CAPSTONE PROJECT REPORT

SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF POST GRADUATE DIPLOMA IN MANAGEMENT (PGDM)

on

"Mergers and Acquisition in Banking Sector"

Submitted to SIES COLLEGE OF MANAGEMENT STUDIES

Submitted by Ruchi Agarwal Roll No. 96 Batch 2012-14

SIES COLLEGE OF MANAGEMENT STUDIES NERUL, NAVI MUMBAI

DECLARATION

I, Ruchi Agarwal, studying in the second year of POST GRADUATE DIPLOMA IN MANAGEMENT-HUMAN RESOURCE (PGDM-HR) at SIES College of Management Studies, Nerul, Navi Mumbai, hereby declare that I have completed the Capstone Project titled

"Mergers and Acquisition in Banking Sector" as a part of the course requirements for
POST GRADUATE DIPLOMA IN MANAGEMENT (PGDM) Program.

I further declare that the information presented in this project is true and original to be best of my knowledge

Date:

Place: Mumbai

Signature of the Student

Name of Guide: Prof. Susen Varghese Signature

ACKNOWLEDGEMENT

I, gratefully acknowledge the valuable guidance and support of Prof. Susen Varghese, my project guide, who had been of immense help to me in choosing the topic and successful completion of the project. I, would like to thank people working in various banks, their experience, perception and thorough professional knowledge, being available beyond the stipulated period of time and everwilling attitude to help led to successful completion of this project.

I would like to extend my gratitude towards all the professors and staff of SIES College of Management Studies for all their support throughout the project.

I am thankful to my parents, fellow colleagues and all the people who helped me directly or indirectly in making this project report successful and for their continuous support

CERTIFICATE

This is to certify that Ruchi Agarwal SIES College of Management Studies, specializing in Human Resource has completed her Research project on "Mergers and Acquisition in

Banking Sector" The information submitted is true and original to the best of my
knowledge.

Signature:

TABLE OF CONTENTS

Sr.no. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Particulars Executive Summary & Objectives Introduction of the Topic Literature Review Mergers & Acquisition (Purpose, Types, Advantages, Procedure) HR Issues in Mergers & Acquisition Mergers & Acquisition In Indian Banking Sector Risk associated with Mergers & Acquisition Challenges and Opportunities in Indian Banking Sector Procedure of Bank Merger RBI guidelines on Banks Mergers & Acquisition Case 1-Merger of ICICI Bank with Bank of Madura Case 2-Merger of Centurion Bank with Bank of Punjab Case 3-Merger of IDBI with IDBI Bank Case 4-Merger of ICICI Bank with Sangli Bank Conclusion Bibliography

Page No.

EXECUTIVE SUMMARY

Merger is a combination of two or more companies into one company. The acquiring company, (also referred to as the amalgamated company or the merged company) acquires the assets and the liabilities of the target company (or amalgamating company). Typically, shareholders of the amalgating company get shares of the amalgamated company in exchange for their shares in the Target Company. There are two ways which company can grow; one is internal growth and the other one is external growth. The internal growth suffers from drawbacks like the problem of raising adequate finances, longer implementation time of the projects, uncertain etc. in order to overcome these problems a company can grow externally by acquiring the already existing business firms. This is the route of mergers and acquisition. Mergers and acquisitions allow shareholders to maximize value from their investments. An effective collaboration between two companies will eventually benefit the shareholder. Another favorable consequence is the lessening of competition. A company acquiring one of its rivals will result in one less competitor for the company. Most importantly mergers and acquisitions help utilize resources efficiently and lead to an overall improved performance of the companies. The process of an M&A is not an easy one. It is a very time consuming process and involves exhaustive analysis and study of various factors. Even people skilled and trained in the art of negotiations and dealing with the nitty gritties of a merger or acquisition find it difficult to pinpoint the right method to carry out an M&A. Equally difficult is to predict the success of one. The HR department has to play a major role during the entire process, right from the inception of the idea for the proposed merger and acquisition to the final stage of integration HR is like the interface between the top management and the employees, and hence communication is of prime importance here for ensuring success of the M&A

OBJECTIVES

To evaluate whether the mergers and acquisitions in banking sector create any shareholder value or not. To study why mergers and acquisition is necessary in banking sector. To study challenges in mergers and acquisitions in banking sector. To study the risks associated with mergers and acquisitions. To understand how to identify key talent and take steps to retain the same post in mergers and acquisitions. To identify the major HR issues during mergers and acquisitions. The following project gives an insight into the various details of a merger or acquisition, the various issues faced during the same, the role played by HR in tackling them and finally the critical issue of talent retention in mergers and acquisitions. Case studies of mergers and acquisitions of banks were studied to understand the above mentioned aspects better.

Literature Review
After going through the available relevant literature on M&As and it comes to know that most of the work done high lightened the impact of M&As on different aspects of the companies. A firm can achieve growth both internally and externally. Internal growth may be achieved by expanding its operation or by establishing new units, and external growth may be in the form of Merger and Acquisitions (M&As), Takeover, Joint venture, Amalgamation etc. Many studies have investigated the various reasons for Merger and Acquisitions (M&As) to take place, Just to look the effects of Merger and Acquisitions on Indian financial services sector.

