29053073 Mergers and Acquisition

Merger and Acquisition of Banking Sector

CHAPTER 1

INTRODUCTION

TO

MERGERS

AND

ACQUISITIONS

OF

BANKING SECTOR

1. INTRODUCTION TO MERGER AND ACQUISITION

OF BANKING SECTOR

MERGERS

A merger occurs when two or more companies combines and the resulting firm maintains the

identty of one of the firms. One or more companies may merger with an existing company or they

may merge to form a new company.

Usually the assets and liabilities of the smaller firms are merged into those of larger firms. Merger

may take two forms-

• Merger through absorption

• Merger through consolidation.

1


Absorption

Absorption is a combination of two or more companies into an existing company. All companies

except one loose their identify in a merger through absorption.

Consolidation

A consolidation is a combination if two or more combines into a new company. In this form of

merger all companies are legally dissolved and a new entity is created. In consolidation the ac

quired company transfers its assets, liabilities and share of the acquiring company for cash or ex-

change of assets.

ACQUISITION

A fundamental characteristic of merger is that the acquiring company takes over the ownership of

other companies and combines their operations with its own operations. An acquisition may be

defined as “an act of acquiring effective control by one company over the assets or management

of another company without any combination of companies”.

TAKEOVER

A takeover may also be defined as obtaining control over management of a company by another

company.

1.1 DISTINCTION BETWEEN MERGERS AND

ACQUISITIONS OF BANKS

Although they are often uttered in the same breath and used as though they were synonymous, the

terms merger and acquisition mean slightly different things. When one company takes over another

2


and clearly established itself as the new owner, the purchase is called an acquisition. From a legal

point of view, the target company ceases to exist, the buyer "swallows" the business and the

buyer's stock continues to be traded.

In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to

go forward as a single new company rather than remain separately owned and operated. This kind of

action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered

and new company stock is issued in its place.

$

In practice, however, actual mergers of equals don't happen very often. Usually, one company will

buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action

is a merger of equals, even if it's technically an acquisition. Being bought out often carries negative

connotations, therefore, by describing the deal as a merger, deal makers and top managers try to

make the takeover more palatable.

A purchase deal will also be called a merger when both CEOs agree that joining together is in the

best interest of both of their companies. But when the deal is unfriendly - that is, when the target

company does not want to be purchased - it is always regarded as an acquisition.

Whether a purchase is considered a merger or an acquisition really depends on whether the purchase

is friendly or hostile and how it is announced. In other words, the real difference lies in how the pur-

chase is communicated to and received by the target company's board of directors, employees and

shareholders.

3


1.2 TYPES OF MERGERS

Mergers are of many types. Mergers may be differentiated on the basis of activities, which

are added in the process of the existing product or service lines. Mergers can be a distinguished into

the following four types:-

• Horizontal Merger

• vertical Merger

• Conglomerate Merger

• Concentric Merger

Horizontal merger

Horizontal merger is a combination of two or more corporate firms dealing in same lines of

business activity. Horizontal merger is a co centric merger, which involves combination of two or

more business units related to technology, production process, marketing research ,development and

management. Elimination or reduction in competition, putting an end to price cutting, economies of

scale in production, research and development, marketing and management are the motives underly-

ing such mergers.

Vertical Merger

Vertical merger is the joining of two or more firms in different stages of production or distri-

bution that are usually separate. The vertical Mergers chief gains are identified as the lower buying

4

Merger and Acquisition of Banking Sectorcost of material. Minimization of distribution costs, assured supplies and market increasing or creat-

ing barriers to entry for potential competition or placing them at a cost disadvantage.

Conglomerate Merger

Conglomerate merger is the combination of two or more unrelated business units in respect of techno-

logy, production process or market and management. In other words, firms engaged in the different or

unrelated activities are combined together. Diversification of risk constitutes the rational for such mer-

ger moves.

Concentric Merger

Concentric merger are based on specific management functions where as the conglomerate mergers

are based on general management functions. If the activities of the segments brought together are so

related that there is carry over on specific management functions. Such as marketing research, Market-

ing, financing, manufacturing and personnel.

1.3 ADVANTAGES OF MERGERS AND ACQUISITIONS

• Accelerating a company's growth, particularly when its internal growth is constrained due to

paucity of resources. Internal growth requires that a company should develop its operating fa -

cilities- manufacturing, research, marketing, etc. But, lack or inadequacy of resources and time

needed for internal development may constrain a company's pace of growth. Hence, a company

can acquire production facilities as well as other resources from outside through mergers and

acquisitions.

• Specially, for entering in new products/markets, the company may lack technical skills and

may require special marketing skills and a wide distribution network to access different seg

•

5

Merger and Acquisition of Banking Sectorments of markets. The company can acquire existing company or companies with requisite in -

frastructure and skills and grow quickly.

• Enhancing profitability because a combination of two or more companies may result in more

than average profitability due to cost reduction and efficient utilization of resources. This may

happen because of:-

• GROWTH 0R DIVERSIFICATION: -

Companies that desire rapid growth in size or market share or diversification in the range of

their products may find that a merger can be used to fulfill the objective instead of going through

the time

consuming process of internal growth or diversification. The firm may achieve the same objective

in a short period of time by merging with an existing firm. In addition such a strategy is often less

costly than

the alternative of developing the necessary production capability and capacity. If a firm that wants

to expand operations in existing or new product area can find a suitable going concern. It may

avoid many of risks associated with a design; manufacture the sale of addition or new products.

Moreover when a firm expands or extends its product line by acquiring another firm, it also re-

moves a potential competitor.

SYNERGY: -

• Implies a situation where the combined firm is more valuable than the sum of the individual

combining firms. It refers to benefits other than those related to economies of scale. Operating

economies are one form of synergy benefits.

6

Merger and Acquisition of Banking SectorBut apart from operating economies, synergy may also arise from enhanced managerial capab-

ilities, creativity, innovativeness, R&D and market coverage capacity due to the complement-

arity of resources and skills and a widened horizon of opportunities merger may result in finan-

cial synergy and benefits for the firm in many ways:-

• By eliminating financial constraints

• By enhancing debt capacity. This is because a merger of two companies can bring stability

of cash flows which in turn reduces the risk of insolvency and enhances the capacity of the

new entity to service a larger amount of debt

• By lowering the financial costs. This is because due to financial stability, the merged firm

is able to borrow at a lower rate of interest.

Other motives For Merger

may be motivated by other factors that should not be classified under synergism. These are the op-

portunities for acquiring firm to obtain assets at bargain price and the desire of shareholders of the

acquired firm to increase the liquidity of their holdings.

1. Purchase of Assets at Bargain Prices:-

Mergers may be explained by opportunity to acquire assets, particularly land mineral rights,

plant and equipment, at lower cost than would be incurred if they were purchased or constructed at the

current market prices. If the market price of many socks have been considerably below the replace-

ment cost of the assets they represent, expanding firm considering construction plants, developing

mines or

7

Merger and Acquisition of Banking Sectorbuying equipments often have found that the desired assets could be obtained where by heaper

by acquiring a firm that already owned and operated that asset. Risk could be reduced because the as-

sets were already in place and an organization of people knew how to operate them and market their

products. Many of the mergers can be financed by cash tender offers to the acquired firm’s sharehold-

ers at price substantially above the current market. Even so, the assets can be acquired for less than

their current casts of construction. The basic factor underlying this apparently is that inflation in con-

struction costs not fully rejected in stock prices because of high interest rates and limited optimism by

stock investors regarding future economic conditions.

2.Increased Managerial Skills or Technology:-

Occasionally a firm will have good potential that is finds it unable to develop fully because of defi -

ciencies in certain areas of management or an absence of needed product or production technology.

If the firm cannot hire the management or the technology it needs, it might combine with a compat-

ible firm that has needed managerial, personnel or technical expertise. Of course, any merger, re-

gardless of specific motive for it, should contribute to the maximization of owner’s wealth.

3.Acquiring new technology –

To stay competitive, companies need to stay on top of technological developments and their busi-

ness applications. By buying a smaller company with unique technologies, a large company can

maintain or develop a competitive edge.

8

Merger and Acquisition of Banking Sector• Economy of scale :-

This refers to the fact that the combined company can

often reduce its fixed costs by removing duplicate departments or operations, lowering the costs of

the company relative to the same revenue stream, thus increasing profit margins.

