Sumit Kochar , Shreyika Walia
December 16, 2022
With the rapidly advancing technology and an increase in competitions between corporations, Mergers and Acquisitions (“M&A”) are the immediate choice and an effective strategy to penetrate new markets. This approach is often employed by corporations with an aim to extend their business into a new domain and prevail over their unviable state.
Banks being the underpinning foundation of our economy, are frequently encouraged to merge in order to expand globally and create harmony, which in turn benefits the affluence of our country through enhanced flow of monies. In the present day, the Indian banking industry is considered to be growing swiftly and has altered itself into a dynamic industry. A new dimension is accelerated in the sector through mergers and acquisitions and has enabled banks to achieve a high ranking, tossing huge value to the shareholders.
On April 21, 2016, the Reserve Bank of India ("RBI") issued master directions streamlining the process of mergers of private sector banks ("Guidelines"). The proposed merger of two banking companies or of a banking company with a non-banking financial company is governed by these Guidelines. Additionally, these Guidelines would be applicable to public sector banks, as appropriate.
According to the Guidelines, under the terms of Section 44A of the Banking Regulation Act of 1949, RBI has the discretionary authority to authorize the voluntary merger of two banking entities.
These powers do not apply to the voluntary merger of a banking company with a non-banking company, which is governed by Sections 232 to 234 of the Companies Act of 2013, under which the National Company Law Tribunal (“Tribunal”) must approve the merger's plan.
Boards of the banks play a vital role in the amalgamation process as the decision of amalgamation must be ratified by two-third majority of the total board members and not just of those present and voting.
According to Section 44A of the Banking Regulation Act of 1949, no banking company may merge with another banking company unless a scheme outlining the terms of the merger has been presented in draft form to the shareholders of each of the relevant banking companies separately and approved by a resolution passed by a majority of the shareholders of each of the aforementioned companies present in person or by proxy at a meeting of shareholders.
Prior to the shareholders’ approval, the boards of directors of the two banking companies must accept the draft scheme. The following factors should be taken into account while considering such approval:
If such a scheme is adopted by the required number of shareholders, it must be presented to the RBI for approval, which if granted, will be binding on the relevant banking companies.
In the event its proposed to merge an NBFC with a banking company, the banking company should procure RBI’s permission after its board has authorized the proposed merger but before it is filed to the Tribunal for approval.
With respect to the approval of the scheme, in addition to the considerations listed above, the board should also consider the following aspects:
Along with the application of scheme of amalgamation, following are few of the documents/ information required to be submitted:
The following are the reasons for the mergers in banks:
The objective of combining weaker banks with stronger banks has been supported in order to stabilize weak banks and diversify risk management. By joining forces with a more powerful bank, the weaker ones can maintain its presence and avoid going out of business completely.
Due to the synergies created by the combined client bases of the two banks, the amalgamated product will be more profitable and provide improved customer satisfaction. The merged bank will have superior business portfolio, risk management plans, and market capitalization. It also benefits from economies of scale and lower costs through better utilization of available resources.
A merger increases liquidity, ensures direct access to cash resources, and assists in the disposition of surplus and obsolete assets. It aids to pool the resources of the individual banks and use them in an effective and efficient manner. After the merger, the banks will be better equipped to fund massive projects that they previously wouldn't be able to do so on their own, making the funding procedure for those projects swift and simple.
With the advent of the internet, banks can now offer services with the touch of a screen, allowing them to utilize the latest technologies. Through the merger, banks work together and make use of cutting-edge technology to deliver better services and support the expansion of the banking industry.
When two banks merge or are acquired by one another, staff and expertise are also amalgamated, creating a larger talent pool that gives the merged entity an advantage over its competitors.
The Indian banking sector has witnessed a few mergers with the primary motive to ensure growth, expand and diversify within the sector. For example, inter-alia, Punjab National Bank acquired New Bank of India in 1993, Bank of Madura Ltd merged into ICICI Bank Ltd in 2001 and Bhartiya Mahila Bank merged into State Bank of India in 2017.
In August 2019, Government of India announced the -merger of 10 Public Sector Banks (“PSBs”) to 4. In accordance with RBI’s press release dated 28th March 2020, the said mergers were to take effect from 1st April, 2020.
|Punjab National Bank
|United Bank of India and Oriental Bank of Commerce
|Union Bank of India
|Andhra Bank and Corporation Bank
|Bank of Baroda
|Dena Bank and Vijaya Bank
|State Bank of India
-State Bank of Bikaner and Jaipur
-State Bank of Hyderabad
-State Bank of Mysore
-State Bank of Patiala
-State Bank of Travancore
-Bharatiya Mahila Bank
The merger, which saw 27 public sector banks consolidated and reduced to 12, had a principal objective to establish next generation banks and achieve a trillion-dollar economy in the years to come. This merger undoubtedly has positive and synergistic effects on the banking industry, which would have an impact on the effectiveness, workforce, and clients of the banks.
The government's consolidation strategy aims to create larger banks that can compete with both domestic and international financial institutions. Following the mergers, SBI currently has a 22% market share among all banks, and PNB, the second-largest public-sector bank, has a market share of roughly 8%.
With the merger of Punjab National Bank, United Bank of India, and Oriental Bank of Commerce, the country's second-largest nationalized bank in terms of revenue and branch network will be created. The resulting synergy will yield a next-generation bank that is competitive on a global scale.
The Government of India announced the mergers with the following objectives:
The combined PSBs' total assets account for almost 90% of all PSB assets. As a result, under the same reasoning, the following data analysis of all PSBs can be treated equivalently for the combined PSBs.
The following data is extracted from RBI’s financial stability report published in January, 2021
In addition to providing a bank with additional capital to work with in terms of making loans and investments, an acquisition or merger also aids in the growth of the bank's geographic reach, allowing it to serve a bigger customer base.
Major M&A transactions have taken place in the Indian banking industry recently, and as a result, a number of international players have emerged. Recent studies demonstrate that there are reliable predictions of increases in the profitability of Indian banks in the near future. However, a dramatic increase in the volume of these mergers and acquisitions has led to an unprecedented growth in market-level bank concentration, which could have an effect on the competitiveness of the banking industry.
Mergers do appear to be a solution because the country's nonperforming assets (NPAs) and bad loans have adversely affected its reputation abroad. However, the government should constantly monitor anti-competitive mergers and abuses of power in the banking industry. The Government currently needs to enact stringent legislations pertaining to mergers in both PSBs and private banking organizations.
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