Shail Shakya, M&A, 2014

RESEARCH PAPER

Mergers & Acquisitions in Indian Banking Sector:

Regulatory Issues and Challenges

Mr. Shail Shakya

Assistant Professor of Law
&
Khaitan & Co. Fellow in Corporate Mergers & Acquisitions
Gujarat National Law University
Gandhinagar, Gujarat (INDIA)
E-mail: sshakya@gnlu.ac.in

Electronic copy available at: http://ssrn.com/abstract=2399288

Shail Shakya, M&A, 2014

Content Index

The Prologue
1. Overview of M&A in Banking Sector
2. Regulatory Framework of M&A in Banking Sector
3. Over-regulation, self-regulation or prudential-regulation?
While banks are international, RBI is national
Global competitiveness- Whether to Consolidate?
Shareholder Responses to M&A of Banks
Miscellaneous Issues
4. Whether consolidation is to be through M&A?
A Look at Strengths
Weaknesses Posing the Challenge
5. Predicting the Future of M&A in Banking Sector
6. Concluding Remarks
7. Select Bibliography

Electronic copy available at: http://ssrn.com/abstract=2399288

Shail Shakya, M&A, 2014

The Prologue
Banking sector is the most extensively regulated sector in Indian financial market.
RBI, the sole regulator has the responsibility of regulating, supervising and assisting
the banking companies in carrying out their fundamental activities and meets their
liabilities as and when they accrue. Despite the fact that regulation enhances
performance at various levels, business growth is the perpetual quest for all
companies, and banking companies are not alien to that. Rapid growth of
consolidations has depicted that banking operations, though strictly regulated aspire
for a high rate of profitability and business presence. There are numerous examples
present in Indian context that show varied reasons of mergers and acquisitions in
banking sector in India. Some study these on the counts of profits and performance
after mergers; others look these mergers as helping the banks in overcoming their
likely dissolution.
Keeping everything apart from the purview of this paper, this paper shall focus
entirely on specific regulatory issues associated with the mergers and acquisitions in
banking sector in India and shall (on the basis of hypotheses) tend to explain various
commercial issues annexed to it or incidental thereto. Some of the specific issues
highlighted in the paper cover the merger policies of RBI, competition regulation
issue between CCI and RBI, etc. Going through the insight of a typical merger
process between two banks, this paper shall throw light upon implications of
mergers in banking sector of India. The list is endless, when we talk of issues related
to bank mergers and acquisitions because in a spit fall, the economic crisis does not
appear to be far from the sight. RBI is constantly updating its procedural norms
relating to bank mergers and acquisitions that call for serious interpretation to the
whole idea. This paper is an attempt towards such an objective.
The tabled Banking Regulation (Amendment) Bill, 2011 would be a central figure
under scrutiny in the paper and shall corroborate the objectives and perceptions of
regulators of various sectors in India. While achievement of economies of scale may
be one of the agendas behind such consolidation, restructuring of weak banks
employs more critical issues. This research report thus dwells into the core reasons
behind RBI, monopolizing the banking merger regulations and future of M&A in
banking in light of such rigid stands taken by RBI.