• Operating economies:-

arise because, a combination of two or more firmsmay result in cost reduction due to operating

economies. In other words, a combined firm may avoid or reduce over-lapping functions and

consolidate its management functions such as manufacturing, marketing, R&D and thus reduce

operating costs. For example, a combined firm may eliminate du

plicate channels of distribution, or crate a centralized training center, or introduce an integrated

planning and control system

• Increased revenue or market share:-

REVENUE

In business,revenue (net sales) is the income that a company receives from its normal business activit-

ies,usually from the sale of goods and services to customers.revenue is also referred to as sales or

turnover. Some companies receive revenue from interest,royality,or otherfees.revenue may refer to

business income in general,or it may refer to the amount,in a

monetary unit,received during a period of time,as in ‘last year,company X had revenue of $42 mil-

lion.”profits or net income generally imply total revenue minus total expenses in agiven period. In ac-

counting,revenue is often refered to as the “topline” due ti its position on the income statement at the

very top.this is to be contrasted with the “bottom line” which denotes net income.

For non-profit organization,annual revenue may be referred to as gross receipt.this revenue includes

donations from individuals and corporations,support from gobernment agencies,income from activities

9

Merger and Acquisition of Banking Sectorrelated to the organization’s mission,and income from fundraising activities, membership dues, and

financial securities such as stocks, bonds or investment funds.

In general usage , revenue is a calculation oe estimation of periodic income based on a particular

standard accounting practice or the rules established by a government or government agency.two com-

mon accounting methods, cash basis accounting and accual basis accounting, do not use the same pro-

cess for measuring revenue.corporation that offer shares for sale to the public are usually required by

law to report revenue based on generally accepted accounting principles or international financial re-

porting standards.

In double entry booking system, revenue accounts are general ledger accounts that are summarized

periodically under the heading revenue or revenue on an income statement. Revenue account names

“repair service revenue”,”rent revenue earned”or “sales”.

This assumes that the buyer willbe absorbing a major competitor and thus increase its market power

(by capturing increased market share) to set prices.

• Cross-selling :-

Cross- selling is the action or practice of selling an additional product or service to an existing cus-

tomer.In practice ,businesses define cross-selling in many different ways. Elements that might in-

fluence the definition might include the size of the business, the industry sector it operates within

and financial motivations of those required to define the term.

The objectives of cross-selling can be either to increase the the income derived from the client or

clients or to protect the relationship with the client or clients.The approach to the process of cross-

selling can be varied.

10

Merger and Acquisition of Banking SectorFor example, a bank buying a stock broker could then sell its

banking products to the stock broker's customers, while the broker can sign up the bank's cus-

tomers for brokerage accounts. Or, a manufacturer can acquire and sell complementary product

1.4 Procedure for evaluating the decision for mergers and Acquisi -

tions

The three important steps involved in the analysis of mergers and acquisitions are:-

1. Planning:-

of acquisition will require the analysis of industry-specific and firm-specific information. The ac-

quiring firm should review its objective of acquisition in the context of its strengths and weaknesses

and corporate goals. It will need industry data on market growth, nature of

competition, ease of entry, capital and labour intensity, etc. This will help in indicating the

product-market strategies that are appropriate for the company. It will also help the firm in

identifying the business units that should be dropped or added. On the other hand, the target

firm will need information about quality of management, market share and size, capital struc-

ture, profitability, production and marketing capabilities, etc.

2. Search and Screening:-

11

Merger and Acquisition of Banking Sector Search focuses on how and where to look for suitable candidates for acquisition. Screening pro

cess short-lists a few candidates from many available and obtains detailed information about each of

them.

3. Financial Evaluation:-

a merger is needed to determine the earnings and cash flows, areas of risk, the maximum price

payable to the target company and the best way to finance the merger. In a competitive market situ-

ation, the current market value is the correct and fair value of the share of the target firm. The target

firm will not accept any offer below the current market value of its share. The target firm may, in fact,

expect the offer price to be more than the current market value of its share since it may expect that

merger benefits will accrue to the acquiring firm.

CHAPTER 212


MERGER

AND

ACQUISTION

IN

INDIA

OF

BANKING

SECTOR

2. MERGERS AND ACQUISITION IN INDIA

Banking in India originated in the first decade of 18th century with The General Bank of India com-

ing into existence in 1786. This was followed by Bank of Hindustan. Both these banks are now de-

funct. The oldest bank in existence in India is the State Bank of India being established as "The Bank

of Bengal" in Calcutta in

June 1806. A couple of decades later, foreign banks like Credit Lyonnais started their Calcutta opera-

tions in the 1850s. At that point of time, Calcutta was the most active trading port, mainly

due to the trade of the British Empire, and due to which banking activity took roots there and

prospered. The first fully Indian owned bank was the Allahabad Bank, which was established in 1865.

13

Merger and Acquisition of Banking SectorBy the 1900s, the market expanded with the establishment of banks such as Punjab National Bank, in

1895 in Lahore and Bank of India, in 1906, in Mumbai - both of which were founded under private

ownership. The Reserve Bank of Indi a formally took on the responsibility of regulating the Indian

banking sector from 1935. After India's independence in 1947, the Reserve Bank was nationalized and

given broader powers.

BEFORE LIBERALISATION

In India the companies’ act 1956 and the monopolies and restrictive trade practices act, 1969 are

statutes governing mergers among companies.

In the companies act, as procedural has been laid down, in terms of which the merger can be effectu-

ated. Sanction of the company court is essential perquisite for the effectiveness of a scheme of merger.

The other statue regulating mergers was the hitherto monopolies and restrictive trade practices act.

After the amendments the status does not regulate mergers.

The regulatory provisions in the MRTP act were removed through the 1991 amendments, with a view

to giving effect to the new industrial policy of liberalization and deregulation, aimed at achieving eco-

nomies of scale for ensuring higher productivity competitiveness.

Liberalization

In the early 1990s the then Narasimha Rao government embarked on a policy of liberalisation and

gave licences to a small number of private banks, which came to be known as New Generation

tech-savvy banks, which included banks such as UTI Bank (the first of such new generation

banks to be set up), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the

economy of India, kick

14


started the banking sector in India, which has seen rapid growth with strong contribution from all the

three sectors of banks, namely, government banks, private banks and foreign banks. The next

stage for the Indian banking has been setup with the proposed relaxation in

the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting

rights which could exceed the present cap of 10%.

The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the

4-6-4 method (Borrow at 4%; Lend at 6%;Go home at 4) of functioning. The new wave ushered in a

modern outlook and tech-savvy methods of working for traditional banks. All this led to the retail

boom in India. People not just demanded more from their banks but also received more.

Sarrriya Committee

In 1972 examined the restructuring of banks in greater depth and recommended that there should be

three all India banks and 5 or 6 regional banks plus a network of cooperative or rural banks in the

rural areas.

N.Vagul suggested the restructuring on the basis of location and functioning of the bank and re-

commended four sets of banks in the public sector.

• There should be district banks having the network of around 300 branches and Rs. 250 crores

or more. Their functions similar to that of commercial banks.

• National saving banks which will be located only in urban and metropolitan towns.

• The third and fourth set of banks will be trade and industry banks and foreign

exchange banks and located at urban and metropolitan centers catering to designate clien-

tele only.15


In July 1976, a commission under the chairmanship of Sh. Manubhai shah suggested the reduc-

tion in the number of existing banks and making the smallest nationalized banks bigger so as to

have strong regional character in states of UP, MP, Bihar, and Orissa and North east part of the

country.

James Raj Committee appointed by RBI in June 1997 recommended that

• A bank’s size should be in the range of 1000 to 1500 branches.

• SBI group should be converted into holing company with 5 zones subsidiaries and

3. Streamlining of the rural and semi urban branches.

Narasimhan Committee Report

The first report of the Narsimhan committee on the financial system had recommended a

broad pattern of the structure of the banking system as under: 3 or 4 larger banks (including

the State Bank of India) which could become international in character.

8 to 10 national banks with a network of branches throughout the country engaged in universal bank-

ing.

Local banks whose operations would be generally confined to a specific region. Rural banks (includ-

ing RRB’s) whose operations would be confined to the rural areas and whose business would be pre-

dominantly engaged in financing of agricultural and allied activities

16

Merger and Acquisition of Banking SectorThe Narsimhan committee was of the view that the move towards this revised system should be mar-

ket driven and based on profitability considerations and brought about through a process of mergers

and acquisitions.

Narsimhan Committee (1998)

The second report of the Narsimhan committee on the banking sector reforms on the structural issues

made following recommendations.