It described that the acquiring firms mainly focuses on the economies of scale, efficiency gain and address the need of communication and employee concern, and described the integration process was handled by professional and joint integration committee. Road map is prepared and HR integration is done as per schedule and they took a case of the Bank of Punjab acquired the Lord Krishna Bank and later on the Centurion Bank of Punjab acquired by the HDFC Bank and gave the frame of integration. This study regulate the link between communication, HR integration, management action and consequent contribution of post merger success by conducted interview in a recent bank merger, in depth interviews work conducted in a recent mergers of a Indian Bank. It was inferred that proactive communication, changes in organizational structure, and appropriate human resource integration would smoothen the journey towards successful integration. the views on financial implications and problem occurring in Merger and Acquisitions (M&As) highlighted the cases for consolidation and discussed the synergy based merger which emphasized that merger is for making large size of the firm but no guarantee to maximize profitability on a sustained business and there is always the risk of improving performance after merger.

Introduction
We have been learning about the companies coming together to form another company and companies taking over the existing companies to expand their business.

With recession taking toll of many Indian businesses and the feeling of insecurity surging over our businessmen, it is not surprising when we hear about the immense numbers of corporate
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restructurings taking place, especially in the last couple of years. Several companies have been taken over and several have undergone internal restructuring, whereas certain companies in the same field of business have found it beneficial to merge together into one company.

In this context, it would be essential to understand what corporate restructuring and mergers and acquisitions are all about.

All our daily newspapers are filled with cases of mergers, acquisitions, spin-offs, tender offers, & other forms of corporate restructuring. Thus important issues both for business decision and public policy formulation have been raised. No firm is regarded safe from a takeover possibility. On the more positive side Mergers & Acquisitions may be critical for the healthy expansion and growth of the firm. Successful entry into new product and geographical markets may require Mergers & Acquisitions at some stage in the firm's development. Successful competition in international markets may depend on capabilities obtained in a timely and efficient fashion through Mergers & Acquisitions. Many have argued that mergers increase value and efficiency and move resources to their highest and best uses, thereby increasing shareholder value. To opt for a merger or not is a complex affair, especially in terms of the technicalities involved. Before going for merger considerable amount of brainstorming would be required by the managements to reach a conclusion.

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. The survivor acquires all the assets as well as liabilities of the merged company or companies. Generally, the surviving company is the buyer, which retains its identity, and the extinguished company is the seller.
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Merger is also defined as amalgamation. Merger is the fusion of two or more existing companies. All assets, liabilities and the stock of one company stand transferred to Transferee Company in consideration of payment in the form of: Equity shares in the transferee company, Debentures in the transferee company, Cash, or A mix of the above modes.

WHAT IS ACQUISITION
Acquisition in general sense is acquiring the ownership in the property. In the context of business combinations, an acquisition is the purchase by one company of a controlling interest in the share capital of another existing company.

Methods of Acquisition:
An acquisition may be affected by a) Agreement with the persons holding majority interest in the company management like members of the board or major shareholders commanding majority of voting power; b) Purchase of shares in open market; c) To make takeover offer to the general body of shareholders; d) Purchase of new shares by private treaty; e) Acquisition of share capital through the following forms of considerations viz. Means of cash, issuance of loan capital, or insurance of share capital.

Takeover:
A takeover is acquisition and both the terms are used interchangeably. Takeover differs from merger in approach to business combinations i.e. The process of takeover, transaction involved in takeover, determination of share exchange or cash price and the fulfillment of goals of combination all are different in takeovers than in mergers. For example,
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process of takeover is unilateral and the offeror company decides about the maximum price. Time taken in completion of transaction is less in takeover than in mergers, top management of the offeree company being more co-operative.

De-merger or corporate splits or division:

De-merger or split or divisions of a company are the synonymous terms signifying a movement in the company.

Purpose of Mergers & Acquisitions

The purpose for an offeror company for acquiring another company shall be reflected in the corporate objectives. It has to decide the specific objectives to be achieved through acquisition. The basic purpose of merger or business combination is to achieve faster growth of the corporate business. Faster growth may be had through product improvement and competitive position. Other possible purposes for acquisition are short listed below: -

(1) Procurement of supplies:

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1. To safeguard the source of supplies of raw materials or intermediary product; 2. To obtain economies of purchase in the form of discount, savings in transportation costs, overhead costs in buying department, etc.; 3. To share the benefits of suppliers economies by standardizing the materials.

(2) Revamping production facilities:

1. To achieve economies of scale by amalgamating production facilities through more intensive utilization of plant and resources. 2. To standardize product specifications, improvement of quality of product, expanding. 3. Market and aiming at consumers satisfaction through strengthening after sale Services. 4. To obtain improved production technology and know-how from the offered company. 5. To reduce cost, improve quality and produce competitive products to retain and improve market share.

(3) Market expansion and strategy:

1. To eliminate competition and protect existing market; 2. To obtain a new market outlets in possession of the offeree; 3. To obtain new product for diversification or substitution of existing products and to enhance the product range; 4. Strengthening retain outlets and sale the goods to rationalize distribution; 5. To reduce advertising cost and improve public image of the offeree company; 6. Strategic control of patents and copyrights.

(4) Financial strength:

1. To improve liquidity and have direct access to cash resource; 2. To dispose of surplus and outdated assets for cash out of combined enterprise; 3. To enhance gearing capacity, borrow on better strength and the greater assets backing; 4. To avail tax benefits;
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5. To improve EPS (Earning Per Share).