Electronic copy available at: http://ssrn.com/abstract=2399288

Shail Shakya, M&A, 2014

Chapter 1: Overview of M&A in Banking Sector
There are two modes of growth for any corporation, the first being the organic mode
and the second being inorganic. In organic mode, high industrial utility is achieved
by the sales-profit ratio and therefore, a company is said to be growing if it has
increasing net sales index. In inorganic growth mode, the corporations undertake
mergers, takeovers and joint-venture operations to strengthen their business
presence and monopolise the market supply to the maximum extent possible.
However, this is a view from a corporate perspective. Banks do not fall in such
category, principally because of the fact that they are no-doubt companies, but are
under the supervision of their master regulator for all business purposes. 1 Be it
appointment of directors2 or expansion of business,3 almost everything is supervised
and sometimes dictated by RBI in consultation with its Department of Banking
Supervision. Banks are the sole institutions that are efficient to credit creation, are
privileged borrowers and are the best practitioners in balancing profitability with
liquidity. They are entrusted with the high duty to comply with the demands of
depositors, as and when they arise.4
Improvement of operational and distribution efficiency of commercial banks has
always been an issue for discussion in the Indian policy milieu and Government of
India in consultation with Reserve Bank of India (RBI) have, over the years,
appointed several committees to suggest structural changes towards this objective.
Some important committees among these are the Banking Commissions, 1972
(Chairman: R.G. Saraiya) and 1976 (Chairman: Manubhai Shah), and the Committee
for the Functioning of Public Sector Banks, 1978 (Chairman: James S. Raj). Further,
the second Narasimham Committee (1998) had also suggested mergers among
strong banks, both in the public and private sectors and even with financial
institutions and Non-Banking Finance Companies (NBFCs).5
These all being ideal prudential norms set by RBI; do not attract much of our
attention primarily because they are voluntary mergers or friendly takeovers.
However, we need to undertake specific power vested with RBI to implement a
forced merger of one bank into another bank,6 specifying the reasons as it may
desire. This not only attracts legal issues of compliance but invokes some human and
See S. 6 of Banking Regulation Act, 1949
See S. 10A, 10B of Banking Regulation Act, 1949
3 See S. 23 of Banking Regulation Act, 1949
4 S. 5 (b), Banking Regulation Act, 1949
5 Ravisha N. S., Dr. M.G. Krishnamurthy, M&A in Indian Banking Sector, Contemporary Research
In
India
(ISSN:
2231-2137)
Special
Issue:
Feb.,
2012;
available
at
http://www.contemporaryresearchindia.com/Pdf/CRI/Feburary2012/24%20ravisha,%20drishnam
urthy%20and%20srikanth.pdf (Last accessed Nov. 23, 2012)
6 See S.36(1)(d), S. 36AA, 36AB of Banking Regulation Act, 1949
1
2

Shail Shakya, M&A, 2014

ethical issues as well. This has only led to value erosion but also several other
consequences to be debated upon.7 RBIs recent move in taking out bank mergers
outside of the scope of CCI is another question which needs to be answered. 8
Miscellaneous interpretations about the Bill has given a considerable hike to the
question- Is over-regulation beneficial to the financial market or mere supervision
would increase the business and profitability of banking companies? RBI moreover,
attempts to gain a significant position in approving or imposing penalties in lieu of
the amalgamation schemes or merger proposals forwarded for its approval.9 RBI has
no doubt, been the most successful regulator of its business in India but whether is
competent to over-ride issues of competition, takeover etc under the umbrella of
core-banking operations is a generic question which attracts considerable thought
of the intelligentia. Many commentators have for example, commented upon the
prudential regulation of banks and allied regulation of banking companies10 in
India. 11 The complex structure of M&A deals in banking is because of the fact that
government is generally the owner of both sides in such a scheme. 12 One of the
major reasons that they are urged to be kept out of the purview of CCI is that RBI
does consider competition to be harmful for the banking sector and with such a
view deeply regulates the banking enterprise and its business presence. 13 Mergers in
such a scenario are rarely voluntary and mostly are marriage shots fired by RBI in
lieu of consolidation to improve supervision over the financial sector.14 However, the
sudden announcement of merger between HDFC bank & Centurion Bank of Punjab
was recorded as a merger of strength and the merger was held as a merger of
strength amongst two healthy banks, thereby creating an exception to the foregoing
vision. 15 The recent move of Central Government in propelling the merger of
Regional Rural Banks (RRBs) has also attracted debate among the officers of All
India RRB Officers Federation (AIBOC).

S. Vaidya Nathan, Forced Bank Mergers, Leading to Value Erosion, available athttp://www.thehindubusinessline.in/iw/2002/09/29/stories/2002092900350800.htm (Nov 24, 2012)
8 S. 2 to Banking Regulation (Amendment) Bill, 2011
9 http://www.prsindia.org/billtrack/the-banking-laws-amendment-bill-2011-1589/ (Nov. 24, 2012)
10 For Example, Under section 72A (1) of the Income Tax Act where there has been an amalgamation
of a banking company with a specified bank, the accumulated loss and the unabsorbed depreciation
of the amalgamating company shall be deemed to be the loss and the provisions of the Income Tax
Act relating to set-off and carry forward of loss and allowance for depreciation shall apply
accordingly. The effect of this provision is that benefit of carry forward loss and unabsorbed
depreciation is available only in case where a banking company is merged with SBI or subsidiary of
SBI or a corresponding new bank.
11 Pradeep S Mehta, CCI has a Role to Play in Bank Mergers, Financial Express, January 10, 2010, at
http://www.cuts-ccier.org/ArticlesJan10-CCI_has_a_role_to_play_in_bank_mergers.htm
12 For example, the merger between State Bank of Saurashtra & Bank of Indore
13 S. 23 of Banking Regulation Act, 1949
14 http://www.thehindubusinessline.com/opinion/editorial/article3824523.ece (Nov. 25, 2012)
15 See, http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4268 (Nov. 25, 2012)
7

