Scope of mergers in banking industry

NATIONAL LAW UNIVERSITY Page 1

A

Project report

On

““““Scope Of mergers and Scope Of mergers and Scope Of mergers and Scope Of mergers and

acquisitions in the Indian bankingacquisitions in the Indian bankingacquisitions in the Indian bankingacquisitions in the Indian banking

industryindustryindustryindustry””””

Submitted towards partial fulfillment of the assessment in the subject of

Banking and Finance Laws

Submitted By Submitted To

Ajay Singh Chauhan, Roll-no-188 Shaina Mittal, Roll No-206 Mayank Kr. Agarwal- Roll no-

MBA-MBL IV Sem

Mr.P.K. Jain

Mr. R.P. Das,

Faculty Of Management

NATIONAL LAW UNIVERSITY


ACKNOWLEDGEMENT:


CHAPTERIZATION

S.NO TOPIC Page No.

1 Introduction 4

2 Overview of the Indian banking industry 6

3 Restructuring 8

4 Motives and reasons for mergers 11

5 Benefits of consolidation 15

6 Merger in Indian banks 20

7 Important mergers worldwide 23

8 History in India 26

9 New trends in merger 31

10 Issues involved in merger 36

11 Legal Framework 38

12 Critical factors for merger success 46

13 The road ahead for consolidation in the Indian banking

industry

48

14 Relevant committees 52

15 Case studies 56

16 Government standing 65

17 Conclusion 67


CHAPTER-I

INTRODUCTION

The Liberalization, Privatization and Globalization process which was started in early 1990s has

brought so many changes in the economic scene of the country. This process of economic

reforms has brought competition not only from India but also from Overseas1. In order to

compete with these competitors, Indian corporate sector has tried to reorganize and restructure

the companies by adopting various strategies. These strategies include Mergers, Acquisitions,

Joint ventures, Spin off, Divestitures, etc.

The idea behind any merger is to create synergy — making one and one add up to

three! That is to say, the value of the merged entity, by virtue of the merger itself, becomes

greater than the sum of the independent values of the merging companies. Merger benefits may

accrue from, say, acquisition of new technology, or when smaller, specialized companies merge

with larger companies, in which case they not only profit from the technology but also gain

competitive advantage2.

Benefits can also be cloaked as market share increases or wider geographical reach,

which is especially the case in cross- country mergers. Staff benefits may be amassed through a

management shake-up or the talent pool in the merging company. And since the size of the

newly merged company also increases with mergers, advantages by virtue of size in terms of cost

of production, bargaining power and so on may also be a significant driver of mergers.

Strategic benefits may also stem from a pre-emptive strike against competition, or by becoming

big enough to overcome competition3. In case of vertical mergers, wherein a company merges

with its suppliers or customers, the benefits accrue by way of a greater control over the supply

chain, reduced costs, and assured supply, improved coordination and much more.

1 http://economics.about.com/od/globalizationtrade/l/aaglobalization.htm

2 http://www.investopedia.com/university/mergers

3 http://www.economywatch.com/mergers-acquisitions/benefits.html


These apart, tax advantages may be the other force behind mergers. If the one of the merging

entities enjoys an SEZ status, that benefit may be passed on to the newly merged company. A

firm with accumulated losses or a huge unabsorbed depreciation merging with a profitable firm

erects tax shields which neither company may be in a position to enjoy independently.

Mergers and takeovers are prevalent in India right from the post independence period. But

Government policies of balanced economic development and to curb the concentration of

economic power through introduction of Industrial Development and Regulation Act-1951,

MRTP Act, FERA Act etc. made these activities almost impossible and only a very few M&A

and Takeovers took place in India prior to 90s4.

But policy of decontrol and liberalization coupled with globalization of the economy after 1980s,

especially after liberalization in 1991 had exposed the corporate sector to severe domestic and

global competition. This had been further accentuated by the reversionary trends resulted in

falling demand, which in turn resulted in overcapacity in several sectors of the economy.

Companies started to consolidate themselves in areas of their core competence and divest those

businesses where they do not have any competitive advantage. It led to an era of corporate

restructuring through Mergers and Acquisitions in India.

Bank mergers were authorized only as a rescue operation in recent years. Two nationalized

banks played the role of shock-absorbers5. New Bank of India and Nedungadi Bank Ltd were

merged with Punjab National Bank; Global Trust Bank Ltd was merged with Oriental Bank

of Commerce.

4 www.thinkingmanagers.com/management/takeovers.php

5 www.coolavenues.com/know/fin/arindam_1.php3


CHAPTER-II

OVER VIEW OF INDIAN BANKING INDUSTRY

India has an extensive banking network, in both urban and rural areas. All large Indian banks are

nationalized, and all Indian financial institutions are in the public sector. The Reserve Bank of

India is the central banking institution. It is the sole authority for issuing bank notes and the

supervisory body for banking operations in India6. It supervises and administers exchange

control and banking regulations, and administers the government's monetary policy. It is also

responsible for granting licenses for new bank branches. 36 foreign banks operate in India with

full banking licenses.

Indian Banking System7

The banking system has three tiers. These are the scheduled commercial banks; the regional rural

banks which operate in rural areas not covered by the scheduled banks; and the cooperative and

special purpose rural banks. Commercial banks are categorized as scheduled and non-scheduled

banks, but for the purpose of assessment of performance of banks, the Reserve Bank of India

categories them as public sector banks, old private sector banks, new private sector banks and

foreign banks.

Scheduled and non Scheduled Banks8

There are 93 scheduled commercial banks, Indian and foreign; 196 regional rural banks. In

cooperative sector- nearly 2000 cooperative banks operate, which include non scheduled banks.

In terms of business, the public sector banks, namely the State Bank of India and the nationalized

banks, dominate the banking sector.

6 www.india-reports.com/RNCOS/banking.aspx

7 http://www.researchandmarkets.com/reports/4020/indian_banking_industry

8 http://www.studentsguide.in/careers-in-banking-finance-insurance/scheduled-banks-non-scheduled-banks.html


Scheduled Commercial Banks (SCBs) in India are categorized in five different groups according

to their ownership and/or nature of operation. These bank groups are: (I) State Bank of India and

its associates, (ii) Nationalized Banks, (iii) Regional Rural Banks, (iv) Foreign Banks and (v)

Other Indian Scheduled Commercial Banks (in the private sector). The site provides facility of

aggregating data for various bank-groups.

Regional Spread of Banking9

The total number of branches of SCBs as at end-June 2004 stood at 67,097 comprising 32,207

rural branches, 15,028 semi-urban branches and 19,837 urban and metropolitan branches. In line

with the regional distribution of income, the Southern region accounted for the highest

percentage of bank branches, followed by Eastern Region, Northern Region, Western Region

and North-Eastern region.

The State Bank and its seven associates have about 14,000 branches; 19 nationalized banks

34,000 branches; the RRBs 14,700 branches; and foreign banks around 225 branches. If one

includes the branch network of old and new private banks, collectively the spread could be over

68,000 branches across the country. Besides, there are a few thousand co-operative bank

branches. On an average, one bank branch caters to 15,000 people. India is the 4th largest

economy in terms of the purchasing price parity and 10th place in terms of the GDP. Indian

economy is registering consistent 6 per cent annual growth for last 5 years. However, only one

bank -- State Bank of India -- is among the top 200 banks in the world.

9 http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=A%20Profile%20of%20Banks


CHAPTER-III

RESTRUCTURING

Restructuring can be broadly classified into three types10. They are:

a) Portfolio restructuring: - If a firm is reshuffling its assets by selling some of its existing

production facilities or acquiring some new facilities to produce the feeding raw–material

for the main product, it is called portfolio restructuring.

b) Financial restructuring: - In financial restructuring the composition of debt and equity are

shuffled.

c) Organizational restructuring: - In the process of organizational restructuring,

Organizational Structure is revisited and changes are made.

Types of Mergers11

:

When a company acquires another company, the acquiring company is called the ‘Acquirer

Company ’and the company which is being acquired is called the ‘Acquired Company’. The

acquirer company has two alternatives for dealing the acquired company. First the acquiring

company can take over the management of acquired company and run it as a separate company

with its own new Management. This is called the ‘Takeover’ or the ‘Change of Management’.

10

www.imi.edu/MDP/December7-8,2009.pdf 11

www.icwai.org/icwai/knowledgebank/fm34.pdf

Forms Of business Restructuring

Expansion

• Mergers and

acquisitions

• Tender Offers

• Joint

Ventures

Sell-offs

• Spin-offs

• Split – offs

• Split – ups

• Divestitures

• Equity Carve-

outs

Corporate Control

• Premium Buy-

backs

• Standstill

Agreements

• Anti-takeover

Amendments

• Proxy

contests

Changes in Ownership

Structure

• Exchange Offers

• Share

Repurchases

• Going Private

• Leveraged Buy-

out


The second alternative for Acquirer Company is to merge the acquired company into itself. This

is called the ‘merger’.

Merger is a combination of two or more companies into one company. In India, mergers are

called as amalgamations, in legal parlance. The acquiring company, (also referred to as the

amalgamated company or the merged company) acquires the assets and liabilities of the target

company (or amalgamating company). Typically, shareholders of the amalgamating company get

shares of the amalgamated company in exchange for their existing shares in the target company.

Merger may involve absorption or consolidation.

A) Merger and amalgamation: the term merger or amalgamation refers to a combination of

two or more corporate into a single entity. It may involve either;

a) absorption- one bank acquires the other. Or

b) consolidation- two or more banks combine to former a new entity. In India the legal term for

merger is amalgamation.

Other way of classifying merger is upon the basis of what type of corporate combine12

. It

can be of following types-

1) Horizontal merger13

: This is the merger of the corporate engaged in the same kind of

business. E.g.: Merger of bank with another bank.

2) Vertical merger14: This is the merger of the corporate engaged in various stages of

production in an industry. A vertical merger (entities with different product profiles) may help in

optimal achievement of profit efficiency. Consolidation through vertical merger would facilitate

convergence of commercial banking, insurance and investment banking.

12

http://www.learnmergers.com 13

Ibid 14

http://law.jrank.org/pages/8543/Mergers-Acquisitions-Types-Mergers.html


3) Conglomerate merger15

- A conglomerate merger arises when two or more firms in different

markets producing unrelated goods join together to form a single firm. An example of a

conglomerate merger is that between an athletic shoe company and a soft drink company. The

firms are not competitors producing similar products (which would make it a horizontal merger)

nor do they have an input-output relation (which would make it a vertical merger).

B) Acquisition16: This may be defined as an act of acquiring effective control by one corporate

over the assets or management of the other corporate without any combination of both of them.

For example recently oracle major software firm has agreed to acquire a majority stake in Indian

banking software company I-flex Solutions.

It can be characterized in terms of the following:

a) The corporate remain independent.

b) They have a separate legal entity.

C) Take over17

: Under the monopolies and restrictive trade practices act, lake over means

acquisition of not less than 25% of voting powers in a corporate.

15

http://www.wisegeek.com/what-is-a-conglomerate-merger.htm 16

www.investorwords.com/80/acquisition.html 17

www.investorwords.com/4868/takeover.html


CHAPTER-IV

Motives for merger

Any acquisition takes place with a number of motivations culminating in a positive synergy

(2+2=5 relationship). This means that the performance of the combined company is more than

the sum of the performance of erstwhile two independent companies18.

A study conducted in the U.S.A., identified 12 motives that promote merger and acquisition

activity. They are given below in the order of their priority:

1. Taking advantage of awareness that a company is undervalued.

2. Achieving growth more rapidly than by internal effort.

3. Satisfying market demand for additional products/services.

4. Avoiding risks of internal start-ups of expansion.

5. Increasing earnings per share.

6. Reducing dependence on a single product/service.

7. Acquiring market share or position.

8. Offsetting seasonal or cyclical fluctuations in the present business.

9. Enhancing the power and prestige of the Owner, CEO, or Management.

10. Increasing utilization of present resources, i.e., physical plant and individual skills.

11. Acquiring outstanding Management or Technical Personnel.

12. Opening new markets for present products/services.

A survey, conducted in 1955, by the U.S. Federal Trade Commission, to find out why companies

choose the merger and acquisition route, listed seven major benefits of acquisition for the

acquiring company19. They are:

1. Gaining additional capacity to supply to a market already being serviced by the acquirer.

2. Gaining extended product lines.

3. Achieving diversification of product base.

4. Gaining facilities to produce goods purchased earlier.

5. Gaining facilities to process or distribute goods sold earlier.

18

http://www.experiencefestival.com/mergers_and_acquisitions_-_motives_behind_mampa 19

http://www.lib.washington.edu/business/guides/mergers.html


6. Gaining access to additional markets.

7. Other advantages such as empty plants control of patents, etc.

Reasons for Bank Mergers20

:

In India, the merger and takeover phenomenon in the past was understood largely as one of the

sick units being taken over by healthy ones. This is because of the reason that Sec. 72A of the

Income Tax Act, 1961, provides for the carry forward of losses.