(5) General gains:

1. To improve its own image and attract superior managerial talents to manage its affairs; 2. To offer better satisfaction to consumers or users of the product.

(6) Own developmental plans:

The purpose of acquisition is backed by the offeror companys own developmental plans. 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, accounting, valuation, etc. But might feel resource constraints with limitations of funds and lack of skill managerial personnels. It has to aim at suitable combination where it could have opportunities to supplement its funds by issuance of securities, secure additional financial facilities, eliminate competition and strengthen its market position.

(7) Strategic purpose:

The Acquirer Company view the merger to achieve strategic objectives through alternative type of combinations which may be horizontal, vertical, product expansion, market extensional or other specified unrelated objectives depending upon the corporate strategies. Thus, various types of combinations distinct with each other in nature are adopted to pursue this objective like vertical or horizontal combination.

(8) Corporate friendliness:

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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. The combining corporate aim at circular combinations by pursuing this objectives.

(9) Desired level of integration:

Mergers and acquisition are pursued to obtain the desired level of integration between the two combining business houses. Such integration could be operational or financial. This gives birth to conglomerate combinations. 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.

Types of Mergers
Merger or acquisition depends upon the purpose of the offeror company it wants to achieve. Based on the offerors objectives profile, combinations could be vertical, horizontal, circular and conglomeratic as precisely described below with reference to the purpose in view of the offeror company.

(A) Vertical combination:

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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. The acquiring company through merger of another unit attempts on reduction of inventories of raw material and finished goods, implements its production plans as per the objectives and economizes on working capital investments. In other words, in vertical combinations, the merging undertaking would be either a supplier or a buyer using its product as intermediary material for final production. The following main benefits accrue from the vertical combination to the acquirer company i.e. 1. It gains a strong position because of imperfect market of the intermediary products, scarcity of resources and purchased products; 2. Has control over products specifications.

(B) Horizontal combination:

It is a merger of two competing firms which are at the same stage of industrial process. The acquiring firm belongs to the same industry as the target company. The mail 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, reduction in investment in working capital, elimination in competition concentration in product, reduction in advertising costs, increase in market segments and exercise better control on market.

(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 company obtains benefits in the form of economies of resource sharing and diversification.

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(D) Conglomerate combination:

It is amalgamation of two companies engaged in unrelated industries like DCM and Modi Industries. 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, lowering average cost of capital and thereby raising present worth of the outstanding shares. Merger enhances the overall stability of the acquirer company and creates balance in the companys total portfolio of diverse products and production processes.

Advantages of Mergers

Mergers and takeovers are permanent form of combinations which vest in management complete control and provide centralized administration which are not available in combinations of holding company and its partly owned subsidiary. Shareholders in the selling company gain from the merger and takeovers as the premium offered to induce acceptance of the merger or takeover offers much more price than the book value of shares. Shareholders in the buying company gain
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in the long run with the growth of the company not only due to synergy but also due to boots trapping earnings. Mergers and acquisitions are caused with the support of shareholders, managers ad promoters of the combing companies. The factors, which motivate the shareholders and managers to lend support to these combinations and the resultant consequences they have to bear, are briefly noted below based on the research work by various scholars globally.

(1) From the standpoint of shareholders Investment made by shareholders in the companies subject to merger should enhance in value. The sale of shares from one companys shareholders to another and holding investment in shares should give rise to greater values i.e. The opportunity gains in alternative investments. Shareholders may gain from merger in different ways viz. From the gains and achievements of the company i.e. Through (a) (b) (c) (d) (e) Realization of monopoly profits; Economies of scales; Diversification of product line; Acquisition of human assets and other resources not available otherwise; Better investment opportunity in combinations.

One or more features would generally be available in each merger where shareholders may have attraction and favour merger.

(2) From the standpoint of managers Managers are concerned with improving operations of the company, managing the affairs of the company effectively for all round gains and growth of the company which will provide them better deals in raising their status, perks and fringe benefits. Mergers where all these things are the guaranteed outcome get support from the managers. At the same time, where managers have fear of displacement at the hands of new management in amalgamated company and also resultant depreciation from the merger then support from them becomes difficult.
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(3) Promoters gains Mergers do offer to company promoters the advantage of increasing the size of their company and the financial structure and strength. They can convert a closely held and private limited company into a public company without contributing much wealth and without losing control.

(4) Benefits to general public Impact of mergers on general public could be viewed as aspect of benefits and costs to: (a) Consumer of the product or services; (b) Workers of the companies under combination; (c) General public affected in general having not been user or consumer or the worker in the companies under merger plan.

(a) Consumers The economic gains realized from mergers are passed on to consumers in the form of lower prices and better quality of the product which directly raise their standard of living and quality of life. The balance of benefits in favour of consumers will depend upon the fact whether or not the mergers increase or decrease competitive economic and productive activity which directly affects the degree of welfare of the consumers through changes in price level, quality of products, after sales service, etc.

(b) Workers community The merger or acquisition of a company by a conglomerate or other acquiring company may have the effect on both the sides of increasing the welfare in the form of purchasing power and other miseries of life. Two sides of the impact as discussed by the researchers and academicians are: firstly, mergers with cash payment to shareholders provide opportunities for them to invest this money in other companies which will generate further employment and growth to uplift of the economy in general. Secondly, any
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restrictions placed on such mergers will decrease the growth and investment activity with corresponding decrease in employment. Both workers and communities will suffer on lessening job opportunities, preventing the distribution of benefits resulting from diversification of production activity.

