You are on page 1of 41

A DOCUMENTARY REPORT ON

MERGERS AND ACQUISITIONS IN BANKING SECTOR

SUBMITTED TO: PROF. I. SRIDHAR FINANCIAL MARKETS & INSTITUTIONS

DATE: 21/9/2011

SUBMITTED BY: DHRUV N. PATEL FSB # 2 61250

MERGERS & ACQUISITIONS IN BANKING SECTOR

1|P a g e

DECLARATION

I, the undersigned, hereby declare that the documentary Project Report entitled “mergers and acquisitions in banking sector” written and submitted by me to prof. I. Sridhar, in partial fulfillment of the requirement of the course, “financial markets and institutions”, is my original work and the conclusions drawn therein are based on the material collected by myself.

Place: Ahmedabad Date: 22/9/2011

Signature DHRUV PATEL

MERGERS & ACQUISITIONS IN BANKING SECTOR

2|P a g e

ACKNOWLEDGEMENT

It is my proud privilege to express my sincere gratitude to all those who helped me directly or indirectly in completion of this project report. I am very thankful to FLAME for providing all the facilities to complete my project. I, gratefully acknowledge the valuable guidance and support of Prof. I. Sridhar; our faculty for FMI & my project guide, who had been of immense help to me in choosing the topic and successful completion of the project. I extend my sincere thanks to all who have either directly or indirectly helped me for the completion of this project. Endeavour has been made to make the project error free yet I apologize for the mistakes.

MERGERS & ACQUISITIONS IN BANKING SECTOR

3|P a g e

EXECUTIVE SUMMARY

Like all business entities, banks want to safeguard against risks, as well as exploit available opportunities indicated by existing and expected trends. M&As in the banking sector have been on the rise in the recent past, both globally and in India. In this backdrop of emerging global and Indian trends in the banking sector, this article illuminates the key issues surrounding M&As in this sector with the focus on India. It seeks to explain the motives behind some M&As that have occurred in India post2000, analyze the benefits and costs to both parties involved and the consequences for the merged entity. A look at the future of the Indian banking sector, and some key recommendations for banks, follow from this analysis

MERGERS & ACQUISITIONS IN BANKING SECTOR

4|P a g e

CONTENTS Sr. 6 7 7 9 9 10 13 16 17 23 24 25 26 27 28 29 31 32 34 40 41 Abstract What is merger Types of merger What is acquisition Difference between merger & acquisition Purpose of M&A Benefits Other motives Bank M&A under various acts Overview of Indian banking sector Structure of Indian banking sector Banks merged since liberalization M&A as opportunity Procedure of bank M&A RBI guidelines Documents to be furnished Risk in M&A HR issues Key M&A deals 2000 onwards Future of M&A in Indian banking sector Conclusion MERGERS & ACQUISITIONS IN BANKING SECTOR 5|P a g e . no. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 topic Pg. no.

Mergers and Acquisitions is the only way for gaining competitive advantage domestically and internationally and as such the whole range of industries are looking to strategic acquisitions within India and abroad. It has transformed itself from a sluggish business entity to a dynamic industry. The Indian banking sector is growing at an astonishing pace.ABSTRACT The project aims to understand the various “Mergers and Acquisitions in Indian Banking Sector”. In the recent times. preparedness of banks to meet the fast approaching Basel II deadline. One of the principal objectives behind the mergers and acquisitions in the banking sector is to reap the benefits of economies of scale. In the last two decade. The growth rate in this sector is remarkable and therefore. Consolidation of Indian banking sector through mergers and acquisitions on commercial considerations and business strategies – is the essential pre-requisite. inorganic growth and many more. A relatively new dimension in the Indian banking industry is accelerated through mergers and acquisitions. the banking industry is counted among the rapidly growing industries in India. there have been numerous reports in the media on the Indian Banking Industry. A large number of international and domestic banks all over the world are engaged in merger and acquisition activities. These reports have been on a variety of topics such as user friendliness of Indian banks. It will enable banks to achieve world class status and throw greater value to the stakeholders. In order to attain the economies of scale and also to combat the unhealthy competition within the sector besides emerging as a competitive force to reckon with in the International economy. MERGERS & ACQUISITIONS IN BANKING SECTOR 6|P a g e . there have been paradigm shift in Indian banking industries. increasing foray of Indian banks in the overseas markets targeting. Today. it has become the most preferred banking destinations for international investors‟.

which retains its identity. the surviving company is the buyer. in vertical combinations. Merger is also defined as amalgamation. Based on the offeror’s objectives profile. The survivor acquires all the assets as well as liabilities of the merged company or companies. All assets. or a mix of the above modes. (A) Vertical combination: A company would like to take over another company or seek its merger with that company to expand espousing backward integration to assimilate the resources of supply and forward integration towards market outlets. horizontal. TYPES OF MERGER Merger or acquisition depends upon the purpose of the offeror company it wants to achieve. circular and conglomeratic as precisely described below with reference to the purpose in view of the offeror company.WHAT IS MERGER? Merger is defined as combination of two or more companies into a single company where one survives and the others lose their corporate existence. combinations could be vertical. liabilities and the stock of one company stand transferred to the Transferee Company in consideration of payment in the form of:    Equity shares in the transferee company Debentures in the transferee company Cash. MERGERS & ACQUISITIONS IN BANKING SECTOR 7|P a g e . The acquiring company through merger of another unit attempts on reduction of inventories of raw material and finished goods. the merging undertaking would be either a supplier or a buyer using its product as intermediary material for final production. Merger is the fusion of two or more existing companies. Generally. implements its production plans as per the objectives and economizes on working capital investments. and the extinguished company is the seller. In other words.

reduction in advertising costs. MERGERS & ACQUISITIONS IN BANKING SECTOR 8|P a g e . lowering average cost of capital and thereby raising present worth of the outstanding shares. (B) Horizontal combination: It is a merger of two competing firms which are at the same stage of industrial process. (D) Conglomerate combination: It is amalgamation of two companies engaged in unrelated industries like DCM and Modi Industries. increase in market segments and exercise better control on market. elimination in competition concentration in product.The following main benefits accrue from the vertical combination to the acquirer company i. The main purpose of such mergers is to obtain economies of scale in production by eliminating duplication of facilities and the operations and broadening the product line.e. The basic purpose of such amalgamations remains utilization of financial resources and enlarges debt capacity through re-organizing their financial structure so as to service the shareholders by increased leveraging and EPS. Has control over products specifications. (C) Circular combination: Companies producing distinct products seek amalgamation to share common distribution and research facilities to obtain economies by elimination of cost on duplication and promoting market enlargement. The acquiring firm belongs to the same industry as the target company.   It gains a strong position because of imperfect market of the intermediary products. scarcity of resources and purchased products. reduction in investment in working capital. The acquiring company obtains benefits in the form of economies of resource sharing and diversification. Merger enhances the overall stability of the acquirer company and creates balance in the company’s total portfolio of diverse products and production processes.