The advantage that the merging corporations get is that the book losses of the sick corporation

get written off against the future profits, thus saving the profitable corporations some tax

outflow.

As far as the Banking sector is concerned following reasons are more relevant:

1. Growth with External Efforts: With the economic liberalization the competition in the

banking sector has increased and hence there is a need for mega banks, which will be

intensely competing for market share. In order to increase their market share and the

market presence some of the powerful banks have started looking for banks which could

be merged into the acquiring bank. They realized that they need to grow fast to capture

the opportunities in the market. Since the internal growth is a time taking process, they

started looking for target banks

2. Deregulation: With the liberalization of entry barriers, many private banks came into

existence. As a result of this there has been intense competition and banks have started

looking for target banks which have market presence and branch network.

3. Technology: The new banks which entered as a result of lifting of entry barriers have

started many value added services with the help of their technological superiority. The

older banks which cannot compete in this area may decide to go for mergers with these

high-tech banks.

20

http://finance.mapsofworld.com/merger-acquisition/bank/


4. New Products/Services: New generation private sector banks which have developed

innovative products/services with the help of their technology may attract some old

generation banks for merger due to their incapacity to face these challenges.

5. Over Capacity: The new generation private sector banks have begun their operation with

huge capacities. With the presence of many players in the market, these banks may not be

able to capture the expected market share on its own. Therefore, in order to fully utilize

their capacities these banks may look for target banks which may not have modern day

facilities.

6. Customer Base: In order to utilize the capacity of the new generation private sector

banks, they need huge customer base. Creating huge customer base takes time. Therefore,

these banks have started looking for target banks with good customer bases. Once there is

a good customer base, the banks can sell other banking products like car loans, Housing

loans, consumer loans, etc., to these customers as well.

7. Merger of Weak Banks: There has been a practice of merging weak banks with a

healthy bank in order to save the interest of customers of the weak Bank. Narasimham

Committee–II discouraged this practice. Khan Group suggested that weak Developmental

Financial Institutions (DFIs) may be allowed to merge with the healthy banks21.

8. In the Banking Sector of any economy, the most crucial concern is the Risk Management.

Banks of every country are supposed to make a proper risk analysis in order to balance

the deposit and credit portfolios. Mergers can diversify these risks to a significant extent.

9. Drastic increase in market competition, innovation of new financial products and

consolidation of regional financial systems and national financial systems are the other

reasons, for which banks are going for mergers, around the world.

21

www.thehindubusinessline.com/.../2009100751170600.htm


10. As the banking markets are becoming more developed and competitive, increasing

market share or margins is becoming difficult. In this environment it is becoming more

likely that banks will seek to expand and cut costs by way of acquisitions and mergers.

11. Merger can be proved really useful in fighting market competition, as merger has the

capability to generate economies of scale. These Economies of scale can help the banks

in lowering their servicing cost and in this way can provide a competitive edge to them22.

12. Moreover, when Mergers happen, Transfer of Skills takes place between the two

banking organizations and this transfer of skills lead to higher efficiency on the part of

the merged bank.

13. Banking Sectors of every economy of the world are becoming global sooner or later. This

globalization or economic liberalization has exerted a great impact on the Bank

Mergers23.

22

http://www.hinduonnet.com/businessline/2001/01/27/stories/042708ma.htm 23

http://www.business-standard.com/india/news/govt.htm


CHAPTER-V

BENEFITS OF CONSOLIDATION

Why Merger in banks- the benefits.

A merger involves a marriage of two or more banks. It is generally accepted that mergers

promote synergies. The basic idea is that the combined will create more value than the individual

banks operating independently. Economist refers to the phenomenon of the “2+2=5” effect

brought about by synergy24.

Economies of scale refer to the lower operating costs (per unit) arising from spreading the fixed

costs over a wider scale of production and economies of scope refer to the utilization of skill

assets employed in the production in order to produced similar products or services.

The resulting combined entity gains from operating and financial synergies25. In a combined

entity, the skill used to produce separate and limited results will be used to produce results on

wider scale. Additional financial synergies refer to the effect of a merger on the financial

activities of the resulting company. The cash flows arising from the merger are expected to

present opportunities in respect of the cost of financing and investment.

� Greater efficiency

Banks often are able to operate more cost effectively by increasing their size. The costs of many

functions don't double when the scale of operation doubles. As a result, mergers are one way to

keep costs and prices down.

� Leveraging technology

Banks and their customers have become increasingly accustomed to the advantages of new and

expensive technologies. Many of these technologies are too expensive unless costs can be spread

over a large number of customers. Mergers are often necessary to allow banks to introduce and

maintain the technologies customers increasingly demand.

24

http://library.thinkquest.org/C007226F/NoPop/history/sidenotes/cons/bocon.htm 25

www.banknetindia.com/banking/70920.htm


� Changing laws

Laws which had prevented many banks from operating in more than one state recently have been

removed or overridden. The advent of interstate banking and branching means more

opportunities for banks operating in different states to merge with each other.

� Diversification

One effective method of controlling risks inherent in bank lending is to diversify operations

across different geographic regions and different types of customers. Mergers can help diversify

such risks.

� Broader array of products

Mergers may give banking institutions an opportunity to offer a broader array of services. A

merger of two banks with different expertise can result in a combination more to the liking of

customers looking for one-stop shopping.

WHY CONSOLIDATION IN INDIAN BANKING INDUSTRY

Financial Sector Reforms set in motion in 1991 have greatly changed the face of Indian Banking.

The banking industry has moved gradually from a regulated environment to a deregulated market

economy26. The pace of changes gained momentum in the last few years. Globalization would

gain greater speed in the coming years particularly on account of expected opening up of

financial services under WTO. Banks in India are gradually going for- 1) Consolidation of

players through mergers and acquisitions, 2) Globalization of operations, 3) Development

of new technology and 4) Universalisation of banking.

With the international banking scenario being dominated by larger banks, it is important

that India too should have a fair number of large banks, which could play a meaningful

role in the emerging economics. Among the top twenty banks in the emerging economics,

India has only one, whereas China has five banks and Brazil had six banks.

26

www.thehindu.com/2009/06/29/stories/2009062950031300.htm


The performance of banks in India indicates that certain performance characteristic is not

restricted to a particular bank. Therefore, consolidation of banking industry is critical

from several aspects. Mainly, the reasons for mergers and acquisitions can include

motives for value maximizations well non-value maximization. The factors including

mergers and acquisitions usually include technological progress, excess capacity,

emerging opportunities, consolidation of international banking markets and deregulations

of geographic, functional and product restrictions. Policy inducements such as the

government’s incentives that could accrue to the top managers are also other important

factors, which may determine the pace of consolidation27.

It is found that in all major economics, banking industry undergoes some sort of

restructuring process. The economy, which delays this process, leads to stagnation. That

is why, it is important from the point of view of long term prospect of the economy, the

consolidation process should be given prime attention.

The major gains perceived from bank consolidation are the ability to withstand the

pressures of emerging global competition, to strengthen the performance of the banks, to

effectively absorb the new technologies and demand for sophisticated products and

services, to arrange funding for major development products in the realm of

infrastructure, telecommunication, etc. which require huge financial outlays and to

streamline human resources functions and skills in tune with the emerging competitive

environment28.

The international experience reveals a wide range of processes and practices involving

consolidation, their impact on the banking market and the trends in post merger

performance of banking institutions. These experiences could provide useful inputs to the

banking policy in India.

27

www.coolavenues.com/know/fin/rachna_1.php3 28

www.iba.org.in/legal/LA-consolidationmodified1.doc


An important observation which may be induced from various past mergers that the

merger between big and small banks led to greater gains as compared to merger between

equals. It is also observed from past experiences that if the merger follows business aided

by appropriated technology and diversified product range, it could lead to greater gains

for the banking industry as a whole. Similarly, consolidation increases the market power

and does not cause any damage to the availability of services to small customers.

Evaluation of banks carried out by individual banks reveal that higher capital adequacy

and lower nonperforming assets explain to a greater extent the growth, Profitability and

productivity of banks since increase in capital and steep reduction in non-performing

assets cannot be entirely left to the individual banks in the present scenario.

Consolidation in the banking industry is of great relevance to the economy29.

A diagnostic performance evolution study would reveal out important aspects of

divergence in the performance of the domestic banking institutions. A high degree of

variations is found in the performance of various groups of banks. Since, public sector

banks account for the large scale of banking assets and the lower performance ratio

reflect the entire banking industry, it is considered important that suitable consolidation

process may be initiated at the earliest, so that, the efficiency gain made by the large

number of banks of other groups will be reflected which could lead to a positive impact

on the image of banking.

Consolidation can also be considered critical from the point of view of quantum of

resources required for strengthening the ability of banks in assets creation. It indicates

that restructuring in Indian banking may not be viewed from the point of particular group

rather it can be evolved across the bank groups.

Indians banks have unique character in displaying similar characteristics of performance

despite consisting of different size and ownership. This trend further substantiates the

scope for consolidation across banks group.

29

www.financialexpress.com/.../banking-industry-consolidation/192711/


As per the Quantitative Impact Study published by Basel Committee in May 2003, there

would be increase in capital requirements by 12% for banks in developing countries on

the implementations of the Basel II Accord. Mergers among the banks will be one of the

ways to increase market power and thereby increase the revenue-generation of the Banks.

The Reserve Bank of India (central bank) has set up an experts committee to implement

Basel II accord by 2006 to strengthen the financial health of banks by adopting globally

accepted norms for capital adequacy. The RBI also wants all banks in India to have a

capital base of Rs 300 crore (Rs 3 billion) over the next three years. This will bring about

number of acquisitions in the banking industry.

Over the last two years, the RBI has stopped issuing branch licenses to cooperative

banks, after the unbridled growth of co-operative banks during the last decade. For

cooperative banks to expand there is no alternative to go for merger an amalgamation.

The Mumbai-based Saraswat Co-operative Bank is now poised to take over Maharashtra-

based Maratha Mandir Co-operative Bank which is in trouble. This could mark the

beginning of voluntary mergers of cooperative banks after the Reserve Bank of India

(RBI) unveiled for mergers and amalgamations among urban co-operative banks. The

other suitor for Maratha Mandir was Pune-based Cosmos Co-operative Bank.

Last but most important reason for consolidation in any industry is tax saving and this

thing is true for the banking industry also.


CHAPTER-VI

MERGER IN INDIAN BANKS

In the 1950s and 1960s there were instances of private sector banks, which had to be rescued or

closed down because they had very low capital and were mostly operating with other people’s

money. For instance, against total deposits of Rs.2750 crore at the end of December 1968, the

paid-up capital of private sector banks was only Rs.28.5 crore or just a little over 1%. In 1960,

the failure of Palai Central Bank and Laxmi Bank led to loss of confidence in the banking system

as a whole. So mergers were initiated to avoid losses to depositors and maintain confidence in

the system.

In 1961, the Banking Companies (Amendment) Act empowered RBI to formulate and carry out a

scheme for the reconstitution and compulsory amalgamation of sub-standard banks with well-

managed ones. Consequently, out of 42 banks which were granted moratoria, 22 were

amalgamated with other banks, one was allowed to go into voluntary liquidation, one to

amalgamate voluntarily with another bank, three were ordered to be wound up and the

moratorium on three was allowed to lapse30.

In India, mergers have been used to bail out weak banks till the Narasimham Committee-II

discouraged this practice. For instance, since the mid-1980s, several private banks had to be

rescued through mergers with public sector banks:

Target Group of Banks for M&A

There are four categories of banks interested in M&A in a big way.