(c) General public Mergers result into centralized concentration of power. Economic power is to be understood as the ability to control prices and industries output as monopolists. Such monopolists affect social and political environment to tilt everything in their favour to maintain their power ad expand their business empire. These advances result into economic exploitation. But in a free economy a monopolist does not stay for a longer period as other companies enter into the field to reap the benefits of higher prices set in by the monopolist. This enforces competition in the market as consumers are free to substitute the alternative products. Therefore, it is difficult to generalize that mergers affect the welfare of general public adversely or favorably. Every merger of two or more companies has to be viewed from different angles in the business practices which protects the interest of the shareholders in the merging company and also serves the national purpose to add to the welfare of the employees, consumers and does not create hindrance in administration of the Government polices.

Procedure for evaluating the decision for Mergers and Acquisition

The three important steps involved in the analysis of mergers and acquisitions are:-

1. Planning:- of acquisition will require the analysis of industry-specific and firm-specific

information. The acquiring firm should review its objective of acquisition in the context of its strengths and weaknesses and corporate goals. It will need industry data on market
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growth, nature of competition, ease of entry, capital and labour intensity, etc. This will help in indicating the product-market strategies that are appropriate for the company. It will also help the firm in identifying the business units that should be dropped or added. On the other hand, the target firm will need information about quality of management, market share and size, capital structure, profitability, production and marketing capabilities, etc.

2. Search and Screening:- Search focuses on how and where to look for suitable
candidates for acquisition. Screening process short-lists a few candidates from many available and obtains detailed information about each of them.

3. Financial Evaluation:- a merger is needed to determine the earnings and cash flows,
areas of risk, the maximum price payable to the target company and the best way to finance the merger. In a competitive market situation, the current market value is the correct and fair value of the share of the target firm. The target firm will not accept any offer below the current market value of its share. The target firm may, in fact, expect the offer price to be more than the current market value of its share since it may expect that merger benefits will accrue to the acquiring firm.

The following graph shows the total valuation of mergers and acquisitions in India in the period 2000-2009.

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The following graph shows the total valuation of mergers and acquisitions in India in the period 2000-2009. Thus it is evident from the graphs that companies are becoming more and more open to the idea of acquiring and takeovers and are willing to invest a good amount in the achievement of the same.

HR issues in Mergers and Acquisitions

Mergers and acquisitions are the buzzwords currently doing the rounds in the corporate world. Used as a tool of expansion, a lot of resources are invested in these M&A. They are strategic
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alliances between two companies and for any alliance to be successful, proper planning and careful consideration of the various aspects involved therein have to be looked after. A lot of attention is given to the legal, financial and operational elements of mergers and acquisitions. People management is one of the most critical aspects in an M&A, which is usually overlooked. Issues like staffing decisions, organizational grading, and pay scales are not given as much importance as they should be. The success rate of an M&A is usually around 30%-40%, the major cause for this being inadequate attention given to people related issues. Today it has been widely accepted that the way in which HR issues are handled is critical to the success of any M&A. It is also seen that most M&A failures can be traced to poor support of HR related issues and activities. The following are the major HR issues that are faced during a merger or an acquisition: 1. Lack of communication 2. Unrealistic expectations 3. Clash of objectives and goals 4. Cultural differences 5. Differences in the organizational hierarchy/grading 6. Issues in compensation management 7. Leadership issues 8. Identifying key personnel and taking measures to retain the same 9. Change management 10. Lay offs

Mergers and Acquisition In India Of Banking Sector

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Banking in India originated in the first decade of 18th century with The General Bank of India coming into existence in 1786. This was followed by Bank of Hindustan. Both these banks are now defunct. The oldest bank in existence in India is the State Bank of India being established as "The Bank of Bengal" in Calcutta in June 1806. A couple of decades later, foreign banks like Credit Lyonnais started their Calcutta operations in the 1850s. At that point of time, Calcutta was the most active trading port, mainly due to the trade of the British Empire, and due to which banking activity took roots there and prospered. The first fully Indian owned bank was the Allahabad Bank, which was established in 1865. By the 1900s, the market expanded with the establishment of banks such as Punjab National Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai - both of which were founded under private ownership. The Reserve Bank of India formally took on the responsibility of regulating the Indian banking sector from 1935. After India's independence in 1947, the Reserve Bank was nationalized and given broader powers. BEFORE LIBERALISATION In India the companies act 1956 and the monopolies and restrictive trade practices act, 1969 are statutes governing mergers among companies. In the companies act, as procedural has been laid down, in terms of which the merger can be effectuated. Sanction of the company court is essential perquisite for the effectiveness of a scheme of merger. The other statue regulating mergers was the hitherto monopolies and restrictive trade practices act. After the amendments the status does not regulate mergers. The regulatory provisions in the MRTP act were removed through the 1991 amendments, with a view to giving effect to the new industrial policy of liberalization and deregulation, aimed at achieving economies of scale for ensuring higher productivity competitiveness.

