mergers and acquisitions lekha

Mergers And Acquisitions of Banking Sector

MERGERS AND ACQUISITIONS OF INDIAN

BANKING SECTOR

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INTRODUCTION

We have been learning about the companies coming together to from another

company and companies taking over the existing companies to expand their

business. With recession taking toll of many Indian business and the feelings of

insecurity surging over our businessmen, it is not surprising when we hear about

the immense numbers of corporate restructuring taking place, especially in the

last couple of years. Several companies have been taken over and several

have undergone internal restructuring, whereas certain companies in the same

field of business have found it beneficial to merge together into one company.

All our daily newspapers are filled with cases of mergers, acquisitions, spin-

offs, tender offers, & other forms of corporate restructuring. Thus

important issues both for business decision and public policy

formulation have been raised. No firm is regarded safe from a takeover

possibility. On the more positives idea Mergers & Acquisitions may be critical

for the healthy expansion and growth of the firm. Successful entry into new

product and geographical markets may require Mergers & Acquisition’s at some

stage in the firm’s development. Successful competition in international markets

may depend on capabilities obtained in a timely and efficient fashion through

Mergers and Acquisitions.

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To opt for a merger or not is a complex affair, especially in terms of the

technicalities involved. We have discussed almost all factors that the

management may have to look into before going for merger.

Considerable amount of brainstorming would be required by the managements

to reach a conclusion. E.g. A due diligence report would clearly identify the

status of the company in respect of the financial position along with the net

worth and pending legal matters and details about various contingent liabilities.

Decision has to be taken after having discussed the pros & cons of the proposed

merger & the impact of the same on the business, administrative costs benefits,

addition to shareholder’s value, tax implications including stamp duty and last

but not the least also on the employees of the Transferor or Transferee

Company.

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1.1 WHAT IS MERGER ?

Merger is defined as combination of two or more companies into a single

company where one survive and the others lose their corporate existence. The

survivor acquires all the assets as well as liabilities of the merged company or

companies. Generally, he surviving company is the buyer, which retains its

identify, and the extinguished company is the seller. Merger is also defined as

amalgamation. Merger is the fusion of two or more existing companies. All

assets, liabilities and the stock stand transferred to transferee company in

consideration of payment in the form of:

Equity shares in the transferee company,

Debentures in the transferee company,

Cash, or

A mix of the above modes.

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1.2 WHAT IS ACQUISITION?

Acquisition in general sense is acquiring the ownership in the property. In the

context of business combinations, an acquisition is the purchase by one

company of a controlling interest in the share capital of another existing

company.

Methods of Acquisition:

An acquisition may be affected by

a) Agreement with the persons holding majority interest in the

company management like members of the board or major shareholders

commanding majority of voting power;

b) Purchase of shares in open market;

c) To make takeover offer to the general body of shareholders;

d) Purchase of new shares by private treaty;

e) Acquisition of share capital through the following forms of considerations

viz. Means of cash, issuance of loan capital, or insurance of share capital.

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Takeover:

A ‘takeover’ is acquisition and both the terms are used inter changeably.

Takeover differs from merger in approach to business combinations i.e. The

process of takeover, transaction involved in takeover, determination of share

exchange or cash price and the fulfillment of goals of combination all are

different in takeovers than in mergers. For example, process of takeover is

unilateral and the offer or company decides about the maximum price.

Time taken in completion of transaction is less in takeover than in mergers,

top management of the offeree company being more co-operative.

DE-MERGER OR CORPORATE SPLITS OR DIVISION:

De-merger or split or divisions of a company are the synonymous terms

signifying a movement in the company.

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1.3 PURPOSE OF THE MERGER AND ACQUISITION

The purpose for an offer or company for acquiring another company shall be

reflected in the corporate objectives. It has to decide the specific objectives to

be achieved through acquisition. The basic purpose of merger or business

combination is to achieve faster growth of the corporate business. Faster growth

may be had through product improvement and competitive position. Other

possible purposes for acquisition are short listed below: -

(1) Procurement of supplies:

To safeguard the source of supplies of raw materials or intermediary

product;

To obtain economies of purchase in the form of discount,

savings in transportation costs, overhead costs in buying department, etc.;

To share the benefits of suppliers economies by standardizing the

materials.

(2) Revamping production facilities:

To achieve economies of scale by amalgamating production facilities

through more intensive utilization of plant and resources;

To standardize product specifications, improvement of quality of product,

expanding Market and aiming at consumers satisfaction through

strengthening after sale Services;

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To obtain improved production technology and know-how from the

offered company

To reduce cost, improve quality and produce competitive products to

retain and Improve market share.

(3) Market expansion and strategy:

To eliminate competition and protect existing market;

To obtain a new market outlets in possession of the offeree;

To obtain new product for diversification or substitution of existing

products and to enhance the product range;

Strengthening retain outlets and sale the goods to rationalize distribution;

To reduce advertising cost and improve public image of the

offeree company;

Strategic control of patents and copyrights.