“Merger between banks and between banks and DFI’s and NBFC’s need to be based on synergies and

locational and business specific complimentary of the concerned institutions and must obviously make

sound commercial sense. Mergers of public sector banks should emanate from the managements of

banks with the govt. as the common shareholder playing a supportive role. Such mergers however can

be worthwhile if they lead to rationalization of workforce and branch network otherwise the mergers

of public sector banks would tie down the management with operational issues and distract attention

from the real issue. It would be

nessary to evolve policies aimed at right sizing and redeployment of the surplus staff either by the way

of retraining them and giving them appropriate alternate employment or by introducing a VRS with

appropriate incentives. This would necessitate the corporation and understanding of the employees and

towards this direction. Management should initiate discussion with the representatives of staff and

would need to convince their employees about the intrinsic soundness of the idea, the competitive be-

nefits that would accrue and the scope and potential foe employees’ own professional advancement in

a larger institution. Mergers should not be seen as a means of bailing out weak banks. Mergers

between strong banks/FIs would make for greater economic and commercial sense and would greater

17

Merger and Acquisition of Banking Sectorthan the sum of its parts and have a force multiplier effect. It can hence be seen from the recommenda-

tions of Narsimhan Committee that mergers of the public sector banks were expected to emanate from

the management of the banks with government as common shareholder playing a supportive role.

CHAPTER 3

NEED OF MERGERS AND ACQUISITIONS

IN

BANKING SECTOR

3.NEED FOR MERGER AND ACQUISITION

The South East Asian crisis and the earlier economic turmoil in several developing nations demonstrated

that strong banking system is critical. Throughout the world, banking industry has been transformed from

highly protected and regulated to competitive and deregulated. Globalization coupled with technological

development has shrinked the boundaries. Trade has become transactional from international. Due to this,

there is no differencebetween domestic and foreign currency. As a result innovations and improvement

assumed greatest significance in institutional performance.

18

Merger and Acquisition of Banking SectorThis trend of global banking has been marked by twin phenomena of consolidation and conver-

gence. The trend towards consolidation has been driven by the need to attain meaningful balance

sheet size and market share in the face of intensified competition. The trend towards convergence is

driven by a move across industry to provide most of the financial services under one roof.

Indian banking experienced wide ranging reforms in the last decade and these reforms have contrib-

uted to a great extent in enhancing their competitiveness.

The issue of bank restructuring assumes significance from the point of view of making Indian banking

strong and sound apart its growth and development to become

suitable. International evidence also strongly indicates greater gains to banking industries after the re-

structuring process. With the impending capital account convertibility, cross border movement of fin-

ancial capital would become a reality. If we cannot consolidate our size, it is rather difficult to find

reasons that could prevent Indian banks from being swallowed by the powerful foreign banks in the

long run, under the free for

all environments. The core objective of restructuring is to maintain long term profitability and

strengthen the competitive edge of banking business in the context of changes in the fundamental mar-

ket scenario. Restructuring can have both internal and external dimensions.

The pace of change in the financial market world over and in the external economic environment, in

which we work, shows no sign of slowing down. Commercial banks now have to think “global” to

service the requirements of the highly sophisticated multinationals that are increasingly dominated

the industrial world.

19

Merger and Acquisition of Banking SectorBank mergers would be the rule rather than exception in times to come and there is a need for banks to

check their premises before embanking on their future plans. There are synergies to be leveraged

through consolidation where factors such as size, spread, technology, human resource and capital can

be reconciled. We could hence think of a situation where we have 4-5 global players which are really

large, a handful of regional banks which will gradually set to merger and some other players which

will get to acquire special

niche to serve limited market. But it involves the sorting of various issues such as legal, regulatory,

procedural etc. This is statement of SH. V. Leeladhar, chairman, IBA on 28th aug, 2004.

History has improved beyond doubt that strong banking systems are critical for sound economic

growth. It is important to improve the comprehensiveness and quality of the banking system to bring

efficiency in the performance of the real sector in India.

Throughout the world, banking industry has been transferred from a highly protected and regulated

situation to competitive and deregulated. Globalization coupled with technological development has

shrinked

the boundaries. Financial services and products are being provided to the customers across the length

and breadth of the globe.

Due to this, domestic and foreign currency, banking and non banking financial services are getting

closer. Correspondingly innovations and improvements assumed greater significance in institutional

performance. This trend of global banking has been marked by twin phenomena of consolidation and

20

Merger and Acquisition of Banking Sectorconvergence. The trend towards consolidation has been driven by the need to attain meaningful bal-

ance sheet size and market share in the face of intensified competition. The trend towards conver-

gence is driven by a move across industry to provide most of the financial service viz., banking, in-

surance, investment etc, to the customers in

one roof. Consolidation of banking industry is critical from several aspects. The factors inducing

mergers and acquisition include technological progress, excess capacity, emerging opportunities

and deregulation of geographic, functional and product restrictions. It may also bring the perform-

ance of public sector banks to a remarkable level without variation between banks in public sec-

tor.

The following are the important aspects for staying in the market:

• Competition from global majors.

• Competition from new Indian banks.

• Disinter mediation and competition resulting into pressure or spread.

• Qualitative change in the banking paradigm.

• The competencies required from a banker would be sharper information technology and

knowledge centric.

In order to compete with the new entrants effectively, Indian commercial banks need to posses match-

ing financial muscle, as a fair competition is possible only among the equals. Size has therefore, as -

sumed critically.

21

Merger and Acquisition of Banking SectorA bank’s size is really to be determined by the size of its balance sheet. The question before major

commercial banks,therefore, is how to acquire a competitive size. Mergers and acquisition route

provides a quick step forward in this direction offering opportunities to share synergies and reduce the

cost of product development and delivery. Different type of banks, even through they themselves be-

long to the public sector, spend considerable time competing themselves without increasing commen-

surate benefits to the system as a whole. As a result, the focus on banks has shifted away from the

areas of real productivity.

The present system is not ideal for simultaneously retaining separate identities as well as preserving

the very characteristics of competitiveness. Our banks are really small in terms of business size or cap-

ital when compared with banks in the west or even China.. The lesson here is to think of consolidation

of our efficient banks to build up global scale institutions. Consolidations would also enable us to go

for global technologies benefiting the customers and efficiency of our banks.

If Indian banks are to be made more effective, efficiency and comparable with their counterparts

from abroad, they would need to be more capitalized, automated and technology oriented, even

while strengthening their internal operations and systems. Further in order to make them comparable

with their competitors from abroad with regard to the size of their capital and asset base, it would be

necessary to structure these banks. Merger and acquisitions are considered useful to achieve the re-

quisite size in the short run.

22


CHAPTER 4

MERGER

IN

INDIAN

BANKING

SECTOR

4.MERGER IN INDIAN BANKING SECTOR

23

Merger and Acquisition of Banking SectorMergers and acquisitions encourage banks to gain global reach and better synergy and allow large

banks to acquire the stressed assets of weaker banks. Merger in India between weak/unviable banks

should grow faster so that the weak banks could be rehabilitated providing continuity of employment

with the

working force, utilization of the assets blocked up in the weak/unviable banks and adding construct-

ively to the prosperity of the nation through increased flow of funds.

In the banking sector, important mergers and acquisitions in India in recent years include the merger

between IDBI (Industrial Development bank of India) and its own subsidiary IDBI Bank. The

deal was worth $ 174.6 million (Rs. 7.6 billion in Indian currency). Another important merger was

that between Centurion Bank and Bank of Punjab. Worth $82.1 million (Rs. 3.6 billion in Indian

currency), this mer

ger led to the creation of the Centurion Bank of Punjab with 235 branches in different regions of In-

dia, another merger was HDFC bank and Centurion bank of punjab.

Some of the past merged banks are Grind lay Bank merged standard charated Bank, Times Bank with

HDFC Bank, bank of Madura with ICICI Bank, Nedungadi Bank Ltd. With Punjab National Bank and

Global Trust Bank merged with Oriental Bank of Commerce.

The small and medium sized banks are working under threats from economic environment which is

full of problem for them, viz. inadequacies of resources, outdated technology, on systemized man-

agement pattern, faltering marketing efforts and weak financial structure. Their existence remains un-

der challenge in the absence of keeping pace with growing automation and techniques obsolescence 24

Merger and Acquisition of Banking Sectorand lack of product innovations. These banks remain, at times, under threat from large banks. Their

reorganization through consolidation/merger could offer succor to re-establish them in viable banks

of optimal size with global presence.

Merger and amalgamation in Indian banking so far has been to provide the safeguard and hedging to

weak bank against their failure and too at the initiative of RBI, rather than to pay the way to initiate

the banks to come forward on their own record for merger and amalgamation purely with a commer-

cial view and economic consideration.

As the entire Indian banking industry is witnessing a paradigm shift in systems, processes, strategies,

it would warrant creation of new competencies and capabilities on an on going basis for which an en-

vironment of continuous learning would have to be created so as to enhance knowledge and skills.

There is every reason to welcome the process of creating globally strong and competitive banks and

let big Indian banks create big thunders internationally in the days to come.

