INTRODUCTION

TO

MERGERS

AND

ACQUISITIONS

OF

BANKING SECTOR

1

1. INTRODUCTION TO MERGER AND ACQUISITION OF BANKING SECTOR

MERGERS

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

maintains the identity of one of the firms. One or more companies may merger with

an existing company or they may merge to form a new company.

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

firms. Merger may take two forms-

1. Merger through absorption

2. Merger through consolidation.

Absorption

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

companies except one loose their identify in a merger through absorption.

Consolidation

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

this form of merger all companies are legally dissolved and a new entity is created. In

consolidation the acquired company transfers its assets, liabilities and share of the

acquiring company for cash or exchange of assets.

ACQUISITION

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

ownership of other companies and combines their operations with its own operations.

An acquisition may be defined as “an act of acquiring effective control by one

company over the assets or management of another company without any

combination of companies”.

TAKEOVER

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

by another company.

1.1 DISTINCTION BETWEEN MERGERS AND ACQUISITIONS OF BANKS

2

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

synonymous, the terms merger and acquisition mean slightly different things.

When one company takes over another and clearly established itself as the new

owner, the purchase is called an acquisition. From a legal point of view, the target

company ceases to exist, the buyer "swallows" the business and the buyer's stock

continues to be traded.

In the pure sense of the term, a merger happens when two firms, often of about the

same size, agree to go forward as a single new company rather than remain separately

owned and operated. This kind of action is more precisely referred to as a "merger of

equals." Both companies' stocks are surrendered and new company stock is issued in

its place.

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

company will buy another and, as part of the deal's terms, simply allow the acquired

firm to proclaim that the action is a merger of equals, even if it's technically an

acquisition. Being bought out often carries negative connotations, therefore, by

describing the deal as a merger, deal makers and top managers try to make the

takeover more palatable.

A purchase deal will also be called a merger when both CEOs agree that joining

together is in the best interest of both of their companies. But when the deal is

unfriendly - that is, when the target company does not want to be purchased - it is

always regarded as an acquisition.

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

whether the purchase is friendly or hostile and how it is announced. In other words,

the real difference lies in how the purchase is communicated to and received by the

target company's board of directors, employees and shareholders.

1.2 TYPES OF MERGERS

3

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

which are added in the process of the existing product or service lines. Mergers can

be a distinguished into the following four types:-

1. Horizontal Merger

2. vertical Merger

3. Conglomerate Merger

4. Concentric Merger

Horizontal merger

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

lines of business activity. Horizontal merger is a co centric merger, which involves

combination of two or more business units related to technology, production

process, marketing research ,development and management. Elimination or

reduction in competition, putting an end to price cutting, economies of scale in

production, research and development, marketing and management are the motives

underlying such mergers.

Vertical Merger

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

or distribution that are usually separate. The vertical Mergers chief gains are

identified as the lower buying cost of material. Minimization of distribution costs,

assured supplies and market increasing or creating barriers to entry for potential

competition or placing them at a cost disadvantage.

Conglomerate Merger

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

respect of technology, production process or market and management. In other words,

firms engaged in the different or unrelated activities are combined together.

Diversification of risk constitutes the rational for such merger moves.

Concentric Merger

4

Concentric merger are based on specific management functions where as the

conglomerate mergers are based on general management functions. If the activities of

the segments brought together are so related that there is carry over on specific

management functions. Such as marketing research, Marketing, financing,

manufacturing and personnel.

1.3ADVANTAGES OF MERGERS AND ACQUISITIONS

1) Accelerating a company's growth, particularly when its internal growth is

constrained due to paucity of resources. Internal growth requires that a

company should develop its operating facilities- manufacturing, research,

marketing, etc. But, lack or inadequacy of resources and time needed for

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

company can acquire production facilities as well as other resources from

outside through mergers and acquisitions. Specially, for entering in new

products/markets, the company may lack technical skills and may require

special marketing skills and a wide distribution network to access different

segments of markets. The company can acquire existing company or

companies with requisite infrastructure and skills and grow quickly.

2) Enhancing profitability because a combination of two or more companies may

result in more than average profitability due to cost reduction and efficient

utilization of resources. This may happen because of:-

1. GROWTH 0R DIVERSIFICATION: -

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

range of their products may find that a merger can be used to fulfill the objective

instead of going through the tome consuming process of internal growth or

diversification. The firm may achieve the same objective in a short period of time by

merging with an existing firm. In addition such a strategy is often less costly than the

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

that wants to expand operations in existing or new product area can find a suitable

going concern. It may avoid many of risks associated with a design; manufacture the

sale of addition or new products. Moreover when a firm expands or extends its

product line by acquiring another firm, it also removes a potential competitor.

5

SYNERGY: -

3. Implies a situation where the combined firm is more valuable than the sum of

the individual combining firms. It refers to benefits other than those related to

economies of scale. Operating economies are one form of synergy benefits.

But apart from operating economies, synergy may also arise from enhanced

managerial capabilities, creativity, innovativeness, R&D and market coverage

capacity due to the complementarity of resources and skills and a widened

horizon of opportunities

merger may result in financial synergy and benefits for the firm in many ways:-

i. By eliminating financial constraints

ii. By enhancing debt capacity. This is because a merger of two companies

can bring stability of cash flows which in turn reduces the risk of

insolvency and enhances the capacity of the new entity to service a larger

amount of debt

iii. By lowering the financial costs. This is because due to financial stability,

the merged firm is able to borrow at a lower rate of interest.

Other motives For Merger

Merger may be motivated by other factors that should not be classified under

synergism. These are the opportunities for acquiring firm to obtain assets at bargain

price and the desire of shareholders of the acquired firm to increase the liquidity of

their holdings.

1. Purchase of Assets at Bargain Prices

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

rights, plant and equipment, at lower cost than would be incurred if they were

purchased or constructed at the current market prices. If the market price of many

socks have been considerably below the replacement cost of the assets they represent,

expanding firm considering construction plants, developing mines or buying

equipments often have found that the desired assets could be obtained where by

heaper by acquiring a firm that already owned and operated that asset. Risk could be

6

reduced because the assets were already in place and an organization of people knew

how to operate them and market their products. Many of the mergers can be financed

by cash tender offers to the acquired firm’s shareholders at price substantially above

the current market. Even so, the assets can be acquired for less than their current casts

of construction. The basic factor underlying this apparently is that inflation in

construction costs not fully rejected in stock prices because of high interest rates and

limited optimism by stock investors regarding future economic conditions.

