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LVB bondholders file petition in Madras HC against tier 2 write-off


Mumbai: Bond holders of Lakshmi Vilas Bank (LVB) have filed a writ petition in the Madras High Court, challenging the banking regulator’s decision to extinguish tier 2 bonds worth Rs 320 crore. They have argued that the Centre-approved merger scheme was silent on the write-down of tier 2 bonds, and that the central bank decision was ‘arbitrary.

The petitioners have also argued that since the liabilities extinguished were maturing in 2024-25, there was no urgency on the part of the regulator to extinguish these bonds. The bond holders have also argued that when the regulator moved to protect public deposits worth Rs 20,000 crore, it should also have considered retail bonds holders who form a minuscule part of the total liabilities.

“We have approached the Madras High Court, and the matter could be heard on Wednesday,” a bond holder told ET on the condition of anonymity. “Through the writ, we are arguing that the regulator’s move is unreasonable; if it had put some effort to look into the investor profile of the people who have bought these bonds, it would not have taken such a move. We are just trying to correct a big wrong.”

The bond holders are expected to join a separate petition filed by shareholders in which the Madras High Court last week passed an interim order protecting shareholders of LVB and said no prejudicial action be taken against them. The court also said that DBS Bank should furnish an undertaking that in case the court concludes and directs it to provide compensation to LVB shareholders, they will do so.

Meanwhile, another set of investors in Chennai are also firming up plans to approach the Madras High Court against the Reserve Bank of India (RBI).

A group of senior citizen bondholders also petitioned the finance minister Nirmala Sitharaman seeking her intervention in the matter. In a letter to Sitharaman which ET has seen, bond holders argued that they would be in peril if the write-off of bonds was allowed to go through.

“This amount may be negligible in view of the merger from the point of view of the government of India, RBI or DBS,” the letter stated. “However, it is a major chunk of the investments of the senior citizens, who had purchased the bonds in good faith, owing to the reputation of LVB. We fail to understand the compulsions, if any, for the government to take such a drastic decision which is patently unfair and unjust to us and investors like us, who can only appeal to your sense of fair play.”

The 94-year LVB wrote down Basel III-compliant tier 2 bonds worth 320 crore on November 26, just a day before its amalgamation with DBS Bank India. It was done on RBI’s instructions. LVB ceased to exist from November 27 with all of its branches operating as DBS Bank.

LBV had tier II bonds worth Rs 370 crore on its books while bonds worth Rs 320 crore had the loss-absorption feature under Basel III capital structure. These bonds, issued between March 2014 and June 2017 and maturing between March 2024 and September 2025, carried high coupon rates of 10.70-11.80%.

The terms and conditions of these Basel III-compliant bonds included that if the regulator decides to reconstitute or amalgamate the bank with any other bank under the Banking Regulation Act, the bonds will be written down by activation of the trigger at the point of non-viability, people familiar with the matter said.

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