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Liberalization In the early 1990s the then Narasimha Rao government embarked on a policy of liberalization and gave licenses to a small number of private banks, which came to be known as New Generation tech-savvy banks, which included banks such as UTI Bank (the first of such new generation banks to be set up), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, kick started the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks. The next stage for the Indian banking has been setup with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%. The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%;Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks. All this led to the retail boom in India. People not just demanded more from their banks but also received more. In 1972 examined the restructuring of banks in greater depth and recommended that there should be three all India banks and 5 or 6 regional banks plus a network of cooperative or rural banks in the rural areas. N.Vagul suggested the restructuring on the basis of location and functioning of the bank and recommended four sets of banks in the public sector. 1) There should be district banks having the network of around 300 branches and Rs. 250 crores or more. Their functions similar to that of commercial banks. 2) National saving banks which will be located only in urban and metropolitan towns. 3) The third and fourth set of banks will be trade and industry banks and foreign exchange banks and located at urban and metropolitan centers catering to designate clientele only. In July 1976, a commission under the chairmanship of Sh. Manubhai shah suggested the

reduction in the number of existing banks and making the smallest nationalized banks bigger

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so as to have strong regional character in states of UP, MP, Bihar, and Orissa and North east part of the country. James Raj Committee appointed by RBI in June 1997 recommended that 1. A banks size should be in the range of 1000 to 1500 branches. 2. SBI group should be converted into holing company with 5 zones subsidiaries and 3. Streamlining of the rural and semi urban branches.

Narasimhan Committee Report

The first report of the Narsimhan committee on the financial system had recommended a broad pattern of the structure of the banking system as under: 3 or 4 larger banks (including the State Bank of India) which could become international in character. 8 to 10 national banks with a network of branches throughout the country engaged in universal banking. Local banks whose operations would be generally confined to a specific region. Rural banks (including RRBs) whose operations would be confined to the rural areas and whose business would be predominantly engaged in financing of agricultural and allied activities. The Narsimhan committee was of the view that the move towards this revised system should be market driven and based on profitability considerations and brought about through a process of mergers and acquisitions. Narsimhan Committee (1998) The second report of the Narsimhan committee on the banking sector reforms on the structural issues made following recommendations. Merger between banks and between banks and DFIs and NBFCs need to be based on synergies and locational and business specific complimentary of the concerned institutions and must obviously make sound commercial sense. Mergers of public sector banks should emanate
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from the managements of banks with the govt. as the common shareholder playing a supportive role. Such mergers however can be worthwhile if they lead to rationalization of workforce and branch network otherwise the mergers of public sector banks would tie down the management with operational issues and distract attention from the real issue. It would be necessary to evolve policies aimed at right sizing and redeployment of the surplus staff either by the way of retraining them and giving them appropriate alternate employment or by introducing a VRS with appropriate incentives. This would necessitate the corporation and understanding of the employees and towards this direction. Management should initiate discussion with the representatives of staff and would need to convince their employees about the intrinsic soundness of the idea, the competitive benefits that would accrue and the scope and potential foe employees own professional advancement in a larger institution. Mergers should not be seen as a means of bailing out weak banks. Mergers between strong banks/FIs would make for greater economic and commercial sense and would greater than the sum of its parts and have a force multiplier effect. It can hence be seen from the recommendations of Narsimhan Committee that mergers of the public sector banks were expected to emanate from the management of the banks with government as common shareholder playing a supportive role.

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MERGERS IN INDIAN BANKING SECTOR

Mergers and acquisitions encourage banks to gain global reach and better synergy and allow large banks to acquire the stressed assets of weaker banks. Merger in India between weak and unviable banks should grow faster so that the weak banks could be rehabilitated providing continuity of employment with the working force, utilization of the assets blocked up in the weak/unviable banks and adding constructively to the prosperity of the nation through increased flow of funds. In the banking sector, important mergers and acquisitions in India in recent years include the merger between IDBI (Industrial Development bank of India) and its own subsidiary IDBI Bank. The deal was worth $ 174.6 million (Rs. 7.6 billion in Indian currency). Another important merger was that between Centurion Bank and Bank of Punjab. Worth $82.1 million (Rs. 3.6 billion in Indian currency), this merger led to the creation of the Centurion Bank of Punjab with 235 branches in different regions of India, another merger was HDFC bank and Centurion bank of punjab. Some of the past merged banks are Grind lay Bank merged standard charated Bank, Times Bank with HDFC Bank, bank of Madura with ICICI Bank, Nedungadi Bank Ltd. With Punjab National Bank and Global Trust Bank merged with Oriental Bank of Commerce. The small and medium sized banks are working under threats from economic environment which is full of problem for them, viz. inadequacies of resources, outdated technology, on systemized management pattern, faltering marketing efforts and weak financial structure. Their existence remains under challenge in the absence of keeping pace with growing automation and techniques obsolescence and lack of product innovations. These banks remain, at times, under threat from large banks. Their reorganization through consolidation/merger could offer succor to re-establish them in viable banks of optimal size with global presence. Merger and amalgamation in Indian banking so far has been to provide the safeguard and hedging to weak bank against their failure and too at the initiative of RBI, rather than to pay the way to initiate the banks to come forward on their own record for merger and amalgamation purely with a commercial view and economic consideration.

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As the entire Indian banking industry is witnessing a paradigm shift in systems, processes, strategies, it would warrant creation of new competencies and capabilities on an on going basis for which an environment of continuous learning would have to be created so as to enhance knowledge and skills.

RISKS ASSOCIATED WITH MERGER

There are several risks associated with consolidation and few of them are as follows: 1) When two banks merge into one then there is an inevitable increase in the size of the organization. Big size may not always be better. The size may get too widely and go beyond the control of the management. The increased size may become a drug rather than an asset.