(4) Financial strength:

To improve liquidity and have direct access to cash resource;

To dispose of surplus and outdated assets for cash out of combined

enterprise;

To enhance gearing capacity, Bank of Rajasthan row on better strength

and the greater assets backing;

To avail tax benefits;

To improve EPS (Earning per Share).

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(5) General gains:

To improve its own image and attract superior managerial talents to

manage its affairs;

To offer better satisfaction to consumers or users of the product.

(6) Own developmental plans:

The purpose of acquisition is backed by the offer or company’s own

developmental plans.

A company thinks in terms of acquiring the other company only when

it has arrived at its own development plan to expand its operation having

examined its own internal strength where it might not have any problem of

taxation, accounting, valuation, etc. but might feel resource constraints with

limitations of funds and lack of skill managerial personnel’s. It has to aim at

suitable combination where it could have opportunities to supplement its funds

by issuance of securities, secure additional financial facilities, eliminate

competition and strengthen its market position.

(7) Strategic purpose:

The Acquire Company view the merger to achieve strategic objectives through

alternative type of combinations which may be horizontal, vertical, product

expansion, market extensional or other specified unrelated Objectives

depending upon the corporate strategies.

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Thus, various types of combinations distinct with each other in nature are

adopted to pursue this objective of horizontal combination.

(8) Corporate friendliness:

Although it is rare but it is true that business houses exhibit degrees of co-

operative spirit despite competitiveness in providing rescues to each other from

hostile takeovers and cultivate situations of colla Bank of Rajasthan nations

sharing goodwill combinations. He combining corporate aim at circular

combinations by pursuing the objective.

(9) Desired level of integration:

Mergers and acquisitions are pursued to obtain the desired level of integration

between the two combining business houses. Such integration could be

operational or financial. This gives birth to conglomerate combinations. The

purpose and the requirements of the offer or company go a long way in

selecting a suitable partner for merger or acquisition in business combinations.

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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 India. 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 System:-

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.

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Scheduled and non Scheduled Banks:-

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

rural banks. In Co-operative 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.

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.

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TYPES OF MERGERS

Merger or acquisition depends upon the purpose of the offer or company it

wants to achieve. Based on the offer or’s objective profile, combination could

be vertical, horizontal, circular and conglomeratic as precisely described below

with reference to the purpose in view of the offer or company.

(A) Vertical combination:

A company would like to takeover another company or seek its merger with that

company to expand espousing backward integration to assimilate the resources

of supply and forward integration towards market outlets. The acquiring

company through merger of another unit attempts on reduction of inventories of

raw material and finished goods, implements its production plans as per the

objectives and economizes on working capital investments. In other words, in

vertical combinations, the merging undertaking would be either a supplier or a

buyer using its product as intermediary material for final production.

The following main benefits accrue from the vertical combination to the

acquirer company i.e.

1. It gains a strong position because of imperfect market of the intermediary

products, scarcity of resources and purchased products;

2. Has control over products specifications.

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(B) Horizontal combination:

It is a merger of two competing firms which are at the same stage of industrial

process. The acquiring firm belongs to the same industry as the target

company. The mail purpose of such mergers is to obtain economies of scale in

production by eliminating duplication of facilities and the operations

and broadening the product line, reduction in investment in working

capital, elimination in competition concentration in product, reduction in

advertising costs, increase in market segments and exercise better control on

market.

(C) Circular combination:

Companies producing distinct products seek amalgamation to share common

distribution and research facilities to obtain economies by elimination of cost on

duplication and promoting market enlargement. The acquiring company obtains

benefits in the form of economies of resource sharing and diversification.

(D) Conglomerate combination:

It is amalgamation of two companies engaged in unrelated industries like DCM

and Modi Industries. The basic purpose of such amalgamations remains

utilization of financial resources and enlarges debt capacity through re-

organizing their financial structure so as to service the shareholders by

increased leveraging and EPS, lowering average cost of capital and thereby

raising present worth of the outstanding shares.

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3.1 DIFFERENCE BETWEEN MERGERS AND AQUISITION

Merger Acquisition

The case when two companies (often

of same size) decide to move forward

as a single new company instead of

operating business separately.

The case when one company takes

over another and establishes itself as

the new owner of the business.

The stock of both the companies are

surrendered while new stock are

issued afresh.

The buyer company “swallows” the

business of the target company, which

ceases to exist.

For example, Glaxo Wellcome and

SmithKline Beecham ceased to exist

and merged to become a new

company, known as Glaxo

SmithKline.

Dr. Reddy Labs acquired Betapharm

through an agreement amounting

$597 million.

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3.2 POSSIBLE IMPACT OF MERGERS AND ACQUISITIONS

Impacts on Employees

Mergers and acquisitions may have great economic impact on the employees of

the organization. In fact, mergers and acquisitions could be pretty difficult for

the employees as there could always be the possibility of layoffs after any

merger or acquisition. If the merged company is pretty sufficient in terms of

business capabilities, it doesn't need the same amount of employees that it

previously had to do the same amount of business. Due to the changes in the

operating environment and business procedures, employees may also suffer

from emotional and physical problems.

