Why did Lakshmi walk away from LVB?

Within the chartered accountant community in Chennai, the buzz on Lakshmi Vilas Bank did not sound favourable. Amid official denial it was clear that the institution with a 90-year history had crossed the line and done the unthinkable. That was two years ago in 2018 and LVB, as it is known, was said to be facing a systemic breakdown – allegations of favoured lending and potential defaults not being flagged off in time, were rife.

A report on the bank’s internal systems and processes with adverse comments was downplayed. A well-known chartered accountant in the city says that was an indication that things were going downhill. “There were a few other banks that were also involved but LVB being in that group was a shocker since it was known for high level of diligence,” he describes with incredulity.

Pretty soon, the bank which was set up in 1926 would face a crisis which would lead to the promoter losing control and equity holders being wiped out. Its gross non-performing assets hitting 25% would push it beyond redemption as suitors played hard to get. The story of how LVB ended up where it has is one of misplaced ambition, unbridled power and mismanagement by its promoter.

Lining up dominoes
In 2016, when the credit review committee at LVB sat down to assess a proposal from Mumbai-based Talwalkars, whose core business is fitness clubs, there was high level of discomfort. Unconvinced about the business model, it rejected the Rs.1.2 billion loan application with a terse “not safe”. It was assumed that the story ended right there.

A month later, an enthusiastic KR Pradeep, a director on the bank’s board, brought it up again. Instead of sanctioning a loan of around Rs.1.2 billion, he suggested LVB subscribe to Talwalkars non-convertible debentures (NCDs). A former official present during the discussion says, “He knew it could be risky and decided to take the debenture route. For some reason, Pradeep was very keen on it though it seemed like a bad idea.” That apprehension was not without merit as Talwalkars eventually defaulted. In all, the total outstanding (counting unpaid interest) now stands at Rs.1.50 billion, with little hope of that money ever coming back.

Much of LVB’s aggression, transitioning from a bank that primarily catered to SMEs to one that went after large corporates was the brainchild of Pradeep. A chartered accountant, he got on LVB’s board in February 2009. The story goes that the break was facilitated by Kusuma Muniraju, a director on LVB’s board. Muniraju, an advocate, had shared office space with Pradeep in his earlier days. The friendship blossomed over time and culminated with him getting on to the board of the bank. No one was quite prepared for what was to follow. With a holding of around 5%, Pradeep would irretrievably alter the fortunes of LVB.

The process of bringing in a professional CEO was initiated in early 2010 and by August that year, it roped in PR Somasundaram from Standard Chartered. That was the beginning of a revolving saga where CEOs joined and departed abruptly. Over a decade, there were four occupants of the corner office. Once Somasundaram moved out in November 2012 after being around for less than two years, the board elevated KSR Anjaneyulu, then the bank’s ED and earlier with ING Vysya Bank, to the top job. In early 2014, Rakesh Sharma came aboard from SBI. Like his predecessors, his tenure was a short one and in September 2015, he put in his papers. Then came Parthasarathi Mukherjee from Axis Bank who stuck around for close to four years.

Banking circles say post Mukherjee no professional was willing to come aboard with LVB finally elevating S Sundar, the bank’s CFO, in January 2020 (See: Firesale in the making). Those who have worked closely with Pradeep describe him as someone with an “iron grip on the bank.” Regardless of the image of professionalism that LVB wanted to portray to the outside world, it was really his gig. He handpicked all the board members and in return, he got their loyalty. No decision taken by him, be it lending or anything that was strategic, was ever questioned by them. In fact, they were happy to tag along.

One former board member narrates a story about Pradeep’s deep desire to move LVB’s focus from SMEs to wholesale and corporate banking. The bank’s history had a bunch of businessmen from the jewellery business in Karur (Tamil Nadu) coming together to start it. “It was really a conservative bank operating with tight controls,” he says. In a meeting around 2009-10, Pradeep told a senior official that “these merchants don’t understand banking and growth will never come from lending to SMEs.” Over time, the shareholding moved to a bunch of new promoters located in Karur, Bengaluru and Chennai. “The Karur faction was not in favour of expanding the business but Pradeep managed to sell the idea to the other two groups,” says the former board member.