2) Consolidation does not lead to instant results and there is an incubation period before the results arrive. Mergers and acquisitions are sometimes followed by losses and tough intervening periods before the eventual profits pour in. Patience, forbearance and resilience are required in ample measure to make any merger a success story. All may not be up to the plan, which explains why there are high rate of failures in mergers. 3) Consolidation mainly comes due to the decision taken at the top. It is a top-heavy decision and willingness of the rank and file of both entities may not be forthcoming. This leads to problems of industrial relations, deprivation, depression and demotivation among the employees. Such a work force can never churn out good results. Therefore, personal management at the highest order with humane touch alone can pave the way. 4) The structure, systems and the procedures followed in two banks may be vastly different, for example, a PSU bank or an old generation bank and that of a technologically superior foreign bank. The erstwhile structures, systems and procedures may not be conducive in the new milieu. A thorough overhauling and systems analysis has to be done to assimilate both the organizations. This is a time consuming process and requires lot of cautions approaches to reduce the frictions. 5) There is a problem of valuation associated with all mergers. The shareholder of existing entities has to be given new shares. Till now a foolproof valuation system for transfer and compensation is yet to emerge.

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6) Further, there is also a problem of brand projection. This becomes more complicated when existing brands themselves have a good appeal. Question arises whether the earlier brands should continue to be projected or should they be submerged in favor of a new comprehensive identity. Goodwill is often towards a brand and its sub-merger is usually not taken kindly.
MERGERS AND ACQUISITIONS AT A GLANCE..

YEAR

BANK

MERGED WITH

1969 1970 1971 1974 1976 1984-85 1984-85 1985 1986 1988 1989-90 1989-90 1989-90 1989-90 1990-91 1993-94

Bank Of Bihar National Bank Of Lahore Eastern Bank Ltd. Krishnaram Baldeo Bank Ltd. Belgaum Bank Ltd. Lakshmi Commercial Bank Bank Of Cochin Miraj State Bank Hindustan Commercial Bank Traders Bank Ltd. United Industrial Bank Bank Of Tamilnad Bank Of Thanjavur Parur Central Bank Purbanchal Bank New Bank Of India

State Bank Of India State Bank Of India Chartered Bank State Bank Of India Union Bank Of India Canara Bank State Bank Of India Union Bank Of India Punjab National Bank Bank Of Baroda Allahabad Bank Indian Overseas Bank Indian Bank Bank Of India Central Bank Of India Punjab National Bank

30

1993-94 1995-96 1996 1997 1997 1998 1998 1999 1999 2000 2001 2002 2003 2004 2004 2005 2005 2008

Bank Of Karad Kasinath Seth Bank SCICI ITC Classic BARI Doab Bank Punjab Co-operative Bank Anagram Fianance Bareilly Corporation Bank Sikkim Bank ltd. Times bank Bank of Madura Benaras state bank Nedungadi Bank South Gujarat Local Area Bank Global Trust Bank Bank of Punjab IDBI bank HDFC bank

Bank Of India State Bank Of India ICICI ICICI Oriental Bank of Commerce Oriental Bank of Commerce ICICI Bank of Baroda Union Bank HDFC Bank ICICI Bank of Baroda Punjab national Bank Bank of Baroda Oriental Bank of Commerce Centurion bank IDBI Centurion bank of punjab

31

Challenges and opportunities in Indian banking sector

In a few years from now there would be greater presence of international players in Indian financial system and some of the Indian banks would become global players in the coming years. Also competition is not only on foreign turf but also in the domestic field. The new mantra for Indian banks is to go global in search of new markets, customers and profits. But to do so the Indian banking industry will have to meet certain challenges. Some of them are FOREIGN BANKS India is experiencing greater presence of foreign banks over time. As a result number of issues will arise like how will smaller national banks compete in India with them, and will they themselves need to generate a larger international presence? Second, overlaps and potential conflicts between home country regulators of foreign banks and host country regulators: how will these be addressed and resolved in the years to come? It has been seen in recent years that even relatively strong regulatory action taken by regulators against such global banks has had negligible market or reputational impact on them in terms of their stock price or similar metrics. Thus, there is loss of regulatory effectiveness as a result of the presence of such financial conglomerates. Hence there is inevitable tension between the benefits that such global conglomerates bring and some regulatory and market structure and competition issues that may arise. I. GREATER CAPITAL MARKET OPENNESS - An important feature of the Indian financial reform process has been the calibrated opening of the capital account along with current account convertibility. It has to be seen that the volatility of capital inflows does not result in unacceptable disruption in exchange rate determination with inevitable real sector consequences, and in domestic monetary conditions. The vulnerability of financial intermediaries can be addressed through prudential regulations and their supervision; risk management of non-financial entities. This will require market development, II. Enhancement of regulatory capacity in these areas, as well as human resource development in both financial intermediaries and non-financial entities.

32

III.