2.Increased Managerial Skills or Technology

Occasionally a firm will have good potential that is finds it unable to develop fully

because of deficiencies in certain areas of management or an absence of needed

product or production technology. If the firm cannot hire the management or the

technology it needs, it might combine with a compatible firm that has needed

managerial, personnel or technical expertise. Of course, any merger, regardless of

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

3. Acquiring new technology –

To stay competitive, companies need to stay on top of technological developments

and their business applications. By buying a smaller company with unique

technologies, a large company can maintain or develop a competitive edge.

i. Economy of scale : This refers to the fact that the combined company can

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

lowering the costs of the company relative to the same revenue stream, thus

increasing profit margins.

ii. Operating economies:-arise because, a combination of two or more firms

may result in cost reduction due to operating economies. In other words, a

combined firm may avoid or reduce over-lapping functions and consolidate its

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

reduce operating costs. For example, a combined firm may eliminate duplicate

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

integrated planning and control system

7

iii. Increased revenue or market share: This assumes that the buyer will

be absorbing a major competitor and thus increase its market power (by

capturing increased market share) to set prices.

iv. Cross-selling : For example, a bank buying a stock broker could then sell its

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

the bank's customers for brokerage accounts. Or, a manufacturer can acquire

and sell complementary products.

1.4 Procedure for evaluating the decision for mergers and acquisitions

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

1. Planning:- of acquisition will require the analysis of industry-specific and

firm-specific information. The acquiring firm should review its objective of

8

acquisition in the context of its strengths and weaknesses and corporate goals.

It will need industry data on market growth, nature of competition, ease of

entry, capital and labour intensity, etc. This will help in indicating the product-

market strategies that are appropriate for the company. It will also help the

firm in identifying the business units that should be dropped or added. On the

other hand, the target firm will need information about quality of management,

market share and size, capital structure, profitability, production and

marketing capabilities, etc.

2. Search and Screening:- Search focuses on how and where to look for

suitable candidates for acquisition. Screening process short-lists a few

candidates from many available and obtains detailed information about each of

them.

3. Financial Evaluation:- a merger is needed to determine the earnings and

cash flows, areas of risk, the maximum price payable to the target company

and the best way to finance the merger. In a competitive market situation, the

current market value is the correct and fair value of the share of the target

firm. The target firm will not accept any offer below the current market value

of its share. The target firm may, in fact, expect the offer price to be more than

the current market value of its share since it may expect that merger benefits

will accrue to the acquiring firm.

MERGERS

AND

ACQUISITION

IN9

INDIA

OF

BANKING

SECTOR

2. MERGERS AND ACQUISITION IN INDIA

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

Bank of India coming into existence in 1786. This was followed by Bank of

Hindustan. Both these banks are now defunct. The oldest bank in existence in India is

the State Bank of India being established as "The Bank of Bengal" in Calcutta in June

1806. A couple of decades later, foreign banks like Credit Lyonnais started their

Calcutta operations in the 1850s. At that point of time, Calcutta was the most active

10

trading port, mainly due to the trade of the British Empire, and due to which banking

activity took roots there and prospered. The first fully Indian owned bank was the

Allahabad Bank, which was established in 1865.

By the 1900s, the market expanded with the establishment of banks such as Punjab

National Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai - both of

which were founded under private ownership. The Reserve Bank of India formally

took on the responsibility of regulating the Indian banking sector from 1935. After

India's independence in 1947, the Reserve Bank was nationalized and given broader

powers.

BEFORE LIBERALISATION

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

act, 1969 are statutes governing mergers among companies.

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

can be effectuated. Sanction of the company court is essential perquisite for the

effectiveness of a scheme of merger.

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

practices act. After the amendments the status does not regulate mergers.

The regulatory provisions in the MRTP act were removed through the 1991

amendments, with a view to giving effect to the new industrial policy of liberalization

and deregulation, aimed at achieving economies of scale for ensuring higher

productivity competitiveness.

Liberalization

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

liberalisation and gave licences to a small number of private banks, which came to be

known as New Generation tech-savvy banks, which included banks such as UTI Bank

(the first of such new generation banks to be set up), ICICI Bank and HDFC Bank.

This move, along with the rapid growth in the economy of India, kick started the

11

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

the three sectors of banks, namely, government banks, private banks and foreign

banks. The next stage for the Indian banking has been setup with the proposed

relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in

banks may be given voting rights which could exceed the present cap of 10%.

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

were used to the 4-6-4 method (Borrow at 4%; Lend at 6%;Go home at 4) of

functioning. The new wave ushered in a modern outlook and tech-savvy methods of

working for traditional banks. All this led to the retail boom in India. People not just

demanded more from their banks but also received more.

Sarrriya Committee

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

there should be three all India banks and 5 or 6 regional banks plus a network of

cooperative or rural banks in the rural areas.

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

bank and recommended four sets of banks in the public sector.

1) There should be district banks having the network of around 300 branches and

Rs. 250 crores or more. Their functions similar to that of commercial banks.

2) National saving banks which will be located only in urban and metropolitan

towns.

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

exchange banks and located at urban and metropolitan centers catering to

designate clientele only.

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

suggested the reduction in the number of existing banks and making the smallest

nationalized banks bigger so as to have strong regional character in states of UP,

MP, Bihar, and Orissa and North east part of the country.

James Raj Committee appointed by RBI in June 1997 recommended that

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

2. SBI group should be converted into holing company with 5 zones

subsidiaries and

3. Streamlining of the rural and semi urban branches.

12

Narasimhan Committee Report

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

recommended a broad pattern of the structure of the banking system as under:

3 or 4 larger banks (including the State Bank of India) which could become

international in character.

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

universal banking.

Local banks whose operations would be generally confined to a specific region.

Rural banks (including RRB’s) whose operations would be confined to the rural areas

and whose business would be predominantly engaged in financing of agricultural and

allied activities.

The Narsimhan committee was of the view that the move towards this revised system

should be market driven and based on profitability considerations and brought about

through a process of mergers and acquisitions.

Narsimhan Committee (1998)

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

structural issues made following recommendations.

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

on synergies and locational and business specific complimentary of the concerned

institutions and must obviously make sound commercial sense. Mergers of public

sector banks should emanate from the managements of banks with the govt. as the

common shareholder playing a supportive role. Such mergers however can be

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

the mergers of public sector banks would tie down the management with operational

issues and distract attention from the real issue. It would be necessary to evolve

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

of retraining them and giving them appropriate alternate employment or by

introducing a VRS with appropriate incentives. This would necessitate the corporation

and understanding of the employees and towards this direction. Management should

initiate discussion with the representatives of staff and would need to convince their

employees about the intrinsic soundness of the idea, the competitive benefits that

would accrue and the scope and potential foe employees’ own professional

advancement in a larger institution. Mergers should not be seen as a means of bailing

out weak banks. Mergers between strong banks/FIs would make for greater economic

13

and commercial sense and would greater than the sum of its parts and have a force

multiplier effect. It can hence be seen from the recommendations of Narsimhan

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

management of the banks with government as common shareholder playing a

supportive role.

NEED

OF

MERGERS

AND14

ACQUISITIONS

IN

BANKING SECTOR

3.NEED FOR MERGER AND ACQUISITION

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

nations demonstrated that strong banking system is critical. Throughout the world,

banking industry has been transformed from highly protected and regulated to

competitive and deregulated. Globalization coupled with technological development

15

has shrinked the boundaries. Trade has become transactional from international. Due

to this, there is no difference between domestic and foreign currency. As a result

innovations and improvement assumed greatest significance in institutional

performance.