Being just a director was restrictive and Pradeep harboured ambition of becoming the bank’s chairman. After he came on board in 2009, LVB, under his direction, began pushing the RBI for this. The central bank was reluctant, and that appointment never saw the light of day. An official involved in the process recalls a note from the RBI asking LVB to propose another name. “Pradeep was extremely adamant, and the bank replied to the RBI saying we want him for the job. There was no response for six months and it was clear they would not allow this,” he says.

Nothing deterred Pradeep and with the objective of wielding complete control, he always ‘installed’ his chairman. Examples being the appointment of B Manjunath and Raghuraj Gujjar, with the former having been Pradeep’s business partner as well. “It was a case of not giving a free hand to the CEO and crippling him with a chairman who only listened to him,” says another former LVB employee.

Another instance of asserting control took place in mid-2012 when Pradeep wanted to move the bank’s headquarters to Chennai from Karur. The logic he gave was that it was impossible to attract talent to a small town. “The older bunch of promoters knew this was a way to keep them away from key decisions and they opposed it but Pradeep managed to get it cleared at the general body meeting,” says the official quoted above.

Impending doom

Capital is critical for a bank to grow and that deficiency was also hampering LVB’s growth. For a long time starting 2012-13, a host of foreign funds were keen on picking up a stake in the bank. LVB employees, who were involved in the discussions, speak of how unrealistic Pradeep’s valuation expectation were and no deal ever came to fruition. “Our fundamental business was not so great that we could ask for a high price. The way to do it was to raise some amount of money first at a slightly low valuation and then look to raise more at a higher price. He would just not budge from his point of view,” says another former official.

Even as potential suitors kept getting rejected, Pradeep worked towards getting the investing community on to his side. When the stock was quoting at Rs.50, he kept telling them it would be up 3x. “This story was sold to brokers, associates and friends across the country. They just lapped it up and, on every resolution, they voted for him. It was impossible to oppose him on anything given the support he enjoyed,” says the same official quoted above.

Another instance was when a foreign bank wanted to acquire a stake in 2013. An official who worked with Pradeep recalls a telephone call when discussions were at advanced stage. “They were keen on going ahead but wanted a board seat. Pradeep saw the danger of losing control and he made sure the deal was called off. His objective was to hold on to power.”

Through all the discussions that took place, Pradeep wanted at least 30-40% premium over the prevailing stock price. That was always the dealbreaker and the board merely went with his point of view. In hindsight, this irrationality cost the bank dearly and during its final hour would end up pushing it to its doom.

First to fall

Given its deteriorating balance sheet, it was forced to look at a merger with Indiabulls Housing Finance. The same employee points out how much of a negative perception surrounded Indiabulls at that point. “Pradeep was pushing it like crazy even when senior officials believed that RBI would not give the green signal. By then, we really needed the capital and options were running out,” he recalls. Driven solely by one man, the merger was announced last April and in October 2019, it was vetoed by RBI.

Meanwhile, the stress on LVB continued and the decision to lend to large corporate houses was not paying off (See: Off the books). In fact, it was a disaster. Take the case of Rs.2 billion loan to Coffee Day Enterprises. This was to the employees of the company and without any collateral. Pradeep is said to have enjoyed a good rapport with VG Siddhartha, the promoter of Coffee Day Group who met an untimely demise last year. As a top up, there was another Rs.1 billion lent to the group against real estate as collateral. “How much of all this has been provisioned is still not known and that is a big worry. With Covid-19, the value of the property may also have fallen,” says a company insider.

Without a doubt, the biggest hit will be Religare Finvest (RFL), the NBFC arm of Religare Enterprises, an entity looking to recover Rs.9.5 billion (including interest) from LVB. The allegation is that two LVB officials joined hands with erstwhile Religare promoters Malvinder and Shivinder Singh to misappropriate the money that was parked in fixed deposits. LVB had loaned Rs.7.5 billion (around 3% of LVB’s balance sheet) to the brothers without authorisation, which later had been set off against RFL’s fixed deposits.

