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1. INTRODUCTION TO MERGER AND ACQUISITION OF BANKING SECTOR
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 forms1. 2. Merger through absorption 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.
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”.
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
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
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. 2. 3. 4. Horizontal Merger vertical Merger Conglomerate Merger Concentric 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 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 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 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
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.
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:-
By eliminating financial constraints 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
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.
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
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.
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 productmarket 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 IN
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.
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.
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 11
of India, kick started the 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 12
3. Streamlining of the rural and semi urban branches.
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 13
out weak banks. Mergers between strong banks/FIs would make for greater economic 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
AND 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 has shrinked the boundaries. Trade has become transactional from international. Due 15
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
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
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
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 topheavy 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. 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 21
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.
Structure of the Organized Banking Sector in India. Number Of Banks Are In Brackets.
MERGER STORY SO FAR YEAR 1969 1970 1971 1974 1976 1984-85 1984-85 1985 1986 1988 1989-90 1989-90 1989-90 1989-90 1990-91 1993-94 1993-94 1995-96 1996 1997 1997 1998 1998 1999 1999 2000 2001 2002 2003 2004 2004 2005 2005 2008 BANK Bank Of Bihar National Bank Of Lahore Eastern Bank Ltd. Krishnaram Baldeo Bank Ltd. Belgaum Bank Ltd. Lakshmi Commercial Bank Bank Of Cochin Miraj State Bank Hindustan Commercial Bank Trader’s Bank Ltd. United Industrial Bank Bank Of Tamilnad Bank Of Thanjavur Parur Central Bank Purbanchal Bank New Bank Of India Bank Of Karad Kasinath Seth Bank SCICI ITC Classic BARI Doab Bank Punjab Co-operative Bank Anagram Fianance Bareilly Corporation Bank Sikkim Bank ltd. Times bank Bank of Madura Benaras state bank Nedungadi Bank South Gujarat Local Area Bank Global Trust Bank Bank of Punjab IDBI bank HDFC bank MERGED WITH State Bank Of India State Bank Of India Chartered Bank State Bank Of India Union Bank Of India Canara Bank State Bank Of India Union Bank Of India Punjab National Bank Bank Of Baroda Allahabad Bank Indian Overseas Bank Indian Bank Bank Of India Central Bank Of India Punjab National Bank Bank Of India State Bank Of India ICICI ICICI Oriental Bank of Commerce Oriental Bank of Commerce ICICI Bank of Baroda Union Bank HDFC Bank ICICI Bank of Baroda Punjab national Bank Bank of Baroda Oriental Bank of Commerce Centurion bank IDBI Centurion bank of punjab
CHALLENGES AND OPPORTUNITIES IN THE INDIAN BANKING SECTOR
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.
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.
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.
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.
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 nonagriculture 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.
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.
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 policyframework, 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.
The 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.
REGULATIONS REGARDING MERGERS AND ACQUISITION OF BANK
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.
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.
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.
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
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
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
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.
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.
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.
MERGER OF HDFC BANK AND CENTURIAN BANK OF PUNJAB A CASE STUDY
9.MERGERS OF HDFC BANK AND CENTURIAN BANK OF PUNJAB
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.
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
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.
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
MERGER OF IDBI AND IDBI BANK A CASE STUDY
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. 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.
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
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.
OF BANK OF PUNJAB AND CENTURION BANK A CASE STUDY
11.MERGERS OF CENTURIAN BANK
AND BANK OF PUNJAB
BANK OF PUNJAB
a) It was incorporated on may27, 1994 under the companies act, 1956. 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. b) The registered office of the bank was situated at SCO 46-47, sector 9-D,
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, 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 46
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 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.
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. 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 49
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. 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.
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 .
Books 1. Finance and profits:- N.J.Yasaswy 2. Financial management and policy:-James Horne 3. Financial management:-P.K Jain 4. Financial management:- , Ravi.M.Kishore 5. Financial management:-Subir Kumar Banarjee 6. Merger and acquisition :- C.H.Rajeshwar Paper Economics times Web