TECHNOLOGY IS THE KEY IT is central to banking. Foreign banks and the new private sector banks have embraced technology right from their inception and continue to do so even now. Although public sector banks have crossed the 70%level of computerization, the direction is to achieve 100%. Networking in banks has also been receiving focused attention in recent times. Most recently the trend observed in the banking industry is the sharing of ATMs by banks. This is one area where perhaps India needs to do significant catching up. It is wise for Indian banks to exploit this globally state-of-art expertise, domestically available, to their fullest advantage. CONSOLIDATION We are slowly but surely moving from a regime of "large number of small banks" to "small number of large banks." The new era is one of consolidation around identified core competencies i.e., mergers and acquisitions. Successful merger of HDFC Bank and Times Bank; Stanchart and ANZ Grindlays; Centurion Bank and Bank of Punjab have demonstrated this trend. Old private sector banks, many of which are not able to cushion their NPAs, expand their business and induct technology due to limited capital base should be thinking seriously about mergers and acquisitions.

IV.

V.

PUBLIC SECTOR BANKS - It is the public sector banks that have the large and widespread reach, and hence have the potential for contributing effectively to achieve financial inclusion. But it is also they who face the most difficult challenges in human resource development. They will have to invest very heavily in skill enhancement at all levels: at the top level for new strategic goal setting; at the middle level for implementing these goals; and at the cutting edge lower levels for delivering the new service modes. Given the current age composition of employees in these banks, they will also face new recruitment challenges in the face of adverse compensation structures in comparison with the freer private sector.

VI.

Basel II As of 2006, RBI has made it mandatory for Scheduled banks to follow Basel II norms. Basel II is extremely data intensive and requires good quality data for better results. Data versioning conflicts and data integrity problems have just one resolution,
33

namely banks need to streamline their operations and adopt enterprise wide IT architectures. Banks need to look towards ensuring a risk culture, which penetrates throughout the organization.

VII.

COST MANAGEMENT Cost containment is a key to sustainability of bank profits as well as their long-term viability. In India, however, in 2003, operating costs as proportion of total assets of scheduled commercial banks stood at 2.24%, which is quite high as compared to in other economies. The tasks ahead are thus clear and within reach.

VIII.

RECOVERY MANAGEMENT This is a key to the stability of the banking sector. Indian banks have done a remarkable job in containment of non-performing loans (NPL) considering the overhang issues and overall difficult environment. Recovery management is also linked to the banks interest margins. Cost and recovery management supported by enabling legal framework hold the key to future health and competitiveness of the Indian banks. Improving recovery management in India is an area requiring expeditious and effective actions in legal, institutional and judicial processes.

IX.

REACH AND INNOVATION - Higher sustained growth is contributing to enhanced demand for financial savings opportunities. In rural areas in particular, there also appears to be increasing diversification of productive opportunities. Also industrial expansion has accelerated; merchandise trade growth is high; and there are vast demands for infrastructure investment, from the public sector, private sector and through public private partnerships. Thus, the banking system has to extend itself and innovate. Banks will have to innovate and look for new delivery mechanisms and provide better access to the currently under-served. Innovative channels for credit delivery for serving new rural credit needs will have to be found. The budding expansion of non-agriculture service enterprises in rural areas will have to be financed. Greater efforts will need to be made on information technology for record keeping, service delivery, and reduction in

34

Procedure of Bank Merger

The procedure for merger either voluntary or otherwise is outlined in the respective state statutes/ the Banking regulation Act. The Registrars, being the authorities vested with the responsibility of administering the Acts, will be ensuring that the due process prescribed in the Statutes has been complied with before they seek the approval of the RBI. They would also be ensuring compliance with the statutory procedures for notifying the amalgamation after obtaining the sanction of the RBI. Before deciding on the merger, the authorized officials of the acquiring bank and the

merging bank sit together and discuss the procedural modalities and financial terms. After the conclusion of the discussions, a scheme is prepared incorporating therein the all the details of both the banks and the area terms and conditions. Once the scheme is finalized, it is tabled in the meeting of Board of directors of respective banks. The board discusses the scheme thread bare and accords its approval if the proposal is found to be financially viable and beneficial in long run. After the Board approval of the merger proposal, an extra ordinary general meeting of the shareholders of the respective banks is convened to discuss the proposal and seek their approval. After the board approval of the merger proposal, a registered valuer is appointed to valuate both the banks. The valuer valuates the banks on the basis of its share capital market capital, assets and liabilities, its reach and anticipated growth and sends its report to the respective banks. Once the valuation is accepted by the respective banks , they send the proposal along with all relevant documents such as Board approval, shareholders approval, valuation report etc to Reserve Bank of India and other regulatory bodies such Security & exchange board of India SEBI for their approval. After obtaining approvals from all the concerned institutions, 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 After completion of the above procedures , a merger and acquisition agreement is signed.

35

RBI Guidelines on Mergers & Acquisitions 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, it has been decided to frame guidelines to encourage merger/amalgamation in the sector.

Although the Banking Regulation Act, 1949 (AACS) does not empower Reserve Bank to formulate a scheme with regard to merger and amalgamation of banks, the State Governments have incorporated in their respective Acts a provision for obtaining prior sanction in writing, of RBI for an order, inter alia, for sanctioning a scheme of amalgamation or reconstruction.

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. While the State Acts specifically provide for merger of co-operative societies registered under them, the position with regard to take over of a co-operative bank registered under the State Act by a co-operative 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, it is felt that, if all concerned including administrators of the concerned Acts are agreeable to order merger/ amalgamation, RBI may consider proposals on merits leaving the question of compliance with relevant statutes to the administrators of the Acts. In other words, 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.