In order to achieve the INDIAN VISION 2020 as envisaged by Hon’ble president of India Sh.

A.P.J.Addul Kalam much requires to be done by banking industry in this regard.

It is expected that the Indian banking and finance system will be globally competitive. For this the

market players will have to be financially strong and operationally efficient. Capital would be key

factor in the building a successful institution. The Banking and finance system will improve compet-

25

Merger and Acquisition of Banking Sectoritiveness through a process of consolidation either through mergers and acquisitions or through stra-

tegic alliances.

There is need to restructure the banking sector in India through merger and amalgamation in order

top makes them more capitalized, automated and technology oriented so as to provide environment

more competitive and customer friendly

4.1RISKS ASSOCIATED WITH MERGER

There are several risks associated with consolidation and few of them are as follows: -

• When two banks merge into one then there is an inevitable increase in the size of the organiza-

tion. Big size may not always be better. The size may get too widely and go beyond the control

of the management. The increased size may become a drug rather than an asset.

• Consolidation does not lead to instant results and there is an incubation period before the results

arrive. Mergers and acquisitions are sometimes followed by losses and tough intervening periods

before the eventual profits pour in.

Patience, forbearance and resilience are required in ample measure to make any merger a suc-

cess story. All may not be up to the plan, which explains why there are high rate of failures in

mergers.

26


• Consolidation mainly comes due to the decision taken at the top. It is a top-heavy decision and

willingness of the rank and file of both entities may not be forthcoming. This leads to prob-

lems of industrial relations, deprivation, depression and demotivation among the employees.

Such a

• work force can never churn out good results. Therefore, personal management at the highest

order with humane touch alone can pave the way.

• The structure, systems and the procedures followed in two banks may be vastly different, for ex-

ample, a PSU bank or an old generation bank and that of a technologically superior foreign bank.

The erstwhile structures, systems and procedures may not be conducive in the new milieu.

• A thorough overhauling and systems analysis has to be done to assimilate both the organiza-

tions. This is a time consuming process and requires lot of cautions approaches to reduce the

frictions.

27


• There is a problem of valuation associated with all mergers. The shareholder of existing entities

has to be given new shares. Till now a foolproof valuation system for transfer and compensation is

yet to emerge.

• Further, there is also a problem of brand projection. This becomes more complicated when exist-

ing brands themselves have a good appeal. Question arises whether the earlier brands should con-

tinue to be

• projected or should they be submerged in favour of a new comprehensive identity. Goodwill is

often towards a brand and its sub-merger is usually not taken kindly.

28


29


Struc-

ture of

the Or-

gan-

ized

Bank-

ing

Sector

in In-

dia.

Num-

ber Of

Banks

Are In

Brack-

ets.

30

MERGER STORY SO FAR

YEAR BANK MERGED WITH

1969 Bank Of Bihar State Bank Of India

1970 National Bank Of Lahore State Bank Of India

1971 Eastern Bank Ltd. Chartered Bank

1974 Krishnaram Baldeo Bank Ltd. State Bank Of India

1976 Belgaum Bank Ltd. Union Bank Of India

1984-85 Lakshmi Commercial Bank Canara Bank

1984-85 Bank Of Cochin State Bank Of India

1985 Miraj State Bank Union Bank Of India

1986 Hindustan Commercial Bank Punjab National Bank

1988 Trader’s Bank Ltd. Bank Of Baroda

1989-90 United Industrial Bank Allahabad Bank

1989-90 Bank Of Tamilnad Indian Overseas Bank

1989-90 Bank Of Thanjavur Indian Bank

1989-90 Parur Central Bank Bank Of India

1990-91 Purbanchal Bank Central Bank Of India

1993-94 New Bank Of India Punjab National Bank

1993-94 Bank Of Karad Bank Of India

1995-96 Kasinath Seth Bank State Bank Of India

1996 SCICI ICICI

1997 ITC Classic ICICI

1997 BARI Doab Bank Oriental Bank of Comerce

1998 Punjab Co-operative Bank

Oriental Bank of Com-

merce

1998 Anagram Fianance ICICI

1999 Bareilly Corporation Bank Bank of Baroda

1999 Sikkim Bank ltd. Union Bank

2000 Times bank HDFC Bank

2001 Bank of Madura ICICI

2002 Benaras state bank Bank of Baroda


CHAPTER 5

CHALLENGES

AND

31


OPPORTUNITIES

IN

THE

INDIAN

BANKING SECTOR

5.Challenges and opportunities in Indian banking sector

In a few years from now there would be greater presence of international players in Indian financial

system and some of the Indian banks would become global players in the coming years. Also competi-

tion is not only on foreign turf but also in the domestic field. The new mantra for Indian banks is to go

global in search of

new markets, customers and profits. But to do so the Indian banking industry will have to meet certain

challenges. Some of them are –

• FOREIGN BANKS –

India is experiencing greater presence of foreign banks over time. As a result number of issues

will arise like how will smaller national banks compete in India with them, and will they them-

selves need to generate a larger international presence? Second, overlaps and potential con-

flicts between home country regulators of foreign banks and host country regulators: how will

these be addressed and resolved in the years to come? It has been seen in recent years that 32

Merger and Acquisition of Banking Sectoreven relatively strong regulatory action taken by regulators against such global banks has had

negligible market or reputational impact on them in terms of their stock price or similar met-

rics. Thus, there is loss of regulatory effectiveness as a result of the presence of such financial

conglomerates. Hence there is inevitable tension between the benefits that such global con-

glomerates bring and some regulatory and market structure and competition issues that may

arise.

• GREATER CAPITAL MARKET OPENNESS –

An important feature of the Indian financial reform process has been the calibrated opening of

the capital account along with current account convertibility. It has to be seen that the volatil-

ity of capital inflows does not result in unacceptable disruption in exchange rate determination

with inevitable real sector consequences, and in domestic monetary conditions. The vulnerabil-

ity of financial intermediaries can be addressed through prudential regulations and their super-

vision; risk management of non-financial entities. This will require market development,

• Enhancement of regulatory capacity in these areas, as well as human resource development in both

financial intermediaries and non-financial ent entities.

IV. TECHNOLOGY IS THE KEY –

IT is central to banking. Foreign banks and the new private sector banks have embraced techno-

logy right from their inception and continue to do so even now. Although public sector banks

have crossed the 70%level of computerization, the direction is to achieve 100%. Networking in

banks has also been receiving focused attention in recent times. Most recently the trend ob-33

Merger and Acquisition of Banking Sectorserved in the banking industry is the sharing of ATMs by banks. This is one area where per -

haps India needs to do significant ‘catching up’. It is wise for Indian banks to exploit this glob-

ally state-of-art expertise, domestically available, to their fullest advantage.

V. CONSOLIDATION –

We are slowly but surely moving from a regime of "large number of small banks" to "small

number of large banks." The new era is one of consolidation around identified core competen-

cies i.e., mergers and acquisitions. Successful merger of HDFC Bank and Times Bank; Stan-

chart and ANZ Grindlays; Centurion Bank and Bank of Punjab have demonstrated this trend.

Old private sector banks, many of which are not able to cushion their NPA’s, expand their busi -

ness and induct technology due to limited capital base should be thinking seriously about mer-

gers and acquisitions.

VI. PUBLIC SECTOR BANKS –

It is the public sector banks that have the large and widespread reach, and hence have the poten-

tial for contributing effectively to achieve financial inclusion. But it is also they who face the

most difficult challenges in human resource development. They will have to invest very heavily

in skill enhancement at all levels: at the top level for new strategic goal setting; at the middle

level for implementing these

goals; and at the cutting edge lower levels for delivering the new service modes. Given the cur -

rent age composition of employees in these banks, they will also face new recruitment chal-

lenges in the face of adverse compensation structures in comparison with the freer private sector.

34

Merger and Acquisition of Banking SectorVII. Basel II –

As of 2006, RBI has made it mandatory for Scheduled banks to follow Basel II norms. Basel II

is extremely data intensive and requires good quality data for better results. Data versioning

conflicts and data integrity problems have just one resolution, namely banks need to streamline

their27operations and adopt enterprise wide IT architectures. Banks need to look towards ensuring

a risk culture, which penetrates throughout the organization.

VIII. COST MANAGEMENT –

Cost containment is a key to sustainability of bank profits as well as their long-term viability.

In India, however, in 2003, operating costs as proportion of total assets of scheduled commer-

cial

banks stood at 2.24%, which is quite high as compared to in other economies. The tasks ahead

are thus clear and within reach.

