Lakshmi Vilas Bank (LVB) and Indiabulls Housing Finance (IBHF) boards on Friday approved merger of the two entities.
The merger would solve LVB’s capital needs as its capital adequacy ratio will go up to 20.6%, post the merger, due to the mortgage lender’s strong capital position.
IBHF, which has a loan book three times bigger than LVB, and was unsuccessful in getting a bank licence earlier, will now get access to the low-cost funds of the bank.
LVB’s growth ambitions were choked due to capital needs, with its capital adequacy ratio falling to 7.7% as on end December, much below the regulatory requirement of 10.875%. IBHF’s capital adequacy ratio is 23.1%.
IBHF’s shareholders will own 90.5% of the amalgamated entity, while LVB shareholders will hold the remaining 9.5%.
Sources said Indiabulls group had significantly brought down its exposure in real estate business over the years and the revenues of the group from the financial services activities are over 80%. According to RBI’s bank licensing norms, any entity that wishes to apply for a bank licence should not have more than 40% of its revenues from non-financial activities.
Indiabulls founder and chairman Sameer Gehlaut’s stake, which is presently at 21.5%, will be down at 19.5% in the merged entity. Mr. Gehlaut will further bring down his holding to below 15% before the merger is effective, a statement from IBHF said. RBI has capped promoters’ stake at 15% in a bank.
The four-promoter family of LVB has 7% stake, which would be diluted to less than 1%, sources said.
Gagan Banga, vice-chairman and managing director of Indiabulls HFC, and Parthasarathi Mukherjee, managing director and CEO of LVB, are proposed to be the joint MDs. Sources said the entities would consult with the banking regulator before naming the MD&CEO.
The new entity will be known as Indiabulls Lakshmi Vilas Bank, and it is yet to be decided if the bank will continue to be headquartered in Chennai.
“Indiabulls Housing Finance’s board has constituted a reorganisation committee headed by S.S. Mundra, independent director on the board of IBH, and ex-deputy governor, RBI, to undertake necessary decisions in relation to the proposed amalgamation between Indiabulls Housing Finance and Lakshmi Vilas Bank,” the housing finance company said.
Outlining the benefit for LVB, Mr. Mukherjee said, “So far as the motivating factors are concerned, there are clearly many. One is presence, since our presence is largely in the south, whereas they have significance presence in the west and north, that clearly helps us. There, the loan book is good and we do expect to use this platform to grow our retail business.”
On when the transaction was expected to be completed, he indicated that the banking regulator had been informally sounded about the deal. LVB has two RBI nominee directors on its board. Mr. Mukherjee said the board was unanimous in approving the merger.
“Both have there own major concern. For Indiabulls, it is the liquidity, as options of raising funds turn costly and less in availability. For LVB, it is asset quality and scope of loan growth which needs better management,” Sameer Kalra, equity research analyst and founder, Target Investing.