This article is written by Sivagnana Selvi, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from lawsikho.com. Here she discusses “Why do banks merge?”

Introduction

To address the problem of economic slowdown, the Finance Minister has announced the merger of 10 public sector banks into 4, which would reduce the number of public sector banks from 27 to 12, to boost the economy by increasing the liquidity, diversifying the risk and also to combat the issue of non-performing assets. Further, the Finance Minister of India announced INR 55,000 Crore recapitalisation after the merger.

These are the list of banks that will be merged:

1. “Punjab National Bank, Oriental Bank of Commerce and United Bank of India will combine to form the nation’s second-largest lender.
2. Canara Bank and Syndicate Bank will merge.
3. Union Bank of India will amalgamate with Andhra Bank and Corporation Bank.
4. Indian Bank will merge with Allahabad Bank.”^[i]

Before getting into bank mergers, we need to understand what is meant by mergers and acquisition in the first place.

When two or more enterprises join together under any circumstances then it is said to be a Merger.

The acquisition means when one company is taken over by another company. The Mergers and Acquisitions can be either amicable or hostile. In India, the provisions for Mergers and Acquisition are found in Sections 390- 395 of the Companies Act, 1956. Under Companies Act, 2013, Chapter XV deals with “Compromises, Arrangements and Amalgamations.” The Provisions of Mergers and Acquisitions are also dealt under the Competition Act 2002, Foreign Exchange Management Act, 1999, SEBI Takeover Code 2011 and Income Tax Act, 1961.

Historical Background of Bank Mergers in India

• Bank merger is not something new in India, if we take the Indian Banking history, the first bank merger happened in 1921 by merger of three major banks ie. Bank of Bengal, Bank of Bombay and Bank of Madras into Imperial Bank of India, which later became known as State Bank of India.
• The banking sector in India can be divided into two important eras, pre-liberalisation and post-liberalisation.
• The first phase of bank nationalisation in 1969, nationalised 14 largest banks and in the second phase of nationalisation ie. 1980, 6 more banks were nationalised i
• The merger after post-liberalisation happened in 1993, where New Bank of India has merged with Punjab National Bank; this merger resulted in the reduction of the number of nationalised banks from 20 to 19.
• After liberalisation many private banks entered into Indian economy like Global Trust Bank, Axis Bank, HDFC bank, ICICI bank etc.
• By the entry of private players there was a strict competition between Indian banks, many banks adopted different strategies and policies to sustain in the field, merger of banks is one such strategy to improve the efficiency of the banks.^[ii]

Idea behind Bank Mergers in India

1. INCREASE IN PROFITS: The merger would increase the assets by combining that of the amalgamated entity, which will increase the value of the shareholders.
2. DIVERSIFICATION: By way of merger, banks can diversify their service and attain a quick growth with expanded market access.
3. COMBINED SYNERGY: It is one of the motives of the merger. The merger would increase the efficiency of performance and value of the companies when they are combined.
4. REDUCING THE RISK: Mergers significantly reduces the risk of bankruptcy.
5. REDUCTION OF COMPETITION: By merging the banks, the potential competitors will be absorbed into one entity and reduces the competition in the market.

Procedure of Bank Mergers

Under Indian Law, Mergers and Acquisitions safeguards the interest of the secured creditors, in the case of SEBI and Competition law, it aims to protect investors and appreciable adverse effect on trade-related competition covered under Companies Act, SEBI and Competition Act 2002. The objectives of the legislation vary for instances in Company law it tries to ??? in the relevant market in India (AAEC) respectively.

For mergers of banks, RBI by virtue of Section 35A and Section 44A of the Banking Regulation Act, 1949 issued a Master Directions named “Reserve Bank of India (Amalgamation of Private Sector Bank) Direction, 2016.