IX. RECOVERY MANAGEMENT –

This is a key to the stability of the banking sector. Indian banks have done a remarkable job in

containment of non-performing loans (NPL) considering the overhang issues and overall diffi-

cult environment. Recovery management is also linked to the banks’ interest margins. Cost and

recovery man

35

Merger and Acquisition of Banking Sector agement supported by enabling legal framework hold the key to future health and competitive-

ness of the Indian banks. Improving recovery management in India is an area requiring expedi-

tious and effective actions in legal, institutional and judicial processes.

• REACH AND INNOVATION –

Higher sustained growth is contributing to enhanced demand for financial savings opportunities.

In rural areas in particular, there also appears to be increasing diversification of productive oppor

tunities. Also industrial expansion has accelerated; merchandise trade growth is high; and there

are vast demands for infrastructure investment, from the public sector, private sector and through

public private partnerships. Thus, the banking system has to extend itself and innovate. Banks

will have to innovate and look for new delivery mechanisms and provide better access to the cur-

rently under-

served. Innovative channels for credit delivery for serving new rural credit needs will have to be

found. The budding expansion of non-agriculture service enterprises in rural areas will have to

be fi

nanced. Greater efforts will need to be made on information technology for record keeping, ser-

vice delivery, and reduction in transactions costs, risk assessment and risk management. Banks

36

Merger and Acquisition of Banking Sectorwill have to invest in new skills through new recruitment and through intensive training of exist-

ing personnel.

XI. RISK MANAGEMENT –

Banking in modern economies is all about risk management. The successful negotiation and im-

plementation of Basel II Accord is likely to lead to an even sharper focus on the risk measurement and

risk management at the institutional level. Sound risk management practices would be an important

pillar

for staying ahead of the competition. Banks can, on their part, formulate ‘early warning indicators’

suited to their own requirements, business profile and risk appetite in order to better monitor and man-

age risks.

XII. GOVERNANCE –

The quality of corporate governance in the banks becomes critical as competition intensifies, banks

strive to retain their client base, and regulators move out of controls and micro-regulation. The object-

ive should be to continuously strive for excellence. Improvement in policy-framework, regulatory re-

gime,

37

Merger and Acquisition of Banking Sectormarket perceptions, and indeed, popular sentiments relating to governance in banks need to be on

the top of the agenda

– to serve our society’s needs and realities while being in harmony with the global perspective.

5.1FUTURE SCENARIO

The future outlook of the Indian banking industry is that a lot of action is set to be seen with respect

to M & A’s, with consolidation as a key to competitiveness being the driving force. Both the private

sector banks and public sector banks in India are seeking to acquire foreign banks. As an example, the

State Bank of India, the largest bank of the country has major overseas acquisition plans in its bid to

make itself one of the top three

Banks in Asia by 2008, and among the top 20 globally over next few years. Some of the PSU banks

are even planning to merge with their peers to consolidate their capacities. In the coming years we

would also see strong cooperative banks merging with each other and weak cooperative banks mer-

ging with stronger ones.

While there would be many benefits of consolidation like size and thereby economies of scale, greater

geographical penetration, enhanced market image and brand name, increased bargaining power, and

other synergies; there are also likely to be risks involved in consolidation like problems associated

with size, human relations problems, dissimilarity in structure, systems and the procedures of the two

organizations, problem of valuation etc which would need to be tackled before such activity can give

enhanced

value to the industry.

38


CHAPTER 6

REGULATION

REGARDING

MERGERS

AND

ACQUISITION

OF

BANK

6.BANK MERGER/AMALGAMATION UNDER

VARIOUS ACTS

The relevant provisions regarding merger, amalgamation and acquisition of banks under various

acts are discussed in brief as under:39

Merger and Acquisition of Banking SectorMergers- banking Regulation act 1949

Amalgamations of banking companies under B R Act fall under categories are voluntary amal-

gamation and compulsory amalgamation.

Section 44A Voluntary Amalgamation of Banking Companies.

Section 44A of the Banking Regulation act 1949 provides for the procedure to be followed in case of

voluntary mergers of banking companies. Under these provisions a banking company may be amal-

gamated with another banking company by approval of shareholders of each banking company by res-

olution passed by majority of two third in value of shareholders of each of the said companies. The

bank to obtain Reserve Bank’s sanction for the approval of the scheme of amalgamation. However, as

per the observations of JPC the role of RBI is limited. The reserve bank generally encourages amal-

gamation when it is satisfied that the scheme is in the interest of depositors of the amalgamating

banks.

A careful reading of the provisions of section 44A on banking regulation act 1949 shows that the high

court is not given the powers to grant its approval to the schemes of merger of banking companies and

Reserve bank is given such powers. Further, reserve bank is empowered to determine the Markey

value of shares of minority shareholders who have voted against the scheme of amalgamation. Since

nationalized banks are not Baking Companies and SBI is governed by a separate statue, the provisions

of section 44A on voluntary amalgamation are not applicable in the case of amalgamation of two pub-

lic sector banks or for the merger of a nationalized bank/SBI with a banking company or vice versa.

These mergers have to be attempted in terms of the provisions in the respective statute under which

they are constituted. Moreover, the section does not envisage approval of RBI for the merger of any

other financial entity such as NBFC with a banking company voluntarily.

Therefore a baking company can be amalgamated with another banking company only under sec-

tion 44A of the BR act.40


Sector 45- Compulsory Amalgamation of banks

Under section 45(4) of the banking regulation act, reserve bank may prepare a scheme of amalgama-

tion of a banking company with other institution (the transferee bank) under sub- section (15) of sec-

tion 45. Banking institution means any banking company and includes SBI and subsidiary banks or a

corresponding new bank.

A compulsory amalgamation is a pressed into action where the financial position of the bank has be-

come week and urgent measures are required to be taken to safeguard the depositor’s interest. Section

45 of the Banking regulation Act, 1949 provides for a bank to be reconstructed or amalgamated com-

pulsorily’ i.e. without the consent of its members or creditors, with any other banking institutions as

defined in sub section(15) thereof. Action under there provision of this section is taken by reserve

bank in consultation with the central government in the case of banks, which are weak, unsound or im-

properly managed. Under the provisions, RBI can apply to the central government for suspension of

business by a banking company and prepare a scheme of reconstitution or amalgamation in order to

safeguard the interests of the depositors.

Under compulsory amalgamation, reserve bank has the power to amalgamate a banking company

with any other banking company, nationalized bank, SBI and subsidiary of SBI. Whereas under vol-

untary amalgamation, a banking company can be amalgamated with banking company can be amal-

gamated with another banking company only. Meaning thereby, a banking company can not be

merged with a nationalized bank or any other financial entity.

Companies Act

41

Merger and Acquisition of Banking SectorSection 394 of the companies act, 1956 is the main section that deals with the reconstruction and amal-

gamation of the companies. Under section 44A of the banking Regulation Act, 1949 two banking com-

panies can be amalgamated voluntarily. In case of an amalgamated of any company such as a non

banking finance company with a banking company, the merger would be covered under the provisions

of section 394 of the companies act and such schemes can be approved by the high courts and such

cases do not require specific approval of the RBI. Under section 396 of the act, central government

may amalgamate two or more companies in public interest.

State Bank of India Act, 1955

Section 35 of the State Bank of India Act, 1955 confers power on SBI to enter into negotiation for

acquiring business including assets and liabilities of any bankinginstitution with the sanction of the

central government and if so directed by the government in consultation with the RBI. The terms

and conditions of acquisition by central board of the SBI and the concerned banking institution and

the reserve bank of India is required to be submitted to the central government for its sanction. The

central government is empowered to sanction any scheme of acquisition and such schemes of ac-

quisition become effective from the date specified in order of sanction. As per sub-section (13) of

section 38 of the SBI act, banking institution is defined as under “banking institution” includes any

individual or any association of individuals (whether incorporated or not or whether a department

of government or a separate institution), carrying on the business of banking.

SBI may, therefore, acquire business of any other banking institution. Any individual or any associ-

ation of individuals carrying on banking business. The scope provided for acquisition under the SBI

act is very wide which includes any individual or any association of individuals carrying on banking

business. That means the individual or body of individuals carrying on banking business. That means

the individual or body of individuals carrying on banking business may also include urban cooperative

banks on NBFC. However it may be observed that there is no specific mention of a corresponding new

bank or a banking company in the definition of banking institution under section 38(13) of the SBI act.

42


It is not clear whether under the provisions of section 35, SBI can acquire a corresponding new bank or

a RRB or its own subsidiary for that matter. Such a power mat have to be presumed by interpreting the

definition of banking institution in widest possible terms to include any person doing business of bank-

ing. It can also be argued that if State Bank of India is given a power to acquire the business of any in-

dividual doing banking business it should be permissible to acquire any corporate doing banking busi-

ness subject to compliance with law which is applicable to such corporate.