1) First, there are banks (like Indian Bank) that have survived on the government's largesse in the

form of thousands of crores of recapitalization bonds over the past decade. They are now keen to

take over other banks to become strong and acquire widespread reach.

2) In the second category are two types of banks. In one group are strong public sector banks

with large domestic presence (like State Bank of India) that want to acquire a bank with an

30

http://timesofindia.indiatimes.com/biz/india-business/Govt-will-welcome-bank-merger

proposals/articleshow/830878.cms

NATIONAL LAW UNIVERSITY

overseas presence to become global entities. The other group of banks

increasing their domestic presence and reach. For instance, Bank of Baroda

presence in western India -- has started looking out for opportunities in the north, east and south.

Vijaya Bank, which is based in Bangalor

India major Punjab National Bank, headquartered in Delhi, is looking southwards.

3) In the third category, are "make

banks headed by CEOs who were denied opportunities to head big banks and are believed to be

taking the initiative to acquire other banks so that they can prove their leadership qualities.

4) In the fourth category is a weak and small bank, which needs to be taken over by larger

to remain viable. These can be the potential targets of foreign banks and investors.

Over 90 per cent of private sector banks have a capital base of less than Rs 100 crore (Rs 1

billion). Some of them even do not have a net worth of Rs 300 crore. Lar

cooperative banks are in trouble and looking for take

overseas presence to become global entities. The other group of banks has been looking at

increasing their domestic presence and reach. For instance, Bank of Baroda -- which has a solid

has started looking out for opportunities in the north, east and south.

Vijaya Bank, which is based in Bangalore, is interested in picking up a northern bank. North


3) In the third category, are "make-believe" M&As that are purely personality-driven. These are

were denied opportunities to head big banks and are believed to be


4) In the fourth category is a weak and small bank, which needs to be taken over by larger



billion). Some of them even do not have a net worth of Rs 300 crore. Large numbers of urban

cooperative banks are in trouble and looking for take-over/acquisition to survive.

Page 21

has been looking at

which has a solid

has started looking out for opportunities in the north, east and south.

e, is interested in picking up a northern bank. North


driven. These are

were denied opportunities to head big banks and are believed to be


4) In the fourth category is a weak and small bank, which needs to be taken over by larger banks



ge numbers of urban

over/acquisition to survive.


Numerous studies have assessed the

• Efficiency of banks; and

• Efficiency gains from mergers amongst banks and financial institutions

Efficiency is measured or defined as the definition and choice of the inputs and outputs used for

measuring the efficiency of banks depends on the specific approach used to model the banking

business.

Various approaches have been used for measuring the bank efficiency. Two major approaches

are:

� Production,

� Intermediation,

Production approach: The production approach views banks as producers of various types of

accounts in form of deposits and loans by incurring cost of production. The input is measured by

the cost of production and excludes the interest expenses. Cost of production includes the costs

of physical capital and labour. The output is: measured in terms of number of accounts serviced;

and not measured in terms of the currency value of deposits.

Intermediation Approach: This approach considers banks as intermediary of financial services.

It assumes that banks collect funds (deposits and purchased funds) and transform these into loans

and other assets by incurring the cost of production. Inputs are the deposits and the cost of

production. Costs are defined to include both interest expense and total costs of production.

Output is the volumes of earning assets.

� Summary of Possible Inputs and Outputs for Measuring the Relative Efficiency of

Banks:


CHAPTER-VII

SOME IMPORTANT MERGERS WORLDWIDE:

1. Citigroup Merger31

: In 1998, the Multinational Bank Citicorp and the Insurance & Credit

Service Provider Travelers Group signed a merger deal and formed Citigroup. This Citigroup

Merger was expected to generate a market capitalization, which would be enough to give the

merged company the first position among the financial services companies of the world.

When these two biggies, Citicorp and Travelers Group merged in 1998, expectations rose to high

levels. It was estimated that the Citigroup would serve almost 100 million customers in more

than 100 countries of the world. It was expected that market capitalization of the merged

company would give it the first rank among all the financial services company of the world.

2. Bank of America Merger32: Bank of America Mergers are quite important in the evolution

of the bank over the years. Most important among all the mergers and acquisitions were the

merger between Nations Bank and Bank America and the acquisition of ABN North America

and LaSalle Bank by Bank of America.

Bank of America Mergers are significant events in the history of the Bank. In fact, these

mergers and acquisitions provided the base of the rapid growth of the bank and contributed

enormously in achieving the position, which the Bank of America holds in today's world. Bank

of America went through a number of merger and acquisition deals to attain the present status.

The important mergers and acquisitions are as follows:

• Before 1998, today's Bank of America was known as Nations Bank. In the year 1998, this

Nations Bank made an acquisition deal with Bank America. This acquisition deal was the

largest bank acquisition of that period. After this acquisition of Bank America by Nations

Bank, the combined entity got the name, Bank of America. Although the deal was

technically an acquisition, it was provided the structure of a Merger.

• In the year 2004, Bank of America acquired National Processing Company, which was

engaged in processing of VISA and MasterCard Transactions.

31

http://www.uow.edu.au/~bmartin/dissent/documents/health/citigrp_after98.html 32

ttp://www.hostseeq.com/business/bank-of-america.htm


• In the same year of 2004, Bank of America made an acquisition deal with FleetBoston

Financial. This acquisition helped Bank of America to gain market share in the north-

eastern part of USA.

• In 2005, Bank of America declared that it was going to make an acquisition deal with

MBNA. After getting the approval of Federal Reserve Board, the acquisition finally took

place in January, 2006. This acquisition helped Bank of America to get a strong foothold

in the credit card market of USA.

• In the year 2006, Bank of America declared that it would buy out The United States trust

Company and the deal was finally executed in January, 2007.

• In 2007, Bank of America made a historic acquisition deal by acquiring LaSalle Bank

Corporation, LaSalle Corporate Finance and ABN-AMRO North America.

• Recently, in January 2008, Bank of America has made an announcement that they are

going to buy Countrywide Financial.

3. European Bank Mergers33: European Bank Mergers took place in maximum numbers in

the period 1985 to 2000. Then, in 1997-98 there were significant mergers. Among the European

Bank Mergers, the domestic mergers created more value compared to the cross-border mergers.

European Bank Mergers had a great impact on the financial sector of Europe. Specially, in the

period, 1985-2000, significant number of bank mergers took place in Europe. These bank

mergers resulted in drastic increase in the banking assets. Banking Assets as a percentage of

GDP became 244.2% in 1997 from the figure of 177.2% in 1985. Due to these mergers, total

number of banks decreased in this period. In the year 1985, the total number of banks in Europe

was 12670, whereas, in 1999, the number came down to 8395.

After 2002, a tendency to go for cross-border merger was noticed in Europe. In fact, the merger

regulatory authority of UK encouraged the UK banks to make cross-border merger deal. As

many bank mergers within the countries took place in the 1985-2000 periods, the European

Banks were asked to shift their focus to abroad for further consolidation.

33

http://finance.mapsofworld.com/merger-acquisition/bank/european-banks.html


It was expected that cross-border bank mergers would be able to fill up the market gaps by

generating extensive network across countries. But, in reality, it was observed that the cross-

border bank mergers have underperformed in Europe, whereas the domestic mergers have

generated value by substantial amount.

To get the real picture of European Bank Mergers, some important mergers of Europe are34:

• In the year 1997, Union Bank of Switzerland merged with Swiss Bank.

• In 1998, Banque Nationale de Paris(BNP) of France went through a merger with Banque

Paribas and a new bank was formed with market capital of $688 billion.

• In the same year of 1998, the merger between Hypobank and Bayerische Vereinsbank,

created a new banking institution which became the second largest bank in Germany.

• In 1999, Banco Santander acquired Banco Central Hispano and became the largest bank

in Spain.

• In the same year of 1999, Bank Austria did a merger deal with Creditanstalt Bankverein

and became the largest bank in Austria.

• In 2000, UBS of Switzerland acquired US Investment Bank Paine Webber.

• In the same year of 2000, Credit Suisse of Europe acquired Donaldson, Lufkin and

Jenrette.

• Recently, in 2007, two Italian Banks, UniCredit and Capitalia merged and became the

second largest bank in Europe after HSBC.

34

www.jstor.org/stable/2554795


CHAPTER-VIII

HISTORY IN INDIA

The merger of the loss making New Bank of India with the profitable Punjab National Bank was

the first instance of merger of two public sector commercial banks. Now public sector

commercial banks are themselves in need of restructuring so it may be more efficient to close

down unviable bank. However, the recent merger of banks in private sector, i.e., HDFC Bank

and Times Bank (1999) as well as ICICI Bank and Bank of Madura (2000), could herald a

welcome trend as it is driven by commercial considerations. It is only such mergers among

banks that will impart strength and stability to the banking system in the new millennium35.

With economic reforms and opening up of the economy, like other sectors, banking sector also

saw a lot of changes. Two major changes are worth mentioning. They are:

• Increased competition, and

• Falling interest rates.

35

http://maddengroupinc.com/mergers-and-acquisitions/mergers-and-acquisitions-in-india.html


There has been a decline in the interest rates in the last decade worldwide. As a result of this

profitability of the banks has been under tremendous pressure. The interest rates both on the

deposits and on the loans have come down drastically.

The ‘spread’ which was available to the banks thinned down and banks have started searching

for cost reduction and market enhancing strategies. Use of technology in their operations has

come up as an immediate strategy and banks have started using technology in a big way. This

has resulted in saving of salary expenses, which used to be a major part of the banks’

expenditure. In addition to this, banks have started looking for strategies which allow the banks

to grow faster. One of the options before the banks was to merge their counterparts in it and

become not only big but also gain entry into the new markets. As a result of these mergers, banks

are able to use their full capacities and avoid unnecessary duplication of efforts. Some of the

banks which merged in recent times are:

• Times Bank merged with HDFC Bank

• Bank of Madura Merged with ICICI Bank

• Nedungadi Bank Merged with Punjab National Bank.

• Subsequently the RBI allowed Development Financial Institutions also to merge with

banks on the recommendation of Khan Group.

• As a result of this ICICI Limited merged itself with ICICI Bank and

• IFCI Limited is being merged with the Punjab National Bank.

1. Centurion Bank Merger36: Centurion Bank Merger created the Centurion Bank of Punjab

bringing together two separate banks, named Centurion Bank and Bank of Punjab. This merger

increased market share for the merged bank, raised its' book value and gave it a rank among the

top ten private banks of India.

Centurion Bank Merger refers to the Merger which took place in the year 2005, between Bank of

Punjab and Centurion Bank. This merger created Centurion Bank of Punjab. After the merger the

merged bank gained significantly in terms of market size and at present it operates through more

than 403 franchise branches and more than 446 ATMs across 143 locations in India.

36

http://www.banknetindia.com/banking/bop.htm


The Centurion Bank Merger took place in the presence of the independent valuers like KPMG

India Private Limited and NM Raiji & Co. The Swap Ratio for this merger was fixed at the ratio

of 4:9.

It ensured that, every four shares of worth ten rupees could be converted into nine shares of

rupees ten of Centurion Bank. No Cash transaction took place in this merger deal. The merger

happened through the share swapping.

In the merger deal, it was decided that the Chairman of Centurion Bank would be the Chairman

of the merged bank. In the same way, MD of the Centurion Bank would be the MD of Centurion

Bank of Punjab. In time of merger, both the banks assured their employees that there would be

no downsizing and Number of Employees would not be reduced through Voluntary Retirement

Scheme.

The merger has helped the both the banks to gain in terms of market share and customer base.

The merged entity of Centurion Bank of Punjab was expected to stand among the top ten private

sector banks of India. The customer base of the merged bank was expected to be widened as the

branch network of the two banks would be integrated to provide a nationwide service.

The merged bank was expected to gain significantly in respect of sectoral dominance as well

because the Centurion Bank had dominance in the retail sector financing and the Bank of Punjab

had dominance in agricultural sector and SME financing.

It was also anticipated that this merger would raise the book value of the bank which would in

turn help the merged bank to channelize its funds at a lower rate compared to the pre-merger

period.

2. Lord Krishna Bank: Lord Krishna Bank Merger took place in the year 2006, between

Lord Krishna Bank and Centurion Bank of Punjab. This merger helped the combined entity to

establish a strong market presence in Kerala and Punjab37.

