The Reserve Bank of India (RBI) has rejected the planned merger between Indiabulls Housing Finance and Lakshmi Vilas Bank after examining the proposal for more than six months, during which multiple approaches were considered to ensure compliance with strict banking sector takeover rules.
“This is to inform that RBI, vide its letter dated October 9, informed that the application for voluntary amalgamation of lndiabulls Housing Finance Limited and lndiabulls Commercial Credit Limited with Lakshmi Vilas Bank cannot be approved,” the private sector lender said in a late evening regulatory filing on Wednesday.
Gagan Banga, Indiabulls Housing Finance (IHF) vice chairman, said it appears that the RBI saw the move as a backdoor entry into banking. “They (RBI) have not gone ahead and approved the deal because they saw it as an NBFC taking over a bank. That is the feedback we are getting. The message is very clear that if you want a bank, do it in a straightforward manner,” said Banga.
“We will get back to growth from tomorrow morning as housing finance company,” he said. “We have done liability correction by getting rid of short-term liabilities. Our businesses were on hold because of the uncertainty over the last six months. We had shrunk balance sheet by 20%. We will get back to growth.”
Talking to ET NOW on RBI’s move, Ajit Kumar Mittal, ED, Indiabulls Group, said he didn’t expect any negative reaction from investors to the decision.
‘Okay with RBI Decision’
“We are okay with RBI’s decision. Nothing changes for Indiabulls. Our business has withstood the test of time and the company is very well capitalised and robust,” Mittal said.
“Now that the merger will not happen, the uncertainty of last five months on the business is lifted and the company will focus on the growth of its core business of housing finance,” Indiabulls had said in the regulatory filing.
The rejection raises fresh concerns at NBFCs that are struggling to raise funds after Infrastructure Leasing & Financial Services (IL&FS) crisis last year. The customary filing didn’t give reasons for the proposal’s rejection.
“The RBI has otherwise shown great concern for the NBFC sector through its various regulatory actions, although this particular decision may not be a reflection of that. It may just be limited to the proposal in question,” said Vinod Kothari, a consultant tracking the NBFC sector. “It would be unfortunate if the housing finance sector, crucial for achieving our ambitious housing-for-all target, gets a jolt due to this episode.”
Ever since these financial entities made a formal announcement about the merger on April 5, questions have been raised on regulatory aspects of the proposed union since the NBFC in question is focused on the real estate sector, which Mint Road considers risky.
Still, the Indiabulls promoters walked the extra mile to obtain regulatory approvals by shedding some assets, including the sale of property to private equity funds.
In June, ET reported that the Indiabulls Group is set to exit the real estate business with the sale of chairman Sameer Gehlaut’s 39.5% stake for Rs 2,700 crore to the US-based PE firm Blackstone and its local partner Embassy Group.
The promoters were also willing to cut their holding in the bank to 15.5% through a share sale just ahead of the merger and take it down further to under 10% within 18 months of the union, in line with the RBI norms.
For the merger to go ahead, Indiabulls needed clearances from various central agencies, including the Income Tax authorities and Enforcement Directorate.
“The RBI took too long to reject the merger and this caused a lot of uncertainty in the system,” said Abizer Diwanji, EY India Financial Services Leader. “I do not think it is a bad idea to merge weak banks with NBFCs. An earlier communication would have been good for the depositors.”
After the merger was announced, Indiabulls Housing had to contend with allegations of financial wrongdoing, and a petition was filed in the Delhi High Court.
The housing finance company maintained that those allegations were false and that they suppressed material facts. As on date, the loan accounts of the Reliance ADAG Group, DLF Group and Americorp Group, which were included in the petition, stood closed and the loans were fully repaid, the company said. Indiabulls also said that the petitioner was making false and incomplete claims at the “behest of interested persons”.
According to the initial plans, Lakshmi Vilas shareholders would have got 0.14 equity share in the merged firm for each held in the bank. However, on May 4, the contours of the deal had changed. The two firms had said that Indiabulls Housing Finance and its subsidiary Indiabulls Commercial Credit Ltd would be merged into Lakshmi Vilas Bank, with the lender now becoming the acquiring company.
Indiabulls is financially strong, with high capital adequacy and low bad loans as a percentage of advances. But its ability to raise retail loans is restricted since it faces curbs on accepting deposits as a non-bank lender. Lakshmi Vilas Bank, on the other hand, has access to retail deposits, but is crippled by high bad loans and a poor capital position.
Recently, the regulator put the bank under its Prompt Corrective Action (PCA) framework, imposing operational curbs that restrict the scope of lending.
Lakshmi Vilas Bank’s losses have almost doubled to Rs 237 crore in the June quarter from Rs 124 crore a year ago, as lower income and higher provisions for bad loans ate into its capital. At the end of June, the bank’s gross NPAs were at 17.30%, a level rivalled only by badly placed public sector peers.
The bank’s desperate need for capital was reflected in its low capital adequacy ratio (CAR), which at 6.46% at the end of June was lower than the 8% mandatorily required under Basel-III norms. That ratio has since improved in August after the issuance of 16.8 million preference shares to IHF, providing the bank with Rs 188.16 crore of capital and helping raise the CAR to 7.56%, a level still below the prescribed minimum.
Source: Economic Times