But in our view, it is not advisable to rely on such interpretations in the matter of acquisition of busi -

ness of banking being conducted by any company or other corporate. Any such acquisition affects

right to property and rights of many other stakeholders in the organization to be acquired. The powers

for acquisition are therefore required to be very clearly and specifically provided by statue so that any

possibility of challenge to the action of acquisition by any stakeholder are minimized and such stake-

holders are aware of their rights by virtue of clear statutory provisions.

Nationalised banks may be amalgamated with any other nationalized bank or with another banking in-

stitution. i.e. banking company or SBI or a subsidiary. A nationalized bank cannot be amalgamated

with NBFC.

Under the provisions of section 9 it is permissible for the central government to merge a corresponding new

bank with a banking company or vice versa. If a corresponding new bank becomes a transferor bank and is

merged with a banking company being the transferee bank, a question arises as to the applicability of the

provisions of the companies act in respect to the merger. The provisions of sec. 9 do not specifically ex -

clude the applicability of the companies act to any scheme of amalgamation of a company. Further section

394(4) (b) of the companies act provides that a transferee company does not include any company other

than company within the meaning of companies act. But a transferor company includes anybody corporate

43

Merger and Acquisition of Banking Sectorwhether the company is within the meaning of companies act or not. The effect of this provision is that pro-

vision contained in the companies act relating to amalgamation and mergers apply in cases where any cor-

poration is to be merged with a company. Therefore if under section 9(2)(c) of nationalization act a corres -

ponding new bank is to merged with a banking company( transferee company), it will be necessary to com -

ply with the provisions of the companies act. It will be necessary that shareholder of the transferee banking

company ¾ the in value present and voting should approve the scheme of amalgamation. Section 44A of

the Banking Regulation Act which empowers RBI to approve amalgamation of any two banking companies

requires approval of shareholders of each company 2/3rd in value.

But since section44A does not apply if a Banking company is to be merged with a corresponding new

bank, approval of 3/4th in value of shareholders will apply to such merger in compliance with the compan-

ies act.

Acquisition of co-operative banks with Other Entities

Co-operative banks are under the regulation and supervision of reserve bank of India under the provi-

sion of banking regulation act 1949(as applicable to cooperative banks). However constitution, com-

position and administration of the cooperative societies are under supervision of registrar of co-oper-

ative societies of respective states (in case of Maharashtra State, cooperative societies are governed

by the positions of Maharashtra co operative societies act, 1961)

Amalgamation of cooperative banks

Under section 18A of the Maharashtra State cooperative societies act 1961(MCS Act ) registrar of co-

operatives societies is empowered to amalgamate two or more cooperative banks in public interest or

in order to secure the proper management of one or more cooperative banks. On amalgamation, a new

en

44


tity comes into being. Under sector 110A of the MCS act without the sanction of requisition of reserve

bank of India no scheme of amalgamation or reconstruction of banks is permitted. Therefore a cooper-

ative bank can be amalgamated with any other entity.

6.1ACQUISITION OF MULTISTATE COOPERATIVE BANKS WITH OTHER

ENTITIES :-

Voluntary Amalgamation

Section 17 of multi state cooperative society’s act 2002 provides for voluntary amalgamation by the

members of two or more multistage cooperative societies and forming a new multi state cooperative

society.

It also provides for transfer of its assets and liabilities in whole or in part to any other multi state co-

operative society or any cooperative society being a society under the state legislature. Voluntary am-

algamation of multi state cooperative societies will come in force when all the members and the credit-

ors give their assent. The resolution has been approved by the central registrar.

Compulsory Amalgamation

Under section 18 of multi state cooperative societies act 2002 central registrar with the previous ap-

proval of the reserve bank, in writing during the period of moratorium made under section 45(2) of BR

45

Merger and Acquisition of Banking Sectoract (AACS) may prepare a scheme for amalgamation of multi state cooperative bank with other multi

state cooperative bank and with a cooperative bank is permissible.

Amalgamation of Regional Rural Banks with other Entities

Under section 23A of regional rural banks act 1976 central government after consultation with The

National Banks (NABARD) the concerned state government and sponsored banks in public interest an

amalgamate two or ore regional rural banks by notification in official gazette. Therefore, regional rural

banks can be amalgamated with regional rural banks only.

Amalgamation of Financial Institution with other entities

Public financial institution is defined under section 4A of the companies’ act 1956. Section 4A of the

said act specific the public financial institution. Is governed by the provisions of respective acts of the

institution

Acquisition of non-Banking financial Companies (NBFC’s) with other entities

NBFCs are basically companies registered under companies’ act 1956. Therefore, provisions of

companies act in respect of amalgamation of companies are applicable to NBFCs.

Voluntary Acquisition

46


Section 394 of the companies’ act 1956 provides for voluntary amalgamation of a company with any

two or more companies with the permission of tribunal. Voluntary amalgamation under section 44A of

banking regulation act is available for merger of two” banking companies”. In the case of an amalgam-

ation of any other company such as a non banking finance company with a banking company, the mer-

ger would be covered under the provisions of section 394 of the companies act such cases do not re-

quire specific approval of the RBI.

Compulsory Acquisition

Under section 396 of the companies’ act 1956, central government in public interest can amalgamate

2 or more companies. Therefore, NBFCs can be amalgamated with NBFCs only.

CHAPTER 7

MERGER

OF

HDFC BANK AND CENTURIAN

BANK OF PUNJAB

A CASE STUDY

47


7.MERGERS OF HDFC BANK AND CENTURIAN BANK

OF PUNJAB

HDFC BANK

The Housing Development Finance Corporation Limited (HDFC) was amongst the first to receive an

'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the private sector, as

part of the RBI's liberalisation of the Indian Banking Industry in 1994. The bank was incorporated in

August 1994 in the name of 'HDFC Bank Limited', with its registered office in Mumbai, India.

HDFC Bank commenced operations as a Scheduled Commercial Bank in January 1995. The follow-

ing year, it started its operations

as a Scheduled Commercial Bank. Today, the bank boasts of as many as 1412 branches and over

3275 ATMs across India.

Amalgamations

In 2002, HDFC Bank witnessed its merger with Times Bank Limited (a private sector bank promoted

by Bennett, Coleman & Co. / Times Group). With this, HDFC and Times became the first two private

banks in the New Generation Private Sector Banks to have gone through a merger

About Centurion Bank of Punjab

48

Merger and Acquisition of Banking SectorCenturion bank of Punjab is a new generation private bank offering a wide spectrum of retail, SME

and corporate banking products and services. It has been among the earliest banks to offer a techno-

logy enabled customer interface that provides easy access and superior customer service.

Centurion Bank of Punjab has a nationwide reach through its network of 241 branches and 389 ATM-

s.The bank aims to serve all the banking and financial needs of its customers through multiple delivery

channels, each of which is supported by state of the art technology architecture.

Centurion Bank of Punjab was formed by the merger of Centurion Bank and Bank of Punjab, both of

which had strong retail franchises in their respective markets. Centurion Bank had a well managed

and growing retail assets business, including leadership positions in two wheeler loans and commer-

cial vehicles loans and a strong capital base. The shares of the bank are listed on the major stock ex-

changes in India and also on the Luxembourg Stock exchange

MERGER POSITION

HDFC Bank Board on 25th February 2008 approved the acquisition of Centurion Bank of Punjab

(CBoP) for Rs 9,510 crore in one of the largest merger in the financial sector in India. CBoP share-

holders will get one share of HDFC Bank for every 29 shares held by them.

HDFC Bank and Centurion Bank of Punjab have agreed to the biggest merger in Indian banking

history, valued at about $2.4 billion. It is likely the beginning of a wave of M&A deals in the fin -

ancial services industry, as India prepares to ease restrictions on bank ownership in 2009.

49

Merger and Acquisition of Banking SectorThis will be HDFC Bank’s second acquisition after Times Bank. HDFC Bank will jump to the 7th

position among commercial banks from 10th after the merger. However, the merged entity would

become second largest private sector bank.

The merger will strengthen HDFC Bank's distribution network in the northern and the southern re-

gions. CBoP has close to 170 branches in the north and around 140 branches in the south. CBoP has a

concentrated presence in the in the Indian states of Punjab and Kerala. The combined entity will have

a network of 1148 branches. HDFC will also acquire a strong SME (small and medium enterprises)

portfolio from CBoP. There is not much of overlapping of HDFC Bank and CBoP customers.