Shail Shakya, M&A, 2014

Chapter 2: The Regulatory Framework for M&A in Banking16
The comprehensive regulatory framework of amalgamation or merger between two
banks, irrespective of their business and capital adequacy is by and large the product
of sequential work groups appointed by RBI.17 The regulatory framework for M&As
in the banking sector is laid down in the Banking Regulation (BR) Act, 1949. In the
post-Independence era, the legal framework for amalgamations of banks in India
was provided in the Act. The Act provides for two types of amalgamations, viz., (i)
voluntary and (ii) compulsory. For voluntary amalgamation, Section 44A of the BR
Act provides that the scheme of amalgamation of a banking company with another
banking company is required to be approved individually by the board of directors
of both the banking companies and subsequently by the two-thirds shareholders (in
value) of both the banking companies. Further, Section 44A of the BR Act requires
that after the scheme of amalgamation is approved by the requisite majority in
number representing two-third in value of shareholders of each banking company,
the case can be submitted to the Reserve Bank for sanction. However, the Reserve
Bank has the discretionary powers to approve the voluntary amalgamation of two banking
companies under section 44A of the BR Act.
The experience of the Reserve Bank has been, by and large, satisfactory in approving
the schemes of amalgamation of private sector banks in the recent past and there has
been no occasion to reject any scheme of amalgamation submitted to it for
approval.18 Most of these voluntary mergers were between healthy banks, somewhat
on the lines suggested by the first Narasimham Committee. The Committee was of
the view that the move towards the restructured organisation of the banking system
should be market-driven and based on profitability considerations and brought
about through a process of M&As.
Insofar as compulsory amalgamations are concerned, these are induced or forced
by the Reserve Bank under Section 45 of the BR Act, in public interest, or in the
interest of the depositors of a distressed bank, or to secure proper management of a
banking company, or in the interest of the banking system. In the case of a banking
company in financial distress, the Reserve Bank under Section 45(2) of the BR Act
may apply to the Central Government for an order of moratorium in respect of a
banking company and during the period of such moratorium, may prepare a scheme
of amalgamation of the banking company with any other banking institution
Consolidation
&
Competition,
Reserve
Bank
of
India,
available
at
http://rbi.org.in/scripts/publicationsview.aspx?id=10495 (Nov. 26, 2012)
17 A Hundred Small Steps, Raghram Rajan Committee Report, Standing Committee on Finance,
http://planningcommission.nic.in/reports/genrep/rep_fr/cfsr_all.pdf (Nov. 25, 2012)
18 There have been six voluntary amalgamations between the private sector banks so far, while one
amalgamation between two private sector banks (Ganesh Bank of Kurundwad and the Federal Bank)
was induced by the Reserve Bank in the interest of the depositors of one of the banks.
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Shail Shakya, M&A, 2014

(banking company, nationalised bank, SBI or its subsidiary). Such a scheme framed
by the Reserve Bank is required to be sent to the banking companies concerned for
their suggestions or objections, including those from the depositors, shareholders
and others. After considering the same, the Reserve Bank sends the final scheme of
amalgamation to the Central Government for sanction and notification in the official
gazette. The notification issued for compulsory amalgamation under Section 45 of
the BR Act is also required to be placed before the two Houses of Parliament. The
amalgamation becomes effective on the date indicated in the notification issued by
the Government in this regard.
In the case of voluntary merger or acquisition of any financial business by any
banking institution, there was no provision under the BR Act for obtaining approval
of the Reserve Bank. In order to revisit the regulatory, legal, accounting and human
relations related issues, which may arise in the process of consolidation in Indian
banking system, the Working Group was constituted by the Indian Banks
Association. The Group in its Report titled Consolidation in Indian Banking
System submitted in 2004 highlighted the need for making an omnibus provision in
the BR Act requiring any banking institution to obtain prior approval of the Reserve
Bank before acquiring any other business or any merger or amalgamation of any
other business of banking institution or non-banking financial institution, with
absolute right to the Reserve Bank to finalise the swap ratio which should be made
binding on all concerned.
The Reserve Bank, on the recommendations of the Joint Parliamentary Committee
(2002), had constituted a Working Group to evolve guidelines for voluntary mergers
involving banking companies. Based on the recommendations of the Group, the
Reserve Bank announced guidelines in May 2005 laying down the process of merger
proposal, determination of swap ratios, disclosures, the stages at which boards will
get involved in the merger process and norms of buying/selling of shares by the
promoters before and during the process of merger. Voluntary amalgamation of a
non-banking company with a banking company is governed by sections 391 to 394 of
the Companies Act, 1956 and the scheme of amalgamation has to be approved by the
High Court. However, to ensure the continued strenght of merged entity, it has been
provided in the guidelines that in such cases, the banking company should obtain
the approval of the Reserve Bank of India after the scheme of amalgamation
approved by its Board but before it is submitted to the High Court for approval.
In both situations, whether a non-banking company amalgamates with a banking
company or amalgamation is among banking companies, the Reserve Bank ensures
that amalgamations are normally decided on business considerations. For this, the
Reserve Bank also laid down guidelines, to which boards of directors should give
consideration during the merger process. These guidelines mainly relate to (i) values