Impact on Management

The percentage of job loss may be higher in the management level than the

general employees. The reason behind this is the corporate culture clash. Due to

change in corporate culture of the organization, many managerial level

professionals, on behalf of their superiors, need to implement the

corporate policies that they might not agree with. It involves high level of stress.

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Impact on Shareholders

Impact of mergers and acquisitions also include some economic impact on the

shareholders. If it is a purchase, the shareholders of the acquired company get

highly benefited from the acquisition as the acquiring company pays a hefty

amount for the acquisition. On the other hand, the shareholders of the acquiring

company suffer some losses after the acquisition due to the acquisition premium

and augmented debt load.

Impact on Competition

Mergers and acquisitions have different impact as far as market competitions

are concerned. Different industry has different level of competitions after the

mergers and acquisitions. For example, the competition in the financial services

industry is relatively constant. On the other hand, change of powers can also be

observed among the market players.

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3.3 ADVANTAGES OF MERGERS

Mergers and takeovers are permanent form of combinations which vest in

management complete control and provide centralized administration which are

not available in combination of holding company and its partly owned

subsidiary. Shareholders in the selling company gain from the merger and

takeovers as the premium offered to induce acceptance of the merger or

takeover offers much more price than the book value of shares. Shareholders in

the buying company gain in the long run with the growth of the company not

only due to synergy but also due to “boots trapping earnings”.

Mergers and acquisitions are caused with the support of shareholders,

manager’s ad promoters of the combing companies. The factors, which motivate

the shareholders and managers to lend support to these combinations and

the resultant consequences they have to bear, are briefly noted below

based on the research work by various scholars globally.

(1) From the standpoint of shareholders

Investment made by shareholders in the companies should enhance in value.

The sale of shares from one company’s shareholders to another and holding

investment in shares should give rise to greater values i.e. The opportunity gains

in alternative investments. Shareholders may gain from merger in different

ways viz. From the gains and achievements of the company i.e. through

(a)Realization of monopoly profits;

(b)Economies of scales;

(c)Diversification of product line;

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(d)Acquisition of human assets and other resources not available otherwise;

( e ) Better investment opportunity in combinations

One or more features would generally be available in each merger where

shareholders may have attraction and favor merger.

(2)From the standpoint of managers

Managers are concerned with improving operations of the company, managing

the affairs of the company effectively for all round gains and growth of the

company which will provide them better deals in raising their status, perks and

fringe benefits. Mergers where all these things are the guaranteed outcome get

support from the managers. At the same time, where managers have fear of

displacement at the hands of new management in amalgamated company and

also resultant depreciation from the merger then support from them becomes

difficult.

(3) Promoter’s gains

Mergers do offer to company promoters the advantage of increasing the size of

their company and the financial structure and strength. They can convert a

closely held and private limited company into a public company without

contributing much wealth and without losing control.

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4) Benefits to general public

Impact of mergers on general public could be viewed as aspect of benefits and c

osts to:

(a) Consumers

The economic gains realized from mergers are passed on to consumers in the

form of lower prices and better quality of the product which directly raise their

standard of living and quality of life. The balance of benefits in favour of

consumers will depend upon the fact whether or not the mergers increase or

decrease competitive economic and productive activity which directly affects

thedegree of welfare of the consumers through changes in price level, quality of

products, after sales service, etc.

(b) Workers community

The merger or acquisition of a company by a conglomerate or other acquiring

company may have the effect on both the sides of increasing the welfare in the

form of purchasing power and other miseries of life. Two sides of the impact

as discussed by the researchers and academicians are:

firstly, mergers with cash payment to shareholders provide opportunities for

them to invest this money in other companies which will generate further

employment and growth to uplift of the economy in general. Secondly, any

restrictions placed on such mergers will decrease the growth and investment

activity with corresponding decrease in employment.

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Both workers and communities will suffer on lessening job Opportunities,

preventing the distribution of benefits resulting from diversification of

production activity.

(c) General public

Mergers result into centralized concentrate of power. Economic power is to be

understood as the ability to control prices and industries output as

monopolists. Such monopolists affect social and political environment to till

everything in their favour to maintain their power ad expand their business

empire. These advances result into economic exploitation.

But in a free economy a monopolist does not stay for a longer period as other

companies enter into the field to reap the benefits of higher prices set in by the

monopolist. Every merger of two or more companies has to be viewed from

different angles in the business practices which protects the interest of the

shareholders in the merging company and also serves the national purpose to

add to the welfare of the employees, consumers and does not create hindrance in

administration of the Government polices.

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REGULATIONS OF MERGER AND ACQUISTIONS

Mergers and acquisitions are regulated under various laws in India. The

objective of the laws is to make these deals transparent and protect the interest

of all shareholders. They are regulated through the provisions of:-

The Companies Act, 1956

The Act lays down the legal procedures for mergers or acquisitions:-

Permission for merger :- Two or more companies can amalgamate only

when the amalgamation is permitted under their memorandum of

association. Also, the acquiring company should have the permission in

its object clause to carry on the business of the acquired company. In the

absence of these provisions in the memorandum of association, it is

necessary to seek the permission of the shareholders, board of directors

and the Company Law Board before affecting the merger.