Lord Krishna Bank Merger refers to the merger of Lord Krishna Bank with the Centurion

Bank of Punjab. In August 2006, both the banks decided to go for a merger deal. But as any

37

www.ibtimes.co.in/.../centurion-punjab-bank-lord-krishna-merger.htm


merger of nationalized banks of India is subject to the approval of Reserve Bank of India (RBI),

the Centurion Bank of Punjab and the Lord Krishna Bank were waiting for the approval of RBI.

RBI finally gave its nod in the month of September.

After the merger, the combined entity of Centurion Bank of Punjab and Lord Krishna Bank

started operating through 361 branches and 12 extension counters. RBI also approved the

proposal of Centurion Bank of Punjab for opening another 30 branches.

The Lord Krishna Bank was a Kerala Based Bank and Centurion Bank of Punjab had wide

network in Punjab. So, it was quite obvious that after the merger, the combined bank would be

able to provide financial service on an extensive basis in all the regions of Kerala and Punjab.

According to a report of June 2006, Lord Krishna Bank held a credit-deposit ratio of 80% in

Kerala. This figure was significantly higher than the industry average figure of 66%. So, it was

expected that after the merger, the combined entity of Lord Krishna Bank and Centurion Bank of

Punjab would be able to dominate the financial market of Kerala.

The merger between Lord Krishna Bank and Centurion Bank of Punjab was done through the

swapping of shares. The swap ratio for shares was fixed at 5:7. It ensured that, every 5 shares of

Lord Krishna Bank could be converted into 7 shares of Centurion bank of Punjab. The merger

deal was finalized in the presence of advisors like DSP Merrill Lynch and Ambit Corporate

Finance. During the merger process, the banks assured their employees that, employee interests

would be taken care of in the proper manner.



CHAPTER-IX

NEW TRENDS IN MERGERS

Some of the new generation banks like HDFC Bank and ICICI Bank have started looking for

external growth by way of merger route. These banks have started looking for healthy banks

rather than sick and weak banks for acquisition.

The main criteria while selecting target bank was synergy benefits like market growth, market

presence, effect on profit and so on. It can be said merger of Times Bank with HDFC Bank in

1999 is a beginning of this new trend. HDFC Bank emerged as the largest private sector bank in

India after the merger. By this merger HDFC Bank got the customer base of Times Bank, its

infrastructure, and branch network. This merger also had product harmonization effect, as

HDFC Bank had Visa network and Times Bank had Master card network. Following HDFC,

ICICI also merged Bank of Madura into it38. ICICI Bank was looking for a bank which could be

merged into it and which could provide some synergic benefits after the merger. ICICI Bank had

considered two possible banks, Federal Bank and the Bank of Madura and finally went for Bank

of Madura, considering its better technological edge, attractive business per employee, and its

vast branch network in Southern India. At the time of merger the Bank of Madura had 263

branches.

Another trend which is taking place in Bank Mergers is merging of Developmental Financial

Institutions (DFIs) with the Banks. Some of the examples are; merger of ICICI Ltd. with ICICI

Bank39, and the proposed merger of IFCI Ltd. with Punjab National Bank. This trend is a fall out

of the recommendations of Khan Group and Narasimham Committee-II.

Impact of merger40:

• On Synergies

• On Product portfolios

• On Merged bank

38

http://www.mayin.org/ajayshah/MEDIA/2000/icicibank-bankofmadura.html 39

http://www.icici.com 40

http://www.banknetindia.com/banking/roundtable.htm


• On Image

• On Human resource

Case of UTI-GB merger:

• Synergies: - the two banks have lot of similarities. They are roughly of the same size, age

and have retail presence. Both have a strong technology base with similar technology

platforms. Both banks also have the advantages of new private sector banks:- lean staff,

automated and non-unionized work environment and connectivity.

Although there could be an overlap of branches because of the merger, there are also

some complementary strength. Global Trust Bank, has a fairly strong clearing bank

business and UTI Bank, is strong in cash management products. UTI Bank, with support

of UTI has strong Corporate Base, while GTB is one of the strong retail Bank

• Product portfolios: - Consumers will be the beneficiaries from this merger. The merged

entity is expected to have a focus on retail. With good technology and backing of UTI,

retail customers will benefit in terms of more ATMs, deposits, and loan products.

• Merged bank: - The new entity will effectively combine the strengths and complementary

features of the two banks. It will be strongly capitalized with a net worth that will be in

excess of Rs 1,000 crore by end-March 2001.

• Image: - Both UTI Bank and GTB basically are manned by bankers from PSU and old

Private sector Banks and their work culture at the senior management level is quite

similar. Unlike the ICICI and Madura merger, integration of UTI and global will be

comparably much smoother.

• Human resource: - Like in any consolidation between two entities, employee

retrenchment is going to happen sooner or later. In this case as a new entity is being

formed, employees from both banks, who do not fit in the scheme of things, will face

prospects of retrenchment.


CHAPTER-X

ISSUES INVOLVED IN MERGERS:

As far as the merger activity in banking sector is concerned, there used to be mostly merger of

sick and weak banks with a healthy bank. The only purpose of this type of mergers was to save

the sick bank and its customers from the problems. With the process of liberalization the thinking

of the government also changed. We do not see much of mergers of this type now-a-days. The

merger of New Bank of India with Punjab National Bank was a bad experience. This has not

served any purpose. As a result of the merger, PNB had to face lot of court litigations and also

incurred a loss in the year 1996 which was unusual in the history of the Bank41.

With the liberalization policies of the government, many private banks came into existence. In

1995 the government also removed entry barriers in the banking sector. As a result of this good

number of technology savvy, customer friendly banks have started operating in India. In order to

survive in the competition and get a market share these new banks started offering innovative

and attractive products with the help of their technology. Some of the services like mobile

banking, internet banking, tele-banking, online share trading services, depository services ,

anywhere banking, anytime banking which are offered by these new generation banks were

never thought of about a decade ago in India. These services have given an edge to these banks

over the public sector banks. The public sector banks also realized the need of the hour and

started using technology in a big way. These banks are also collaborating with the new

generation banks in offering certain services and getting mutually benefited42.

• The prevailing political consensus has held up bank restructuring. The government is not

merely committed to holding 51 per cent stake, but also ends up supporting weak banks.

• Unlike in the case of life insurance, when a monolith public-sector life insurance

institution was set up on nationalization, in the case of banks the received doctrine was

that the pre-nationalized structure should not be altered. It is nearly 20 years since

Narasimham Committee-I articulated the need for consolidation.

41

http://www.pluggd.in/merger-acquisition-people-issues-in-297 42

http://www.allbusiness.com/4071078-1.html


• The more recent initiatives of encouraging pan-Indian banks (like Canara Bank, Punjab

National Bank, Union Bank, Bank of India and Bank of Baroda) to take over smaller

public sector banks is unlikely to materialize as very strong vested interests in smaller

public sector banks would use political agitation to scuttle such mergers.

• Although calculated leaks from the government indicate that foreign consultants are

likely to be appointed shortly to assist the larger public sector banks to undertake due

diligence before mergers, such initiatives are likely to come to naught. Mergers involve

blood-letting and are often very ugly.

Mistakes:

• The consolidation of public sector banks has been on the agenda for many years, but

despite many an effort precious little has been achieved on the ground. The first mistake

was made at the time of nationalization of 14 banks in 1969, when the erstwhile entities

were all allowed to continue.

• The second error was when six more banks were nationalized in 1980 and these banks

were not merged.

• The third false step was not merging the associate banks with the State Bank of India.

Ground realities:

The need to consolidate the banking sector in India through bank mergers is often debated

without a proper perception of the ground realities. The size of banks is being measured; it

appears, in terms of the number of branches, their geographical dispersion and the volume of

business handled. To promote strong banks, it is not enough to have a large number of branches.

Retail banking being the accepted pattern of banking in India, there is a preponderance of small

branches, whose contribution to the top line is dismal. This aspect is often lost sight of in

discussions on bank mergers.


Compared to international banks, Indian banks are small in size. Except State Bank of India, no

other bank is big enough to be counted among big banks in the international arena. State Bank of

India has over 10,000 branches and has cross-border presence. Nationalized banks vary widely in

size, both in the volume of business handled and the network of branches.

While four banks handle business volumes exceeding Rs 3 lakh crore each, at the other end are

five banks managing to live with a volume of business less than Rs 1 lakh crore, according to the

financial data available for March 2009.

The biggest bank has a little more than 4,000 branches; 10 banks have less than 2,000 branches

and the smallest bank is limping behind with barely 838 service points. A review of their

profitability reveals that 12 out of 19 banks had bottom lines below Rs 1,000 crore during 2008-

09.


Position Of Rural Banks And Small Banks

One area where the bank mergers were very effectively used for consolidation of a segment of

the banking sector was in rural banking. The merger of gramin banks, initiated by the

Government since 2005, has gained momentum, their number coming down from 196 to 84. This

has resulted in the expansion of their operational areas and the number of loss-making banks has

come down significantly43.

Till recently, the State Bank of India could not take a decisive step relating to the future shape

of its associate banks. After much ado, the State Bank of Saurashtra was merged with it last

year. Now, there is a proposal to merge State Bank of Indore with it. From this piecemeal

approach, it is not clear whether the parent bank has any perspective plan for the consolidation of

its associate banks. Private sector banks have been silently consolidating their position through

mergers, wherever possible. The number of small banks has been declining over the last few

years due to bank mergers. Lord Krishna Bank Ltd, Sangli Bank Ltd, United Western Bank

Ltd and Ganesh Bank of Kurundwadi Ltd are some of the smaller banks bowing out. One

more bank merger in Kerala is in the offing.

The need to consolidate the banking sector has gained urgency from the point of enhancing the

competitive strength of Indian banks and expanding their capital bases. However, mere increase

in the number of branches through mergers would not add to the competitive strength of banks.

The preponderance of rural branches, whose contribution to the total business is

disproportionately low, would emerge as speed-breakers in any scheme of bank mergers. Rural

branches, numbering 31,666 as on June 2009, constitute 40 per cent of the total branches44.

In all probability, less than 10 per cent of the total domestic business originates from these

branches. As the details of the share of these branches in the gross profit are not available, it can

be estimated at not more than 5 per cent of the total.

43

http://www.indiastat.com/banksandfinancialinstitutions/3/regionalruralbanks/242/stats.aspx 44

http://www.nabard.org/pdf/report_financial/Chap_V.pdf


The merger of any two big banks would not drastically reduce the share of rural branches in the

combined branch network; nor is it likely to raise the rural branches' contribution to the total

profit. In the composition of branch network, the share of rural branches varies from 43 to 30 per

cent for most of the banks, as can be seen from the table.

According to the latest issue of Quarterly Statistics on Deposits and Credit of Scheduled

Commercial Banks June 2009, there are 32,183 branches (both rural and non-rural) with credit

outstanding up to Rs 5 crore per branch. Their share in total deposits is 10.7 per cent and in

credit deployment it is as low as 2.7 per cent. In the absence of more qualitative data, it may not

be wrong to postulate that the share of rural branches in the gross profit generated by banks is

inversely related to their share in the total branch network.


CHAPTER-XI

LEGAL FRAMEWORK

Under Banking Regulation Act, there is presently no provision for obtaining approval of the

Reserve Bank of India for any acquisition or merger of any financial business by any banking

institution. In other words, if a banking institution desires to acquire nonbanking finance

company there is no requirement of approval of the Reserve Bank of India. Further, in case of a

merger of an all India financial institution with own subsidiary bank, there was no express

requirement of obtaining the approval of Reserve Bank of India for such merger, under the

provisions of the Banking Regulation Act or the Reserve Bank of India Act. Such approval of the

Reserve Bank of India is required only in the context of relaxation of regulatory norms to be

complied with by a bank45.

However, for a regulator, it is a matter of concern to ensure that such acquisitions or mergers do

not adversely affect the concerned banking institutions or the depositors of such banking

institutions.

Compliance with Securities and Exchange Board of India (SEBI) Regulations

The regulations apply to the companies registered under the Companies Act as well as to

corporations established by Acts of Parliament by virtue of listing agreements. It is for this

reason that corresponding new banks increasing capital by issue of shares to the public are

required to comply with SEBI regulations in spite of the fact that the other provisions of the

companies Act in regard to issue of shares etc. do not apply to the corresponding new banks. In

view of this position in respect of acquisitions and mergers of any banking institutions whose

shares are listed at the Stock Exchanges will be required to comply with all the relevant

regulations of SEBI. In India take-over are regulated by SEBI’s Takeover Code for substantial

acquisitions of shares in listed companies of November 199446.