The entire process of the merger had taken about four months for completion. The merged entity will

be known as HDFC Bank. Rana Talwar's Sabre Capital would hold less than 1 per cent stake in the

merged entity from 3.48 in CBoP, while Bank Muscat's holding will decline to less than 4 per cent

from over 14 per cent in CBoP. HDFC shareholding falls to will fall from 23.28 per cent to around 19

per cent in the merged entity.

Rana Talwar, chairman of Centurion Bank of Punjab, says, “I believe that the merger with HDFC

Bank will create a world-class bank in quality and scale and will set the stage to compete with banks

both locally as well as on a global level.”

According to HDFC Bank Managing Director and Chief Executive Officer Aditya Puri, Integration

will be smooth as there is no overlap. In an interview, he mentioned that at 40% growth rate there

will be no lay-offs. The integration of the second rung officials should be smooth as there is hardly

any overlap.

50

Merger and Acquisition of Banking SectorThe boards of the two banks had meet on February 28 to consider the draft scheme of amalgamation,

which will be subject to regulatory approvals. HDFC Bank will consider making a preferential offer to

its parent Housing Development Finance Corp Ltd (HDFC). The move would allow HDFC to maintain

the same level of shareholding in the bank.

7.1HIGHLIGHTS OF THE MERGER- HDFC AND

CENTURION BANK OF PUNJAB

• HDFC bank is merged with Centurion Bank of punjab

• New entity is named as “HDFC bank itself”.

• The merger will strengthen HDFC Bank's distribution network in the northern and the south-

ern regions.

• HDFC Bank Board on 25th February 2008 approved the acquisition of Centurion Bank

of Punjab (CBoP) for Rs 9,510 crore

CHAPTER 8

MERGER OF

IDBI

AND

IDBI BANK51


A CASE STUDY

8.Merger of IDBI and

IDBI BANK

The Industrial Development Bank of India Limited commonly known by its acronym IDBI is one

of India's leading public sector banks and 4th largest Bank in overall ratings. RBI categorized IDBI as

"other public sector bank".It was established in 1964 by an Act of Parliament to provide credit and

other facilities for the development of the fledgling Indian industry. It is currently the tenth largest de -

velopment bank in the world in terms of reach with 975 ATMs, 568 branches and 352 centers.[1] Some

of the institutions built by IDBI are The National Stock Exchange of India (NSE), The National Secur-

ities Depository Services Ltd. (NSDL) and the Stock Holding Cor poration of India (SHCIL) IDBI

BANK , as a private bank after government policy for new generation private banks.

IDBI

The Industrial Development Bank of India (IDBI) was established on July 1, 1964 under an Act of Par-

liament as a wholly owned subsidiary of the Reserve Bank of India. In 16 February 1976, the owner-

ship of IDBI was transferred to the Government of India and it was made the principal financial insti-

tution for coordinating the activities of institutions engaged in financing, promoting and developing in-

dustry in the country. Although Government shareholding in the Bank came down below 100% fol-

lowing IDBI’s public issue in July 1995, the former continues to be the major shareholder (current

shareholding: 52.3%). During the four decades of its existence, IDBI has been instrumental not only in 52

Merger and Acquisition of Banking Sectorestablishing a well-developed, diversified and efficient industrial and institutional structure but also

adding a qualitative dimension to the process of industrial development in the country

Merger position

On April 2, 2005, the merger of IDBI Bank Ltd. (IDBI Bank), the banking subsidiary of Industrial De-

velopment Bank of India (IDBI) with its parent company (IDBI held 57% stake in IDBI Bank) was

announced. However, the merger was to be effective retrospectively from October 1, 2004. The swap

ratio was established at 1:1.42 , that is, IDBI issued 100 equity shares for every 142 equity shares held

by the shareholders in IDBI Bank. The merged entity was to be called IDBI Ltd...

IDBI, one of India's leading Development Financial Institutions (DFI), .merged with IDBI bank, its

banking subsidiary, in a move aimed at consolidating businesses across the value chain and realizing

economies of scale.

M Damodaran is IDBI chairman he confirm that the merger would benefit both IDBI and IDBI Bank.

“The rationale of the merger is extremely compelling because the bank needs capital to grow and gets

to use a name that has great brand value. They can start operations as a full-fledged bank without in-

curring expenditure on setting up branches, inducting technology, or bringing in new people,” Damod-

aran said.

53

Merger and Acquisition of Banking SectorA new entity, IDBI Ltd, will become the holding company with two strategic business units — IDBI,

which will function as a development finance company, and IDBI Bank, which will be the retail arm.

IDBI Home Finance, which was acquired from the Tatas, would also be merged into IDBI.

CHAPTER 9

MERGER

OF

BANK OF PUNJAB

54


AND

CENTURION BANK

A CASE STUDY

9.MERGERS OF CENTURIAN BANK AND BANK OF PUNJAB

BANK OF PUNJAB

• It was incorporated on may27, 1994 under the companies act, 1956.

• The registered office of the bank was situated at SCO 46-47, sector 9-D, Madhya Marg,

Chandigarh- 160017.

• It is banking company under the provisions of regulation act, 1949

The objects of bank are banking business as set out in its memorandum

and Articles of association.

• The bank is a new private sector bank in operating for more than 10 years, with a national

network of 136 branches( including extension counters) having a significant presence in the

most of the major banking sectors of the country. The transferor bank offers a host of bank-

55

Merger and Acquisition of Banking Sectoring products catering to various classes of customers ranging from small and medium enter-

prises to large cooperates.

• The bank is listed on the stock exchange, Mumbai, the national stock exchange of In-

dia limited and the Ludhiana stock exchange.

CENTURION BANK

• It was incorporated on june30, 1994 under the companies act, 1956.

• The registered office of the Bank was situated at Durga Niwas, Mahatma Gandhi Road,

Panaji, 403001, Goa.

• It is a banking company under the provisions of banking regulation act, 1949.

• The objectives of transferee bank are banking business as set out in its memorandum

and articles of association.

• The bank is a profitable and well capitalized new private sector bank having a national pres-

ence of over 99 branches( including extension counter)

• It has a significant presence in the retail segment offering a range of products across various

categories.

56

Merger and Acquisition of Banking Sector• The bank is listed on the stock exchange, Mumbai and the National stock exchange of India

limited, Mangalore stock exchange of India limited, Mangalore stock exchange and its global

depository receipts are listed on the

Luxembourg stock exchange.

The amalgamation of the Transferor bank (BOP) with the transferee bank (centurion) is effected sub-

ject to the terms and conditions embodied in the scheme of merger pursuant to section 44A of bank-

ing

regulation act, 1949( hereinafter “the act”). In terms of section 44A of the said act, a resolution is re-

quired to be passed by a majority in number and two-third in the value of the members of the Trans-

feror and the Transferee Bank, present rather in person or by proxy at the respective meetings. As

both the companies are banking companies, the amalgamation is regulated by the provisions of the act

and would require the sanction of the reserve bank of India under the said act. The provisions of sec-

tion 391-394 of the companies’ act, 1956 relating to amalgamation are not applicable to the amalgam-

ation of the transferor bank with the transferee bank and therefore the scheme is not be required to be

sanctioned by a high court under the provisions of the companies act, 1956.

About Centurion Bank of Punjab

57

Merger and Acquisition of Banking SectorCenturion bank of Punjab is a new generation private bank offering a wide spectrum of retail, SME

and corporate banking products and services. It has been among the earliest banks to offer a techno-

logy enabled customer interface that provides easy access and superior customer service.

Centurion Bank of Punjab has a nationwide reach through its network of 241 branches and 389 ATM-

s.The bank aims to serve all the banking and financial needs of its customers through multiple delivery

channels, each of which is supported by state of the art technology architecture.

Centurion Bank of Punjab was formed by the merger of Centurion Bank and Bank of Punjab, both of

which had strong retail franchises in their respective markets. Centurion Bank had a well managed

and growing retail assets business, including leadership positions in two wheeler loans and commer-

cial

vehicles loans and a strong capital base. Bank of Punjab brings with it a strong retail deposit customer

base in North India in addition to a sizable SME and agriculture portfolio.

The shares of the bank are listed on the major stock exchanges in India and also on the Luxembourg

Stock exchange. Among centurion bank of Punjab’s greatest strengths is the fact that it is a profession-

ally managed bank with a globally experienced and capable management team. The day to day opera-

tions of the bank are looked by Mr. Shilnder bhandari, managing Director & CEO, assisted by a senior

management team, under the overall supervision and control of the Board of directors. Mr. Rana Tal-

war is the chairman of the board. Some of our major shareholders are saber capital, Bank Muscat and

Keppel Corporation, Singapore are represented on the Board.

The book value of the bank would also go up to around Rs 300 crores. The higher book value

should help the combine entity to mobilize funds at lower rate.