Information to the stock exchange : - The acquiring and the acquired

companies should inform the stock exchanges (where they are listed)

about the merger.

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Approval of board of directors: - The board of directors of the

individual companies should approve the draft proposal for

amalgamation and authorize the managements of the companies to further

pursue the proposal.

Application in the High Court: - An application for approving the draft

amalgamation proposal duly approved by the board of directors of the

individual companies should be made to the High Court.

Shareholders' and creators' meetings: - The individual companies should

hold separate meetings of their shareholders and creditors for approving

the amalgamation scheme. At least, 75 percent of shareholders

and creditors in separate meeting, voting in person or by proxy, must

accord their approval to the scheme.

Sanction by the High Court: - After the approval of the shareholders

and creditors, on the petitions of the companies, the High Court will pass

an order, sanctioning the amalgamation scheme after it is satisfied that the

scheme is fair and reasonable. The date of the court's hearing will be

published in two newspapers, and also, the regional director of the

Company Law Board will be intimated.

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Filing of the Court order: After the Court order, its certified true copies

will be filed with the Registrar of Companies.

Transfer of assets and liabilities : - The assets and liabilities of the

acquired company will be transferred to the acquiring company in

accordance with the approved scheme, with effect from the specified

date.

Payment by cash or securities :- As per the proposal, the acquiring

company will exchange shares and debentures and/or cash for the shares

and debentures of the acquired company. These securities will be listed

on the stock exchange.

The Competition Act, 2002

The Act regulates the various forms of business combinations

through Competition. Under the Act, no person or enterprise shall enter into a

combination, in the form of an acquisition, merger or amalgamation, which

causes or is likely to cause an appreciable adverse effect on competition in the

relevant market and such a combination shall be void. Enterprises intending to

enter into a combination may give notice to the Commission, but this

notification is voluntary. But, all combinations do not call for scrutiny unless

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the resulting combination exceeds the thresh old limits in terms of assets or

turnover as specified by the Competition Commission of India.

The Commission while regulating a 'combination' shall consider the following

factors:-

• Actual and potential competition through imports;

• Extent of entry barriers into the market;

• Level of combination in the market;

• Degree of countervailing power in the market;

• Possibility of the combination to significantly and substantially increase

prices or profits;

• Extent of effective competition likely to sustain in a market;

• Availability of substitutes before and after the combination;

• Market share of the parties to the combination individually and as a

combination;

• Possibility of the combination to remove the vigorous and effective competitor

or competition in the market;

• Nature and extent of vertical integration in the market;

• Nature and extent of innovation;

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• Whether the benefits of the combinations outweigh the adverse impact of the

combination.

Thus, the Competition Act does not seek to eliminate combinations and only

aims to eliminate their harmful effects.

4.1 PROCEDURE OF MERGERS & ACQUISITIONS

Public announcement:

To make a public announcement an acquirer shall follow the following

procedure:

1. Appointment of merchant banker :

The acquirer shall appoint a merchant banker registered as category – I with

SEBI to advise him on the acquisition and to make a public announcement of

offer on his behalf.

2. Use of media for announcement :

Public announcement shall be made at least in one national English daily one

Hindi daily a done regional language daily newspaper of that place where the

shares of that company are listed and traded.

3. Timings of announcement:

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Public announcement should be made within four days of finalization of

negotiations or entering into any agreement or memorandum of understanding

to acquire the shares or the voting rights.

4. Contents of announcement:

Public announcement of offer is mandatory as required under the SEBI

Regulations.

(1)Paid up share capital of the target company, the number of fully paid up

and partially paid up shares.

( 2 ) Total number and percentage of shares proposed to be acquired from public

subject to minimum as specified in the sub-regulation (1) of Regulation 21 that

is:

a)The public offer of minimum 20% of voting capital of the company to the

shareholders;

b)The public offer by a raider shall not be less than 10% but more than 51%

of shares of voting rights. Additional shares can be had @ 2% of voting rights

in any year.

(3)The minimum offer price for each fully paid up or partly paid up share;

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( 4 ) Mode of payment of consideration;

(5) The identity of the acquirer and in case the acquirer is a company, the

identity of the promoters and, or the persons having control over such company

and the group, if any, to which the company belong;

( 6 ) The existing holding, if any, of the acquirer in the shares of the target

company, including holding of persons acting in concert with him;

(7) Salient features of the agreement, if any, such as the date, the name of the

seller, the price at which the shares are being acquired, the manner of payment

of the consideration and the number and percentage of shares in respect of

which the acquirer had entered into the agreement to acquirer the shares or the

consideration, monetary or otherwise, for the acquisition of control over the

target company, as the case may be;

(8)The highest and the average paid by the acquirer or persons acting in concert

with him for acquisition, if any, of shares of the target company made

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by him during the twelve month period prior to the date of the public

announcement;