 Scope

1. An amalgamation of two banking companies.
2. An amalgamation of an NBFC with a banking company.^[iii]

Approval by Board of Directors

For the purpose of amalgamation, two-third of majority, of the concerned companies to the matter specified in Note-1^[iv]

Amalgamation Between Two Banking Companies

By virtue of Section 44A of the Banking Regulation Act, 1949, the shareholder of each bank should pass a resolution on the draft scheme of amalgamation, with 2/3^rd of the majority present in person or proxy. Before placing the draft scheme agreement before the shareholders, it must be approved by the Board of Directors of each bank separately.

The Board will consider the following matters before approval:

1. “The valuation of assets, liabilities and the reserves of the amalgamated company and whether it will result in a revaluation of assets upward or credit being taken for unrealised gains.
2. Whether due diligence exercise has been undertaken in respect of the amalgamated company.
3. The nature of the consideration, which, the amalgamating company will pay to the shareholders of the amalgamated company.
4. The shareholding pattern in the two banking companies and whether as a result of the amalgamation and the swap ratio, the shareholding of any individual, entity or group in the amalgamating company will be violative of the Reserve Bank guidelines or require its specific approval.
5. The impact of the amalgamation on the profitability and the capital adequacy ratio of the amalgamating company.
6. The changes which are proposed to be made in the composition of the board of directors of the amalgamating banking company, consequent upon the amalgamation and whether the resultant composition of the Board will be in conformity with the Reserve Bank guidelines in that behalf.”^[v]

After the approval of the draft scheme of amalgamation, by the shareholders in majority, it will be placed before the RBI for its approval.

For the purpose of amalgamation, the banking companies shall submit the following documents to the RBI for its sanction:

• Draft scheme of amalgamation which was placed before the shareholders for approval.
• Copies of the notice of every meeting of the shareholders conducted for the approval of amalgamation, along with newspaper publication supporting such meetings.
• The officers presiding the shareholder meeting shall certify the following:

1. Copy of the resolution which was passed in the meeting.
2. Total number of shareholders presented in the meeting, which includes the persons presented in the meeting and proxy.
3. The number of shareholders who are in favour and against the resolution and aggregate number of shares held by them.
4. The total number of shareholders whose votes were declared invalid, along with the aggregate number of shares held by them.
5. The particulars like names and ledger folios of the dissenting shareholders.
6. Details of the scrutineers, who were appointed during counting of the votes.

• Certificates from the officers of both the banks regarding the notices given by the dissenting shareholders along with their names and the number of shares held by them.
• The details of the Directors and Chief Executive Officer, who would be appointed after the amalgamation.
• Copies of the report of the valuers who were appointed during the determination of swap ratios.
• Other relevant information like: Annual reports, financial results, pro- forma combined balance sheet, of each bank.
• Any other information required by the RBI as proper.

Amalgamation of an NBFC with a Banking Company

Chapter IV of the Master direction deals with Merger of a Non-Banking Financial Company with Banking Companies. For the amalgamation, the RBI’s approval is required, and it is granted on the basis of the Boards of both the Companies. The Board will consider the factors in Chapter III before giving its approval. Additionally, the Board will consider the following in the case of NBFC:

1. “The NBFC has violated / is likely to violate any of the RBI / SEBI norms and if so, shall ensure that these norms are complied with before the scheme of amalgamation is approved.
2. The NBFC has complied with the “Know Your Customer” norms for all the accounts, which will become accounts of the banking company after amalgamation.
3. If the NBFC has availed of credit facilities from banks / FIs, whether the loan agreements mandate the NBFC to seek consent of the bank / FI concerned for the proposed merger / amalgamation.”^[vi]

Benefits Of Mergers

For Banks

1. In this competition era, small banks will be more beneficial in mergers, they could upgrade themselves with international standards.
2. Expansion of geographical location.
3. Inter- banking service would come down and save time.
4. Increase in the efficiency of the employee’s performance through synergies.
5. Increase in the value of assets of the combined bank.

