This article is written by Adv. Kashish Goel, pursuing a Diploma in M&A, Institutional Finance, and Investment Laws (PE and VC transactions) from LawSikho. The article has been edited by Tanmaya Sharma (Associate, LawSikho) and Ruchika Mohapatra (Associate, LawSikho).
The world can be said to be in the state of flux i.e. it is being affected by the rapidly changing technology and the forces of globalisation due to which the companies are facing fierce competition. They are exploring different strategies in order to grow internally as well as externally. A way to achieve growth internally can be by streamlining the operations, improving the management, and investing capital into the existing business of the firm. The other tools and methods that are used to find growth are by way of merger and acquisition (M&As), joint ventures (JVs), strategic alliances, etc. By doing any of the previously mentioned exercises, the companies can gain an advantage over the rest of the competition.
Mergers and acquisitions in India
The Indian corporate sector has shown interest in the M&A practice and various business entities and companies are using this to build different companies that cater to the ever-growing domestic and global markets. These activities were dormant until the policies of 1991 came which led to the departure of the old policies. In the years before the liberalisation, due to the restrictions that were created by the likes of MRTP Act, ICA 1956, FERA Act the number of the activities that pertained to the strategy of using mergers and acquisition were low in number.
The basic economic policies during the time of pre-liberalisation era were not beneficial to the private sector and that in turn stopped them from creating monopolies. However, when the policies changed in 1991, which can be called the post-liberalization era, many companies across the country started using this as an effective strategy to expand. All of it is because of the relaxation under the MRTP Act and FERA Act. It can be said that the growth in the sector of M&A has been a spectacular thing to watch. India was a great participant in the study that was conducted by Grant Thornton and stood at 661 in the year 2007. Over the years, India has managed to become a good player in the field of mergers and acquisitions, not only domestically but internationally as well.
The Indian banking system has achieved various milestones in a relatively short amount of time. This is the world’s largest and most diverse democracy which itself is a challenge as the companies have to cater to such a diverse customer base. It is part and parcel of the agenda of the government to reform the banking sector by repositioning and integrating it into the global financial system. In the past years, there have been various reforms and successful mergers which have had a positive impact on the banking sector.
1. Punjab National Bank taking over “Oriental Bank of Commerce and United Bank of India”.
2. The merger of Indian bank and Allahabad Bank.
3. The merger of Canara Bank and Syndicate Bank.
4. The merger of Union Bank of India with Andhra Bank and Corporation Bank.
As of August 2019, there were 27 public sector banks, but due to this practice of M&A, the number was reduced to 12. The merger of Punjab National Bank with Oriental Bank of Commerce and United Bank of India is considered to be the second-largest merger in the public sector undertakings.
- In the case of “Peerless General Finance and Investments Co. Limited vs. Reserve Bank of India” the Apex Court held that RBI plays an integral part in the economy and in its financial affairs, and the main role of RBI is to regulate the banking sector of India. Two functions of RBI that are supervisory in nature have helped the sector in a great way as it has enhanced the banking standards of India by developing a sound line and improved the methods of operating the activities.
- Banking Regulation Act 1949 provides two types of mergers namely :
1) forced, and
2) voluntary mergers.
The initiations of a forced merger are by RBI to achieve the main objective of protecting the depositors of a weak bank. There are various signs that are indicative that a bank is weak such as:
1) a huge amount of non-performing assets, and
2) use of junk or erosion in the net worth.
Under such circumstances, it is the duty of the RBI to intervene and merge the weak banks with the stronger ones. The procedure prescribed in the Banking Regulation Act, 1949 is applicable for only the private sector bank’s involuntary and compulsory mergers. Governance of the regional rural bank is done by the Regional Rural Banks Act, 1976.
- Role of RBI in the compulsory merger of private sector banking companies: Under Section 45 of the Banking Regulation Act 1949, RBI has the power to apply to the Central Government of India for the suspension of the businesses by a company which is in banking to prepare a reconstruction scheme or an amalgamation scheme. It is to provide a compulsory amalgamation of the bank with any other bank without the vote of their members or creditors. A period of moratorium has to be declared by the RBI for the interest of the various shareholders and to get a proper managing committee of the bank that will prepare the scheme of merger or amalgamation. It also provides that the various schemes finalised by the RBI have to be filed before the Central Government of India that has the power to sanction the scheme either with modifications or without changes.