Shail Shakya, M&A, 2014

of assets and liabilities and the reserves of amalgamated entity proposed to be
incorporated into the book of amalgamating banking company; (ii) swap ratio to be
determined by competent independent valuers; (iii) shareholding pattern; (iv)
impact on profitability and, capital adequacy of the amalgamating company; and (v)
conformity of the proposed changes in the composition of board of directors with
the Reserve Bank guidelines in that context. The statutory framework for the
amalgamation of public sector banks, viz., nationalised banks, State Bank of India
and its subsidiary banks, is, however, quite different since the foregoing provisions
of the BR Act do not apply to them. As regards the nationalised banks, the Banking
Companies (Acquisition and Transfer of Undertakings) Act, 1970 and 1980, or the
Bank Nationalisation Acts authorise the Central Government under Section 9(1)(c)
to prepare or make, after consultation with the Reserve Bank, a scheme, inter alia, for
the transfer of undertaking of a corresponding new bank (i.e., a nationalised bank)
to another corresponding new bank or for the transfer of whole or part of any
banking institution to a corresponding new bank. Unlike the sanction of the schemes
by the Reserve Bank under Section 44A of the BR Act, the scheme framed by the
Central Government is required, under Section 9(6) of the Bank Nationalisation Acts,
to be placed before the both Houses of Parliament. Under this procedure, the only
merger that has taken place so far relates to the amalgamation of the erstwhile New
Bank of India with Punjab National Bank, on account of the weak financials of the
former. As regards the State Bank of India (SBI), the SBI Act, 1955, empowers the
State Bank to acquire, with the consent of the management of any banking
institution (which would also include a banking company), the business, including
the assets and liabilities of any bank. Under this provision, the consent of the bank
sought to be acquired, the approval of the Reserve Bank, and the sanction of such
acquisition by the Central Government are required. Several private sector banks
were acquired by State Bank of India following this route. However, so far, no
acquisition of a public sector bank has taken place under this procedure. Similar
provisions also exist in respect of the subsidiary banks of the SBI. Thus, there are
sufficient enabling statutory provisions in the extant statutes governing the public
sector banks to encourage and promote consolidation even among public sector
banks through the merger and amalgamation route, and the procedure to be
followed for the purpose has also been statutorily prescribed.
It has to be noted however, that in case an NBFC merges with a bank or vice-versa,
the consolidation scheme has to be compulsorily approved by the Reserve Bank of
India.19

http://www.financialexpress.com/news/banks-should-obtain-prior-approval-for-merger-withnbfc-rbi/107276 (Last accessed on Nov. 26, 2012)