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

and convergence. The trend towards consolidation has been driven by the need to

attain meaningful balance sheet size and market share in the face of intensified

competition. The trend towards convergence is driven by a move across industry to

provide most of the financial services under one roof.

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

have contributed to a great extent in enhancing their competitiveness. The issue of

bank restructuring assumes significance from the point of view of making Indian

banking strong and sound apart its growth and development to become suitable.

International evidence also strongly indicates greater gains to banking industries after

the restructuring process. With the impending capital account convertibility, cross

border movement of financial capital would become a reality. If we cannot

consolidate our size, it is rather difficult to find reasons that could prevent Indian

banks from being swallowed by the powerful foreign banks in the long run, under the

free for all environments. The core objective of restructuring is to maintain long term

profitability and strengthen the competitive edge of banking business in the context of

changes in the fundamental market scenario. Restructuring can have both internal and

external dimensions.

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

environment, in which we work, shows no sign of slowing down. Commercial banks

now have to think “global” to service the requirements of the highly sophisticated

multinationals that are increasingly dominated the industrial world.

Bank mergers would be the rule rather than exception in times to come and there is a

need for banks to check their premises before embanking on their future plans. There

are synergies to be leveraged through consolidation where factors such as size, spread,

technology, human resource and capital can be reconciled. We could hence think of a

situation where we have 4-5 global players which are really large, a handful of

regional banks which will gradually set to merger and some other players which will

get to acquire special niche to serve limited market. But it involves the sorting of

16

various issues such as legal, regulatory, procedural etc. This is statement of SH. V.

Leeladhar, chairman, IBA on 28th aug, 2004.

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

economic growth. It is important to improve the comprehensiveness and quality of the

banking system to bring efficiency in the performance of the real sector in India.

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

and regulated situation to competitive and deregulated. Globalization coupled with

technological development has shrinked the boundaries. Financial services and

products are being provided to the customers across the length and breadth of the

globe.

Due to this, domestic and foreign currency, banking and non banking financial

services are getting closer. Correspondingly innovations and improvements assumed

greater significance in institutional performance. This trend of global banking has

been marked by twin phenomena of consolidation and convergence. The trend

towards consolidation has been driven by the need to attain meaningful balance sheet

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

convergence is driven by a move across industry to provide most of the financial

service viz., banking, insurance, investment etc, to the customers in

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

factors inducing mergers and acquisition include technological progress, excess

capacity, emerging opportunities and deregulation of geographic, functional and

product restrictions. It may also bring the performance of public sector banks to a

remarkable level without variation between banks in public sector.

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

1) Competition from global majors.

2) Competition from new Indian banks.

3) Disinter mediation and competition resulting into pressure or spread.

4) Qualitative change in the banking paradigm.

5) The competencies required from a banker would be sharper information

technology and knowledge centric.

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

to posses matching financial muscle, as a fair competition is possible only among the

equals. Size has therefore, assumed critically. A bank’s size is really to be determined

by the size of its balance sheet. The question before major commercial banks,

17

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

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

reduce the cost of product development and delivery. Different type of banks, even

through they themselves belong to the public sector, spend considerable time

competing themselves without increasing commensurate benefits to the system as a

whole. As a result, the focus on banks has shifted away from the areas of real

productivity. The present system is not ideal for simultaneously retaining separate

identities as well as preserving the very characteristics of competitiveness. Our banks

are really small in terms of business size or capital when compared with banks in the

west or even China.. The lesson here is to think of consolidation of our efficient banks

to build up global scale institutions. Consolidations would also enable us to go for

global technologies benefiting the customers and efficiency of our banks.

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

counterparts from abroad, they would need to be more capitalized, automated and

technology oriented, even while strengthening their internal operations and systems.

Further in order to make them comparable with their competitors from abroad with

regard to the size of their capital and asset base, it would be necessary to structure

these banks. Merger and acquisitions are considered useful to achieve the requisite

size in the short run.

MERGERS

IN

INDIAN

18

BANKING

SECTOR

MERGER IN INDIAN BANKING SECTOR

Mergers and acquisitions encourage banks to gain global reach and better synergy and

allow large banks to acquire the stressed assets of weaker banks. Merger in India

between weak/unviable banks should grow faster so that the weak banks could be

rehabilitated providing continuity of employment with the working force, utilization

19

of the assets blocked up in the weak/unviable banks and adding constructively to the

prosperity of the nation through increased flow of funds.

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

include the merger between IDBI (Industrial Development bank of India) and its

own subsidiary IDBI Bank. The deal was worth $ 174.6 million (Rs. 7.6 billion in

Indian currency). Another important merger was that between Centurion Bank and

Bank of Punjab. Worth $82.1 million (Rs. 3.6 billion in Indian currency), this

merger led to the creation of the Centurion Bank of Punjab with 235 branches in

different regions of India, another merger was HDFC bank and Centurion bank of

punjab.

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

Times Bank with HDFC Bank, bank of Madura with ICICI Bank, Nedungadi Bank

Ltd. With Punjab National Bank and Global Trust Bank merged with Oriental Bank of

Commerce.

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

environment which is full of problem for them, viz. inadequacies of resources,

outdated technology, on systemized management pattern, faltering marketing efforts

and weak financial structure. Their existence remains under challenge in the absence

of keeping pace with growing automation and techniques obsolescence and lack of

product innovations. These banks remain, at times, under threat from large banks.

Their reorganization through consolidation/merger could offer succor to re-establish

them in viable banks of optimal size with global presence.

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

and hedging to weak bank against their failure and too at the initiative of RBI, rather

than to pay the way to initiate the banks to come forward on their own record for

merger and amalgamation purely with a commercial view and economic

consideration.

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

processes, strategies, it would warrant creation of new competencies and capabilities

on an on going basis for which an environment of continuous learning would have to

be created so as to enhance knowledge and skills.

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

competitive banks and let big Indian banks create big thunders internationally in the

days to come.

20

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

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

regard. It is expected that the Indian banking and finance system will be globally

competitive. For this the market players will have to be financially strong and

operationally efficient. Capital would be key factor in the building a successful

institution. The Banking and finance system will improve competitiveness through a

process of consolidation either through mergers and acquisitions or through strategic

alliances. There is need to restructure the banking sector in India through merger and

amalgamation in order top makes them more capitalized, automated and technology

oriented so as to provide environment more competitive and customer friendly

RISKS ASSOCIATED WITH MERGER

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

follows: -

1) 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 drug rather than an asset.

2) 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 the plan, which explains why

there are high rate of failures in mergers.

3) Consolidation mainly comes due to the decision taken at the top. It is a top-

heavy decision and willingness of the rank and file of both entities may not be

forthcoming. This leads to 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.