 Both companies' stocks are surrendered and new company stock is issued in its place.     Purchase of shares in open market. DIFFERENCE BETWEEN MERGER & ACQUISITION Although they are often uttered in the same breath and used as though they were synonymous. the purchase is called an acquisition. To make takeover offer to the general body of shareholders. MERGERS & ACQUISITIONS IN BANKING SECTOR 9|P a g e . agree to go forward as a single new company rather than remain separately owned and operated. issuance of loan capital. an acquisition is the purchase by one company of a controlling interest in the share capital of another existing company. Acquisition of share capital through the following forms of considerations viz. 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. Methods of Acquisition: An acquisition may be affected by: Agreement with the persons holding majority interest in the company management like members of the board or major shareholders commanding majority of voting power.WHAT IS ACQUISITION? Acquisition in general sense is acquiring the ownership in the property. or insurance of share capital. Purchase of new shares by private treaty. the terms merger and acquisition mean slightly different things: When one company takes over another and clearly established itself as the new owner. often of about the same size. This kind of action is more precisely referred to as a "merger of equals". Means of cash. In the context of business combinations.  When merger happens when two firms.

The basic purpose of merger or business combination is to achieve faster growth of the corporate business.it is always regarded as an acquisition. 3. etc. savings in transportation costs. 2. PURPOSE OF MERGERS AND ACQUISITIONS The purpose for an offeror company for acquiring another company shall be reflected in the corporate objectives. 3. Aiming at consumers satisfaction through strengthening after sale Services. An example of a recent friendly takeover was when Microsoft bought Fast Search and Transfer (OSE Stock Exchange.CEO of the acquired company (FAST) revealed that they had been working with Microsoft for more than 6 months to get the deal which was announced in January. To standardize product specifications. overhead costs in buying department. expanding market. But when the deal is unfriendly . improvement of quality of product. It has to decide the specific objectives to be achieved through acquisition. 2008. MERGERS & ACQUISITIONS IN BANKING SECTOR 10 | P a g e . Faster growth may be had through product improvement and competitive position. when the target company does not want to be purchased .that is. 2.  An acquisition can be either friendly or hostile. To share the benefits of supplier’s economies by standardizing the materials. Ticker FAST). To achieve economies of scale by amalgamating production facilities through more intensive utilization of plant and resources. Other possible purposes for acquisition are short listed below: (1) Procurement of supplies: 1. To obtain economies of purchase in the form of discount. (2) Revamping production facilities: 1. To safeguard the source of supplies of raw materials or intermediary product. This is challengeable.

To obtain a new market outlets in possession of the offeree. (3) Market expansion and strategy: 1. etc. 5. To eliminate competition and protect existing market. A company thinks in terms of acquiring the other company only when it has arrived at its own development plan to expand its operation having examined its own internal strength where it might not have any problem of taxation. To enhance gearing capacity. To dispose of surplus and outdated assets for cash out of combined enterprise. 4. (6) Own developmental plans: The purpose of acquisition is backed by the offeror company’s own developmental plans. To avail tax benefits. To obtain improved production technology and know-how from the offered company. 5. 2. 3. To improve its own image and attract superior managerial talents to manage its affairs. valuation. To offer better satisfaction to consumers or users of the product. Strengthening retain outlets and sale the goods to rationalize distribution. To reduce advertising cost and improve public image of the offeree company. 3. but might feel resource constraints with limitations of funds and lack of MERGERS & ACQUISITIONS IN BANKING SECTOR 11 | P a g e . improve quality and produce competitive products to retain and improve market share. 2. accounting. 6. To improve liquidity and have direct access to cash resource.4. (4) Financial strength: 1. 4. 5. To reduce cost. To improve EPS (Earning per Share). (5) General gains: 1. To obtain new product for diversification or substitution of existing products and to enhance the product range. Strategic control of patents and copyrights. 2. borrow on better strength and the greater assets backing.

(8) Corporate friendliness: Although it is rare but it is true that business houses exhibit degrees of cooperative spirit despite competitiveness in providing rescues to each other from hostile takeovers and cultivate situations of collaborations sharing goodwill of each other to achieve performance heights through business combinations. Thus. vertical. MERGERS & ACQUISITIONS IN BANKING SECTOR 12 | P a g e .skill managerial personnel’s. market extensional or other specified unrelated objectives depending upon the corporate strategies. product expansion. (7) Strategic purpose: The Acquirer Company view the merger to achieve strategic objectives through alternative type of combinations which may be horizontal. eliminate competition and strengthen its market position. various types of combinations distinct with each other in nature are adopted to pursue this objective like vertical or horizontal combination. secure additional financial facilities. This gives birth to conglomerate combinations. It has to aim at suitable combination where it could have opportunities to supplement its funds by issuance of securities. (9) Desired level of integration: Mergers and acquisition are pursued to obtain the desired level of integration between the two combining business houses. The purpose and the requirements of the offeror company go a long way in selecting a suitable partner for merger or acquisition in business combinations. Such integration could be operational or financial. The corporate thus aim at circular combinations by pursuing this objective.

