UOB Kay Hian concerns that ongoing lawsuits would create legal uncertainties for DBS India – The Online Citizen Asia

UOB Kay Hian released a report yesterday (19 Feb) indicating that DBS Group would be having “more headaches from lawsuits in India”.

DBS’ troubles started when it went ahead to acquire the struggling Lakshmi Vilas Bank (LVB) based in Chennai last November. In fact, it was a “forced merger” initiated by the central bank of India. Bloomberg has described the merger as a “rescue effort” by DBS.

Not long after LVB was merged with DBS India, Religare Finvest Limited (RFL) of India filed a petition with the Delhi High Court to make DBS India a respondent in its ongoing lawsuit with LVB, on the ground of the merger of the two banks (‘Firm petitions court to make DBS responsible for LVB’s embezzlement of S$130m of its FDs‘).

Prior to DBS’ acquisition of LVB, 2 employees of LVB were already arrested last year for their alleged involvement in the misappropriation of RFL’s fixed deposits from the bank. A total amount of some Rs 729 crore (S$132 million) belonging to RFL was alleged to have been embezzled by the 2 senior LVB staff. In fact, RFL reported the matter to the Indian police back in 2018. It was alleged that the staff colluded with external parties in siphoning off RFL’s fixed deposit money from the bank.

UOB Kay Hian said, “Subsequent investigation is said to have uncovered grave irregularities and severe violation of regulations at LVB.” It also noted that the claim amount by RFL has swelled to Rs 900 crore (S$164m) due to compounding of interest. The next hearing of the case is scheduled to be heard next Thursday (25 Feb).

LVB shareholders sue DBS India

Simultaneously, the Madras High Court has also directed DBS India to provide an undertaking of cash compensation to previous LVB shareholders and to create a reserve fund amounting to face value of LVB shares, estimated at Rs781 crore or S$143m. LVB shareholders filed lawsuits against DBS India after they were denied compensation from the resulting merger of the 2 banks.

“This is a negative surprise as previous LVB shareholders were supposed to be wiped out under the scheme of amalgamation. The amalgamation was alleged to be on a fast track and was completed within 10 days. Previous shareholders supposedly were not given sufficient notice,” commented UOB Kay Hian.

Furthermore, UOB Kay Hian also noted that LVB is alleged to have serious governance issues and lacked internal control.

“LVB’s loan book is said to have expanded five times from 2007 to 2019. Bad lending practices and aggressive expansion into corporate loans have led to NPL ratio spiking to 31%. LVB has suffered losses over the past three years. It had experienced continuous withdrawal of deposits prior to the amalgamation,” it said.

“It is unfortunate for DBS to be hit by two ongoing lawsuits since the completion of amalgamation of DBI and LVB. We believe DBS has not made provisions relating to potential damages that may arise from the two lawsuits in India.”

“We are concerned that the two ongoing lawsuits would create legal uncertainties for DBI,” UOB Kay Hian added.