21

4) The structure, systems and the procedures followed in two banks may be

vastly different, for example, a PSU bank or an old generation bank and that of

a technologically superior foreign bank. The erstwhile structures, systems and

procedures may not be conducive in the new milieu. A thorough overhauling

and systems analysis has to be done to assimilate both the organizations. This

is a time consuming process and requires lot of cautions approaches to reduce

the frictions.

5) There is a problem of valuation associated with all mergers. The shareholder

of existing entities has to be given new shares. Till now a foolproof valuation

system for transfer and compensation is yet to emerge.

6) Further, there is also a problem of brand projection. This becomes more

complicated when existing brands themselves have a good appeal. Question

arises whether the earlier brands should continue to be projected or should

they be submerged in favour of a new comprehensive identity. Goodwill is

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

22

23

Structure of the Organized Banking Sector in India. Number Of Banks Are In Brackets.

MERGER STORY SO FAR

YEAR BANK MERGED WITH

1969 Bank Of Bihar State Bank Of India1970 National Bank Of Lahore State Bank Of India1971 Eastern Bank Ltd. Chartered Bank1974 Krishnaram Baldeo Bank Ltd. State Bank Of India1976 Belgaum Bank Ltd. Union Bank Of India1984-85 Lakshmi Commercial Bank Canara Bank1984-85 Bank Of Cochin State Bank Of India1985 Miraj State Bank Union Bank Of India1986 Hindustan Commercial Bank Punjab National Bank1988 Trader’s Bank Ltd. Bank Of Baroda1989-90 United Industrial Bank Allahabad Bank1989-90 Bank Of Tamilnad Indian Overseas Bank1989-90 Bank Of Thanjavur Indian Bank1989-90 Parur Central Bank Bank Of India1990-91 Purbanchal Bank Central Bank Of India1993-94 New Bank Of India Punjab National Bank1993-94 Bank Of Karad Bank Of India1995-96 Kasinath Seth Bank State Bank Of India1996 SCICI ICICI1997 ITC Classic ICICI1997 BARI Doab Bank Oriental Bank of Commerce1998 Punjab Co-operative Bank Oriental Bank of Commerce1998 Anagram Fianance ICICI1999 Bareilly Corporation Bank Bank of Baroda1999 Sikkim Bank ltd. Union Bank2000 Times bank HDFC Bank2001 Bank of Madura ICICI2002 Benaras state bank Bank of Baroda2003 Nedungadi Bank Punjab national Bank2004 South Gujarat Local Area Bank Bank of Baroda2004 Global Trust Bank Oriental Bank of Commerce2005 Bank of Punjab Centurion bank2005 IDBI bank IDBI

2008 HDFC bank Centurion bank of punjab

24

CHALLENGESAND

OPPORTUNITIESIN

THEINDIAN

BANKING SECTOR

25

7.Challenges and opportunities in Indian banking sector

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

Indian financial system and some of the Indian banks would become global players in

the coming years. Also competition is not only on foreign turf but also in the domestic

field. The new mantra for Indian banks is to go global in search of new markets,

customers and profits. But to do so the Indian banking industry will have to meet

certain challenges. Some of them are –

I. FOREIGN BANKS – India is experiencing greater presence of foreign banks

over time. As a result number of issues will arise like how will smaller

national banks compete in India with them, and will they themselves need to

generate a larger international presence? Second, overlaps and potential

conflicts between home country regulators of foreign banks and host country

regulators: how will these be addressed and resolved in the years to come? It

has been seen in recent years that even relatively strong regulatory action

taken by regulators against such global banks has had negligible market or

reputational impact on them in terms of their stock price or similar metrics.

Thus, there is loss of regulatory effectiveness as a result of the presence of

such financial conglomerates. Hence there is inevitable tension between the

benefits that such global conglomerates bring and some regulatory and market

structure and competition issues that may arise.

II. GREATER CAPITAL MARKET OPENNESS - An important feature of

the Indian financial reform process has been the calibrated opening of the

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

the volatility of capital inflows does not result in unacceptable disruption in

exchange rate determination with inevitable real sector consequences, and in

domestic monetary conditions. The vulnerability of financial intermediaries

can be addressed through prudential regulations and their supervision; risk

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

III. Enhancement of regulatory capacity in these areas, as well as human resource

development in both financial intermediaries and non-financial entities.

26

IV. TECHNOLOGY IS THE KEY – IT is central to banking. Foreign banks

and the new private sector banks have embraced technology right from their

inception and continue to do so even now. Although public sector banks have

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

Networking in banks has also been receiving focused attention in recent

times. Most recently the trend observed in the banking industry is the sharing

of ATMs by banks. This is one area where perhaps India needs to do

significant ‘catching up’. It is wise for Indian banks to exploit this globally

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

V. CONSOLIDATION – We are slowly but surely moving from a regime of

"large number of small banks" to "small number of large banks." The new era

is one of consolidation around identified core competencies i.e., mergers and

acquisitions. Successful merger of HDFC Bank and Times Bank; Stanchart

and ANZ Grindlays; Centurion Bank and Bank of Punjab have demonstrated

this trend. Old private sector banks, many of which are not able to cushion

their NPA’s, expand their business and induct technology due to limited

capital base should be thinking seriously about mergers and acquisitions.

VI. PUBLIC SECTOR BANKS - It is the public sector banks that have the large

and widespread reach, and hence have the potential for contributing

effectively to achieve financial inclusion. But it is also they who face the most

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

very heavily in skill enhancement at all levels: at the top level for new

strategic goal setting; at the middle level for implementing these goals; and at

the cutting edge lower levels for delivering the new service modes. Given the

current age composition of employees in these banks, they will also face new

recruitment challenges in the face of adverse compensation structures in

comparison with the freer private sector.

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

follow Basel II norms. Basel II is extremely data intensive and requires good

quality data for better results. Data versioning conflicts and data integrity

problems have just one resolution, namely banks need to streamline their

27

operations and adopt enterprise wide IT architectures. Banks need to look

towards ensuring a risk culture, which penetrates throughout the organization.

VIII. COST MANAGEMENT – Cost containment is a key to sustainability of

bank profits as well as their long-term viability. In India, however, in 2003,

operating costs as proportion of total assets of scheduled commercial banks

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

tasks ahead are thus clear and within reach.

IX. RECOVERY MANAGEMENT – This is a key to the stability of the

banking sector. Indian banks have done a remarkable job in containment of

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

difficult environment. Recovery management is also linked to the banks’

interest margins. Cost and recovery management supported by enabling legal

framework hold the key to future health and competitiveness of the Indian

banks. Improving recovery management in India is an area requiring

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

X. REACH AND INNOVATION - Higher sustained growth is contributing to

enhanced demand for financial savings opportunities. In rural areas in

particular, there also appears to be increasing diversification of productive

opportunities. Also industrial expansion has accelerated; merchandise trade

growth is high; and there are vast demands for infrastructure investment, from

the public sector, private sector and through public private partnerships. Thus,

the banking system has to extend itself and innovate. Banks will have to

innovate and look for new delivery mechanisms and provide better access to

the currently under-served. Innovative channels for credit delivery for serving

new rural credit needs will have to be found. The budding expansion of non-

agriculture service enterprises in rural areas will have to be financed. Greater

efforts will need to be made on information technology for record keeping,

service delivery, and reduction in transactions costs, risk assessment and risk

management. Banks will have to invest in new skills through new recruitment

and through intensive training of existing personnel.