( 9 ) Objects and purpose of the acquisition of the shares and the future plans of

the acquirer for the target company, including disclosers whether the acquirer

proposes to dispose of or otherwise encumber any assets of the target

company:

Provided that where the future plans are set out, the public

announcement shall also set out how the acquirers propose to implement such

future plans;

(10)The ‘specified date’ as mentioned in regulation 19;

(11)The date by which individual letters of offer would be posted to each of the

shareholders;

(12)The date of opening and closure of the offer and the manner in which and

the date by which the acceptance or rejection of the offer would be

communicated to the shareholders;

(13)The date by which the payment of consideration would be made for the

shares in respect of which the offer has been accepted;

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(14) Disclosure to the effect that firm arrangement for financial resources

required to implement the offer is already in place; including the details

regarding the sources of the funds whether domestic i.e. from banks, financial

institutions, or otherwise or foreign i.e. from Non-resident Indians or otherwise;

(15)Provision for acceptance of the offer by person who own the shares but are

not the registered holders of such shares;

(16)Statutory approvals required to obtained for the purpose of acquiring the

shares under the Companies Act, 1956, the Monopolies and Restrictive Trade

Practices Act, 1973,and/or any other applicable laws;

(17)Approvals of banks or financial institutions required, if any;

( 1 8 ) Whether the offer is subject to a minimum level of acceptances from the

shareholders; and

(19)Such other information as is essential fort the shareholders to make an

informed design in regard to the offer.

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4.2 WHY MERGERS FAIL?

It's no secret that plenty of mergers don't work. Those who advocate mergers

will argue that the merger will cut costs or boost revenues by more than enough

to justify the price premium. It can sound so simple: just combine computer

systems, merge a few departments, use sheer size to force down the price of

supplies and the merged giant should be more profitable than its parts. In

theory, 1+1 = 3 sounds great, but in practice, things can go awry.

Historical trends show that roughly two thirds of big mergers will disappoint on

their own terms, which means they will lose value on the stock market. The

motivations that drive mergers can be flawed and efficiencies from economies

of scale may prove elusive. In many cases, the problems associated with trying

to make merged companies work are all too concrete.

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4.3 FINANCIAL IMPLICATIONS OF BANKING M&A

These indicators include measures of financial performance:

asset and liability composition

capital structure

liquidity

risk exposure

profitability

financial innovation and efficiency

As dependent variable, we measure change of performance as the difference

between the merged banks two-year average return on equity (ROE ) after the

acquisition and the weighted average of the ROE of the merging banks two

years before the acquisition.

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COST OF MERGERS AND ACQUISITIONS

Costs of mergers and acquisitions are an important and integral part of mergers and acquisitions process. Before going for any merger or acquisition, both the companies calculate the costs of mergers and acquisitions to find out the viability and profitability of the deal. Based on the calculation, they decide whether they should go with the deal or not.

In mergers and acquisitions, both the companies may have different theories

about the worth of the target company. The seller tries to project the value of the

company high, whereas buyer will try to seal the deal at a lower price. There are

a number of legitimate methods for valuation of companies.

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5.1 REASONS FOR MERGERS AND ACQUISITIONS

Capacity

Economies of Scale

Accessing technology or skills

Tax reasons

Growth with External Efforts

Deregulation

Technology

New Products/Services

Over Capacity

Customer Base

Merger of Weak Banks

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5.2 PROCEDURE FOR BANK MERGER

The procedure for merger either voluntary or otherwise is outlined in

the respective state statutes/the Banking regulation Act. The Registrars,

being the authorizes vested with the responsibility of administering the

Acts, will be ensuring that the due process prescribed in the Statues has

been compiled with before they seek the approval of the RBI.

They would also be ensuring compliance with the statutory procedures

for notifying the amalgamation after obtaining the sanction of the RBI.

Before deciding on the merger, the authorized officials of the acquiring

bank and the merging bank sit together and discuss the procedural

modalities and financial terms. After the conclusion of the discussions, a

scheme is prepared incorporating therein the all the details of both the

banks and the area terms and conditions.

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Once the scheme is finalized, it is tabled in the meeting of Board of

directors of respective banks. The board discusses the scheme thread

bare and accords its approval if the proposal is found to be

financially viable and beneficial in long run.

After the Board approval of the merger proposal, an extra ordinary

general meeting of the shareholders of the respective banks is convened

to discuss the proposal and seek their approval.

After the board approval of the merger proposal, a registered valuer is

appointed to valuate both the banks. The valuer valuates the banks

on the basis of its share capital, market capital, assets and

liabilities, its reach and anticipated growth and sends its report to the

respective banks.

Once the valuation is accepted by the respective banks, they send the

proposal along with all relevant documents such as Board approval,

shareholders approval, valuation report etc. to Reserve Bank of India and

other regulatory bodies such Security and Exchange Board of

India(SEBI) for their approval.