may be combined with the existing assets and MERGERS & ACQUISITIONS IN BANKING SECTOR 13 | P a g e . infact sometimes its implementations may be very subtle. copyrights. Although operating synergy usually is the result of either vertical/horizontal integration some synergistic also may result from conglomerate growth. synergism is “2+2=5”. it also removes a potential competitor. Operating Synergism: . In addition. some degree of monopoly power or increased managerial efficiency. In other words. manufacture the sale of addition or new products.Operating synergism may result from economies of scale. 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. In addition such a strategy is often less costly than the alternative of developing the necessary production capability and capacity. The value may be achieved by increasing the sales volume in relation to assts employed increasing profit margins or decreasing operating risks. Operating synergism occurs when these assets. customer relationship or managerial personnel. If a firm that wants to expand operations in existing or new product area can find a suitable going concern. SYNERGISM: The nature of synergism is very simple. technical proficiency. marketing skills. But identifying synergy on evaluating it may be difficult.BENEFITS OF MERGERS AND ACQUISITION 1. The incremental value may derive from increase in either operational or financial efficiency. It may avoid many of risks associated with a design. sometimes a firm may acquire another to obtain patents. synergism in the basic economic justification of merger. Moreover when a firm expands or extends its product line by acquiring another firm. which are intangible. specific fixes assets. As broadly defined to include any incremental value resulting from business combination. The firm may achieve the same objective in a short period of time by merging with an existing firm. 2. Synergism exists whenever the value of the combination is greater than the sum of the values of its parts.

occur when the acquired firm simply cannot finance its operation. a) Complementary internal funds flow Seasonal or cyclical fluctuations in funds flows sometimes may be reduced or eliminated by merger. The acquisition firm may have little debt and wish to use the high debt of the acquired firm to lever earning of the combination or the acquiring firm may borrow to finance and acquisition for cash of a low debt firm thus providing additional leverage to the combination.organization of the acquiring firm to produce an incremental value. c) Increased External Financial Capabilities Many mergers. particular those of relatively small firms into large ones. Sometimes the acquired MERGERS & ACQUISITIONS IN BANKING SECTOR 14 | P a g e . If so. Making a merger proposal to the small firm. Although that value may be difficult to appraise it may be the primary motive behind the acquisition. increase external financial capability and income tax advantages. Financial synergism:Among these are incremental values resulting from complementary internal funds flows more efficient use of financial leverage. financial synergism results in reduction of working capital requirements of the combination compared to those of the firms standing alone. Typical of this is the situations are the small growing firm with expending financial requirements. But its management may recognize that continued growth to capitalize on its market will require financing be on its means. b) More efficient use of Financial Leverage Financial synergy may result from more efficient use of financial leverage. the financial synergy of acquiring firm’s strong financial capability may provide the impetus for the merger. Sometimes the small firm has encountered operating difficulty. The financial leverage advantage must be weighed against the increased financial risk. The firm has exhausted its bank credit and has virtually no access to long term debt or equity markets. The only alternative the small firm may have is to try to interest 2 or more large firms in proposing merger to introduce. It may not be threatened by non renewable of maturing loan. Although its bargaining position will be better. and the bank has served notice that its loan will not be renewed? In this type of situation a large firms with sufficient cash and credit to finance the requirements of smaller one probably can obtain a good buy bee. competition into those bidding for acquisition. The smaller firm’s situations might not be so bleak.

the acquiring may be able to recover all or parts of the cost of acquiring the cash rich firm when the merger is consummated and the cash then belongs to it. Counter Synergism: Certain factors may oppose the synergistic effect contemplating from a merger. Personality or policy conflicts may develop that either hamstring operations or acquire buying out such contracts to remove personal position of authority. The list of possible counter synergism factors could goon endlessly. management of acquiring firm simply may not have sufficient knowledge of the business to control the acquired firm adequately. has a loss carry forward of rupees twenty crores accumulated from profitable operations of previous years. The resulting reduction of the efficiency may eliminate expected operating synergy or even reduce the post merger profitability of the acquired firm.firm possesses the financing capability. Negative factors and the risks related to them also must be considered in appraising a prospective merger. MERGERS & ACQUISITIONS IN BANKING SECTOR 15 | P a g e .g. income tax consideration may provide the financial synergy motivating a merger. Often another layer of overhead cost and bureaucracy is added. Attempts to maintain control may induce resentment by personnel of acquired firm. assume that a firm A has earnings before taxes of about rupees ten crores per year and firm B now break even. thereby eliminating income taxes in future periods. Do the advantages outweigh disadvantages? Sometimes the acquiring firm agrees to long term employments contracts with managers of the acquiring firm. In some cases. the point is that the mergers do not always produce that expected results. Such often are beneficial but they may be the opposite. d) The Income Tax Advantages In some cases. Particularly in conglomerate merger. The acquisition of a cash rich firm whose operations have matured may provide additional financing to facilitate growth of the acquiring firm. e. The merger of A and B will allow the surviving corporation to utility the loss carries forward.

expanding firm considering construction plants. MERGERS & ACQUISITIONS IN BANKING SECTOR 16 | P a g e . If the firm cannot hire the management or the technology it needs. 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. Many of the mergers can be financed by cash tender offers to the acquired firm’s shareholders at price substantially above the current market. If the market price of many socks have been considerably below the replacement cost of the assets they represent. any merger. the assets can be acquired for less than their current casts of construction. a large company can maintain or develop a competitive edge. particularly land mineral rights. Risk could be reduced because the assets were already in place and an organization of people knew how to operate them and market their products. it might combine with a compatible firm that has needed managerial. 3.OTHER MOTIVES OF M&A Merger may be motivated by two other factors that should not be classified under synergism. Purchase of Assets at Bargain Prices Mergers may be explained by opportunity to acquire assets. companies need to stay on top of technological developments and their business applications. at lower cost than would be incurred if they were purchased or constructed at the current market prices. regardless of specific motive for it. 1. 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. Of course. plant and equipment. should contribute to the maximization of owner’s wealth. Even so. 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. 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. Acquiring new technology To stay competitive. By buying a smaller company with unique technologies. personnel or technical expertise.

