How to lose ~5700 Crores in one day?

Indiabulls Housing Finance, a company that was once the darling of the investor community just lost ~35% of its value in a single day of trading. That translates to about ~5700 Crores. This is our big story for the day.

The Story

The Delhi high court (HC) on Friday issued notices to Indiabulls Housing Finance Ltd (IBHFL), Securities & Exchange Board of India (Sebi), the Reserve Bank of India (RBI) and other respondents in a public interest litigation (PIL) seeking a probe into irregularities in the company.

You would think this is reason enough for investors to sell the stock and run to the nearest exit. But wait, there is more. The recent carnage was compounded by the fact that the RBI only recently put Lakshmi Vilas Bank under the PCA (Prompt Corrective Action) framework.

Now I know what you’re thinking. How are these two stories in any way inter connected? But you’ll have to bear with us. We will get to that in a minute.

Anyway, the RBI thought it fit to take Lakshmi Vilas —your regular, run of the mill private bank and put it under the PCA (Prompt Corrective Action) framework after it found that the bank had mounting losses, bad financial health and a couple of directors committing fraud.

Yes… Fraud.

And desperate times call for desperate measures. The Reserve Bank had to invoke PCA. The idea behind the move is rather simple. You catch faltering banks early on and put them on a corrective path. Hence the name prompt corrective action.

Usually, this means restrictions on things like lending and management salaries. By extension, it’s also intended to promote all things that’ll help the bank preserve capital. Once, they stick to their mandate and build adequate reserves (read as money), banks can walk out of the PCA and resume business as usual. When done right, PCA can help prevent banks from going bust and save a whole lot of taxpayer money.

This is because, if history has taught us anything, it's that when a bank collapses, the ultimate cost is borne by the government and through it the taxpayer.

So PCA is a pretty neat setup. And this begs the question — why on earth are investors panicking?

Well, for two reasons. The short term impacts of the PCA are rather stifling in nature. It means fewer loans disbursed, less business and dull prospects for the bank overall. But this story isn’t about Lakshmi Vilas Bank. It’s about Indiabulls Housing Finance and that is where things get interesting.

So IBHFL has been looking to get access to a banking license for a long long time now. When you are a housing finance company you can’t do everything a bank does. But everybody wants to be a bank, because that's where the real money is. And since RBI has been in no mood to issue new banking licenses. the folks over at Indiabulls have had to bide their time until the people over at Lakshmi Vilas Bank one day said — You know what? Let’s just go merge with Indiabulls. That sounds like a swell idea.

And so there’s been a lot of chatter about a potential mega-merger between Indiabulls, the housing finance company and the bank, Lakshmi Vilas.

Now with the PCA in place, that deal doesn’t look like it’ll go through. And even if it does, nobody knows how long we would have to wait before RBI can greenlight the thing.

So investors who expected a new age Indiabulls to emerge after its merger with Lakshmi Vilas bank have been left bitterly disappointed. Actually, bitterly disappointed is a bit of an understatement. Let's call it stunned. They are probably stunned and yeah, as things stand, the future looks pretty bleak for both companies.

Sharing this newsletter with your friends is just a click away. Send it on Whatsapp

Anyway, that's it from us today. We will see you tomorrow :)