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After obtaining approvals from all the concerned institutions, authorized

officials of both the banks sit together and discuss and finalize

share allocation proportion by the acquiring bank to the shareholders of

the merging bank (SWAP ratio)

After completion of the above procedures, a merger and acquisition

agreement is signed by the bank.

GUIDELINES ON MERGERS & ACQUISITIONS OF BANKS

With a view to facilitating consolidation and emergence of

strong entities and providing an avenue for non disruptive exit of

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weak/unviable entities in the banking sector, it has been decided to frame

guidelines to encourage merger/amalgamation in the sector.

Although the Banking Regulation Act, 1949 (AACS) does not empower

Reserve Bank to formulate a scheme with regard to

merger and amalgamation of banks, the State Governments have

incorporated in their respective Acts a provision for obtaining prior

sanction in writing, of RBI for an order, inter alia, for sanctioning

a scheme of amalgamation or reconstruction.

The request for merger can emanate from banks registered under the

same State Act or from banks registered under the Multi State Co-

operative Societies Act (Central Act) for takeover of

a bank/s registered under State Act. While the State Acts

specifically provide for merger of co-operative societies registered

under them, the position with regard to take over of a co-operative bank

registered under the State Act by a co-operative bank registered under the

CENTRAL

Although there are no specific provisions in the State Acts or the Central

Act for the merger of a co-operative society under the State Acts with that

under the Central Act, it is felt that, if All

concerned including administrators of the concerned Acts are agreeable t

o order merger/amalgamation, RBI may consider proposals on merits

[38]


leaving the question of compliance with relevant statutes to the

administrators of the Acts. In other words, Reserve Bank will confine its

examination only to financial aspects and to the interests of depositors as

well as the stability of the financial system while considering such

proposals.

RECOMMENDATION OF NARASIMHAM COMMITTEE ON

BANKING SECTOR REFORMS

Globally, the banking and financial systems have adopted information and communications technology. This phenomenon has largely by passed the Indian banking system, and the committee feels that requisite success needs to be achieved in the following areas:-

-Banking automation

-Planning, Standardization of electronic payment systems

-Telecom infrastructure

-Data were

[39]


Merger between banks and dfls and nbfcs need to be based on synergies

and should make a sound commercial sense. Committee also opines that

merger between strong banks / fls would make for greater economic and

commercial sense and would be a case where the whole is greater than

the sum of its party and have a ‘force multiplier effect”. It also have

merger should not be seen as a means of bailing out weak banks.

A weak bank could be nurtured into healthy units. Merger could also be a

solution to a after cleaning up their balances sheets it only

say if these is no Voltaire response to a takeover of such bank, are

structuring commission for such PSB, can consider other options such as

restructuring , merger and amalgamations to it not closure.

The committee also options that while licensing new private sector banks,

the initial capital requirement need to be review. It also emphasized on a

transparent mechanism for deciding the ability of promoter to

professionally manage the bank. The committee also feels that a

minimum threshold capital for old private banks also deserved

threshold capitals. The committee also opined that a promoter group

couldn't hold more that 40 percent of the equity of a bank. The

Narasimham Committee also suggested that the merger could be a

solution to ‘Weak banks’ Coney after clearing up the balance sheets) with

a strong public sector bank.

[40]


Source: Narasimham Committee report on banking sector reforms.

REASONS BEHIND THE RECENT TREND OF MERGER IN

BANKING SECTOR

The question on top everybody’s mind is

Are banks and bankers on the road to redundancy?

First consider the reasons that one does not need banks in large numbers any more

A depositor today can open a cheque account with a money market

mutual fund and obtain both higher returns and greater and greater

flexibility. Indian mutual funds are queuing up to offer this facility.

After can be drawn or a telephone bill paid easily through credit cards.

[41]


Even if a bank is just a safe place to put away your savings, you need not

go to it. There is always an ATM you can do business with.

If you are solvent and want to Bank of Rajasthan row money, you can do

so on your credit card- with far fewer hassles.

A ‘AAA’ corporate can directly Bank of Rajasthan row from the market

through commercial papers and get better rates in the bargain. In fact the

banks may indeed be left with dad credit risk or those that can not access

the capital market. This once again makes a shift to non-fund based the

activities all the more important.

CASE STUDY

[42]


[43]


8.1 Case study

About Bank Of Rajasthan

Private sector lender Bank of Rajasthan on 18 may 2010 agreed to merger

with ICICI Bank, India’s second largest private sector lender

Bank of Rajasthan has a market value of $296 million

The acquisition of Bank of Rajasthan by ICICI bank is the first

consolidation of country’s crowded banking sector since 2008.

ICICI Bank and Bank of Rajasthan boards on Sunday cleared their

merger through an all-share deal, valued at about 30.41billion rupees.

ICICI offered to Bank of Rajasthan

ICICI offered to pay 188.42 rupees per share, an all-share deal, for Bank

of Rajasthan, a premium of 89 percent to the small lender’s closing price

on Tuesday, valuing the business at $668 million.

[44]


ICICI is offering the smaller bank’s controlling shareholders 25 shares in

ICICI for 118 shares of Bank of Rajasthan.