The reserve bank generally encourages amalgamation when it is satisfied that the scheme is in the interest of depositors of the amalgamating banks. Therefore a baking company can be amalgamated with another banking company only under section 44A of the BR act. The bank has to obtain Reserve Bank’s sanction for the approval of the scheme of amalgamation. Further. However. Since nationalized banks are not Baking Companies and SBI is governed by a separate statue. 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. Section 44A of the Banking Regulation act 1949 provides for the procedure to be followed in case of voluntary mergers of banking companies. as per the observations of JPC the role of RBI is limited. 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. the section does not envisage approval of RBI for the merger of any other financial entity such as NBFC with a banking company voluntarily. reserve bank is empowered to determine the Market value of shares of minority shareholders who have voted against the scheme of amalgamation. Section 44(A): Voluntary Amalgamation of Banking Companies. amalgamation and acquisition of banks under various acts are discussed in brief as under: Mergers. 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. Moreover. MERGERS & ACQUISITIONS IN BANKING SECTOR 17 | P a g e .BANK MERGER & AMALGAMATION UNDER VARIOUS ACTS The relevant provisions regarding merger.banking Regulation act 1949 Amalgamations of banking companies under B R Act fall under categories are voluntary amalgamation and compulsory amalgamation. These mergers have to be attempted in terms of the provisions in the respective statute under which they are constituted.

central government may amalgamate two or more companies in public interest. Under section 396 of the act. Meaning thereby. MERGERS & ACQUISITIONS IN BANKING SECTOR 18 | P a g e . Under the provisions. Banking institution means any banking company and includes SBI and subsidiary banks or a corresponding new bank. 1949 two banking companies can be amalgamated voluntarily.Section 45: Compulsory Amalgamation of banks Under section 45(4) of the banking regulation act.e. which are weak. Whereas under voluntary amalgamation. 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. 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. reserve bank has the power to amalgamate a banking company with any other banking company. with any other banking institutions as defined in sub section (15) thereof. Companies Act Section 394 of the companies act. Under section 44A of the banking Regulation Act. 1956 is the main section that deals with the reconstruction and amalgamation of the companies. Under compulsory amalgamation. reserve bank may prepare a scheme of amalgamation of a banking company with other institution (the transferee bank) under sub. without the consent of its members or creditors. a banking company cannot be merged with a nationalized bank or any other financial entity. unsound or improperly managed. Section 45 of the Banking regulation Act. nationalized bank.section (15) of section 45. 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. Action under their provision of this section is taken by reserve bank in consultation with the central government in the case of banks. 1949 provides for a bank to be reconstructed or amalgamated compulsorily i. SBI and subsidiary of SBI. In case of an amalgamated of any company such as a non banking finance company with a banking company. a banking company can be amalgamated with banking company can be amalgamated with another banking company only.

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. therefore. 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. 1955 Section 35 of the State Bank of India Act. The powers for acquisition are MERGERS & ACQUISITIONS IN BANKING SECTOR 19 | P a g e . any individual or any association of individuals carrying on banking business. acquire business of any other banking institution. SBI may. 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. As per sub-section (13) of section 38 of the SBI act. 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. But in our view. That means the individual or body of individuals carrying on banking business may also include urban cooperative banks on NBFC. That means the individual or body of individuals carrying on banking business. It is not clear whether under the provisions of section 35. 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. carrying on the 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. 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.State Bank of India Act. SBI can acquire a corresponding new bank or a RRB or its own subsidiary for that matter. 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). 1955 confers power on SBI to enter into negotiation for acquiring business including assets and liabilities of any banking institution with the sanction of the central government and if so directed by the government in consultation with the RBI.

It will be necessary that shareholder of the transferee banking company ¾ the in value present and voting should approve the scheme of amalgamation. 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.e. The provisions of sec. approval of 3/4th in value of shareholders will apply to such merger in compliance with the companies act. But since section44A does not apply if a Banking company is to be merged with a corresponding new bank. If a corresponding new bank becomes a transferor bank and is merged with a banking company being the transferee bank. Therefore if under section 9(2) (c) of nationalization act a corresponding new bank is to merged with a banking company (transferee company). 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.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. However constitution. A nationalized bank cannot be amalgamated with NBFC. But a transferor company includes any body corporate whether the company is within the meaning of companies act or not. a question arises as to the applicability of the provisions of the companies act in respect to the merger. it will be necessary to comply with the provisions of the companies act. 9 do not specifically exclude the applicability of the companies act to any scheme of amalgamation of a company. banking company or SBI or a subsidiary. 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. Nationalized banks may be amalgamated with any other nationalized bank or with another banking institution i. 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. composition and administration of the cooperative MERGERS & ACQUISITIONS IN BANKING SECTOR 20 | P a g e . Amalgamation 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).

Compulsory Amalgamation Under section 18 of multi state cooperative societies act 2002 central registrar with the previous approval of the reserve bank. 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. The resolution has been approved by the central registrar. Voluntary amalgamation of multi state cooperative societies will come in force when all the members and the creditors give their assent. 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 ENTITIES Voluntary Amalgamation 24 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. OF MULTISTATE COOPERATIVE BANKS WITH OTHER MERGERS & ACQUISITIONS IN BANKING SECTOR 21 | P a g e . 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. Therefore a cooperative bank can be amalgamated with any other entity. 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. On amalgamation. cooperative societies are governed by the positions of Maharashtra co operative societies act.societies are under supervision of registrar of co-operative societies of respective states (in case of Maharashtra State. a new entity comes into being.