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Shail Shakya, M&A, 2014

Chapter 3: Over-regulation, Self-regulation or Prudential Regulation?
One of the prime factors behind the extensive regulatory framework for
consolidation in banking sector was the financial inclusion through social control,
which was aimed to benefit the consumers to increased extents.20 Today, various
serious questions have been raised regarding consolidation of banking companies
being expressly regulated by RBI and probable answers are being sought to the
question as to whether such consolidation should come within the ambit of CCI or
not.21 While such observations dominate, some argue that consolidation of banking
system is inevitable in order to establish some world size banks, on the lines of
China.22 This is a paradox. Some authors establish that consolidation of a weak bank
with another strong bank was a way to rescue the dying banks that may lead to
economic crises and as such banks were prohibited to carry out ancillary activities
besides core-banking activities.23 In such a scenario, unregulated or over-regulated
consolidation among the banking companies may lead to market control by few
thereby behaving in an anti-competitive manner.24 There are however, many other
internal and external factors besides such inevitable needs; social control etc. that
regulate or govern the mergers of banks in India.25
If we cross-check the propelling reasons behind the consolidation of banks in India,
we see that it is a government set mood. Though such consolidations were suggested
earlier by Narsimhan Committee Report-I, RBI is against exposing the Indian
Banking Sector to compete in the international forum. Merger as envisaged, for
banking companies was essentially a rescue clause and for that prime reason,
amalgamations were put in the strict control of RBI. However, much complex issues
such as competition, stake-holder interests etc. require a deep insight as RBI is
concerned with depositors interests only. It is in that likely default situation that
RBI triggers compulsory merger to protect the interests of the depositors in a bank.
In keeping the said situation at hand, it becomes important to consider some
challenges before the master-regulator of banking business in India.
Rana Kapoor, MD & CEO, Yes Bank, http://articles.economictimes.indiatimes.com/2011-0822/news/29914945_1_banking-system-foreign-banks-financial-inclusion (Nov. 26, 2012)
21 Pradeep
S Mehta, CUTS International, Should Banking M&As come under CCI?,
http://www.business-standard.com/india/news/should-banking-mas-come-undercci/489040/
22 P.Chidambaram, Finance Minister of India, Consolidation of Banks is Inevitable: FM,
http://www.thehindu.com/business/Industry/consolidation-of-banks-inevitablefm/article4130642.ece (Nov. 27, 2012)
23 Glass-Steagall Act, 1933 in USA
24 T.T. Ram Mohan, (Indian Institute of Management, Ahmedabad), Bank Consolidation- Issues and
Challenges, Economic & Political Weekly, Vol. 40, No. 12, Money, Banking and Finance (Mar. 19-25,
2005), pp. 1151-1152, 1155-1161
25 Prof. B. Radhakrishnan & Swati Pradhan, Consolidation in Indian Banking Industry, Sep 2008,
http://www.bcasonline.org/articles/artin.asp?800 (Last accessed on Nov. 27, 2012)
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Shail Shakya, M&A, 2014

Issue 1: While Banks are Inter-national, RBI is National
The growing complexities of the banking business coupled with significant crossborder and cross-sector expansion has rendered the system increasingly vulnerable
to the threat of contagion. The paradigm shift in the banks business processes,
products and systems with an ever-growing reliance on ICT, as delivery channels
pose immense challenges before the banking supervisor. While on the one hand, the
banking landscape has witnessed considerable changes, the supervisory processes
within the Reserve Bank have remained more or less static. This has necessitated a
review of the supervisory processes and rationalisation of the organisational
structure for bank supervision. Additionally, lessons from the financial crisis which
have manifested in form of new regulatory and supervisory benchmarks like Basel
III, revisions to the Core Principles for Effective Bank Supervision, increased focus
on systemically important banks also have to be factored in for making the
supervisory processes and mechanism at the Reserve Bank more robust and capable
of addressing emerging issues.26
In such a perspective, mergers should not be forced, for that would lead to overregulation and not supervision. There are two caveats that should be kept in mindFirst that any process of consolidation must come out of a felt need for merger rather
than as an imposition from outside. The synergic benefits must be felt by the entities
themselves. The process of consolidation that is driven by flat is much less likely to
be successful, particularly if the decision by flat is accompanied by restrictions on the
normal avenues for reducing costs in the merged entity. Thus, any meaningful
consolidation among the public sector banks must be driven by commercial
motivation by individual banks with the government and the regulatory playing at
best a facilitating role. Second, the process of consolidation does not mean that small
or medium sized banks will have no future. Many of the Indian banks are of
appropriate size in relation to the Indian situation. Actual experience shows that
small and medium sized banks even in advanced countries have been able to survive
and remain profitable. These banks have survived along with very large financial
conglomerates. Small banks may be the more natural lenders to small business.27
Moreover, the regulation over amalgamation between banks is subject to their
character being listed or unlisted. It is for the listed banking companies that RBI is to
be sought for approval of scheme of merger.

Indian Banking Sector: Towards the Next Orbit, Inaugural address delivered by Dr K. C.
Chakrabarty, Deputy Governor, Reserve Bank of India at 9th Advanced Management Programme at
IMI, Delhi on Feb 13, 2012
27 Excerpts from speech of Dr C. Rangarajan, Chairman of the Economic Advisory Council and former
Governor, RBI at Global Banking Conference, 12th Sept 2007
26

