RBI Rejects Indiabulls Housing Finance-Lakshmi Vilas Bank Merger

The Reserve Bank of India (RBI) seal on a gate outside the RBI headquarters in Mumbai. 

(Photo: Reuters)

In a setback to Indiabulls Group's plans to enter the banking space, the Reserve Bank on Wednesday, 9 October, rejected the proposed merger of Indiabulls Housing Finance with troubled private sector lender Lakshmi Vilas Bank.

Speculations were rife about the fate of the merger, announced in April this year, after the Reserve Bank of India (RBI) imposed restrictions on Lakshmi Vilas Bank due to its weak financial health.

The regulator’s decision also comes against the backdrop of both the entities being entangled in legal woes.

"...this is to inform that RBI vide their letter dated October 9, 2019, informed that the application for voluntary amalgamation of lndiabulls Housing Finance Limited and lndiabulls Commercial Credit Limited with the Lakshmi Vilas Bank (LVB) cannot be approved," the bank said in a stock exchange filing.

The bank did not cite any reason for rejection of the merger proposal.

The Tamil Nadu-based bank had sought approval for merger with Indiabulls Housing Finance from the RBI on 7 May 2019.

The merger proposal had received all necessary approvals, but the all-important nod from the RBI was pending since May.

Lakshmi Vilas Bank Comes Under PCA Norms

Last month, the bank was placed under Prompt Corrective Action (PCA) framework of the RBI due to high level of bad loans, lack of sufficient capital to manage risks and negative return on assets for two consecutive years.

The RBI move came amidst the Delhi Police's Economic Offences Wing registering a complaint against the board of LVB alleging cheating and misappropriation of funds.

Generally, the triggers for PCA are low capital buffers, higher NPAs and networth erosion. Once the troubles get rectified and all the necessary steps are undertaken, the RBI gets a bank out of the framework.

For FY19, the bank's net NPA stood at 7.49 percent, capital adequacy ratio was at 7.72 percent and its return on assets was (-) 2.32 per cent. It had reported a net loss of Rs 894.10 crore for 2018-19.

PCA is aimed at improving the performance of the bank and will not have any adverse impact on the day-to-day operations, including acceptance/repayment of deposits in the normal course, LVB had said.

Under PCA, banks are mandated to cut lending to corporates and focus on reducing the concentration of loans to certain sectors. They are also restricted from opening new branches and paying dividends.

Indiabulls Seeks to Exit Realty Business

The Indiabulls management has been making public pronouncements on how they would bring down their stake in the real estate business if the merger goes through. As part of that, they had started to exit the non-kosher realty businesses.

The Bengaluru-based Embassy Group had purchased 15 percent stake in Indiabulls Real Estate Ltd (IBREL).

IBREL also sold various properties to US-based private equity firm Blackstone as part of its exit plan.

Earlier on Wednesday, shares of Indiabulls Housing Finance closed at Rs 240.30, up 2.34 pe cent while that of LVB declined by 4.93 percent to close at Rs 27 apiece on the BSE.

Earlier this month, the Delhi High Court asked an NGO which alleged financial irregularities against Indiabulls Housing Finance Ltd to respond to the company's plea seeking proceedings against advocate Prashant Bhushan for allegedly making false statements against it in a PIL.

The PIL has alleged that monies loaned by Indiabulls to various companies were routed back to its promoters through other entities.

Indiabulls Housing Finance has claimed that the PIL was filed "with the intent of stalling and blocking" its merger with LVB.