Therefore. Therefore. NBFCs can be amalgamated with NBFCs only. Amalgamation of non-Banking financial Companies (NBFC’s) with other entities NBFCs are basically companies registered under companies act 1956. Voluntary amalgamation 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. Therefore. Amalgamation of Financial Institution with other entities Public financial institution is defined under section 4A of the companies act 1956. provisions of companies act in respect of amalgamation of companies are applicable to NBFCs. MERGERS & ACQUISITIONS IN BANKING SECTOR 22 | P a g e . the merger would be covered under the provisions of section 394 of the companies act such cases do not require specific approval .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 more regional rural banks by notification in official gazette. Compulsory Amalgamation Under section 396 of the companies‟ act 1956. Voluntary amalgamation under section 44A of banking regulation act is available for merger of two banking companies. central government in public interest can amalgamate 2 or more companies. In the case of an amalgamation of any other company such as a non banking finance company with a banking company. regional rural banks can be amalgamated with regional rural banks only. Section 4A of the said act specifically the public financial institution is governed by the provisions of respective acts of the institution.

time mergers of banking institutions emerged as an important strategy for growing the size of banks. One of the outcomes of such reforms was the consolidation of the banking industry through mergers and acquisitions. At that. India embarked on a strategy of economic reforms in the wake of a serious balance of payment crisis in1991.OVERVIEW OF INDIAN BANKING SECTOR In India. The main objective of the banking sector reforms was to improve the efficiency of banks and to promote a diversified and competitive financial system. Due to technological progress. the environment under which Indian banking sector has operated witnessed a remarkable changes. cooperative sector banks. Technological progress and financial deregulation have played an important role in accelerating the process of merger and acquisition in Indian banking industry. During last few decades. the Reserve Bank of India acts as a central bank of the country. In Indian banking sector. post office saving banks. MERGERS & ACQUISITIONS IN BANKING SECTOR 23 | P a g e . comprising of scheduled and non-scheduled banks. the policy makers adopted a cautious approach for introducing reform measures on the recommendation of Narsimham Committee I (1991). Size of the bank plays a significant role to enter the global financial market. the scale at which financial services and products are produced has expanded which provide an opportunity for the banks to increase their size and scale of production. Narsimham Committee II (1997) and Verma Committee (1999). foreign and exchange banks. Banking system has a wide mix.

STRUCTURE OF INDIAN BANKING SECTOR MERGERS & ACQUISITIONS IN BANKING SECTOR 24 | P a g e .

BANKS MERGED IN INDIA SINCE LIBERALIZATION MERGERS & ACQUISITIONS IN BANKING SECTOR 25 | P a g e .

the retail banking market biased towards the urban markets is growing at a Compounded Annual Growth Rate (CAGR) of almost 18-20% while the rural market is yet to be fully tapped. The surge in globalization of finance has also gained momentum with the technological advancements which have effectively overcome the national borders in the financial services business. IDBI and IDBI Bank treaded the same route. Technological Expertise: New entrants in the banking sector are armed with technological expertise while older players are well equipped with experience in practices. Though one has to state that consolidated accounting and supervisory techniques would have to evolve and appropriate fire walls built to address the risks underlying such large organizations and banking conglomerates. ICICI Bank today stands as India’s second largest bank offering its clients both in India and overseas a product range as varied us retail banking products to exotic investment banking and treasury solutions. In India. Creation of a Financial Super Market or a Universal Bank: A recent trend is to promote the concept of a financial super market chain. Growing integration of economies and the markets around the world is making global banking a reality. An example of such a financial supermarket would be the reverse merger of ICICI and ICICI Bank. MERGERS & ACQUISITIONS IN BANKING SECTOR 26 | P a g e . For smaller banks to adopt technology platforms the expenditure may not be sustainable and hence this may be one more reason for M&A. technology would be a major enabler for banking in the future.M & A IN INDIAN BANKING SECTOR AS AN OPPORTUNITY Two prime reasons force us to believe that M&A in the Indian Banking Sector is an opportunity. and other modern technologies (such as SWIFT) has widened frontiers of global banking. Mergers would thus help both parties gain an expertise in areas in which they lack. Keeping in focus the population profile. and it is now possible to market financial products and services on a global basis. making available all types of credit and non-fund facilities under one roof under one umbrella organization (or through specialized subsidiaries). A number of state owned banks in India are adopting sophisticated core banking solutions and these are just the larger ones. Similarly. mobile banking. Widespread use of internet banking.

PROCEDURE OF BANK MERGERS & ACQUISITION • The procedure for merger either voluntary or otherwise is outlined in the respective state statutes/ the Banking regulation Act. • After the board approval of the merger proposal. Once the scheme is finalized. assets and liabilities. market capital. a registered valuer is appointed to valuate both the banks. • Before deciding on the merger. They would also be ensuring compliance with the statutory procedures for notifying the amalgamation after obtaining the sanction of the RBI. its reach and anticipated growth and sends its report to the respective banks. India is one of the signatories of Financial Services Agreement (FSA) of1997. MERGERS & ACQUISITIONS IN BANKING SECTOR 27 | P a g e . After the conclusion of the discussions.In the coming years globalization would spread further on account of the likely opening up of financial services under WTO. being the authorities vested with the responsibility of administering the Acts. a scheme is prepared incorporating therein the all the details of both the banks and the area terms and conditions. an extra ordinary general meeting of the shareholders of the respective banks is convened to discuss the proposal and seek their approval. The Registrars. • After the Board approval of the merger proposal. it is tabled in the meeting of Board of directors of respective banks. The valuer valuates the banks on the basis of its share capital. the authorized officials of the acquiring bank and the merging bank sit together and discuss the procedural modalities and financial terms. will be ensuring that the due process prescribed in the Statutes has been complied with before they seek the approval of the RBI. The board discusses the scheme threadbare and accords its approval if the proposal is found to be financially viable and beneficial in long run. An easy way for this is thus to go through adequate reconstruction to acquire the necessary technology and get an early mover advantage in globalizing the Indian Banks. This gives India’s financial sector including banks an opportunity to expand their business on a quid pro quo basis.