SEBI announced a take-over code for the regulation of substantial acquisition of shares, aimed at

ensuring better transparency and minimizing the occurrence of clandestine deals. In accordance

with the regulations prescribed in the code, on any acquisition in a company which makes

45

www.indialawjournal.com/volume1/.../article_by_vikram_malik.html 46

http://www.books.iupindia.org/overview.asp?bookid=IB1101814


acquirer’s aggregate shareholding exceed 15%, the acquirer is required to make a public offer.

The take-over code covers three types of takeovers-negotiated takeovers, open market takeovers

and bail-out takeovers.

� Shareholder approval

The shareholders of the amalgamating and the amalgamated companies are directed to hold

meetings by the respective High Courts to consider the scheme of amalgamation. The scheme is

required to be approved by 75% of the shareholders, present and voting, and in terms of the

voting power of the shares held (in value terms). Further, Section 395 of the Companies act

stipulates that the shareholding of dissenting shareholders can be purchased, provided 90% of the

shareholders, in value terms, agree to the scheme of amalgamation. In terms of section 81(IA) of

the Companies Act, the shareholders of the "amalgamated company" also are required to pass a

special resolution for issue of shares to the shareholders of the "amalgamating company".

� Creditors/Financial Institutions/Banks approval

Approvals from these are required for the scheme of amalgamation in terms of the agreement

signed with them.

� High Court approvals

Approvals of the High courts of the States in which registered offices of the amalgamating and

the amalgamated companies are situated are required.

� Reserve Bank of India approval

In terms of section 19 of FERA, 1973 Reserve Bank of India permission is required when the

amalgamated company issues shares to the nonresident shareholders of the amalgamating

company or any cash option is exercised. Reserve Bank approval is also required in case of

mergers involving a banking entity.

Mergers and Takeovers are generally seen in Public Policy as activities, which, if left

uncontrolled, can lead to negation of Public interests. As a result, these activities are


controlled through various Statutes and Codes of Conduct47

. Some of the contentious issues

that emphasize the need for evolving a Takeover Code are discussed below:-

• Section 111 and 390 to 396a of the Companies Act, 1956, govern mergers and

acquisitions.

• Similarly Sections 19, 26 and 29 of the erstwhile FERA relate to transfer of shares.

Where one of the transacting parties is a Non-Resident Indian, the Act prohibits the

transaction except with the sanction of the Reserve Bank of India (R.B.I.).

• Section 30(A) to 30 (F) of the MRTP Act pertain to transfer of shares relating to

dominant undertakings as defined in the Act.

• Further, Sec. 22 (A) of the Securities Contract (Regulation) Act, 1956, deals with the

transfer of shares.

• Clauses 40 (A) and 40 (B) of the Stock Exchange Listing Agreement Form also lay down

the rules in case of takeover bids.

• Before 1960, section 44A of the Banking Regulation Act only provided for the voluntary

amalgamation of banks. But after widespread weakness in the banking sector, the Act

was amended by adding Section 45 to allow for compulsory amalgamation wherever

necessary and on a voluntary basis wherever possible, in order to strengthen the banking

system by eliminating small and weak banks. The main difference between an

amalgamation and a transfer is that, under amalgamation the company, which is

taken over, ceases to exist, while under transfer the company can opt to either go

into liquidation or convert itself into a non-banking company.

• Under Section 45 of the Act, RBI has the power to compulsorily reconstruct or

amalgamate a weak bank with any other bank.

• Section 44A of the Banking Regulation Act lays down the procedure for amalgamation of

banking companies.

• Section 44B of the Act further empowers RBI in the matter of compromise arrangements

between a bank and its creditors. These have to be approved by RBI and such

compromise cannot be sanctioned even by a High Court.

47

http://articles.manupatra.com/PopOpenArticle.aspx?ID=5babca31-1192-4bcc-af0c-eb4b7be26ff7&txtsearch


• Under Section 36 AE of the Act, the Central Government can under advice from RBI

take over a weak bank. When a bank is placed under liquidation, the High Court can

appoint RBI, SBI or any other bank as the official liquidator and monitor the speedy

disposal of winding up proceedings.

• Part-II C of the Banking Regulation Act deals with the acquisition of the undertaking of

banking companies.

• Section 36-AE of the Banking Regulation Act deals with the power of Central

Government to acquire undertakings of banking companies in certain cases.

• Sec.36-AF deals with the powers of Central Government to make scheme

• Section 36AG deals with compensation to be given to shareholders of the acquired bank.

• The Central Government on receipt of a report from the RBI may acquire a banking

company if it fails to comply with the directions given to it under Sec.21 or Sec. 35-A of

the Banking Regulation Act.

• Similar action may also be taken if the Banking Company is being managed in a manner

which is detrimental to the interest of its depositors, or against the banking policy.

Reasonable opportunity should be given to the bank before taking such action.

The Evolution of the Takeover Code48

:

• 1990: The Government amends clause 40 of the listing agreement according to

which, threshold acquisition level reduced from 25% to 10% ; change in

management control to trigger public offer’; minimum mandatory public offer of

20% disclosure requirement through mandatory public announcement.

• November 1994: SEBI notifies Substantial Acquisition of Shares and Takeover,

1994. New provisions introduced to enable both negotiated and open market

acquisitions and competitive bids allowed.

48

http://www.capitalmarket.com/if.asp?L=MacroEconomy&m=macro/report_on_trend_and_progress_of_.htm


• November 1995: SEBI sets up committee under former Chief Justice of India

P.N. Bhagwati to review the 1994 takeover Regulations in order to frame

comprehensive regulations.

• January 1997: The Bhagwati Committee submits its report on the takeover code

to SEBI.

• February 1997: SEBI accepts Bhagwati committee report and the Substantial

Acquisition of Shares and Takeovers Regulations, 1997, notified.

• February 1998: SEBI proposes to revise the takeover code make it mandatory for

acquirers to make a minimum open offer for 20% (and not 10% as earlier) of the

target company’s equity, even if the holding goes beyond 51% as a result of the

offer.

• June 1998: SEBI asks justice Bhagwati to conduct a complete review of the

takeover code. Issues likely to be taken up are, the extent of disclosure in an open

offer and if any change in the objective of the offer needs to be spelt out in the

revised offer.

• June 1998: SEBI proposes to raise the creeping acquisition limit under its

Takeover Code from 2% to 5%. It also proposes to increase the share acquisition

limit for triggering the takeover code from 10% to 15%.

• November 1998: Takeover panel amends the takeover code to incorporate

buyback offers by companies. The committee decides to allow takeover offers to

be made when a buyback offer is open and vice versa.

• December 1998: Justice P.N. Bhagwati criticizes SEBI for unilaterally increasing

the trigger limit for making a public offer from 10% to 15%. The Bhagwati

Committee also recommends that once an acquirer acquires 75% of shares or


voting rights in a company, he should be outside the purview of the Takeover

Regulations.

• January 2000: SEBI again proposes that all open offers made by promoters for

consolidating their holding in a company will have to be for a minimum of 20%

of equity. Exemption to the minimum 20% requirement should be given only in

the case of such companies in which promoters hold over 75%.

The SEBI’s Takeover Committee also recommends that a special resolution

approved by 75% of the shareholders should be made mandatory for effecting a

change in the management of professionally managed companies. The step aims

to avoid misuse of the earlier provision, under which certain groups with 51%

stake could effect the changes through a simple resolution.

Another recommendation that follows was that venture capital funds should be

treated on par with State Financial Institutions. And like financial institution, they

should be exempted from making a public offer, in the event of acquiring a 15%

stake in a company.

• February 2000: SEBI finalizes the recommendations of takeover panel and

review the takeover norms. However, the crucial decision on issue relating to

‘change in management control of professionally managed companies’ left

unresolved.

• June 2000: SEBI plans to bring public financial institutions under the ambit of its

takeover code, both as acquirers and as pledgees.

• October 2000: Confederation of Indian Industry, FICCI and ASSOCHAM seek

amendments in the takeover code, especially in the case of creeping acquisitions,

to provide the promoters a level-playing field against corporate raiders who may

disrupt existing managements. Under the current takeover code, corporate raiders


can pick up 15% of the paid-up equity of the target company over a 12 month

period without triggering off the takeover code.

• November 2000: SEBI takeover panel decides to make it mandatory for an

‘acquirer’ to disclose his holdings in the target company to the company as well to

the exchanges, at three levels; 5 %, 10% and 14%, instead of the existing

stipulation of only 5%.

• December 2000: SEBI promises a new draft on the takeover code in place by the

end of March 2001 with ‘investor protection’ as its pivot. The main objective of

the new code would be to ensure that acquiring companies are prompt in

informing the stock exchanges when they cross the prescribed limits of holding a

company’s stake make public announcements and allow companies to make

counter offers.

RESERVE BANK’S REVIEW PROCESS

Reserve bank of India has laid down guidelines for the process of merger proposal,

determination of swap ratios, disclosures, the stages at which boards will get involved in the

merger process and norms of buying and selling of shares by the promoters before and during the

process of merger Reserve bank of India (RBI) in its capacity of the primary regulator and

supervisor of the banking systems has information on the present functioning of all the banks in

India, the RBI is the best suited to undertake the merger review process.

While undertaking the merger review process, RBI will need to examine the proposal for the

merger from a prudential perspective to gauge the impact on the stability and the financial well

being of the merger applicants and on the financial systems49. In addition to the assessment of

the proposed merger on the competitiveness and stability of the financial systems, RBI will also

need to examine the implications on regional development, impact on society etc. as a result of

merger since banks in India also have to fulfill have to fulfill various social obligations.

49

http://www.business-standard.com/india/news/rbi-unwraps-guidelines-for-co-op-bank-mergers/201380/


The RBI will need to examine the reasonableness of financial projection, including business plan

and earning assumptions as well as the effect of the proposed merger on the merged entity’s

capital position.

Finally RBI will have to consider potential changes to risk profile and the capacity of the merger

applicants ` risk management systems, particularly the extent to which the level of risk would

change as a result of the proposed merger and the merged entity’s ability to measure, monitor

and manage those risks.

Broadly the information that will need to be examined by RBI while evaluating a proposal for

merger would include:

• The objective to be achieved by the merger.

• What impact could the merger have on the financial markets?

• What impact could be the creations of mega bank have on monetary policy, the

management of interest rates? What threat to the Indian economy would be posed by the

difficulties experienced by a mega bank in its international activities?

• The impact that the merger might have on the overall structure of the industry.

• The possible costs and benefits to customer and to small and medium size businesses,

including the impact on bank branches the availability of financing price, quality and the

availability of services.

• The timing and the socio–economic impact of any branch closures resulting from the

merger.

• The manner in which the proposal will contribute to the international competitiveness of

the financial services sector.

• The manner in which the proposal would indirectly affect employment and the quality of

jobs in the sector, with a distinction made between transitional and permanent effects.

• The manner in which the proposal would increase the ability of the banks to develop and

adopt new technologies.

• Remedial steps that the merger applicants would be willing to take to mitigate the adverse

effects identified to arise from the merger


CHAPETR-XII

CRITICAL FACTORS FOR MERGER SUCCESS

a) Why merger do not succeed50

� Risk and return always go hand in hand, this is also true of the merger in the banks these

are the few risk associated with the merger:

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

organization. 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 liability rather than as 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 success story. All may not

be up to plan, which explains why there are high rate of failure in mergers.

� Consolidation mainly comes due to decision taken at the top. It is a top heavy decision

and willingness of the rank and file of the both entities may not be forthcoming. This

leads to problems 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 example, a PSU bank or 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 through overhauling and systems analysis to be done to assimilate both

the organizations. This is a time consuming process and requires lot of cautions

approaches to reduce the frictions.

� There is problem of valuations associated with all mergers. The shareholder of existing

entities has to be given for transfer and compensations is yet to emerge.

