UOB Kay Hian analyst Jonathan Koh has maintained his “hold” call on DBS Bank with a lower target price of $29.20 from $29.30 after the latter found itself embroiled in lawsuits in India arising from the amalgamation of Lakshmi Vilas Bank (LVB).

Religare Finvest Limited (RFL) has filed a petition with the Delhi High Court to name DBS Bank India as the defendant instead of LVB due to the merger of the two banks.

RFL, one of the leading non-banking finance companies in India, has a pending case against LVB for misappropriating fixed deposits worth Rs750 crore ($136.9 million).

The amount has since swelled to Rs900 crore – or $164.32 million – due to the compounding of interest.

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Two senior employees of LVB were alleged to have conspired with two former owners of RFL, Malvinder Mohan Singh and Shivinder Mohan Singh, to illegally siphon off and misappropriate RFL’s fixed deposits.

The complaint was first brought up to the Delhi police in May 2019. The employees were subsequently arrested in September 2020.

The next hearing for the case is scheduled on Feb 25.

According to The Business Times, DBS has already made provisions for the case, and that the Government of India and the Reserve Bank of India, India’s central bank, would be the primary respondents for the case.

Holders of LVB’s equity shares and Tier-II bonds that were written off before the effective date of amalgamation took legal actions against DBS’s local unit in various high courts in India, says DBS in response to questions from Bloomberg News.

“DBS has no incremental unprovided risks on these lawsuits,” it said, in response to The Business Times. “Other legal liabilities in the normal course of business have also been suitably provided for.”

DBS chief Piyush Gupta had said that he is "optimistic" and "fairly confident" that its takeover of LVB is expected to turn profitable in the next 12 to 24 months, with asset quality concerns accounted for.

The Madras High Court has since directed DBS Bank India to provide compensation to previous LVB shareholders. DBS Bank India is also expected to create a reserve fund amounting to face value of LVB shares estimated at Rs781 crore.

To UOB’s Koh, the lawsuit comes as a “negative surprise” as previous LVB shareholders were supposed to be wiped out under the scheme of amalgamation.

SEE: DBS: You can bank on this stock in the event of a recovery

“The amalgamation was alleged to be on a fast track and was completed within 10 days. Previous shareholders supposedly were not given sufficient notice,” he writes in a Feb 19 report.

“The two ongoing lawsuits create legal uncertainties for DBS Bank India. According to local Indian media reports, 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,” he adds.

“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.”

The Reserve Bank of India, on Nov 17, 2020, proposed that LVB be merged into DBS India.

The merger was approved by the Indian cabinet on Nov 26, 2020.

On Feb 10, 2021, DBS Bank included expenses of $33 million from the merger of LVB with DBS Bank India in its FY2020 results, with provisional goodwill of $153 million.

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

As at 10.46am, shares in DBS are trading 6 cents lower or 0.2% down at $25.57.

See: It's time to 'buy' DBS despite the plunge in its FY2020 net profit, analysts say and PhillipCapital upgrades DBS to 'accumulate' with higher TP of $29.50 on better credit outlook