28

XI. RISK MANAGEMENT – Banking in modern economies is all about risk

management. The successful negotiation and implementation of Basel II

Accord is likely to lead to an even sharper focus on the risk measurement and

risk management at the institutional level. Sound risk management practices

would be an important pillar for staying ahead of the competition. Banks can,

on their part, formulate ‘early warning indicators’ suited to their own

requirements, business profile and risk appetite in order to better monitor and

manage risks.

XII. GOVERNANCE – The quality of corporate governance in the banks

becomes critical as competition intensifies, banks strive to retain their client

base, and regulators move out of controls and micro-regulation. The objective

should be to continuously strive for excellence. Improvement in policy-

framework, regulatory regime, market perceptions, and indeed, popular

sentiments relating to governance in banks need to be on the top of the agenda

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

global perspective.

29

FUTURE SCENARIOThe future outlook of the Indian banking industry is that a lot of action is set to be

seen with respect to M & A’s, with consolidation as a key to competitiveness being

the driving force. Both the private sector banks and public sector banks in India are

seeking to acquire foreign banks. As an example, the State Bank of India, the largest

bank of the country has major overseas acquisition plans in its bid to make itself one

of the top three

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

the PSU banks are even planning to merge with their peers to consolidate their

capacities. In the coming years we would also see strong cooperative banks merging

with each other and weak cooperative banks merging with stronger ones.

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

of scale, greater geographical penetration, enhanced market image and brand name,

increased bargaining power, and other synergies; there are also likely to be risks

involved in consolidation like problems associated with size, human relations

problems, dissimilarity in structure, systems and the procedures of the two

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

activity can give enhanced

value to the industry.

30

REGULATIONS

REGARDING

MERGERS

AND

ACQUISITION

OF

BANK

31

8.BANK MERGER/AMALGAMATION UNDER

VARIOUS ACTS

The relevant provisions regarding merger, amalgamation and acquisition of banks

under various acts are discussed in brief as under:

Mergers- banking Regulation act 1949

Amalgamations of banking companies under B R Act fall under categories are

voluntary amalgamation and compulsory amalgamation.

Section 44A Voluntary Amalgamation of Banking Companies.

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

followed in case of voluntary mergers of banking companies. Under these provisions

a banking company may be amalgamated with another banking company by approval

of shareholders of each banking company by resolution passed by majority of two

third in value of shareholders of each of the said companies. The bank to obtain

Reserve Bank’s sanction for the approval of the scheme of amalgamation. However,

as per the observations of JPC the role of RBI is limited. The reserve bank generally

encourages amalgamation when it is satisfied that the scheme is in the interest of

depositors of the amalgamating banks.

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

shows that the high court is not given the powers to grant its approval to the schemes

of merger of banking companies and Reserve bank is given such powers. Further,

reserve bank is empowered to determine the Markey value of shares of minority

shareholders who have voted against the scheme of amalgamation. Since nationalized

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

provisions of section 44A on voluntary amalgamation are not applicable in the case of

amalgamation of two public sector banks or for the merger of a nationalized bank/SBI

with a banking company or vice versa. These mergers have to be attempted in terms

of the provisions in the respective statute under which they are constituted. Moreover,

the section does not envisage approval of RBI for the merger of any other financial

entity such as NBFC with a banking company voluntarily.

Therefore a baking company can be amalgamated with another banking company

only under section 44A of the BR act.

32

Sector 45- Compulsory Amalgamation of banks

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

of amalgamation of a banking company with other institution (the transferee bank)

under sub- section (15) of section 45. Banking institution means any banking

company and includes SBI and subsidiary banks or a corresponding new bank. A

compulsory amalgamation is a pressed into action where the financial position of the

bank has become week and urgent measures are required to be taken to safeguard the

depositor’s interest. Section 45 of the Banking regulation Act, 1949 provides for a

bank to be reconstructed or amalgamated compulsorily’ i.e. without the consent of its

members or creditors, with any other banking institutions as defined in sub

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

bank in consultation with the central government in the case of banks, which are

weak, unsound or improperly managed. Under the provisions, RBI can apply to the

central government for suspension of business by a banking company and prepare a

scheme of reconstitution or amalgamation in order to safeguard the interests of the

depositors.

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

banking company with any other banking company, nationalized bank, SBI and

subsidiary of SBI. Whereas under voluntary amalgamation, a banking company can

be amalgamated with banking company can be amalgamated with another banking

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

nationalized bank or any other financial entity.

Companies Act

Section 394 of the companies act, 1956 is the main section that deals with the

reconstruction and amalgamation of the companies. Under section 44A of the banking

Regulation Act, 1949 two banking companies can be amalgamated voluntarily. In

case of an amalgamated of any company such as a non banking finance company with

a banking company, the merger would be covered under the provisions of section 394

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

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

government may amalgamate two or more companies in public interest.

State Bank of India Act, 1955

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

negotiation for acquiring business including assets and liabilities of any banking

33

institution with the sanction of the central government and if so directed by the

government in consultation with the RBI. The terms and conditions of acquisition by

central board of the SBI and the concerned banking institution and the reserve bank of

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

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

schemes of acquisition become effective from the date specified in order of sanction.

As per sub-section (13) of section 38 of the SBI act, banking institution is defined as

under “banking institution” includes any individual or any association of individuals

(whether incorporated or not or whether a department of government or a separate

institution), carrying on the business of banking.

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

or any association of individuals carrying on banking business. The scope provided

for acquisition under the SBI act is very wide which includes any individual or any

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

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

of individuals carrying on banking business may also include urban cooperative banks

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

corresponding new bank or a banking company in the definition of banking institution

under section 38(13) of the SBI act.

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

corresponding new bank or a RRB or its own subsidiary for that matter. Such a power

mat have to be presumed by interpreting the definition of banking institution in widest

possible terms to include any person doing business of banking. It can also be argued

that if State Bank of India is given a power to acquire the business of any individual

doing banking business it should be permissible to acquire any corporate doing

banking business subject to compliance with law which is applicable to such

corporate. But in our view, it is not advisable to rely on such interpretations in the

matter of acquisition of business of banking being conducted by any company or

other corporate. Any such acquisition affects right to property and rights of many

other stakeholders in the organization to be acquired. The powers for acquisition are

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

possibility of challenge to the action of acquisition by any stakeholder are minimized

and such stakeholders are aware of their rights by virtue of clear statutory provisions.

34

Nationalised banks may be amalgamated with any other nationalized bank or with

another banking institution. i.e. banking company or SBI or a subsidiary. A

nationalized bank cannot be amalgamated with NBFC.