� There is also exists a problem of brand projection. This becomes more complicated when

existing brands themselves have a good appeal. Questions arise whether the earlier

brands should continue to be projected or should they be submerged in favor of a new

50

http://www.bir.net.au/articleDetailBIR.php?What-Makes-a-Merger-Acquisition-Succeed-or-Fail-21


comprehensive identify. Goodwill is often towards a brand and its sub-merger id usually

not taken kindly.

DRAWBACKS IN LEGAL FRAMEWORK51

:

∇ There is no specific law relating to mergers and acquisitions of banks general provisions

are applied which proves a hindrance for effective merger and lacks a proper control over

such merger.

∇ Divergent stands of the RBI and the finance ministry in respect of bank mergers and

amalgamations.

∇ The role and powers of the reserve bank of India in such issues has been left far too

vague. For instance, the RBI's permission is not needed for mergers of non-banking

companies with banks, ahead of filing the schemes in the high court’s under section 391

of the companies act, and the RBI is insisting on regulatory approbation.

∇ There was a debate over the status of ICICI ltd., before it got reverse-merged with ICICI

bank, with some classifying the former a development financial institution and others an

NBFC.

∇ Under the IDBI (transfer of undertaking and repeal) bill, 2002, the new company is not

required to obtain banking license; it also enjoys a five-year exemption from the statutory

liquidity ratio and cash reserve ratio commitments apart from tax reliefs.

∇ There is the RBI ban on Indian corporate owning banks. This does not apply to foreign

banking companies picking up 49 per cent stake through the foreign direct investment

route in the old and new private banks.

∇ One is not sure of the stake FIIs can hold.

51

Editor, Foggy regulations, Business Line, Dec. 16,2003


CHAPTER-XIII

THE ROAD AHEAD FOR CONSOLIDATION IN INDIAN BANKING INDUSTRY

Consolidation has been a dominant feature of the banking sector in most countries. Most large

banks in the world have acquired repeatedly and integrated successfully. In Asia, Malaysia has

reduced the number of banks from 55 to 10, Taiwan aims to bring down the number of state

banks from 12 to six this year, and Singapore government guided the system down to three

players with DBS being supported to become a regional leader. Similar initiatives are happening

in Indonesia, South Korea and Japan. Only 22 of Indian banks figure among the top 1,000

banks in the world.

In Asia, SBI (the largest in India) is the only local entity that has made it to the top-25 list. In

comparison, China's fourth-largest bank is 2.5 times that of SBI. The market capitalization of the

entire Indian banking sector is about $40-45 billion, which would make the entire Indian banking

sector rank after the 30 largest banks in the world.

The present capital structure of public sector banks will make them vulnerable to takeovers

unless the M&A’s take place. It is necessary for Indian banks complete their M&A activities by

’08-09, to ensure that they have the strength to take on competition from foreign banks, once

sector opens up to foreign banks52.

About 46 percent of public & Private sector banks covered in FICCI survey conducted in

September 2008 have extended their operations overseas in the past 3 Years. About 47 percent of

the banks have formulated strategies for further global expansion. UAE is the most preferred

destination voted by the bankers followed by China, U.K. ASEAN and U.S.A. in the list. Free

Trade Agreements (FTAs) are indeed a positive step in the area of banking and financial

services, as it would facilitate free cross-border trade of such services to flourish. The available

market size and the level of access provided to Indian banks in foreign countries should be the

key factors in consideration.

52

http://business.outlookindia.com/printarticle.aspx?100055


Recently signed Comprehensive Economic Cooperation Agreement (CECA) between India and

Singapore has considerably enhanced the scope if Indian banking operations in Singapore and

vice versa. CECA is the first if its kind signed by India with another country. It is much more

than a Free Trade Agreement (FTA). Presently, Indian Bank, Indian Overseas Bank, UCO Bank,

Bank of India, SBI, ICICI Bank has their operations in Singapore. The agreement has opened

Indian shores for three Singapore Banks – Development Bank of Singapore (DBS), Overseas

Chinese Banking Corporation and United Overseas Bank. Size is increasingly becoming

important for the banks, as it is crucial to improve their overall efficiency. 75 percent of the

FICCI survey respondents also concur with the notion that ‘Large size is the key to further

performance improvement’. This view was equally supported by Public sector banks as well as

the Private and Foreign banks.

• Consolidation in the banking industry seems to be inevitable in the next 2-5 years.

• Opening up of the financial sector from 2005, under WTO, would see a number of Global

banks taking large stakes and control over banking entities in the country. They would

bring with them capital, technology and management skills. This will increase the

competitive spirit in the system leading to greater efficiencies. Government policy to

allow greater FDI in banking and the move to amend Banking Regulation Act to remove

the existing 10% cap on voting rights of shareholders is pointers to these developments.

Public Sector Banks had, in the past, relied on Government support for capital

augmentation. However, with the Government making a conscious decision to reduce it’s

holding in Banks, most Banks have approached the capital market for raising resources.

This process could gain further momentum when the government holding gets reduced to 33% or

below. It is expected that pressures of market forces would be the determining factor for the

consolidation in the structure of these banks. If the process of consolidation through mergers and

acquisitions gains momentum, we could see the emergence of a few large Indian banks with

international character. There could be some large national banks and several local level banks.

Consolidation would take place not only in the structure of the banks, but also in the case of

services. For instance, some banks would like to shed their non-core business portfolios to


others. This could see the emergence of niche players in different functional areas and business

segments such as housing, cards, mutual funds, insurance, sharing of their infrastructure

including ATM Network, etc Structure and ownership pattern would undergo changes. There

would be greater presence of international players in the Indian financial system. Similarly, some

of the Indian banks would become global players. Government is taking steps to reduce its

holdings in Public sector banks to 33%. However the indications are that their PSB character

may still be retained. According to Indian Bank’s Association Banking Industry Vision 2010,

Mergers and acquisitions would gather momentum as managements will strive to meet the

expectations of stakeholders. This could see the emergence of 4-5 world class Indian Banks. As

Banks seek niche areas, we could see emergence of some national banks of global scale and a

number of regional players53.

• The Union Finance Minister, P.Chidambaram gave inklings of the government’s Stance

on mergers in the banking sector when he stated in December 2004, “The government

would encourage consolidation among banks in order to make them globally competitive.

The Government will not force consolidation, but if two banks want to consolidate, we

would encourage them. We will encourage them if it helps bank grow in size, Scale and

muscle so that they can compete globally”. The finance minister said the banking sector

displayed a high degree of fragmentation with the market share of the top five banks in

India at 41.5 per cent against 75 per cent in China54. “A fragmented banking sector is the

antithesis of a profitable banking sector,” he added. India has 19 government owned

banks and around 30 privately-owned banks. “With the entry of new private sector banks,

the banking sector has become even more fragmented in the reform years since 1992.

Public sector banks need to consolidate amongst themselves and with private-sector

banks to survive increasing competition,” Chidambaram said.

53

www.pccoepune.com/Spandan2009/FINAL.../mba%20report.pdf 54

http://www.financialexpress.com/news/risk-mgmt-of-indian-banks-better-than-chinas/178556/


PROCEDURE FOR AMALGAMATION OF BANKING COMPANIES:

Sec. 44A of the Banking Regulation Act, 1949, deals with the procedure for amalgamation of

banking companies. This procedure is discussed hereunder55:

1. No banking company shall be amalgamated with another banking company, unless the

shareholders of both the banking companies approve merger scheme in a meeting called

for the purpose by a majority in number representing two-thirds in value of the

shareholders of each of the said company.

2. The approved scheme of amalgamation shall be sent to RBI for its approval.

3. Any shareholder who has voted against the scheme of merger or has given notice in

writing at or prior to the meeting shall be entitled to claim from banking company the

value of the shares held by him as determined by the RBI while approving the scheme.

4. Once the scheme of amalgamation is sanctioned by the RBI, the property and the

liabilities of the amalgamated company shall become the property and the liabilities of

the acquiring company.

5. After sanctioning the scheme of amalgamation by the RBI, the RBI may further order the

closure of acquired bank and the acquired bank stands dissolved from such a data as may

be specified.

55

http://www.lawyersclubindia.com/section/-Procedure-for-amalgamation-of-banking-companies-/1984/


CHAPTER-XIV

RELEVANT COMMITTEES

The reports of three committees appointed by the RBI are relevant in relation to the restructuring

of Banks. These are: Report of the Narasimham Committee on Banking Sector Reforms, Report

of the Working Group for Harmonizing the Role and Operations of DFIs and Banks, and the

Report of the Working Group on Restructuring of Weak Public Sector Banks. If we study these

three reports we can get a good idea of the trends and future of Bank restructuring in India.

1. NARASIMHAM COMMITTEE56

The Narasimham Committee on Banking Sector Reform was set up in December, 1997. This

Committee’s terms of reference include; review of progress in reforms in the banking sector over

the past six years, charting of a programme of banking sector reforms required making the Indian

banking system more robust and internationally competitive and framing of detailed

recommendations in regard to banking policy covering institutional, supervisory, legislative and

technological dimensions. The Committee submitted its report on 23 April, 1998 with the

following suggestions:

� Merger with strong banks, but not with the weak.

� Two or three banks with international orientation, eight to 10 national banks and a large

number of local banks.

� Rehabilitate weak banks with the introduction of narrow banking.

� Confine small, local banks to States or a cluster of Districts.

� Review the RBI Act, the Banking Regulation Act, the Nationalization Act and the State

Bank of India Act.

� Speed up computerization of public sector banks.

� Review the recruitment procedures, and the training and remuneration policies of PSU

banks.

� Depoliticisation of appointments of the bank CEOs and professionalization of the bank

Boards.

56

http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/24157.pdf


� Strengthen the legal framework to accelerate credit recovery.

� Increase capital adequacy to match the enhanced banking risk.

� Budgetary support non-viable for recapitalization.

� No alternative to the asset reconstruction fund.

2. KHAN GROUP57

:

The Group was set up by the RBI in December, 1997, under the Chairmanship of Shri S.H.

Khan, the then Chairman of IDBI. The Group was to review the role and structure of the

Developmental Financial Institutions and the Commercial Banks in the emerging environment,

and to recommend measures to achieve coordination and harmonization of Lending policies of

financial institutions before they move towards Universal Banking. Some of the

recommendations of this Group are given below58:

� A progressive move towards universal banking and the development of an enabling

regulatory framework for the purpose.

� A full banking license may be eventually granted to DFIs. In the interim, DFIs may be

permitted to have a banking subsidiary (with holdings up to 100 percent), while the DFIs

themselves may continue to play their existing role.

� The appropriate corporate structure of universal banking should be an internal

management/shareholder decision and should not be imposed by the regulator.

� Management and shareholders of banks and DFIs should be permitted to explore and

enter into gainful mergers.

� The RBI/Government should provide an appropriate level of financial support in case

DFIs are required to assume any developmental obligations.

3. VERMA GROUP

The Reserve Bank of India set up a Working Group on Restructuring Weak Public Sector

Banks, under the Chairmanship of Shri M.S. Verma, former Chairman, State Bank of India, to

suggest the measures for revival of weak Public Sector Banks. The group has gone deep into the

57

http://www.rbi.org.in/Scripts/BS_ViewPublicationReport.aspx 58

http://www.business-standard.com/india/news/rbi-group-pens-conversion-terms-for-financial

institutions/152931/


issue and analyzed the problem fully and made specific suggestions. The summary report of this

is given in the appendix to this unit. This group has identified some core principles for

incorporation into the future restructuring strategies for weak banks. They are reproduced below

from the repor59t.

Future restructuring strategies for weak banks must incorporate the following core principles:

� Manageable Cost: The restructuring effort that is embarked upon has to be at the least

cost possible. However, the fact that injudiciously chosen lower cost alternatives may

lead to much higher costs in the long term must not be lost sight of.

� Least Possible Burden on the Public Exchequer: As far as practicable the cost of

restructuring must come out of the unit being restructured. Even if its contribution to the

cost of restructuring is not available upfront, it should be possible to recover this later,

out of the value that can be created by the restructuring. The need to minimise the burden

of such cost, preferably initially, but certainly finally is obvious and cannot be overstated.

Any plan for restructuring which does not clearly result in value addition at the end of the

exercise, is not worth attempting.