Shail Shakya, M&A, 2014

Issue 2: Global Competitiveness: Whether Consolidation?
In structure, significant consolidation is taking place, though the growth of foreign
ownership is not sizeable. With continued pace of international coordination on
creating strong and sustained financial architecture, initiatives for giving more
access to foreign ownership and consolidation within the domestic institutions could
gain speed. The contribution of banking in the economic growth is immense in
respect of Asia, its role has been significant and sizeable. Strong and sound banking
systems are critical for sustaining the pace and momentum of growth of real sector
and also ensure welfare of the society. Already in much of Asia, family owned banks
are increasingly targeted for acquisitions. A World Bank report on Finance for
Growth observes, It is obvious that advanced economies have sophisticated
financial systems. What is not obvious, but is borne out by the evidence, is that the
services delivered by these financial systems have contributed in an important way
to the prosperity of these countries. They promote growth and reduce volatility,
helping the poor. Getting the financial systems of developing countries to function
more effectively in providing the full range of financial services-including
monitoring of managers and reducing risk-is a task that will be well rewarded with
economic growth. At the same time, it is the banking systems that have the evidence
of becoming most vulnerable at the first signs of opening up or financial
liberalization. The World Bank report sums up If finance in fragile, banking is its
most fragile part. The last two decades of financial liberalization has equipped
banks with enormous experience and expertise in dealing with a wide range of
challenges and crises. This hopefully would be handy for them in charting new areas
of growth in the background of next generation reforms.28
This would counter the Finance Ministers statement that we should have four or
five world size banks. In essence, consolidation to that extent would not only lead to
higher exposure to systemic risk but will also lead to cartelization. Banks being the
back-bone of financial sector should be regulated with the objective that they do not
meet liquidation stages and are alien to frequent market fluctuations. It should be
kept in mind by the principal regulator that S. 44A to Banking Regulation Act, 1949
is just a facilitative provision for the weak banks and is not a guarantee provision to
say that forced mergers would increase profitability or business efficiency among the
banks.29

Prof. Prakash Singh, Global Competitiveness of Indian Banks: Indian Banking Sector, available at
http://dspace.iimk.ac.in/bitstream/2259/474/1/171-183.pdf (Nov. 28, 2012)
29 Ms. S. Revathy, M&As in Indian Banking Sector- Financial Implications, available at
http://www.namexijmr.com/pdf/archives_july_dec_2011/MERGERS%20AND%20ACQUISITIONS
_IN_THE_INDIAN.pdf (Last accessed on Nov. 28, 2012)
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Shail Shakya, M&A, 2014

Issue 3: Shareholder Responses to M&A deals
In one of the studies, it was revealed that shareholders were not supportive to such
M&A deals in public sector banks initially, but post-merger status of banks has
brought in additional wealth to them.30 However, some commentators argue that it
need not necessarily be profitable to the shareholder in all situations, while the
combine effect is positive for the target banks and negative for the bidder banks. 31
However, some studies show that in cases of forced merger by RBI, shareholders of
the target banks have gained abnormal returns and the shareholders of bidder banks
lose their value of equity in the stock-market.32 It would not be proper to depict any
of the above situations as fruitful and it could not be thus said that a proposal of
acquisition is always welcomed by the shareholders of the target bank.
Issue 4: Miscellaneous Issues
In a complex scheme devised by either the parties themselves or the regulator, some
crucial issues that suffer an impact on the implementation of M&A deal are reflected
herewith:
1. In such an arrangement, shareholders of acquired bank get much benefited than
those of the acquirer bank. It seems as if equality amongst shareholders loses its
significance or remains un-noticed.
2. The considerable mix between banks doesnt clear the fate of business. This
becomes a perpetual question, when the deal is carried amongst two banks that
differ in their characteristics viz. a public sector bank and a private sector or a cooperative bank.
3. The recent move to merge Union Bank of India & Bank of India 33 depict that
societal/organizations/other co-operative societies also play a significant role in
merger of banks. The management teams of Union Bank of India & Corporation
Bank also refuted the governments proposal to merge the two banks.34

S. Venkatasan, K. Govindarajan, Acquisition Activities of Public Sector Banks in India and its
Impact on Shareholders Wealth, International Research Journal of Finance & Economics, ISSN 14502887, Issue 67, 2011, pp. 64-71
31 Dr. Suresh Chandra, Are Mergers & Acquisitions Beneficial for Banks?, South Asian Journal of
Marketing & Management Research, Vol. 2 , Issue 1, January 2012
32 M Jayadev, Mergers in Indian Banking: An Analysis, IIM Bangalore.
33
See, Officers of UBI and BOI refute Merger Scheme, http://www.businessstandard.com/india/news/boi-ubi-merger-buzz-rankles-unions/196364/ (Accessed on Nov. 28,
2012)
34 See, http://www.contify.com/stories/6233 (UBI & Corporation Bank Merger)
30

