, Gujarat and Madhya Pradesh. Implementation of Core Banking Solution (CBS) was started in October 2006, and all of the bank’s branches were migrated to CBS by March 2008.
M&A Critique, a monthly published magazine, gives News, Deals and Analysis of Merger and Acquisitions, Insolvency, Restructuring, Takeovers and Joint Ventures in India.