58

Merger and Acquisition of Banking SectorThe combined bank will be full service commercial bank with a strong presence in the Retail, SME

and Agricultural segments.

Share holding pattern of Centurion Bank of Punjab

After the merger shareholding of Bank of Punjab (BOP) promotes will shrink to 5%. The family of

Darshanjit Singh which promoted Bop currently holds 15.62% while associates hold another 11.40%

the promoter stake will now fall down to around 5% ad for associate that would be 7-8%.

The major shareholder of the centurion bank, bank of Muscat’s stake will fall to 20.5% from

25.91%, Keppel’s stake will be at 9% from current level of 11.33% and Rana Talwar’s capital will

have a stake of 4.4% as against 5.61%.

The promoters of BoP and major stakeholders of centurion bank will have a combine stake of around

42% in the merged entity- centurion bank of Punjab.

The costs of deposit of Bop were lower than Centurion; While Centurion had a net interest margin of

around 5.8%. The net interest margin of the merged entity will be at 4.8%.

The combined entity will have adequate capital of 16.1% to provide for its growth plans. Centurion

banks capital adequacy on a standalone basis stood at 23.1% while Bank of Punjab figure stood at

9.21%.

59

Merger and Acquisition of Banking SectorThe performance net worth of combined entity as at march 2005 stood at Rs. 696 crores with centur-

ion’s net worth at Rs. 511 crore and Bank of Punjab’s net worth at Rs. 181 crore, and combine en -

tity( centurion Bank of Punjab) will have total asset 9395 crore, deposit 7837 crore and operating

profit 43 crore.

The merged entity will have a paid up share capital of Rs. 130 cr and a net worth of Rs. 696 cr.

The merged entity will have 235 Branches and extension counters, 382 ATMs and 2.2 million custom-

ers.

MERGER POSITION

Private Banks is taking to the consolidation route in a big way. Bank of Punjab (BOP) and Centurion

Banks (CB) have been merged to form Centurion Bank of Punjab (CBP). Private Banks is taking to

the consolidation route in a big way. Bank of Punjab (BOP) and Centurion Banks (CB) have been

merged to form Centurion Bank of Punjab (CBP).

elements of both, he added. Centurion Bank has a presence in south and west and Bank of Punjab

has a strong presence in the north. “The merger will give us scale geographical reach and entry

into new products segments” said the official.

Bank of Punjab is strong in small and medium enterprises (ME) business in the north, with good retail

assets and an agriculture portfolio as well as deposit franchisee Centurion Bank has a capital, ability to

generate retail assets, risk management systems and good treasury division. Market players except the

swap ratio 2:1, said sources. For very two stocks of Centurion bank, a shareholder will

60


RBI approved merger of Centurion Bank and Bank of Punjab effective from October 1, 2005. The

merger is at swap ratio 9:4 and the combined bank is called Centurion bank of Punjab. The merger of

the banks will have a presence of 240 branches and extension counters, 386 ATMs, about 2.2 million

customers. As on March 2005, the net worth of the combined entity is Rs 696 crore and the capital ad-

equacy ratio is 16.1% in the private sector, nearly 30 banks are operating. The top five control nearly

65% of the assets. Most of these private sector banks are profitable and have adequate capital and have

the technology edge. Due to intensifying competition, access to low cost deposits is critical for

growth. Therefore, size and geographical reach

becomes the key for smaller banks. The choice before smaller private banks is to merge and form big-

ger and viable entities or merge into a big private sector bank. The proposed merger of bank of Punjab

and Centurion Bank is sure to encourage other private sector banks to go for the M&A road for con-

solidation.

The merger of Centurion bank and Bank of Punjab, both of which had strong retail franchises in their re -

spective markets, formed centurion bank of Punjab. Centurion bank had a well managed and growing retail

assets business, including leadership positions in 2 wheeler loans and commercial vehicle loans, and a

strong capital base. Bank of Punjab brings with it a strong retail deposit customer base in North India in ad-

dition to a sizeable SME and agricultural portfolio. The shares of the bank are listed on the major stock ex -

changes in India and also on the Luxembourg stock exchange. Bank of Punjab has net non- performing as-

sets of around Rs 110.45 crore as on March 2004, which will be carried to Centurion Banks books after

61

Merger and Acquisition of Banking Sectormerger. Both the brands are strong in their respective geographers and business hence the merged entity

willhave the elements of both, he added. Centurion Bank has a presence in south and west and Bank of

Punjab has a strong presence in the north. “The merger will give us scale geographical reach and entry

into new products segments” said the official.

Bank of Punjab is strong in small and medium enterprises (ME) business in the north, with good retail

assets and an agriculture portfolio as well as deposit franchisee Centurion Bank has a capital, ability to

generate retail assets, risk management systems and good treasury division. Market players except the

swap ratio 2:1, said sources. For very two stocks of Centurion bank, a shareholder will get one stock of

Bank of Punjab. The merged entity will have a asset base of Rs.10, 000 crore, said a senior bank

official. The depository base of entity will be around Rs. 7165.67 crore and advances will be around

Rs. 3909.87 crore. The organization structure for the combined bank is in place and the grades and in-

centives across the organization have largely been realigned. Centurion bank of Punjab said in a state-

ment. ” The operations of the bank have been integrated across the entire network.”

“A decision has been taken on a common system for the banks and a phased migration has been

planned to ensure minimum disruption of customer service and operation across the bank”’ Centur-

ion Bank of Punjab Said.

9.1HIGHLIGHTS OF THE MERGER- CENTURION BANK

AND BANK OF PUNJAB

62

Merger and Acquisition of Banking Sector• Bank of Punjab is merged into Centurion Bank.

• New entity is named as “Centurion Bank of Punjab”.

• Centurion Bank’s chairman Rana Talwar has taken over as the chairman of the merged entity.

• Centurion bank’s MD Shailendra Bhandari is the MD of the merged entity.

• KPMG India pvt ltd and NM Raiji & Co are the independent values and ambit corporate

finance was the sole investment banker to the transaction.

• Swap ratio has been fixed at 4:9 that is for every four shares of Rs 10 of Bank of Punjab, its

shareholders would receive 9 shares of Centurion Bank.

• There has been no cash transaction in the course of the merger; it has been settled through

the swap of shares.

• There is no downsizing via the voluntary retirement scheme.

In the opinion of the Board of Directors of Bank of Punjab the following are amongst others, the be-

nefits that are expected to accrue to the members from the proposed scheme:

(a) Financial Capability:

63


The amalgamation is expected to enable the merge Entity to have a stronger financial and business

profile, which could be synergized to both for resources and mobilization and asset generation.

(b) Branch Network:

As a result of the amalgamation, the branch network of the merged entity would increase to 235

branches, providing increased geographic coverage, particular in the southern India and giving it a

larger national foot print as well as convenience to its customers.

(c) Retail Customer Base:

The amalgamation would enable the merged entity to increase its retail customer base. This larger

customer base will provide the merged entity enhanced opportunities for offering banking and fin-

ancial services and products and facilitate cross selling of products and services.

(d) Use of Technology:

Post amalgamation, the merged entity would be able to provide through its branches, ATMs,

phone and the internet banking and financial services and products to a larger customer base, with

expected savings in costs and operating expenses

(e) Larger Size:

the larger asset base of the merged entity will put the merged entity amongst the bigger players in

the private sector banking space.

64

Merger and Acquisition of Banking Sector(f) International Listing:

The members will become shareholders of an internationally listed entity which has the advant-

age of greater access to raising capital.

CONCLUSION:

Growth is always essential for the existence of a business concern. A business is bound to die if it does

not try to expand its active$$ties. The expansion of a business may be in the form of enlargement of its

activities or acquisition of ownership. Internal expansion results gradual increase in the activities of the

concern. External expansion refers to “business combination” where two or more concerns combine

and expand their business activities.

Looking at the global trend of consolidation and convergence , it is need of the hour to restructure the

banking structure in India through mergers and acquisition in order to make them more capitalized,

automated and technology oriented so as to provide environment more competitive and customer

friendly .Few more impediment for paving the way towards mergers and acquisition on commercial

consideration and mutual arrangement, such as government shareholding of public sector banks, legal

provisions related to banking and industrial matter should immediately be resolved if at all the place

of merger and acquisition has to be accelerated in Indian banking sector .

65


Bibliography

Books

• Finance and profits:- N.J.Yasaswy

• Financial management and policy:-James Horne

• Financial management:-P.K Jain

• Financial management:- , Ravi.M.Kishore

• Financial management:-Subir Kumar Banarjee

• Merger and acquisition :- C.H.Rajeshwar

Paper

Economics times

Web

www.google.com

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