� All Concerned must Share Losses: The restructuring strategy as also the instruments

employed in the implementation of this strategy have to make a clear statement about the

manner in which the losses already incurred and to be incurred have to be shared. The

principle of sharing of losses will have to remain fully operative in both operational and

financial restructuring envisaged for a bank. Such a plan for sharing losses will include

reduction in staff as well as all other administrative cost of operations.

� Changes for Strong Internal Governance: The internal governance of the banks and their

operations at all levels has to be strengthened and fully sensitized to the needs of

protecting against all foreseeable future problems. Restructuring always involves some

amount of destabilization in the organization and during this period as also immediately

after it, management and all its operatives have to make sure that the intended benefits of

the restructuring plans are not allowed in any way to be frittered away or lost due to

delays and lack of diligence in its implementation.

59

www.teriin.org/dsds/dsds2002/speakers/Verma.htm


� Effective Monitoring and Timely Course Corrections: Individual restructuring plans are

to be implemented by the banks concerned internally and their success will depend upon

the quality of governance and organizational commitment to the proposed restructuring.

However, for a successful restructuring it is important that there is an independent agency

which will own it and in the process of driving it forth, constantly monitor its progress.

This role can be played by the owner but such an arrangement has limitations because of

the conflict of interests that are likely to arise in such cases and the lack of time and skill

for the job, which the owner may suffer from. It will be more so when the ownership of

the banks is with the government.

For obvious reasons, this responsibility cannot be given to the regulator either. The regulator will

no doubt have interest in the success of the restructuring programme but direct efforts on its part

to ensure its implementation could result in conflict of interests. The objective can, therefore, be

best achieved by an independent agency, which with the express consent of the owner shall have

full authority over the restructuring process and be in a position to effectively monitor its

progress. In this process, while this independent agency will monitor to ensure that the

restructuring process remains on course, wherever necessary it shall also take steps to facilitate

due implementation of the plan. Such steps by this agency may include devising corrective

measures and ensuring that the banks concerned adopt these measures.

� Ease of Implementation: Above all there must be an all-round consensus on the process

of restructuring, its modalities and timing. The process itself and all the attendant

instruments and instrumentalities will have to be simple and easy to employ.

While setting the core principles, which should govern any programme of bank restructuring is

not so difficult, deciding upon precise modalities of restructuring, is indeed, quite a vexatious

and difficult issue to settle. As can be learnt from international experiences various modalities

and quite a few variations of each of these modalities have been tried with varying degrees of

success. In their time and given socio-economic environment each of these options chosen had

good logic behind them. While, therefore, they have their applicability and merit these are

certainly not transplantable where the prevailing conditions are different.


CHAPTER-XV

CASE STUDIES

Three case studies of bank mergers would be discussed. They are:

1. Punjab National Bank (PNB) and New Bank of India (NBI)

2. ICICI Bank and Bank of Madura, and

3. ICICI Bank and ICICI Ltd.

The case of Punjab National Bank and New Bank of India is a case of two Public Sector Banks

merging together as a solution to protect a weak bank (New Bank of India) by merging with a

healthy bank (PNB).The case study of ICICI Bank and Bank of Madura is a representative case

of modern thinking in the banking industry, i.e., growth through the merger route. The merger of

ICICI Bank and ICICI Ltd is a case of a Developmental Financing Institution merging with a

Commercial Bank and emerging into a Universal Bank. The first case (PNB-NBI) reflects the

old thinking and the remaining two cases reflect new trends in the banking and financial services

sector. Let us now know more details about these cases:

� PUNJAB NATIONAL BANK AND NEW BANK OF INDIA MERGER:

In year 1970 fourteen banks including PNB were nationalized. In 1980 six more banks

including New Bank of India were nationalized. Both these banks were merged in 1993 by the

Central Government. The New Bank of India was incurring losses and by the year 1991-92,

its financial position had become so bad that its capital and deposits completely stood eroded.

Punjab National Bank commenced its operations on April 12,1895 from Lahore with an

authorized capital of Rs. 2 lakhs and working capital limit of Rs. 20,000/- . The Bank has

more than 100 years of history and has faced many financial and other crises in the Indian

financial system over these years60.

New Bank of India was a comparatively small bank among the nationalized banks. It had

around 600 branches all over the country with 12,400 employees and was having 2,500 crores

of deposits and advances Rs. 970 crores.

60

http://www.iilm.edu/files/merger%20&%20Acquisition%20in%20Banks.pdf


Whereas PNB was working with 3734 branches all over the country with total employees

numbered 71,650. It was having total deposits of Rs. 25,280 crore and advances of Rs. 12,078

crore.

This was the first case in the Indian History that one nationalized bank was merged with

another nationalized bank. The basic reasons for this merger were as follows:

� The New Bank of India was in loss consecutively for last three years when merger

took place on 4th September, 1993.

� Productivity per employee of New Bank of India was low.

� Work ethics of the union(s) workers was low.

� Only option left out was either liquidation or merger with another bank.

Since it was a small bank having its head office in Delhi and also with the similarities of work

culture of Punjab National Bank whose head office also happened to be in Delhi, Govt. of India

under recommendations of Narasimham Committee report decided to merge New Bank of India

with Punjab National Bank.

Financials of the PNB and NBI at the time of Merger (1992-93)61:

The PNB and NBI merger has not been a marriage of convenience. It had the seeds of long-term

detrimental effect to the health of PNB. The most ticklish problem which the amalgamated

entity faced was the complete absorption of the sizeable NBI workforce into its own work-

culture. The NBI was notorious for rampant indiscipline and intermittent dislocation of work due

to fierce inter-union rivalries.

61



� ICICI BANK AND BANK OF MADURA MERGER

Bank of Madura (BOM) was a profitable, well-capitalized, Indian private sector commercial

bank operating for over 57 years. The bank had an extensive network of 263 branches, with a

significant presence in the southern states of India. The bank had total assets of Rs. 39.88 billion

and deposits of Rs.33.95 billion as on September 30, 2000. The bank had a capital adequacy

ratio of 15.8% as on March 31, 2000. The Bank’s equity shares were listed on the Stock

Exchanges at Mumbai and Chennai and National Stock Exchange of India before its merger.

ICICI Bank then was one of the leading private sector banks in the country. ICICI Bank had

total assets of Rs. 120.63 billion and deposits of Rs. 97.28 billion as on September 30, 2000.

The bank’s capital adequacy ratio stood at 17.59% as on September 30, 2000. ICICI Bank was

India’s largest ATM provider with 546 ATMs as on June 30, 2001. The equity shares of the

bank were listed on the Stock Exchanges at Mumbai, Calcutta, Delhi, Chennai, Vadodara and

National Stock Exchange of India. ICICI Bank’s American Depository Shares were listed on the

New York Stock Exchange62.

In February 2000, ICICI Bank was one of the first few Indian banks to raise its capital through

American Depository Shares in the international market, and received an overwhelming

response for its issue of $ 175 million, with a total order of USD 2.2 billion. At the time of

filling the prospectus, with the US Securities and Exchange Commission, the Bank had

mentioned that the proceeds of the issue would be used to acquire a bank.

As on March 31, 2000, bank had a network of 81 branches, 16 extension counters and 175

ATMs. The capital adequacy ratio was at 19.64% of risk-weighted assets, a significant excess of

9 % over RBI Benchmark.

ICICI Bank was scouting for private banks for merger, with a view to expand its assets and client

base and geographical coverage. Though it had 21% of stake, the choice of Federal bank, was

not lucrative due to employee size (6600), per employee business was as low as Rs. 161 lakh and

a snail pace of technical up gradation. While, BOM had an attractive business per employee

figure of Rs. 202 lakh, a better technological edge and a vast base in southern India as compared

62



to Federal Bank. While all these factors sound good, a cultural integration was a tough task

ahead for ICICI Bank.

ICICI Bank had then announced a merger with the 57 year old BOM, with 263 branches, out of

which 82 of them were in rural areas, with most of them in southern India. As on the day of

announcement of merger (09-12-2000), Kotak Mahindra group was holding about 12% stake in

BOM, the Chairman BOM, Mr. K.M. Thaigarajan, along with his associates was holding about

26% stake, Spic group had about 4.7%, while LIC and UTI were having marginal holding. The

merger was supposed to enhance ICICI Bank’s hold on the south Indian market.

The swap ratio was approved in the ratio of 1:2- two shares of ICICI Bank for normal every one

share of BOM. The deal with BOM was likely to dilute the current equity capital by around 2%.

And the merger was expected to bring 20% gains in EPS of ICICI Bank and a decline in the

bank’s comfortable Capital Adequacy Ratio from 19.64% 17.6%.

Financials of ICICI Bank and Bank of Madura:

The scheme of amalgamation was expected to increase the equity base of ICICI Bank to Rs.

220.36 crore. ICICI Bank was to issue 235.4 lakh shares of Rs. 10 each to the shareholders of

BOM. The merged entity will have an increase of asset base over Rs. 160 billion and a deposit

base of Rs. 131 billion. The merged entity will have 360 branches across the country and also


enable ICICI Bank to serve a large customer base of 1.2 million customers of BOM through a

wider network, adding to the customer base to 2.7 million.

Some Issues of the Merger:-

The Board of Directors at ICICI Bank had contemplated the following synergies emerging from

the merger:

Financial Capability: The amalgamation will enable them to have a stronger financial

and operational structure, which is supposed to be capable of grater resource/deposit

mobilization. In addition to this, ICICI will emerge as one of the largest private sector

banks in the country.

Branch Network: The ICICI’s branch network would not only increase by 263. But also

increase its geographic coverage as well as convenience to its customers.

Customer Base: The emerged largest customer base will enable the ICICI Bank to offer

other banking and financial services and products to the erstwhile customers of BOM and

also facilitate cross selling of products and services of the ICICI group to their customers.

Tech Edge: The merger will enable ICICI Bank to provide ATM, phone and the Internet

banking and such other technology based financial services and products to a large

customer base, with expected savings in costs and operating expenses.

Focus on Priority Sector: The enhanced branch network will enable the bank to focus

on micro finance activities through self-help groups, in its priority sector initiatives

through its acquired 87 rural and 88 semi-urban branches.

Managing Rural Branches: Most of the branches of ICICI were in metros and major

cities, whereas BOM had its branches mostly in semi urban and city segments of south

India. The task ahead lying for the merged entity was to increase dramatically the

business mix of rural branches of BOM. On the other hand, due to geographic location of

its branches and level of competition, ICICI Bank will have a tough time to cope with.

Managing Software: Another task, which stands on the way, is technology. While ICICI

Bank, which is a fully automated entity, was using the package, banks 2000, BOM has

computerized 90% of its businesses and was conversant with ISBS software. The BOM

branches were supposed to switch over to banks 2000. Thought it is not a difficult task,


80% computer literate staff would need effective retraining which involves a cost. The

ICICI Bank needs to invest Rs.50 crores, for upgrading BOM’s 263 branches.

Managing Human Resources: One of the greatest challenges before ICICI Bank was

managing the human resources. When the head count of ICICI Bank is taken, it was less

than 1500 employees; on the other hand, BOM had over 2,500. The merged entity will

have about 4000 employees which will make it one of the largest banks among the new

generation private sector banks. The staff of ICICI Bank was drawn from 75 various

banks, mostly young qualified professionals with computer background and prefer to

work in metros or big cities with good remuneration packages.

Managing Client Base: The client base of ICICI Bank, after merger, will be as big as 2.7

million from its past 0.5 million, an accumulation of 2.2 million from BOM. The nature

and quality of clients is not uniform. The BOM has built up its client base over a long

time, in a hard way, on the basis of personalized services. In order to deal with the

BOM’s clientele, the ICICI Bank needs to redefine its strategies to suit to the new

clientele. If the sentiments or a relationship of small and medium borrowers is hurt; it

may be difficult for them to reestablish the relationship, which could also hamper the

image of the bank.

� ICICI LTD. AND ICICI BANK MERGER

The merger between ICICI Bank and ICICI Ltd. pioneered the concept of Universal Banking in

India. Taking the reverse merger route ICICI Ltd. Merged with its erstwhile subsidiary, ICICI

Bank. The swap ratio has been decided at 2:1 that is 1 share of ICICI Bank for every 2 shares

held in ICICI Ltd. It was also supposed to include merger of two ICICI subsidiaries, namely,

ICICI Personal Finance Services Limited and ICICI Capital Services Limited with ICICI Bank.

