DH Analysis | In Lakshmi Vilas Bank collapse, gullible retail shareholders suffer once again

The Reserve Bank of India (RBI) on Tuesday decided to take action on the troubled private sector lender Lakshmi Vilas Bank (LVB) by superseding its board, placing it under a moratorium, and forcing a merger with an Indian arm of a foreign bank.

The Reserve Bank, despite the moratorium, has assured depositors that their money is safe. It also has assured the employees of Lakshmi Vilas Bank that their jobs with current salaries are safe. The picture looks perfect so far.

ALSO READ — Lakshmi Vilas Bank placed under moratorium for a month, withdrawals capped at Rs 25,000 till Dec. 16

The rosy scene stops, however, when you gaze at a group of people who will suffer more than anyone in LVB's fall -- the gullible retail shareholders. Imagine this situation: 46.73 per cent of the bank is owned by the retail shareholders (making them the single largest investor group), while promoters own a mere 6.8 per cent stake.

"On and from the appointed date, the entire amount of the paid-up share capital and reserves and surplus, including the balances in the share/securities premium account of the transferor bank, shall stand written off," the draft scheme for amalgamation put out by the Reserve Bank of India read.

With this move, 97,245 retail shareholders owning Rs 243.89 crore (at Tuesday's close valuation) will see their 15.47 crore equity shares being written off as well -- making them lose a lot of money.

There is eerie precedence as well: at the time when YES Bank failed, over 48 per cent of its shareholding was controlled by the retail shareholders. Those retail shareholders haven't still been able to recover their losses, with minimum losses still standing in the range of 40 per cent to 60 per cent.

This group of retail investors is always vulnerable to the machinations of the market players. While the big-ticket institutional investors look at the fundamentals of companies with crashing share prices, the retail investors look at crashing share prices as an opportunity to lower their average share price and hence, end up buying more shares.

ALSO READ — LVB to be merged with DBS Bank India, employees to continue service

Mathematically and technically, the loss to shareholders seems justifiable, given the fact that net-worth of the crashed entities is in negative territory.

However, things get ironic here. The shareholders have suffered due to the actions (in the case of banks it is reckless lending) by the management in cahoots with some of the employees. Yet, the RBI assures employees with a job guarantee and lets shareholders suffer.

In the case of YES Bank as well, there are at least a couple of close aides of the former promoter and co-founder Rana Kapoor, who allegedly helped Kapoor in his alleged misdemeanours at the bank, and yet are serving with the bank -- though they have been stripped off their key portfolios.

In hindsight, it may be time for the regulator to come down with a heavy hand on the erring management and employees in a banking crash, notwithstanding the jitters it will send across the financial system.

"Maybe once some of these institutions (mutual funds included) are allowed to go under is when all stakeholders and the system will reset to a better operating model," said Anubhav Srivastava, Partner, Infinity Alternatives. "But that won’t resolve the PSU banks' conundrum."