The Big Deal

The deal, which will give ICICI a sizeable presence in the northwestern

desert state of Rajasthan, values the small bank at about 2.9 times its

book value, compared with an Indian banking sector average of 1.84.

Bank of Rajasthan has a network of 463 branches and a loan book of

77.81 billion rupees ($1.7 billion).

Why Merger????

In March, The Reserve Bank of India appointed consulting firms to

conduct a special audit of the books and accounts of Bank of Rajasthan.

The Government has called for consolidation in the banking sector in

order to make lenders more competitive but there has been little activity.

RBI had imposed a penalty of Rs 25 lakh on Bank of Rajasthan for

various violations.

Total of BOR

[45]


For the nine- month ended December’09, the bank had net loss of Rs

9crore with total income of Rs 1,086crore. For the year ended March’09,

Bank of Rajasthan had net profit of Rs 117crore with total income of Rs

1,507crore.

Operating income fell 11% to Rs 373.78crore in Q3 December 2009 over

Q3 December 2008.

Advantage for ICICI and BOR

ICICI Bank will gain marginally from the merger as Bank of Rajasthan

has a reasonable penetration in its home state. As a March’09, it had 463

branches across the country. The deal will also help ICICI tackle

increasing competition by HDFC Bank.

The deal value BOR about 2.9 times its book value, compared with an

Indian banking sector average of 1.84.

Comparison of ICICI and BOR

ICICI bank added CASA deposits totaling over 210 billion rupees in the

year ended March 2010, compared with 41.63 billion rupees of BOR.

ICICI recorded a business per branch of 3 billion rupees compared with

47 million rupees of BOR for fiscal 2009.

[46]


For the quarter ended Dec 09, BOR recorded 1.05percent of advances as

NPA’s, which is far better than 2.1 percent recorded by ICICI Bank.

Why is RBI allowing the merger of this bank?

This is very intriguing factor; when RBI claims that there is corporate

governance. Finance Minister Pranab Mukherjee claims that there is

corporate governance prevailing in SEBI, RBI and Finance Ministry.

Hurdles

To protest the Bank of Rajasthan’s management plan to merger with the

ICICI Bank, more than 4200 employees of Bank of Rajasthan went on a

two-day counter wide strike.

SEBI maintains that Tayals hold 55% in the bank and that would make

them owners of nearly 1.87crore ICICI Bank shares from new dilution by

ICICI Bank, amounting to around 1.75% stake in the bank.

ICICI Bank found it economic as always to invest in this deal on a 100%

stock swap basis.

[47]


Impact of the Deal

The deal is very expensive

The proposed amalgamation would substantially enhance branch network

and presence in northern and western India for ICICI

Bank of Rajasthan has a network of 463 branches and a loan book of

77.81 billion rupees ($1.7 billion).

As on March 2009, BOR had 463 branches and 111 ATMs, total assets of

Rs 17,224crore, deposits of Rs 15,187corore and advances of Rs

7,781crore.

[48]


LATEST NEWS ABOUT MERGERS ANDACQUISITION IN

BANKING SECTOR

Banking sector reforms in India are in the progress. Both Finance

Ministry of India and Reserve Bank of India (RBI) are actively

suggesting many far reaching reforms for banking and financial industry

of India.

One of such reforms pertains to regulating mergers and acquisitions

(M&A) pertaining to banking sector. Till now the Competition

Commission of India (CCI) has a say in the M&A pertaining to banking

companies.

However, with the recent proposed amendments in the Banking

Regulations Act, 1949, only RBI would have power to regulate M&A

[49]


pertaining to banking sector. In fact, the proposed amendments have

already been approved by Cabinet of India.

Finance Minister Pranab Mukherjee has also recently said that RBI would

have the final say on bank M&A. He told that banking mergers and

acquisitions will not come under the purview of the Competition Act or

the Companies Act.

Indian mergers and acquisitions in 2011 may surpass this year’s record

$71 billion of deals, led by oil and gas, metals and mining companies,

according to M& A bankers including Top Mathew of Standard

Chartered. Billionaire Sunil Mittal’s $10.7 billion acquisition of mobile-

phone operators in Africa led an almost four fold increase in takeovers

this year as deals surpassed 2007’s $69 billion, according to data

compiled by Bloomberg.

Companies in Asia-Pacific including India and China are expected to be the

most acquisitive buyers in2011 as attractive valuations and domestic

competition drive deals globally, according to Bloomberg’s M&A Global

Outlook survey. Overseas firms may target Indian pharmaceutical and

consumer firms, and local enterprises will seek natural resources, said

Bank of America, ranked No. 3 “outbound deals would continue to be highly

active given that international companies’ valuations are still relatively

depressed, and Indian companies have access to debt and equity capital,”

[50]


Saurabh Agrawal,. The 41-year-old head of India investment banking at

Charlotte, North Carolina-based Bank of America, wrote in an e-mailed

response to questions. “Inbound and local deals will also take place.”