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

a corresponding new bank with a banking company or vice versa. If a corresponding

new bank becomes a transferor bank and is merged with a banking company being the

transferee bank, a question arises as to the applicability of the provisions of the

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

exclude the applicability of the companies act to any scheme of amalgamation of a

company. Further section 394(4) (b) of the companies act provides that a transferee

company does not include any company other than company within the meaning of

companies act. But a transferor company includes anybody corporate whether the

company is within the meaning of companies act or not. The effect of this provision is

that provision contained in the companies act relating to amalgamation and mergers

apply in cases where any corporation is to be merged with a company. Therefore if

under section 9(2)(c) of nationalization act a corresponding new bank is to merged

with a banking company( transferee company), it will be necessary to comply with the

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

banking company ¾ the in value present and voting should approve the scheme of

amalgamation. Section 44A of the Banking Regulation Act which empowers RBI to

approve amalgamation of any two banking companies requires approval of

shareholders of each company 2/3rd in value. But since section44A does not apply if a

Banking company is to be merged with a corresponding new bank, approval of 3/4th in

value of shareholders will apply to such merger in compliance with the companies act.

Acquisition of co-operative banks with Other Entities

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

under the provision of banking regulation act 1949(as applicable to cooperative

banks). However constitution, composition and administration of the cooperative

societies are under supervision of registrar of co-operative societies of respective

states (in case of Maharashtra State, cooperative societies are governed by the

positions of Maharashtra co operative societies act, 1961)

Amalgamation of cooperative banks

35

Under section 18A of the Maharashtra State cooperative societies act 1961(MCS Act

) registrar of cooperatives societies is empowered to amalgamate two or more

cooperative banks in public interest or in order to secure the proper management of

one or more cooperative banks. On amalgamation, a new entity comes into being.

Under sector 110A of the MCS act without the sanction of requisition of reserve bank

of India no scheme of amalgamation or reconstruction of banks is permitted.

Therefore a cooperative bank can be amalgamated with any other entity.

Acquisition OF MULTISTATE COOPERATIVE BANKS WITH OTHER

ENTITIES

Voluntary Amalgamation

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

amalgamation by the members of two or more multistage cooperative societies and

forming a new multi state cooperative society. It also provides for transfer of its assets

and liabilities in whole or in part to any other multi state cooperative society or any

cooperative society being a society under the state legislature. Voluntary

amalgamation of multi state cooperative societies will come in force when all the

members and the creditors give their assent. The resolution has been approved by the

central registrar.

Compulsory Amalgamation

Under section 18 of multi state cooperative societies act 2002 central registrar with

the previous approval of the reserve bank, in writing during the period of moratorium

made under section 45(2) of BR act (AACS) may prepare a scheme for amalgamation

of multi state cooperative bank with other multi state cooperative bank and with a

cooperative bank is permissible.

Amalgamation of Regional Rural Banks with other Entities

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

consultation with The National Banks (NABARD) the concerned state government

and sponsored banks in public interest an amalgamate two or ore regional rural banks

by notification in official gazette. Therefore, regional rural banks can be amalgamated

with regional rural banks only.

Amalgamation of Financial Institution with other entities

36

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

Section 4A of the said act specific the public financial institution. Is governed by the

provisions of respective acts of the institution

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

other entities

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

provisions of companies act in respect of amalgamation of companies are

applicable to NBFCs.

Voluntary Acquisition

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

company with any two or more companies with the permission of tribunal. Voluntary

amalgamation under section 44A of banking regulation act is available for merger of

two” banking companies”. In the case of an amalgamation of any other company such

as a non banking finance company with a banking company, the merger would be

covered under the provisions of section 394 of the companies act such cases do not

require specific approval of the RBI.

Compulsory Acquisition

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

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

NBFCs only.

37

MERGER OF

HDFC BANK AND CENTURIAN

BANK OF

PUNJAB

A CASE STUDY

38

9.MERGERS OF HDFC BANK AND CENTURIAN BANK

OF PUNJAB

HDFC BANK

The Housing Development Finance Corporation Limited (HDFC) was amongst the

first to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set

up a bank in the private sector, as part of the RBI's liberalisation of the Indian

Banking Industry in 1994. The bank was incorporated in August 1994 in the name of

'HDFC Bank Limited', with its registered office in Mumbai, India. HDFC Bank

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

following year, it started its operations as a Scheduled Commercial Bank. Today, the

bank boasts of as many as 1412 branches and over 3275 ATMs across India.

Amalgamations

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

bank promoted by Bennett, Coleman & Co. / Times Group). With this, HDFC and

Times became the first two private banks in the New Generation Private Sector Banks

to have gone through a merger

About Centurion Bank of Punjab

Centurion bank of Punjab is a new generation private bank offering a wide spectrum

of retail, SME and corporate banking products and services. It has been among the

earliest banks to offer a technology enabled customer interface that provides easy

access and superior customer service.

Centurion Bank of Punjab has a nationwide reach through its network of 241 branches

and 389 ATMs.The bank aims to serve all the banking and financial needs of its

customers through multiple delivery channels, each of which is supported by state of

the art technology architecture.

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

Punjab, both of which had strong retail franchises in their respective markets.

Centurion Bank had a well managed and growing retail assets business, including

leadership positions in two wheeler loans and commercial vehicles loans and a strong

capital base. The shares of the bank are listed on the major stock exchanges in India

and also on the Luxembourg Stock exchange

39

MERGER POSITION

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

Bank of Punjab (CBoP) for Rs 9,510 crore in one of the largest merger in the financial

sector in India. CBoP shareholders will get one share of HDFC Bank for every 29

shares held by them.

HDFC Bank and Centurion Bank of Punjab have agreed to the biggest merger in Indian banking history, valued at about $2.4 billion. It is likely the beginning of a wave of M&A deals in the financial services industry, as India prepares to ease restrictions on bank ownership in 2009.

This will be HDFC Bank’s second acquisition after Times Bank. HDFC Bank will

jump to the 7th position among commercial banks from 10th after the merger.

However, the merged entity would become second largest private sector bank.

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

southern regions. CBoP has close to 170 branches in the north and around 140

branches in the south. CBoP has a concentrated presence in the in the Indian states of

Punjab and Kerala. The combined entity will have a network of 1148 branches.

HDFC will also acquire a strong SME (small and medium enterprises) portfolio from

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

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

merged entity will be known as HDFC Bank. Rana Talwar's Sabre Capital would hold

less than 1 per cent stake in the merged entity from 3.48 in CBoP, while Bank

Muscat's holding will decline to less than 4 per cent from over 14 per cent in CBoP.

HDFC shareholding falls to will fall from 23.28 per cent to around 19 per cent in the

merged entity.

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

with HDFC Bank will create a world-class bank in quality and scale and will set the

stage to compete with banks both locally as well as on a global level.”

