This article is written by Simran Bais who is pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions)  from Lawsikho.


The transactions concerning Mergers and Acquisitions (hereinafter referred to as ‘M&A’) in the banking industry are mostly criticized as a large ticket strategy that does not deliver excessive gains. It needs to be noted that the Indian economic environment fundamentally provides an advantage to the banks and also provides unique values in the transaction concerning M&A which proves to be beneficial to the bidders unlike other banks’ M&A regimes in the USA.  

It is significant to note that M&A transactions remain an attractive inorganic strategy for the banks to enhance their reach in product markets and back the economy as a whole within an efficient and well-regulated banking system. 

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With the introduction of universal banking in 1999 it has been observed that in the global transactions concerning M&A, the banking M&A remains a specialized category from the other M&A transactions because of the industry-specific features revolving around banks such as valuation, their means to achieve profit, and their treatment of capital. Therefore, in light of this, the post discusses the critical factors of M&A deals and the regulatory regime in India by analyzing some cases of Bank mergers.

Industry-specific M&A

The Indian economic environment is surrounded by the contentions of higher growth and award performance proportionately as larger games accrued and the same are anticipated by the markets.  Enormous opportunities are created by the banks for growth and while the M&A transactions directly reflect on the economic growth of a nation of a particular sector, banking M&A more particularly favours the economic growth and these gains at the value of the combined company which is shared between the acquirer and the target company. 

Before venturing into the analysis of Banking M&A it is important to understand that the nature of the merger in this particular industry is a horizontal Merger. In a banking merger, the diversification gains are ruled out as it is a merger between the equals that assimilates two different organizations in the same product markets. Concerning the Banking businesses, the cost of funds is critical for valuations and also implies economies of scale dimension, therefore, financing the deal is a critical aspect of M&A as it supports a successful transaction and weans out the failed one.

It is important to note that the Indian banking system has achieved a big feat in a comparatively short period of time for the most diverse democracy. The entire Reform process of the banking sector for this particular industry is fundamentally a part of the government agenda which is aimed with an objective to reposition and integrate the Indian banking sector in the heart of the global financial system. 

The M&A transactions have successfully helped the banking sector to grow manifold.  This is because the transactions concerning M&A are relatively fast and efficient in their own way to pave up into new markets and introduce new technologies, for example, consider the case of Punjab National Bank which in 1993 acquired a new Bank of India. 

The merger of Bharatiya Mahila Bank with the State Bank of India in 2017 was the only other nationalized bank merged with another except for SBI with its associate banks. It is important to note that in 2019, the government merged 27 PSB and reduced them to 12 PSB. The second-largest Punjab National Bank amalgamated with the Oriental Bank of Commerce, United Bank of India, and Bank of India. 

It is also important to observe that M&A is a critical process through which financial service industries accomplish the preferred economic group. The objective for the mergers in the banking sector is for cost reduction, risk reduction, diversification and strengthening of the strategic position.  It was observed that in India initially the Banking Regulation Act, 1949 did not contain any provisions for the M&A among the banking companies however, the Banking laws Amendment Act 1950 for the very first time recognised the right to a voluntary amalgamation of Banking companies by incorporating section 44A to the Banking regulations act 1949.

Through this particular route, power was conferred to the RBI to sanction the scheme of amalgamation between the banking companies. 

It should be kept in mind that the M&A transactions governing the banks are not uniform in nature and because of this in some circumstances, RBI needs to sanction scheme whereas in the compulsory merger as provided under section 45 of the Banking Regulation Act, 1949 RBI needs to prepare the scheme and the same will be presented before the Central government for its sanction.

 The Amalgamation of two or more companies either in the public interest or in order to secure the proper management of the companies is recognised by the Constitution. Speaking of the merger of private banking companies in India, the Banking Regulation Act plays a significant role and it protects the rights as guaranteed under Article 14 and 19 of the Constitution. 

The case of Shivkumar Tulsian and others v. Union of India can be referred to in which the validity of the Banking Regulations Act was challenged on the touchstone of its constitutionality and the Bombay High Court held that section 45 of the act is in conformity with the constitutional provisions as established under article 14 and 19. 

The Apex court in the case of Joseph Kuruvila Vellikunnel v. Reserve Bank of India held that the banking companies cannot be equated at par with the ordinary companies because in a banking company the depositor’s interest is of immense significance and in India RBI is an expert body in determining and protecting the best interest of the banking companies. 

Regulatory Framework for Bank Mergers: Indian Scenario

It is important to note some of the key differences between the merger under the Companies Act, 2013 and the Banking Regulation Act (hereinafter referred to as ‘BR’). Due to the sensitive nature of the banking sector, the entire process is governed under S. 44A of the BR Act.

Merger under Companies Act

Merger under BR Act

Sections 391-394 and Sections 230-232 in the case of the Companies Act, 2013 governs the same. Additionally, regulators such as the CCI, SEBI, and the FIPB are involved to regulate the relevant aspects of the merger.

These transactions are covered under S. 44A of the BR Act and the Merger guidelines. In addition to RBI, only the CCI has any regulatory jurisdiction over the merger. 

The merger is a court driven process.

Subject to the approval and scrutiny of RBI, a merger is driven by the parties themselves.

The scheme must be sanctioned by the NCLT.

The scheme must be approved by the RBI.


What drives M&A in the Banking sector?

It should be observed that like all the other business entities, banks need to safeguard against risks, and at the same time, they need to exploit opportunities that are indicated by existing and expected trends. In the recent past it has been observed that M&As in the banking sector are rising globally and in India also. Therefore, in this respect, it is important to understand the key problems surrounding M&A deals with a special focus on India. 

The international banking situation has witnessed major turmoil within the past few years speaking terms of M&As. Deregulation has been the key driver through three major routes that are listed as the dismantlement of interest rate controls, barriers that has been led to disintermediation, the investor hard to please high returns, price-cutting war, reduced margins, and competition across geographies force in banks to appear for brand new ways.

Driven by apparent edges of scale economies, geographical diversification, lower costs through the branch, and workers rationalization the consolidation has emerged as a strategic tool receiving worldwide recognition for the development.

The deal of HDFC with Centurion Bank of Punjab

It is important to note that the HDFC Bank merged with Centurion Bank of Punjab and after merging it was named HDFC Bank only. This further strengthened the distribution network of the HDFC Bank in the Northern and southern regions.  For HDFC, this merger provided a chance to enhance scale, geography, and management bandwidth. In addition to this, there was a potential of business synergy and cultural fit existing between the two organizations.

It has to be noted that the combined entity increases productivity due to its increased presence that will facilitate massive scale economies and improved distribution with the respective branches and ATMs.


It is important to note that the fundamental reason for the regulation of a banking company is that it is an Institution that is equipped with enormous responsibilities to the depositor’s money and to mitigate the risk of failure of a banking institution is the primary responsibility of the regulators and in this particular context Bank mergers are no exception to it. 

The CCI is responsible for preventing abuse of the dominant position of any company or Enterprise in the market so as to avoid practices which are not having any adverse effect on the competition it should be noted that the role of the CCI is not sector-specific but rather it regulates all kinds of services and business which is likely to have an impact on free competition. 

The merger of the banks should be carried out with utmost care because the acquisition of Bank of Madura by ICICI Bank Ltd, though it facilitated the expansion of ICICI in terms of branches it also had to incur several liabilities of Bank of Madura with a very large number of NPAs therefore, the merger of banks cast a significant impact on the economy.


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