1949 (AACS) does not empower Reserve Bank to formulate a scheme with regard to merger and amalgamation of banks. the position with regard to take over of a co-operative bank registered under the State Act by a cooperative bank registered under the CENTRAL Although there are no specific provisions in the State Acts or the Central Act for the merger of a co-operative society under the State Acts with that under the Central Act. Although the Banking Regulation Act. it is felt that. • After obtaining approvals from all the concerned institutions. The request for merger can emanate from banks registered under the same State Act or from banks registered under the Multi State Co-operative Societies Act (Central Act) for takeover of a bank/s registered under State Act. valuation report etc to Reserve Bank of India and other regulatory bodies such Security & exchange board of India (SEBI) for their approval. for sanctioning a scheme of amalgamation or reconstruction. the State Governments have incorporated in their respective Acts a provision for obtaining prior sanction in writing. shareholders approval. inter alia. RBI may consider proposals on merits MERGERS & ACQUISITIONS IN BANKING SECTOR 28 | P a g e . While the State Acts specifically provide for merger of co-operative societies registered under them. if all concerned including administrators of the concerned Acts are agreeable to order merger/ amalgamation. authorized officials of both the banks sit together and discuss and finalize share allocation proportion by the acquiring bank to the shareholders of the merging bank (SWAP ratio).• Once the valuation is accepted by the respective banks. • After completion of the above procedures. they send the proposal along with all relevant documents such as Board approval. a merger and acquisition agreement is signed by the bank. of RBI for an order. it has been decided to frame guidelines to encourage merger/amalgamation in the sector. RBI’S GUIDELINES ON M&A OF BANKS  With a view to facilitating consolidation and emergence of strong entities and providing an avenue for non disruptive exit of weak/unviable entities in the banking sector.

INFORMATION & DOCUMENTS TO BE FURNISHED BY THE ACQUIRER OF BANKS 1. Tier I Capital II. Pro-forma combined balance sheet of the acquiring bank as it will appear consequent on the merger. if any. Reserve Bank will confine its examination only to financial aspects and to the interests of depositors as well as the stability of the financial system while considering such proposals. Information which is considered relevant for the consideration of the scheme of merger including in particular:A. B. Financial results. 2. Copies of the reports of the valuers appointed for the determination of realizable value of assets (net of amount payable to creditors having precedence over depositors) of the acquired bank. Annual reports of each of the Banks for each of the three completed financial years immediately preceding the proposed date for merger. Tier II Capital III. 3. C. Risk-weighted Assets MERGERS & ACQUISITIONS IN BANKING SECTOR 29 | P a g e . published by each of the Banks for any period subsequent to the financial statements prepared for the financial year immediately preceding the proposed date of merger. Computation based on such pro-forma balance sheet of the following:I. In other words. Draft scheme of amalgamation as approved by the Board of Directors of the acquirer bank.leaving the question of compliance with relevant statutes to the administrators of the Acts. D.

If the values have relied upon projected information. made by the values in relation to such information D. Such other information and explanations as the Reserve Bank may require. The information and documents on which the values have relied and the extent of the verification. Statutory Liquidity Ratio 4.IV. Detailed computation of the realizable value of assets of the acquired bank. the names and designations of the persons who have provided such information and the extent of verification. Gross and Net npas V. MERGERS & ACQUISITIONS IN BANKING SECTOR 30 | P a g e . The method of valuation used by the values B. if any. if any. made by the values to test the accuracy of such information C. Information certified by the values as is considered relevant to understand the net realizable value of assets of the acquired bank including in particular:A. Details of the projected information on which the values have relied E. Ratio of Total Capital to Risk-weighted Assets VIII. Tier I Capital to Total Assets IX. Ratio of Tier I Capital to Risk-weighted Assets VI. 5. Ratio of Tier II Capital to Risk-weighted Assets VII. Gross and Net npas to Advances X. Cash Reserve Ratio XI.

deprivation. 2) Consolidation does not lead to instant results and there is an incubation period before the results arrive. forbearance and resilience are required in ample measure to make any merger a success story. which explains why there are high rate of failures in mergers. Till now a foolproof valuation system for transfer and compensation is yet to emerge. Goodwill is often towards a brand and its sub-merger is usually not taken kindly. Such a work force can never churn out good results. 3) Consolidation mainly comes due to the decision taken at the top. This becomes more complicated when existing brands themselves have a good appeal. there is also a problem of brand projection. 6) Further. for example. 5) There is a problem of valuation associated with all mergers. depression and demotivation among the employees. systems and procedures may not be conducive in the new milieu. All may not be up to the plan. A thorough overhauling and systems analysis has to be done to assimilate both the organizations. The increased size may become a drug rather than an asset.RISK IN BANK MERGERS AND ACQUISITION 1) When two banks merge into one then there is an inevitable increase in the size of the organization. 4) The structure. Therefore. The shareholder of existing entities has to be given new shares. personal management at the highest order with humane touch alone can pave the way. systems and the procedures followed in two banks may be vastly different. Big size may not always be better. Mergers and acquisitions are sometimes followed by losses and tough intervening periods before the eventual profits pour in. Question arises whether the earlier brands should continue to be projected or should they be submerged in favour of a new comprehensive identity. MERGERS & ACQUISITIONS IN BANKING SECTOR 31 | P a g e . It is a top-heavy decision and willingness of the rank and file of both entities may not be forthcoming. a PSU bank or an old generation bank and that of a technologically superior foreign bank. The erstwhile structures. The size may get too widely and go beyond the control of the management. Patience. This is a time consuming process and requires lot of cautions approaches to reduce the frictions. This leads to problems of industrial relations.

etc. Multiple waves of anxiety and culture clashes are most common causes of merger failure. organizational design.* Power status and prestige changes * Loss of identity * Uncertainty Unequal compensation may become issue of contention among new co-workers.. Gaining emotional and intellectual buy-in from the staff is not easy. Major stress on the accompany merger activity are: . technology. services and know-how are combined. behaviors and attitudes of managers affect employees' adjustment to M&A. and so the employees need to know why merger is happening so that they can work out options for themselves. are most sensitive issues in case of M&A negotiations. Lack of communication leads to suspicion. but it has been found that these issues are often being overlooked. Roles. MERGERS & ACQUISITIONS IN BANKING SECTOR 32 | P a g e . But what happens to the employees of the two companies? How will they adjust to the new corporate environment? Will some choose to leave? When a merger is announced.HR ISSUES IN MERGERS & ACQUISITION People issues like staffing decision. and uncertainty about change. HR plays an important role in anticipating and reducing the impact of these cultural clashes. company employees become concerned about job security and rumors start flying creating an atmosphere of confusion. loss of key personnel and business even before the contract has been signed. Before the new organization is formed. efficiencies projected and opportunities appraised as staff. goals are established. products. demoralization.