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4. Banking business has changed since from its inception. As when new policies are
being announced by RBI, Banks have assumed increased business activities.
Investing Banking, Merchant Banking, Bankers to an Issue are such hybrid forms of
banking business that are either carried on by the banks themselves or through their
wholly owned subsidiaries. Valuation of such business is lightly announced by RBI,
because of the reason that merger itself becomes a thought before they prepare to
undergo valuation of the businesses and goodwill of both the acquirer and the
acquired.
5. The individual balance sheet position of the banks is yet another crucial matter.
This assumes greater seriousness when one of the banks is being taken over due to
its weak financial position. Differences in the quality of loan portfolios, mix (e.g., one
bank having a greater percentage of corporate accounts and the other a high level of
retail portfolio), the levels of non-performing assets and stressed accounts, the
composition of deposits (time and demand), the Credit-Deposit ratios, the
investment strategies adopted and the types of investments on the balance sheet
(statutory or otherwise), the Capital Adequacy ratios, matters relating to Asset
Liability Management (area of maturities and interest rates mismatches) all these
demand a high degree of attention and analysis.35
Chapter 4: Whether Consolidation is to be through M&A?
The volatility of the business environment has altered the ways and means by which
transactions are carried out. Perpetual existence of an enterprise has become very
difficult, given the complex and fluctuating nature of the surrounding environment.
There is thus, a need for almost continuous streamlining of business organisations.
The objective of the business firms in the new environment is to take measures
which would result in high levels of sustained profitability so that the expectations
of various stakeholders, and in particular, the shareholders are adequately met.
Profitable growth can be achieved internally by developing new product lines,
expanding existing capacity, acquiring new assets, moving on to technologically
advanced equipment and appreciating the need for investments in research and
development. Alternatively, the growth process can be facilitated through various
forms of corporate combinations such as absorptions, acquisitions, amalgamations,
de-mergers, divestures, joint ventures, leveraged buyouts, mergers, selloffs, spinoffs, strategic alliances, takeovers, and so on.
The banking industry in India has been in the process of transformation and
consolidation ever since 1961. The Banking Regulation Act, 1949 empowers the
regulator with the approval of the government to amalgamate weak banks with
IBA Bulletin, Special Issue 2005, Consolidation in Banking Industry : Mergers & Acquisitions, Jan
2005, Vol XXVII No. 1
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stronger ones. Majority of the mergers in India have been crafted to bail out weak
banks to safeguard depositors interest and to protect the financial system.36
Prior to 1999, the amalgamation of banks was primarily triggered by the weak
financials of the bank being merged, whereas in the post-1999 period, there have also
been mergers between healthy banks driven by business and commercial
considerations. Thus, the new generation mergers on the lines proposed by the
Narasimham Committee are a recent phenomenon in the country. Following are the
existing strengths and weaknesses of the Indian banking system and potential
opportunities and threats if it undertakes consolidation by M&A as an avenue of
inorganic growth.
A.] A Look at Strengths37
Liquidity: Liquidity has been a traditional strength of the Indian banking system.
Banks are required to keep a stipulated proportion of their total demand and time
liabilities in the form of liquid assets which affect their liquidity position. RBI has
been easing the requirements with several rounds of reduction in the Statutory
Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR).
Sound banking systems: The banking system in India has generally been stable and
sound in terms of growth, asset quality and profitability. It is because of healthy,
prudent and well capitalised policies and practices implemented by the RBI from
time to time. The same is evident from the remarkable resilience of the Indian
financial sector to the global financial turmoil which erupted during 2008-09.
B.] Weaknesses Posing the Challenge38
Competition from foreign banks: Foreign banks will be soon allowed to spread
their business in India which will create intense competition for Indian banks. The
RBI Report on Currency and Finance presents the view that mergers are the only
way to face competition from foreign banks. High cost of intermediation:
Intermediation cost (operating expenses as a proportion of total assets), an indicator
of competitiveness, is higher in India as compared to international levels. High level
of fragmentation: There is a high level of fragmentation, especially among
cooperative banks, as compared to some of the advanced economies of the world,
which poses a serious threat to their profitability and viability in conducting