According to HDFC Bank Managing Director and Chief Executive Officer Aditya

Puri, Integration will be smooth as there is no overlap. In an interview, he mentioned

that at 40% growth rate there will be no lay-offs. The integration of the second rung

officials should be smooth as there is hardly any overlap.

40

The boards of the two banks had meet on February 28 to consider the draft scheme of

amalgamation, which will be subject to regulatory approvals. HDFC Bank will

consider making a preferential offer to its parent Housing Development Finance Corp

Ltd (HDFC). The move would allow HDFC to maintain the same level of

shareholding in the bank.

HIGHLIGHTS OF THE MERGER- HDFC AND

CENTURION BANK OF PUNJAB

1) HDFC bank is merged with Centurion Bank of punjab

2) New entity is named as “HDFC bank itself”.

3) The merger will strengthen HDFC Bank's distribution network in the northern

and the southern regions.

4) HDFC Bank Board on 25th February 2008 approved the acquisition of

Centurion Bank of Punjab (CBoP) for Rs 9,510 crore

41

MERGER OF

IDBI

AND

IDBI BANK

A CASE STUDY

42

10.Merger of IDBI and IDBI bank

IDBI BANK

The Industrial Development Bank of India Limited commonly known by its

acronym IDBI is one of India's leading public sector banks and 4th largest Bank in

overall ratings. RBI categorized IDBI as "other public sector bank".It was established

in 1964 by an Act of Parliament to provide credit and other facilities for the

development of the fledgling Indian industry. It is currently the tenth largest

development bank in the world in terms of reach with 975 ATMs, 568 branches and

352 centers.[1] Some of the institutions built by IDBI are The National Stock

Exchange of India (NSE), The National Securities Depository Services Ltd. (NSDL)

and the Stock Holding Corporation of India (SHCIL) IDBI BANK , as a private bank

after government policy for new generation private banks.

IDBI

The Industrial Development Bank of India (IDBI) was established on July 1, 1964

under an Act of Parliament as a wholly owned subsidiary of the Reserve Bank of

India. In 16 February 1976, the ownership of IDBI was transferred to the Government

of India and it was made the principal financial institution for coordinating the

activities of institutions engaged in financing, promoting and developing industry in

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

following IDBI’s public issue in July 1995, the former continues to be the major

shareholder (current shareholding: 52.3%). During the four decades of its existence,

IDBI has been instrumental not only in establishing a well-developed, diversified and

efficient industrial and institutional structure but also adding a qualitative dimension

to the process of industrial development in the country

43

Merger position

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

of Industrial Development Bank of India (IDBI) with its parent company (IDBI held

57% stake in IDBI Bank) was announced. However, the merger was to be effective

retrospectively from October 1, 2004. The swap ratio was established at 1:1.42 , that

is, IDBI issued 100 equity shares for every 142 equity shares held by the shareholders

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

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

IDBI bank, its banking subsidiary, in a move aimed at consolidating businesses across

the value chain and realizing economies of scale.

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

and IDBI Bank. “The rationale of the merger is extremely compelling because the

bank needs capital to grow and gets to use a name that has great brand value. They

can start operations as a full-fledged bank without incurring expenditure on setting up

branches, inducting technology, or bringing in new people,” Damodaran said.

 

A new entity, IDBI Ltd, will become the holding company with two strategic business

units — IDBI, which will function as a development finance company, and IDBI

Bank, which will be the retail arm. IDBI Home Finance, which was acquired from the

Tatas, would also be merged into IDBI.

44

MERGER

OF

BANK OF PUNJAB

AND

CENTURION BANK

A CASE STUDY

45

11.MERGERS OF CENTURIAN BANK

AND BANK OF PUNJAB

BANK OF PUNJAB

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

b) The registered office of the bank was situated at SCO 46-47, sector 9-D,

Madhya Marg, Chandigarh- 160017.

c) It is banking company under the provisions of regulation act, 1949.

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

and articles of association.

e) The bank is a new private sector bank in operating for more than 10 years,

with a national network of 136 branches( including extension counters)

having a significant presence in the most of the major banking sectors of

the country. The transferor bank offers a host of banking products catering

to various classes of customers ranging from small and medium enterprises

to large cooperates.

f) The bank is listed on the stock exchange, Mumbai, the national stock

exchange of India limited and the Ludhiana stock exchange.

CENTURION BANK

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

b) The registered office of the Bank was situated at Durga Niwas, Mahatma

Gandhi Road, Panaji, 403001, Goa.

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

d) The objectives of transferee bank are banking business as set out in its

memorandum and articles of association.

e) The bank is a profitable and well capitalized new private sector bank having a

national presence of over 99 branches( including extension counter)

f) It has a significant presence in the retail segment offering a range of products

across various categories.

g) The bank is listed on the stock exchange, Mumbai and the National stock

exchange of India limited, Mangalore stock exchange of India limited,

46

Mangalore stock exchange and its global depository receipts are listed on the

Luxembourg stock exchange.

The amalgamation of the Transferor bank (BOP) with the transferee bank (centurion)

is effected subject to the terms and conditions embodied in the scheme of merger

pursuant to section 44A of banking regulation act, 1949( hereinafter “the act”). In

terms of section 44A of the said act, a resolution is required to be passed by a

majority in number and two-third in the value of the members of the Transferor and

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

As both the companies are banking companies, the amalgamation is regulated by the

provisions of the act and would require the sanction of the reserve bank of India under

the said act. The provisions of section 391-394 of the companies’ act, 1956 relating to

amalgamation are not applicable to the amalgamation of the transferor bank with the

transferee bank and therefore the scheme is not be required to be sanctioned by a high

court under the provisions of the companies act, 1956.

About Centurion Bank of Punjab

Centurion bank of Punjab is a new generation private bank offering a wide spectrum

of retail, SME and corporate banking products and services. It has been among the

earliest banks to offer a technology enabled customer interface that provides easy

access and superior customer service.

Centurion Bank of Punjab has a nationwide reach through its network of 241 branches

and 389 ATMs.The bank aims to serve all the banking and financial needs of its

customers through multiple delivery channels, each of which is supported by state of

the art technology architecture.

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

Punjab, both of which had strong retail franchises in their respective markets.

Centurion Bank had a well managed and growing retail assets business, including

leadership positions in two wheeler loans and commercial vehicles loans and a strong

capital base. Bank of Punjab brings with it a strong retail deposit customer base in

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

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

the Luxembourg Stock exchange. Among centurion bank of Punjab’s greatest

strengths is the fact that it is a professionally managed bank with a globally

experienced and capable management team. The day to day operations of the bank are

47

looked by Mr. Shilnder bhandari, managing Director & CEO, assisted by a senior

management team, under the overall supervision and control of the Board of directors.

Mr. Rana Talwar is the chairman of the board. Some of our major shareholders are

saber capital, Bank Muscat and Keppel Corporation, Singapore are represented on the

Board.

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

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

The combined bank will be full service commercial bank with a strong presence in the

Retail, SME and Agricultural segments.