MAJOR BANKS INVOLVED IN MERGERS & ACQUISITIONS MERGERS & ACQUISITIONS IN BANKING SECTOR 33 | P a g e .

The retail portfolio of the merged entity will have more by way of unsecured and two-wheeler loans.148 branches and 2. There were significant cross-selling opportunities in the short-term.358 ATMs (the largest in terms of branches in the private sector). 09. Drawbacks The merged entity will not lend home loans given the conflict of interest with parent HDFC and may even sell down CBoP's home-loan book to it.KEY M&A DEALS 2000 ONWARDS The cases chosen for the purpose of this study were selected based on their prominence and recency (all post-2000) to ensure that the motives driving the deals will remain relevant in the current context. transaction banking and third party distribution. CBoP's strong SME relationships complemented HDFC Bank's bias towards highrated corporate entities. For CBoP.718 crore (7th largest in India). HDFC bank would exploit its underutilized branch network that had the requisite expertise in retail liabilities. which have come under pressure recently. The combined entity would improve productivity levels of CBoP branches by leveraging HDFC Bank's brand name. Benefits The deal created an entity with an asset size of Rs 1. providing massive scale economies and improved distribution with 1. this merger provided an opportunity to add scale. there was a potential of business synergy and cultural fit between the two organizations. MERGERS & ACQUISITIONS IN BANKING SECTOR 34 | P a g e . In addition. HDFC Bank Acquires Centurion Bank of Punjab (May '08) Intent For HDFC Bank. geography (northern and southern states) and management bandwidth. CBoP management had relevant experience with larger banks (as evident in the Centurion Bank and BoP integration earlier) managing business of the size commensurate with HDFC Bank.

There were also rumours of the resulting organization becoming too large an entity to manage efficiently. To tackle this. after extending the moratorium for the maximum permissible limit of six months. It also leveraged the infrastructure of ANZ Grindlays to service its overseas clients. Drawbacks The post merger organizational restructuring evoked widespread criticism due to unfair treatment of former Grindlays employees. It aimed at becoming the world's leading emerging markets bank and it thought that acquiring Grindlays would give it a well-established foothold in India and add strength to its management resources. The final decision about the merger was of the MERGERS & ACQUISITIONS IN BANKING SECTOR 35 | P a g e . South Gujarat Local Area Bank had suffered net losses in consecutive years and witnessed a significant decline in its capital and reserves. The merger also greatly reduced the risk profile of ANZ by reducing its exposure to default prone markets. Grindlays had been a poor performer and the Securities Scam involvement had made ANZ willing to wind up. For ANZ. decided that all seven branches of SGLAB function as branches of Bank of Baroda. Benefits Standard Chartered became the largest foreign bank in India with over 56 branches and more than 36% share in the credit card market. the deal provided immediate returns to its shareholders and allowed it to focus on the Australian market. funded its share buy-back in Australia (a defence against possible hostile takeover). For ANZ. especially in the fast changing financial sector. the deal. at a premium of US $700 million over book value. Bank of Baroda Acquires South Gujarat Local Area Bank Ltd (June '04) Intent According to the RBI. RBI first passed a moratorium under Section 45 of the Banking Regulation Act 1949 and then.Standard Chartered Acquires ANZ Grindlays Bank (November '00) Intent Standard Chartered wanted to capitalize on the high growth forecast for the Indian economy.

except that it was able to merge with a bigger bank and able to retain its branches and customers.2 million customer accounts. Acquires Bank of Madura (March '01) Intent ICICI Bank Ltd wanted to spread its network.2 billion at the time of merger). albeit under a different name. there was a possibility of reorienting its asset profile to enable better spreads and create a more robust microcredit system post merger. SGLAB did not benefit much. addition of a small liability did not affect it much. ICICI Bank Ltd. Benefits The branch network of the merged entity increased from 97 to 378.Government of India in consultation with the RBI. BoM wanted a (financially and technologically) strong private sector bank to add shareholder value. Bank of Baroda was against the merger. 793. Benefits The clients of SGLAB were effectively transferred to Bank of Baroda. Albeit minor. Drawbacks There was no widespread criticism or any apparent drawback of the merger since the financials involved were not very high.55 %. technology-based. In addition. IBL gained an additional 1. enhance career opportunities for its employees and provide first rate. besides making an entry MERGERS & ACQUISITIONS IN BANKING SECTOR 36 | P a g e . BoM was a plausible target since its cash management business was among the top five in terms of volumes. including 97 branches in the rural sector.46% to 3. deriving the advantage of dealing with a more secure and bigger bank. Since BoB was a large entity (total assets of Rs. it obtained seven more branches and the existing customers of SGLAB. The Net Interest Margin increased from 2. and protested against the forced deal. This further strengthened its position in rural Gujarat. The Core fee income of ICICI almost doubled from Rs 87 crores to Rs 171 crores. without acquiring RBI's permission for branch expansion. modern banking services to its customers.

which was very different from BoM's ISBS software. Oriental Bank of Commerce Acquires Global Trust Bank Ltd (August '04) Intent For Oriental Bank of Commerce there was an apparent synergy post merger as the weakness of Global Trust Bank had been bad assets and the strength of OBC lay in recovery.into the small and medium segment. The two banks also had a cultural misfit with BoM having a trade-union system and IBL workers being young and upwardly mobile. unlike those for BoM.computerization and high-end technology. given the applicable RBI regulations. Benefits OBC gained from the 104 branches and 276 ATMs of GTB. OBC's presence in southern states increased along with the modern infrastructure of GTB. Both banks also had a common IT platform. a workforce of 1400 employees and one million customers. which was detrimental to solvency. following its bankruptcy. thus enabling the ICICI group to cross-sell different products and services. A capital adequacy ratio of less than 11 per cent could also constrain dividend declaration. GTB being a south-based bank would give OBC the muchneeded edge in the region apart from tax relief because of the merger. With the manual interpretations and procedures and the lack of awareness of the technology utilization in BoM. by an RBI ruling. In addition. GTB had no choice as the merger was forced on it. the Capital Adequacy Ratio of the merged entity was lower (from 19% to about 17%). there were hindrances in the merged entity. Drawbacks Since BoM had comparatively more NPAs than IBL. Drawbacks The merger resulted in a low CAR for OBC. The bank also had a lower business growth (5% vis-a-vis 15% of peers). There were technological issues as well as IBL used Banks 2000 software. The merger also filled up OBC's lacunae . It possessed the largest customer base in the country. MERGERS & ACQUISITIONS IN BANKING SECTOR 37 | P a g e .