The report of the Committee on Banking Sector Reforms (the Second Narasimham Committee 1998), however, discouraged this practice. It recommended a multi-tier banking system with existing
banks to merge into 3-4 international banks at the topmost level, 8-10 nationalbanks engaged in
universal banking at the next level and local and rural banks confined to specific regions.
37 http://www.deccanherald.com/content/39299/banking-sector-needs-consolidation.html
38 Id.
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business. About 1,00,000 entities in the cooperative sector share just 4 percent of the
total banking assets in the economy.
Lack of product differentiation: The financial products offered by banks in India are
similar across the industry with no distinctive features, thereby leading to unhealthy
competition.
Low penetration: There is an uneven distribution of banking services in the country.
It is limited to few customer segments and geographies only. Of the total 611
districts in the country, 375 districts are under-banked. There is a need for banks to
open branches at these locations and establish connectivity with the help of a core
banking solution. According to a report on banking sector consolidation by Ernst &
Young, the country would require 11,600 branches by 2013 and an additional 20,300
branches by 2018 in order to achieve the desired penetration levels of 74 per cent and
81.5 per cent in 2013 and 2018 respectively.
C.] An Observation
Indian PSBs have long been burdened with the responsibility of development
banking through mobilizing deposits at the countryside and providing finance to
agriculture and small scale industries at subsidized rates. It is time to marry the
social responsibility of these banks with proper commercial orientation so that they
can survive and prosper in an environment of high growth, competition and risks.
For some PSBs today, this implies the need for mergers. For a bank that has the
capacity to grow in terms of its intrinsic comparative advantage but is constrained
due to the problems of inter-regional penetration, merger with a similar bank (in
terms of comparative advantage and portfolio) will provide an avenue to grow
optimally. Similarly, a bank of the size and experience of SBI can aspire to become a
universal bank by acquiring smaller banks with lucrative retail and wholesale
portfolio and through strategic alliances with investment banks, insurance
companies and asset management firms. For others, there are other strategic
configurations that are optimal. Given the current distribution of assets and portfolio
performance of the PSBs, most of them belong to the residual category.39

Indrajit Mullick, Does the Future of Indian Banking Lie in M&A?, Centre for Studies in Social
sciences, Electronic copy available at: http://ssrn.com/abstract=1403103 (Accessed Nov. 28, 2012)
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Chapter 5: Predicting the Future of M&A in Banking
As per the objectives of the government that have been discussed in foregoing
portions of the paper, it could be settled that consolidation has been aimed as a tool
of creating world size banks irrespective of the challenges that have been posed.
When initially incorporated as a provision in the Banking Regulation Act, 1949; the
prime objective was to create a mechanism so that weak banks could be prevented
from serious consequences of liquidation and dissolution. Failing of one bank would
lead to failure of the banking industry and for this caution; RBI was entrusted with
the power to compulsorily merge the weak banks with the healthy ones in order to
escape losses and liabilities. But as evident from the case studies, M&A in banking is
being sought for some other purposes. No doubt, consolidation is a big tool in
maintain liquidity, ensuring transparency in business and effective supervision, but
the fact that a single bank would be exposed to uncertain and unpredicted systemic
risk.40
It is interesting to note that the government aims of few international banks through
the consolidation process, whereas banks view some of them to be exposed to
international competition. 41 Despite all the factors taken into consideration and
analysis, consolidation through M&A is a boon for the industry in the times of need.
However, the journey to international banks is still far as there had been a few
mergers in the Indian banking space, it had happened due to exigencies and were
rather forced consolidation. 42 The financial sector reforms have brought about
significant improvements in the financial strength and the competitiveness of the
Indian banking system. The prudential norms, accounting and disclosure standards,
risk management practices, etc are keeping pace with global standards, making the
banking system resilient to global shocks. The consolidation and convergence of
banks in India has, however, not kept pace with global phenomena. The efforts on
the part of the Reserve Bank of India to adopt and refine regulatory and supervisory
standards on a par with international best practices, competition from new players,
gradual disinvestment of government equity in state banks coupled with functional
autonomy, adoption of modern technology, etc are expected to serve as the major
forces for change. In the emerging scenario, the supervisors and the banks need to
put in place sound risk management practices to ensure systemic stability.43

Refer Usha Thorat Committee, Working Group on Issues & Concerns in NBFC Sector, August 2011,
RBI; Report of the Key Advisory Group on NBFCs (KAG), Department of Financial Services, Ministry
of Finance, Government of India, F.No.17/7/2011-BO.II, Dated 31 January, 2012
41 Banking Industry: Vision 2020, Indian Banks Association Report
42 See http://www.sify.com/finance/consolidation-in-indian-banking-sector-still-far-news-bankingklpbEPcjadi.html (Accessed on Nov. 29, 2012)
43 S. P. Talwar, The banking industry in the emerging market economies: competition, consolidation and
systemic stability, 2001, vol. 04, pp 75-79
40