- Jurisdiction of High Court in bank mergers: An interesting conflict arose before the High Court of Allahabad where the petitioner challenged an order of moratorium passed by the Central Government under Section 45(2) of the Banking Regulation Act, 1949, and a scheme prepared under Section 45(4) by RBI , on the grounds that there had previously been a High Court order under Section 153 of the Companies Act which sanctioned an arrangement by the shareholders and creditors of the bank for the continuance of the bank and satisfaction of the liabilities. The Contention of the appellant was that Section 45 cannot operate to nullify the orders passed by the High Court under the jurisdiction conferred on it by the Companies Act. The court ruled that such reading went against the wording of Section 45 which expressly stated that it operated notwithstanding all other laws, and dismissed the appeal. Jurisdiction of the High Court and the power of judicial review with regard to RBI’s decision on schemes of amalgamation are severely limited in many aspects.
The maintenance of a distinction between the jurisdiction of the High court and RBI under the Banking Regulation Act, 1949 was clarified by the Supreme Court in the decision of Himalayan Bank Ltd v. Roshan Lal Mehra. In this case, it was held that a petition presented to the High Court by a bank currently under a sanctioned scheme of amalgamation under Sections 45M and 45B of the Banking Regulation Act, could be entertained, as the High court retained jurisdiction to pass orders under Section 392 read with Section 391 of the Companies Act. In such cases, the Court pointed out that the scheme of amalgamation was not a substitute or an alternative mode of liquidation, but rather was an alternative to liquidation itself.
Purpose for M&As under The Banking Sector of India
The Indian banking sector has been molded into a perfect structure because of mergers and acquisitions. There are many opinions on this material but there is a hope that the situation will improve after mergers between the banking institutions. Some reasons for mergers and acquisitions under banking sector are:
Rise in market competition
The invention of new financial products and the merging of regional financial systems are the reasons for the merger. Markets industrialised and became more competitive and because of this, the market share of all individual companies condensed, and hence, mergers and acquisitions started.
Economies of scale
Economies of scale can lead to consolidation within an industry as smaller companies have difficulty competing with larger and, therefore, more efficient institutions.
Skill and talent
As one firm merges or acquires the other, an exchange of talent and skills takes place. Due to the highly competitive nature of the industry, having a bigger pool of talent and skill gives an edge over the competitors.
Technology and products
With the introduction of e-banking and some monetary instruments/derivatives and the removal of admission barriers, the gates have opened for new banks with the latest technology, and old banks can’t compete with them. Hence, they decide to merge, which gives the old bank the latest technology that the banking industry needs and the new bank an established customer base.
Synergy as a concept states that the combined value and performance of two companies will be greater than the sum of the separate individual parts. It is a term that is most commonly used in the context of mergers and acquisitions (M&A). Synergy, or the potential financial benefit achieved through the combining of companies, is often a driving force behind a merger.
In recent years, the banking industry has been undergoing massive mergers and acquisitions in order to achieve bank consolidation. Mergers and amalgamations assist the institutions in scaling up fast and gaining a bigger number of new consumers so as to improve their balance sheet and cash flow statements. An acquisition or a merger not only offers a bank more capital to work with in terms of giving out loans and making investments, but it also helps in the expansion of the bank’s geographic reach that enables it to provide services to a larger customer base. However, a sharp rise in the number of such mergers and acquisitions has resulted in an unprecedented increase in bank concentration at the market level, which may have an impact on banking competitiveness.
The unexpected increase in the country’s nonperforming assets (NPAs) and bad loans has harmed its international standing and therefore mergers do seem like a way out. However, anti-competitive mergers and abuses of dominance in the banking sector should be closely scrutinised by the Government. Currently, there is also a need for the Government to adopt essential merger regulations relating to both PSBs and private banking organisations.
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