With the Reserve Bank of India (RBI) asking the administrator of Lakshmi Vilas Bank Ltd (LVB) to write down Tier-2 bonds worth Rs318.20 crore, several investors who bought these bonds are staring at huge loss. Earlier, the RBI has written off entire equity capital of LVB following the lender's amalgamation with DBS Bank India Ltd.
These Tier-2 bonds were carrying a high coupon rate, ranging between 10.70% and 11.80% and thus several depositors were lured into investing in this product. But since the liquidity at LVB was draining fast, the RBI asked it to write down Tier-2 bonds from its books.
One such investor says, "Our family of senior citizens have a Rs70 lakh investment in these bonds, which the RBI has arbitrarily wrote down. The gazette for the amalgamation refers only to writing down paid up share capital. But these bonds are shown under borrowings in LVB balance sheet. Now, how will we survive?"
The LVB had raised Rs318.20 crore through unsecured non-convertible redeemable fully paid-up Basel III compliant Tier-2 bonds in three tranches.
Unfortunately, such bonds are unsecured, perpetual in nature and pay a higher coupon rate to attract investors. But they are high risk and can be written down if the bank’s capital dips below threshold limits.
RBI can also ask a bank that is dangerously on the edge to cancel its outstanding bonds without consulting its investors. This happened earlier in the case of the AT1 bonds Yes Bank was holding when SBI bought a 48% stake in the Bank to save it.
According to the RBI, after invoking section 45 of the Banking Regulation Act and notifying the amalgamation scheme, LVB is deemed to be non-viable or approaching non-viability and accordingly, the triggers for a write-down of Basel III Tier 2 bonds issued by the bank has been triggered.
In its letter to the LVB administrator, the RBI says, ""If the relevant authorities decide to reconstitute the Bank or amalgamate the Bank with any other bank under Section 45 of the BR Act (Banking Regulation Act), such a bank shall be deemed as non-viable or approaching non-viability and both the pre-specified trigger and the trigger at the point of non-viability for write-down of the Bonds shall be activated. Accordingly, the Bonds shall be written-off before amalgamation or reconstitution in accordance with applicable rules."
"In light of the above provisions, such Basel III Tier 2 bonds would need to be fully written down before the amalgamation of the bank comes into effect," RBI said in its letter.
In the gazette notification, the central government had written off entire amount of the paid-up share capital and reserves and surplus of LVB, including the balances in the shares or securities premium account and the delisting of the shares and debentures.
As a result, the shareholders of the LVB will not get anything for their shares. Now with RBI writing down Tier-2 bonds, investors who had invested in this product are also unlikely to receive any money.