Share holding pattern of Centurion Bank of Punjab

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

The family of Darshanjit Singh which promoted Bop currently holds 15.62% while

associates hold another 11.40% the promoter stake will now fall down to around 5%

ad for associate that would be 7-8%.

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

20.5% from 25.91%, Keppel’s stake will be at 9% from current level of 11.33% and

Rana Talwar’s capital will have a stake of 4.4% as against 5.61%.

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

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

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

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

4.8%.

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

plans. Centurion banks capital adequacy on a standalone basis stood at 23.1% while

Bank of Punjab figure stood at 9.21%.

The performance net worth of combined entity as at march 2005 stood at Rs. 696

crores with centurion’s net worth at Rs. 511 crore and Bank of Punjab’s net worth at

Rs. 181 crore, and combine entity( centurion Bank of Punjab) will have total asset

9395 crore, deposit 7837 crore and operating profit 43 crore.

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

Rs. 696 cr.

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

million customers.

48

MERGER POSITION

Private Banks is taking to the consolidation route in a big way. Bank of Punjab (BOP) and Centurion Banks (CB) have been merged to form Centurion Bank of Punjab (CBP). Private Banks is taking to the consolidation route in a big way. Bank of Punjab (BOP) and Centurion Banks (CB) have been merged to form Centurion Bank of Punjab (CBP). elements of both, he added. Centurion Bank has a presence in south and west and

Bank of Punjab has a strong presence in the north. “The merger will give us scale

geographical reach and entry into new products segments” said the official.

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

with good retail assets and an agriculture portfolio as well as deposit franchisee

Centurion Bank has a capital, ability to generate retail assets, risk management

systems and good treasury division. Market players except the swap ratio 2:1, said

sources. For very two stocks of Centurion bank, a shareholder will

RBI approved merger of Centurion Bank and Bank of Punjab effective from October

1, 2005. The merger is at swap ratio 9:4 and the combined bank is called Centurion

bank of Punjab. The merger of the banks will have a presence of 240 branches and

extension counters, 386 ATMs, about 2.2 million customers. As on March 2005, the

net worth of the combined entity is Rs 696 crore and the capital adequacy ratio is

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

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

capital and have the technology edge. Due to intensifying competition, access to low

cost deposits is critical for growth. Therefore, size and geographical reach becomes

the key for smaller banks. The choice before smaller private banks is to merge and

form bigger and viable entities or merge into a big private sector bank. The proposed

merger of bank of Punjab and Centurion Bank is sure to encourage other private

sector banks to go for the M&A road for consolidation.

The merger of Centurion bank and Bank of Punjab, both of which had strong retail

franchises in their respective markets, formed centurion bank of Punjab. Centurion

bank had a well managed and growing retail assets business, including leadership

positions in 2 wheeler loans and commercial vehicle loans, and a strong capital base.

Bank of Punjab brings with it a strong retail deposit customer base in North India in

addition to a sizeable SME and agricultural portfolio. The shares of the bank are listed

on the major stock exchanges in India and also on the Luxembourg stock exchange.

49

Bank of Punjab has net non- performing assets of around Rs 110.45 crore as on March

2004, which will be carried to Centurion Banks books after merger. Both the brands

are strong in their respective geographers and business hence the merged entity will

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

and Bank of Punjab has a strong presence in the north. “The merger will give us scale

geographical reach and entry into new products segments” said the official.

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

with good retail assets and an agriculture portfolio as well as deposit franchisee

Centurion Bank has a capital, ability to generate retail assets, risk management

systems and good treasury division. Market players except the swap ratio 2:1, said

sources. For very two stocks of Centurion bank, a shareholder will get one stock of

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

senior bank official. The depository base of entity will be around Rs. 7165.67 crore

and advances will be around Rs. 3909.87 crore. The organization structure for the

combined bank is in place and the grades and incentives across the organization have

largely been realigned. Centurion bank of Punjab said in a statement. ” The operations

of the bank have been integrated across the entire network.”

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

migration has been planned to ensure minimum disruption of customer service and

operation across the bank”’ Centurion Bank of Punjab Said.

HIGHLIGHTS OF THE MERGER- CENTURION BANK

AND BANK OF PUNJAB

1. Bank of Punjab is merged into Centurion Bank.

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

3. Centurion Bank’s chairman Rana Talwar has taken over as the chairman of the

merged entity.

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

5. KPMG India pvt ltd and NM Raiji & Co are the independent values and

ambit corporate finance was the sole investment banker to the transaction.

50

6. Swap ratio has been fixed at 4:9 that is for every four shares of Rs 10 of

Bank of Punjab, its shareholders would receive 9 shares of Centurion Bank.

7. There has been no cash transaction in the course of the merger; it has been

settled through the swap of shares.

8. There is no downsizing via the voluntary retirement scheme.

In the opinion of the Board of Directors of Bank of Punjab the following are amongst

others, the benefits that are expected to accrue to the members from the proposed

scheme:

(a) Financial Capability: The amalgamation is expected to enable the merge

Entity to have a stronger financial and business profile, which could be synergized

to both for resources and mobilization and asset generation.

(b) Branch Network: As a result of the amalgamation, the branch network of the

merged entity would increase to 235 branches, providing increased geographic

coverage, particular in the southern India and giving it a larger national foot print

as well as convenience to its customers.

(c) Retail Customer Base: The amalgamation would enable the merged entity to

increase its retail customer base. This larger customer base will provide the

merged entity enhanced opportunities for offering banking and financial services

and products and facilitate cross selling of products and services.

(d) Use of Technology: Post amalgamation, the merged entity would be able to

provide through its branches, ATMs, phone and the internet banking and financial

services and products to a larger customer base, with expected savings in costs

and operating expenses.

(e) Larger Size: the larger asset base of the merged entity will put the merged

entity amongst the bigger players in the private sector banking space.

(f) International Listing: The members will become shareholders of an

internationally listed entity which has the advantage of greater access to raising

capital.

51

CONCLUSION:

Growth is always essential for the existence of a business concern. A business is

bound to die if it does not try to expand its activities. The expansion of a business may

be in the form of enlargement of its activities or acquisition of ownership. Internal

expansion results gradual increase in the activities of the concern. External expansion

refers to “business combination” where two or more concerns combine and expand

their business activities.

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

to restructure the banking structure in India through mergers and acquisition in order

to make them more capitalized, automated and technology oriented so as to provide

environment more competitive and customer friendly .Few more impediment for

paving the way towards mergers and acquisition on commercial consideration and

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

provisions related to banking and industrial matter should immediately be resolved if

at all the place of merger and acquisition has to be accelerated in Indian banking

sector .

52

Bibliography

Books1. Finance and profits:- N.J.Yasaswy2. Financial management and policy:-James Horne3. Financial management:-P.K Jain4. Financial management:- , Ravi.M.Kishore5. Financial management:-Subir Kumar Banarjee6. Merger and acquisition :- C.H.Rajeshwar

Paper Economics times

Webwww.google.comwww.deccanherald.com

53