Cross-Bank of Rajasthander deals rose to a record $59.2 billion in India

this year, after Mittal’s New Delhi-Bharti Airtel in March agreed to buy

the African assets of Zain for $10.7 billion.

Outbound M&A accounted for 74% of that volume. The acquisition spree in

India, China and Brazil contrasts with a slowdown in global deals. Mergers

worldwide are down 46% from 2007’s record. In the US, the world’s largest

market, volumes are 51% lower, and levels in Europe are down by 59%.

“Large Indian corporate are going through a growth phase: they think

there is a lot of opportunity, they think they have access to capital,” 35-

year-old Mathew, managing director for M&A for India, said in an

interview. The London-based bank climbed 13 places to No. 2 among

Indian takeover advisers this year, its highest ranking. “They are

capitalizing on the positive sentiment to undertake long-term

strategic transactions,” he said.

[51]


The mergers and acquisitions of banks will now come under the purview

of the Banking Regulation Act. This means M&A in banking sector

would no more require the approval of the Competition Commission of

India.

BANK MERGER TO AFFECT ON INSURANCE SECTOR

Feb 26 (IANS) Bank mergers in India are likely to impact the insurance

sector as many insurers have select banks as their banc

assurance partners. Banc assurance is the sale of life, pension and

investment products through the branch network of a bank.

[52]


The recent merger announcement of HDFC Bank and Centurion Bank of

Punjab Ltd is expected to impact the business of Aviva Life Insurance

Co Ltd and ICICI Lombard General Insurance Co Ltd.

Centurion Bank is the banc assurance partner for these two insurers.

The arrangements might be discontinued because HDFC Bank sells life

and non-life insurance policies of group companies HDFC Standard Life

Insurance Co Ltd and HDFC General Insurance Co Ltd.

After the opening up of the insurance sector, banks have come to occupy

an important role in insurance distribution, particularly for private life

insurers.

Banks procure nearly 40 percent of the fresh business for life insurers. It

is not surprising therefore to have life insurers whose very lifeline is their

banking partners.

Insurers find recruiting and training individual agents a time-consuming

and costly process. There are also issues like agency attrition and small-

sized policies procured by agents.

[53]


For new private life insurers who want to achieve fast revenue growth,

banks are the only source of business. Banks also find that selling life

insurance products is a lucrative activity.

Normally banc assurance deals are for three years and each bank can

represent only one insurer as a corporate agent.

Realizing their vital role, banks are now dictating the terms of the banc

assurance deals. In some cases banks are demanding commission

and other fees totaling nearly 70 percent of the first year premium ona

policy, say industry experts However, new private life insurers are

finding it difficult to sign up a banking partner to sell their products as

early entrants have already inked distribution agreements with them.

Some banks have started representing a new life insurer at regular

intervals.

For instance, Aviva Life had recently inked a banc assurance deal with

the Bank of Rajasthan, which has switched life insurance partners in

recent times.

[54]


Initially, the bank vended policies of Birla Sun Life Insurance Co Ltd. It

changed over to Life Insurance Corp of India (LIC) before signing up

with Aviva Life.

V. Srinivasan, chief financial officer of Bharti Axa Life Insurance Co

Ltd, said that the one bank-one insurer concept was not right and would

lead to skewed scenario.

“A bank has a wide variety of customers. No single insurer can satisfy the

needs of all the bank customers. A bank should be allowed to be a broker

and sell the policies of different insurers

CONCLUSION

One of the most common reasons for mergers and acquisitions is the belief that

"synergies" exist, allowing the two companies to work more efficiently together

than either would separately. Suchsynergies may result from the firms'

combined ability to exploit economies of scale, eliminate duplicated functions,

share managerial expertise, and raise larger amounts of capital. Another reason

for banks to move towards merger is that they are motivated by a desire for

greater market power.

The 'human factor' is a major cause of difficulty in making the integration

between two companies work successfully. If the transition is carried out

[55]


without sensitivity towards the employees who may suffer asa result of it, and

without awareness of the vast differences that may exist between corporate

cultures, the result is a stressed, unhappy and uncooperative workforce - and

consequently a drop in productivity Decision to carry out a merger or

acquisition should consider not only the legal and financial implications, but

also the human consequences - the effect of the deal upon the two companies'

managers and employee

Almost 60 -70% mergers and acquisitions and the reason for the failure is

cultural differences, flawed intentions, and sometimes decisions are taken

without properly analysis the future of the merger.

Merger of Bank of Rajasthan an old private sector bank with India's 2nd largest

private sector bank will definitely help both of this parties as ICICI Bank can

extend it activities as it total number branches will go up by 25%and Bank of

Rajasthan will also get new direction as it already witness the share price of

Bank of Rajasthan in BSE is almost doubled after the announcement of the

merger.

[56]


BIBLOGRAPHY

www.investopedia.com

www.business.mapsofindia.com

www.bloomberg.com

www.legalserviceindia.com

www.slideboom.com

[57]


www.papercamp.com

www.moneycontrol.com

[58]