At the time of merger, ICICI Ltd was holding (held) 46 per cent stake in ICICI Bank. In the case

of merger, instead of extinguishing the shares, the company has decided to transfer the stake to a

Special Purpose Vehicle (SPV) to be created in the form of a trust. Post merger, this was to form

about more than 16 per cent of the total capital. This is an intelligent move by the company, as it

would serve many purposes63.

63

http://www.mckinsey.com/locations/india/mckinseyonindia/pdf/india_banking_2010.pdf


First of all it is not prudent to extinguish capital in a scenario where the cost of

raising capital itself is very high. Secondly, by doing so the bank would be able to safeguard its

capital adequacy ratio. Thirdly, the plan is to divest the stake to a strategic partner few years

down the line, which would fetch the bank considerable amount of cash. The shares would be

transferred to the SPV at the price at which ICICI bought the shares i.e. Rs 12 per share.

Reason for Merger:

Analysts say ICICI wanted to merge with its banking subsidiary to obtain cheaper funds for

lending, and to increase its appeal to investors so that it can raise capital needed to write off bad

loans.

This merger was basically a survival; more for ICICI, as its core business didn’t look too

good and they needed some kind of a bank because only a bank has access to low-cost funds.

Cheap Cash was another reason for merger.

Main Concerns:

� A major concern in the road ahead to the merger was the reserve requirement that

a bank was supposed to maintain. At that time these requirements were not

applicable to ICICI Ltd. A bank has to maintain a Cash Reserve Ratio of 5.5 per

cent with RBI and Statutory Liquidity Ratio of 25 per cent. ICICI required a total

of Rs.18, 000 crore to fulfill this requirement. This was a huge amount and given

the scenario of that time and it was difficult for the institutions to raise such an

amount. The group planned to raise the required funds partly through ICICI and

partly through ICICI Bank64.

� Another issue was of fulfilling the priority sector lending requirement. This

requirement at the time of merger was at 40 per cent i.e. 40 per cent of the lending

was to be made to priority sectors.

Benefit to the Players:

� The main objective of adopting the path of Universal Banking is that financial

institutions are finding it increasingly hard to survive in a scenario of high cost of

64

ibid


borrowing and decreasing spread with interest rates going down. Cost of

borrowing for a financial institution through bonds is much higher than a bank,

which can raise current and saving deposits. As per regulations, financial

institutions cannot raise these deposits. Post merger it would be possible to do so.

� Also increasing disintermediation had made things increasingly difficult for ICICI

Ltd. Some of the customers of ICICI Ltd. were in a position to access funds at

much lower cost than from ICICI Ltd. and ICICI Ltd. could not afford to lend at

that rate as its own cost of funds was high. Once converted into a bank, its access

to cheap funds would enable it to lend at competitive rates.

� ICICI Ltd. as a combined entity would be better equipped to handle issues arising

from potential asset liability mismatches due to more stable deposit base.

� Post merger ICICI Bank would be able to significantly enhance its fee based

income based on the strength of its balance sheet. Before the merger, ICICI Ltd.

could not carry out certain activities as it was not a bank and therefore loses out

on the fee based income. ICICI Bank on the other hand was constrained because

of the limited size of its balance sheet. The sheer size of the balance sheet post

merger would boost the fee based income.

� The high margin retail loan portfolio before the merger was with the various

subsidiaries. Post merger this was to be transferred to ICICI Bank.

The Negative Side of the Merger:

� The assets quality of ICICI Bank, which has been its major strength, would be

affected post merger. ICICI Ltd. had NPAs of 5.2 per cent for FY01 as against

ICICI Bank’s NPAs of 1.4 per cent.

� Before the merger, ICICI Ltd. could claim a deduction upto 40 per cent of its

profits from its long term lending by transferring the amount to special reserve.

Post merger, this benefit was to stand withdrawn in the case of incremental loans.

� Average cost of borrowing for ICICI Ltd. for financial year 2001 was 11.71 per

cent. Its Gross yield was 13.54 per cent for the same period. Either way ICICI

Ltd. would have to take a hit in the bottom-line in the initial years.


� By bringing down its loan portfolio and diverting these funds for the reserve

requirement it would have to forego some of the interest spread.

� CRR would get a return of 6.5 per cent and amount in SLR would generate a

return of about 9.5 per cent. Even in the case of fresh funds the cost of borrowing

would be higher and the return on those funds would be less.

Some Financial Parameters at the time of Merger:

ICICI group has pioneered the concept of universal banking in India. The concept of universal

banking has found favour with many global players. Some of the international players, which

have realized the benefits of universal banking, are ABN-AMRO, Citigroup, HSBC, UBS etc.

No doubt in the times to come the benefits of this will start flowing in.


CHAPTER-XVI

GOVERNMENT STANDING

The Government's position is that it would not oppose any voluntary mergers of public sector

banks. The ground reality is that proposals for consolidation are scuttled by political pressures

and the unions, in the absence of proactive measures by the Central Government.

The patriarchal stance of the government that it would bless mergers based on synergies is

unlikely to yield any meaningful results. Furthermore, the government's view that the 19

nationalized banks could be merged into eight or 10 banks appears to be an ex cathedra

judgment, not backed by any concrete examination.

The Government faces a contretemps. Successive governments, of different hues,

have contributed to a political consensus that any reduction in the 51 per cent minimum

government ownership is just not negotiable. As such, the recommendation of Narasimham

Committee II (1998) reiterated by the Committee on Fuller Capital Account Convertibility

(2006) that government ownership be reduced to a minimum of 33 per cent is just not on the

cards65.

Yet, Government spokespersons, from time to time, give assurances on

implementation of the Percy Mistry Committee Report (which recommended that government

completely give up its ownership of banks by 2014) and the Raghuram Rajan Committee

Report (which recommended that government give up its ownership in at least a few public

sector banks). This leads to the inevitable conclusion that apart from lip service, no concrete

steps would be taken to consolidate public sector banks.

The novel and pragmatic recommendation by Dr C. Rangarajan, that the minimum 51 per cent

Government ownership stipulation should be amended to include holdings in these banks by

public sector units which are meant to remain in the public sector, such as LIC, ONGC, and IOC,

has also not found favour with the Government. Such an amendment would have at least eased

the financial burden on the Government. 65

http://www.fsunion.org.au/Upload/Policies%20and%20Submissions/FSU_supplementary_Senate_Bank_mergers

_Inquiry_Final.pdf


At present, there is financial pressure on the fisc to meet the capital requirements of

public sector. banks. To alleviate this financial pressure, a World Bank loan has been taken. This

is clearly a false start. The banks could have directly raised money abroad at lower rates of

interest and the government could have borrowed in the domestic market to meet the enhanced

capital requirements of banks.

While it is assured that the borrowing from the World Bank will not alter the sanctity of the 51

per cent minimum government ownership rule, the casualty could be giving up of the sound

principle of reciprocity in granting banking licenses to foreign banks.

SOLUTION:

The government should set up a high-level Banking Consolidation Commission with specified

powers to merge strong public sector banks. The commission should have a transparent mandate

endorsed by Parliament. The merger process could be undertaken after approval by the non-

government shareholders of the banks concerned and the commission should carry the system

along by giving due attention to the interests of employees and depositors. It should be ensured

that such mergers are only undertaken when one plus one is greater than two.

There are certain prerequisites that should be met before undertaking such meaningful mergers.

• First, the Government, as majority owner, should restrict itself to proprietary interests and

not get into regulatory functions.

• Second, the bank boards should be made accountable, and there should be no back-seat

driving by the government or the RBI. Independent directors on the boards should be

appointed by the bank boards, and government and RBI nominees should be withdrawn.

There is already a move to assign to the boards of public sector units the task of

appointing independent directors; this practice should also be extended to public sector

banks.

• Third, the system of appointment of top management of banks should be totally

revamped and the Banking Commission should be the final authority for making these

appointments.


• Fourth, the salary structure of each public sector bank should be determined by each bank

taking into account the bank's productivity and profits.

• Fifth, to the extent the government wishes to hold on to 51 per cent ownership, it should

pump capital only into well-performing banks. Injecting capital into the relatively weaker

banks is a doomed policy. Banks which are relatively weak and short of capital should

not be allowed to grow.


CHAPTER-XVII

CONCLUSION

If the Government does not take hard decisions, the Indian banking system will continue to

remain weak. We should not be carried away by macho spirits claiming that the Indian banking

system is the strongest in the world.

It may be recalled that the Narasimham Committee, which went into the whole gamut

of financial sec reforms, has suggested the appointment of a banking commission to draw up a

suitable pattern of consolidation of the banking sector. While most of the recommendations of

the Committee have been implemented, that of appointing the banking commission remains yet

to be considered

For strengthening the competitive power of Indian banks vis-à-vis the foreign

banks, there is a need to hive off the rural branches into a separate, professionally managed rural

bank, amalgamating the rural branches of all public sector banks. It is time that a banking

commission is appointed to formulate a roadmap for the banking sector, instead of making any

ad hoc amalgamations of banks in a hurry.

“MERGERS AND ACQUISITIONS IN THE BANKING SECTOR ARE GOING TO

BE THE ORDER OF THE DAY. INDIA IS SLOWLY BUT SURELY MOVING FROM

A REGIME OF `LARGE NUMBER OF SMALL BANKS’ TO `SMALL NUMBER

OF LARGE BANKS'. THE NEW ERA IN BANKING IN INDIA IS GOING TO BE

ONE OF CONSOLIDATION AROUND IDENTIFIED CORE COMPETENCIES. IT

MAY BE BEST TO LAY DOWN SIMPLE LAWS FOR MERGERS AND

ACQUISITIONS WITH THE RBI KEPT OUT OF THE ACTION.”


BIBLIOGRAPHY

WEBSITES

∂ http://www.computereconomics.com

∂ http://www.hhs.state.tx.us

∂ http://economics.about.com/od/globalizationtrade/l/aaglobalization.htm

∂ http://www.investopedia.com/university/mergers

∂ http://www.economywatch.com/mergers-acquisitions/benefits.html

∂ www.thinkingmanagers.com/management/takeovers.php

∂ www.coolavenues.com/know/fin/arindam_1.php

∂ www.india-reports.com/RNCOS/banking.aspx

∂ http://www.researchandmarkets.com/reports/4020/indian_banking_industry

∂ http://www.studentsguide.in/careers-in-banking-finance-insurance/scheduled-banks-non-

scheduled-banks.html

∂ http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=A%20Profile%20of%20Ban

ks

∂ www.imi.edu/MDP/December7-8,2009.pdf

∂ www.icwai.org/icwai/knowledgebank/fm34.pdf

∂ http://www.learnmergers.com/

∂ http://law.jrank.org/pages/8543/Mergers-Acquisitions-Types-Mergers.html

∂ http://www.wisegeek.com/what-is-a-conglomerate-merger.htm

∂ www.investorwords.com/80/acquisition.html

∂ www.investorwords.com/4868/takeover.htm

∂ http://www.experiencefestival.com/mergers_and_acquisitions_-_motives_behind_mampa

∂ http://www.lib.washington.edu/business/guides/mergers.html

∂ http://finance.mapsofworld.com/merger-acquisition/bank/

∂ http://library.thinkquest.org/C007226F/NoPop/history/sidenotes/cons/bocon.htm

∂ http://www.uow.edu.au/~bmartin/dissent/documents/health/citigrp_after98.html

∂ http://www.hostseeq.com/business/bank-of-america.htm

∂ www.researchsea.com


NEWSPAPERS

∂ www.thehindubusinessline.com/.../2009100751170600.htm

∂ http://www.hinduonnet.com/businessline/2001/01/27/stories/042708ma.htm

∂ http://www.business-standard.com/india/news/govt.htm

BOOKS

∂ jayshree bose(2008) bank mergers-the indian scenario ICFAI

∂ H R Machiraju (2008) Mergers, Acuisitions and takeovers new age international

∂ william J carney (2007) mergers & acuisitions: the essentials Aspen Publishers INC

∂ Amihud, Yakov; Miller, Geoffrey (1997) Bank Mergers & Acquisitions.The New York

University Salomon Center Series on Financial Markets and Institutions

Date post:	02-Apr-2015
Category:	Documents
Upload:	ajayajay83
View:	371 times
Download:	5 times

Scope of mergers in banking industry

Documents