Rashmi Saluja, chairperson & managing director, Religare Finvest says her company was never privy to any such arrangement between LVB and the Singh brothers. RFL never executed any document whatsoever to create security/pledge its FDs as collateral for the loans allegedly availed by the Singh brothers through their entities. On its part, Saluja says RFL is “extremely confident of getting back the money from LVB.”  According to her, LVB has sufficient assets to satisfy RFL’s claim. “In case they are not able to pay, Religare Finvest shall pursue all possible legal remedies available with it to recover the money through the Court of Law one of which is to get a decree in its favour and then executing the same for attachment of LVB’s assets.”

Running out of time   

In line with the Banking Regulations Act, any director cannot continue to be on the board of a bank for more than eight years. It needs to be followed by two years of cooling off before the person can join the board again. Pradeep’s term as a non-executive non-independent director at LVB came to an end in 2017 and was followed by his wife, Anuradha Pradeep, a lawyer by profession, joining the board. The plan was to have her on the board till 2019 and then get himself reappointed at the annual general meeting on September 25.

This time around, things did not quite go as planned for Pradeep. A note put out by proxy advisory firm, IIAS on September 22, was blunt and spoke of LVB having been confronted with losses for the last ten quarters, an eroding deposit base, high NPAs, negative Tier-1 capital ratio. “It rarely gets this ugly and yet LVB powers on backed only the promise that it will shortly inject capital,” the note stated. Eventually, the shareholders voted against the reappointment of the CEO apart from seven directors (Pradeep included) and the auditors as well. It is learnt that the institutions voted against the reappointment barring Indiabulls, which holds 4.99% stake in LVB.

Twist in the tale

With LVB starved for funds, it could have surely done without the RFL headache. Its non-provisioning was certainly a dealbreaker for another suitor Clix Capital which stepped in as a potential merger with SREI Infra was heading nowhere. During the negotiation, Clix Capital co-founder Pramod Bhasin had made it clear that, “all NPAs and items that have a bearing on future financials of the combined entity have to be accounted for, to the extent considered necessary. This is normal in any such transaction.”

Even as LVB and Clix Capital were in the final stages of negotiation, RBI pulled the plug on LVB by imposing a moratorium and merger with Singapore’s DBS. The RBI’s surprise move in handing LVB to DBS also raises questions as it was always in the know about LVB’s financial health. Nor did it call for bidders nor were the major shareholders informed.

Amit Tandon, co-founder, IIAS says in the pecking order, the depositors' interest is usually protected. Given that deposit holders need to be retained, equity investors are taking the hit as the entire paid-up capital has been written off (See: Contentious write-off). “Three years of losses and a negative networth means this is the harsh reality that equity holders need to confront,” adds Tandon.

Pradeep is naturally bitter over having no say in the ‘sale’. While LVB’s spokesperson declined to comment for this story, Pradeep did confirm receipt of Outlook Business' detailed questionnaire but did not respond. However, post the RBI diktat, he mentioned to IANS, “RBI should have called for bids from interested parties. Or, if it wanted to give LVB to only DBS Bank India, it could have asked it to talk with the former to give their valuation.”

The last chance the LVB management had to save the bank was during the negotiation with Clix Capital. The capital raising committee at LVB was in advanced discussion, but the deal was stuck due to a few issues. One was the price per share being offered, with Clix not willing to go beyond Rs.10, while LVB insisted on Rs.25-30.

A person privy to the negotiation says the bank believed there was value in the license and in the 563-branch network. More importantly, how much shareholding Clix would control was also a thorny issue. It initially wanted 90%, while the bank was not willing to cede beyond 60%. After many rounds of negotiations, Clix appeared to have settled for 80%.

The critical meeting to decide on this was scheduled for the evening of November 17. As luck would have it, RBI, on that day, decided to merge LVB with DBS. This effectively jettisoned the deal with Clix.

Banking industry sources says DBS was interested in acquiring Yes Bank earlier this year till it went SBI’s way. It had been in touch with the government ever since for any other opportunity. It is learnt that discussion with DBS for a potential deal to acquire LVB had been going on even as others such as PNB were said to be interested.

For promoter Pradeep, it must be hard to shake off déjà vu. According to him, DBS was in negotiations in 2018 to acquire 50% of LVB at Rs.100/share. As much as there was a regulatory slip between the cup and lip for Pradeep, it is back to the drawing board for Pramod Bhasin’s Clix Capital. With how much ever finesse and due diligence you run an NBFC, it is hard to match the low-cost deposits of banks, no matter how badly the bank is run.