Economy

1. Significant reduction in transaction cost.
2. Provides better services to the customers with wide varieties of products and services, which will boost the economy
3. Important positions like CMD, GM, Zonal Managers etc will be absorbed or abolished, which saves a huge sum of money.
4. Diversification of risk, and improves the liquidity of the bank.

 Government

1. The Government need not recapitalise banks frequently.
2. Regulation of a lesser number of banks will be easier to manage.
3. Mergers would increase the capital and it would help to meet BASEL III capital adequacy ratio.

Cons of Mergers

1. Loss of jobs for many people and difficulties in adjusting to new work culture.
2. Mergers will close down many ATMs and Branch offices which would be difficult for customers as an accessibility issue.

Case Study of Ing Vysya with Kotak Mahindra Bank

Kotak Mahindra limited started their journey as Non -Banking Financial Company in 1985 and it got its banking license in 2003 and became the first NBFC to be converted into a bank.

ING Vysya was initially incorporated as Vysya Bank Limited (Vysya Bank) in Bangalore. ING Group acquired major shares of Vysya Bank and became ING Vysya in 2002, and this is the first bank to be acquired by a foreign entity.

The merger of ING Vysya, a quasi-foreign bank owned by Dutch multinational company, with Kotak Mahindra Bank limited, created the fourth largest private bank in India. The announcement came up with full share acquisition of US $2.4 billion, now the balance sheet size after the merger is Rs. 2 trillion and market capitalisation is Rs. 1 trillion. This merger helps Kotak to expand its operation in banking sector, and also gave an edge to compete with other foreign banks. Mergers also provide for adequate capital base which would help banks to invest in huge projects for countries economic growth. By the virtue of the amalgamation, the Kotak has expanded its geographical presence as their branches have increased to 47% and it can also deeply penetrate into Southern part of India, where operations were limited before. The merger has got its own drawbacks because it is very difficult for the employees to cope up with change in working culture. The salary structure of the two banks are different.  Nearly 1/3^rd  ING Vysya employee’s pay structure comes under Indian Bank Association, employees are worried whether they would get the same pay structure and some employees were worried about abolition of position of regional manager, sales head, zonal head etc., and employees are in the fear of losing jobs.^[vii] The merger posed various challenges and speculations on November 22, 2014 SEBI began its investigation, whether there was any insider trading based on the announcement, because the share value of the two banks surged 8% in Kotak and 13% in ING Vysya.^[viii]

Conclusion

Mergers of Bank got its own benefits by increasing in adequacy of capital which would help the bank to invest in huge infrastructure and other essential projects, expansion of geographical operations, better service for the account holder and better performance. But not all bank mergers are successful, mergers of banks would cause dissatisfaction among employees and losing of jobs and there might be motives to avail tax benefits or it might lead to anti-competitive practices by elimination of competition. Mergers of Bank is crucial for the economy to maintain the bank’s liquidity especially when a country is facing with non- performing assets issues, at the same time mergers must be carefully allowed keeping the employees in mind and the merger should not lead to anti-competitive practice.

References

^[i] Available at https://economictimes.indiatimes.com/news/economy/policy/nirmala-sitharaman-announces-fresh-reforms-special-agencies-to-monitor-loans-above-rs-250-crore-to-avert-another-nirav-modi-like-situation/articleshow/70909169.cms?from=mdr

^[ii] Available at http://ajbms.org/articlepdf/ajbms_2011_1231.pdf

^[iii] Available at https://m.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10364

^[iv] Chapter- II OF Master Direction 2016

^[v] Chapter- III of Master Direction 2016

^[vi] Chapter IV, Master Direction 2016.

^[vii] Available at https://www.icmrindia.org/casestudies/catalogue/Business%20Strategy/Merger%20of%20ING%20Vysya%20with%20Kotak%20Mahindra%20Bank-Excerpts.htm

^[viii] Available at http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/ING_Bank_Merges_with_Kotak_Bank.pdf

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