AXIS BANK & ENAM’S MERGER MERGERS & ACQUISITIONS IN BANKING SECTOR 38 | P a g e .

MERGERS & ACQUISITIONS IN BANKING SECTOR 39 | P a g e .

Likely targets of takeover bids will be Yes Bank. investments and rendering of financial services. excessive valuations may act as a deterrent. This will be an opportunity for foreign banks to enter the Indian market as with their huge capital reserves. 8-10 national banks. Persistent growth in Indian corporate sector and other segments provide further motives for M&As. Banks need to keep pace with the growing industrial and agricultural sectors to serve them effectively. In addition. Bank of Rajasthan. and a few large local area banks. The Narsimham Committee (II) recommendations are also an important indicator of the future shape of the sector. MERGERS & ACQUISITIONS IN BANKING SECTOR 40 | P a g e . credit disbursal. best international practices and skilled personnel they have a clear competitive advantage over Indian banks. instead of government-driven. There would be a movement towards a 3-tier structure in the Indian banking industry: 2-3 large international banks. further opening up of the Indian banking sector is forecast to occur due to the changing regulatory environment (proposal for up to 74% ownership by foreign banks in Indian banks). Consolidation can also lower intermediation cost and increase reach to underserved segments. M&As in the future are likely to be more market-driven. Consolidation with global players can give the benefit of global opportunities in funds' mobilization. cutting-edge technology.Future of M&A in Indian Banking In 2011. However. and IndusInd Bank. A bigger player can afford to invest in required technology. especially in the post-sub-prime era.

where product life cycles are short. attempt options like outsourcing. one can list some steps for the future which banks should consider. lack of size should not be taken to imply irrelevance as specialized players can still seek to provide niche and boutique services. but no guarantee for improved profitability on a sustained basis. THANK YOU MERGERS & ACQUISITIONS IN BANKING SECTOR 41 | P a g e . time to market is critical and first mover advantage could be a decisive factor in deciding who wins in future. Banks need to take advantage of this fast changing environment. the thrust should be on improving risk management capabilities. At the same time. The aim should be to create a nimble giant. Post-M&A. both in terms of consolidation and general business. corporate governance and strategic business planning. banks can work towards a synergy-based merger plan that could take shape latest by 2009 end with minimization of technology-related expenditure as a goal. Hence. can be considered. the resulting larger size should not affect agility.Conclusion Based on the trends in the banking sector and the insights from the cases highlighted in this study. strategic alliances. rather than a clumsy dinosaur. etc. Firstly. In the short run. There is also a need to note that merger or large size is just a facilitator.

given the applicable RBI regulations.The merger resulted in a low CAR for OBC. The bank also had a lower business growth (5% vis-a-vis 15% of peers). which was detrimental to solvency. MERGERS & ACQUISITIONS IN BANKING SECTOR 42 | P a g e . A capital adequacy ratio of less than 11 per cent could also constrain dividend declaration.

AXIS BANK & ENAM’S MERGER MERGERS & ACQUISITIONS IN BANKING SECTOR 43 | P a g e .

MERGERS & ACQUISITIONS IN BANKING SECTOR 44 | P a g e .

MERGERS & ACQUISITIONS IN BANKING SECTOR 45 | P a g e .

The Narsimham Committee (II) recommendations are also an important indicator of the future shape of the sector. and IndusInd Bank. However. best international practices and skilled personnel they have a clear competitive advantage over Indian banks. investments and rendering of financial services. M&As in the future are likely to be more market-driven. This will be an opportunity for foreign banks to enter the Indian market as with their huge capital reserves. In addition. Consolidation with global players can give the benefit of global opportunities in funds' mobilization. and a few large local area banks. Bank of Rajasthan. Likely targets of takeover bids will be Yes Bank. excessive valuations may act as a deterrent.Future of M&A in Indian Banking In 2011. Consolidation can also lower intermediation cost and increase reach to underserved segments. There would be a movement towards a 3-tier structure in the Indian banking industry: 2-3 large international banks. 8-10 national banks. Banks need to keep pace with the growing industrial and agricultural sectors to serve them effectively. MERGERS & ACQUISITIONS IN BANKING SECTOR 46 | P a g e . further opening up of the Indian banking sector is forecast to occur due to the changing regulatory environment (proposal for up to 74% ownership by foreign banks in Indian banks). especially in the post-sub-prime era. A bigger player can afford to invest in required technology. Persistent growth in Indian corporate sector and other segments provide further motives for M&As. credit disbursal. cutting-edge technology. instead of government-driven.

banks can work towards a synergy-based merger plan that could take shape latest by 2009 end with minimization of technology-related expenditure as a goal. strategic alliances. can be considered. In the short run. There is also a need to note that merger or large size is just a facilitator. THANK YOU MERGERS & ACQUISITIONS IN BANKING SECTOR 47 | P a g e . the resulting larger size should not affect agility. both in terms of consolidation and general business. where product life cycles are short. one can list some steps for the future which banks should consider. time to market is critical and first mover advantage could be a decisive factor in deciding who wins in future. Hence. At the same time. Banks need to take advantage of this fast changing environment. Firstly. Post-M&A. rather than a clumsy dinosaur. attempt options like outsourcing. etc. the thrust should be on improving risk management capabilities. corporate governance and strategic business planning.Conclusion Based on the trends in the banking sector and the insights from the cases highlighted in this study. The aim should be to create a nimble giant. but no guarantee for improved profitability on a sustained basis. lack of size should not be taken to imply irrelevance as specialized players can still seek to provide niche and boutique services.