36

Change in scenario of Banking Sector

1. The first mega merger in the Indian banking sector that of the HDFC Bank with Times Bank, has created an entity which is the largest private sector bank in the country. 2. The merger of the city bank with Travelers Group and the merger of Bank of America with Nation Bank have triggered the mergers and acquisition market in the banking sector worldwide. 3. Europe and Japan are also on their way to restructure their financial sector thought merger and acquisitions. Merger will help banks with added money power, extended geographical reach with diversified branch Network, improved product mix, and economies of scale of operations. Merger will also help banks to reduced them borrowing cost and to spread total risk associated with the individual banks over the combined entity. Revenues of the combine entity are likely to shoot up due to more effective allocation of bank funds. ICICI Bank has initiated merger talks with Centurian Bank but due to difference arising over swap ration the merger didnt materialized. Now UTI Bank is egeing Centurian Bank. The proposed merger of UTI Bank and Centurian Bank will make them third largest private banks in terms of size and market Capitalization State Bank of India has also planned to merge seven of its associates or part of its long-term policies to regroup and consolidate its position. Some of the Indian Financial Sector players are already on their way for mergers to strengthen their existing base. 4. In India mergers especially of the PSBS may be subject to technology and trade union related problem. The strong trade union may prove to be big obstacle for the PSBS mergers. Technology of the merging banks to should complement each other NPA management. Management of efficiency, cost reduction, tough competition from the market players and strengthing of the capital base of the banks are some of the problem which can be faced by the merge entities. Mergers for private sector banks will be much smoother and easier as again that of PSBS.

37

THE BANKING SCENARIO HAS BEEN CHANGING AT FAST PACE

Bank traditionally just borrower and lenders, has started providing complete corporate and retail financial services to its customers 1. Technology drive has benefited the customers in terms of faster improve convenient banking services and Varity of financial products to suit their requirement. Atms, Phone Banking, Net banking, Any time and Any where banking are the services which bank have started offering following the changing trend in sectors. In plastic money segment customer have also got a new option of debits cards against the earlier popular credit card. Earlier customers had to conduct their banking transaction within the restricted time frame of banking hours. Now banking hours are extended. 2. Atms, Phone banking and Net banking had enable the customer to transact as per their convince customer can now without money at any time and from any branch across country as certain their account transaction, order statements of their account and give instruction using the tally banking or on online banking services. 3. Bank traditionally involve working capital financing have started offering consumer loans and housing loans. Some of the banks have started offering travel loans, as well as many banks have started capitalizing on recent capital market boom by providing IPO finance to the investors.

38

Information & Documents to be furnished by THE ACQUIRER OF BANKS

1. Draft scheme of amalgamation as approved by the Board of Directors of the acquirer bank. 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. 3. Information which is considered relevant for the consideration of the scheme of merger including in particular:a. Annual reports of each of the Banks for each of the three completed financial years immediately preceding the proposed date for merger. b. Financial results, if any, 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. c. Pro-forma combined balance sheet of the acquiring bank as it will appear consequent on the merger. d. Computation based on such pro-forma balance sheet of the following:I. Tier I Capital Ii. Tier II Capital Iii. Risk-weighted Assets Iv. Gross and Net npas V. Vi. Ratio of Tier I Capital to Risk-weighted Assets Ratio of Tier II Capital to Risk-weighted Assets

Vii. Ratio of Total Capital to Risk-weighted Assets Viii. Tier I Capital to Total Assets Ix. X. Gross and Net npas to Advances Cash Reserve Ratio

39

4. 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. The method of valuation used by the values b. The information and documents on which the values have relied and the extent of the verification, if any, made by the values to test the accuracy of such information c. If the values have relied upon projected information, the names and designations of the persons who have provided such information and the extent of verification, if any, made by the values in relation to such information d. Details of the projected information on which the values have relied e. Detailed computation of the realizable value of assets of the acquired bank. 5. Such other information and explanations as the Reserve Bank may require.

40

Case 1:Merger of ICICI Bank with Bank of Madura

The proposed merger between ICICI Bank and Bank of Madura (BOM) is a remarkable one. The pre--merger market capitalization of ICICI Bank was roughly Rs.2500 crore while bom was at roughly Rs.100 crore. BOM is known to have a poor asset portfolio. What will the merged entity be worth? The key rationale underlying every merger is the question of synergy. Can ICICI Bank's products and technology bring new life to the 263 branches of BOM? Will ICICI Bank (which has 1,700 employees) be able to overcome the 2,600 employees that BOM carries, given that Indian labour law makes it troublesome and expensive to sack workers? In applying these ideas to ICICI Bank and to BOM, we need to believe that the stock market effectively processes information to produce estimates of the price and volatility of the shares of both these banks. This assumption is suspect, because both securities have poor stock market liquidity. Hence, we should be cautious in interpreting the numbers shown here. There are many other aspects in which this reasoning leans on models, which are innately imperfect depictions of reality. However, these models are powerful tools for understanding the basic factors at work, and they probably convey the broad picture quite effectively. The stock of ICICI Bank may be in the limelight on the back of the proposed acquisition of Bank of Madura. Though the stock has gained sharply in the last two months after hitting a recent low of Rs 110, some upside may be left as the bank could get re-rated on account of the merger. Existing shareholders could hold their exposures in ICICI Bank while investors with an appetite for risk could contemplate exposures despite the impressive gains of the past few months. ICICI Bank continues to be one of the better options in the banking sector at the moment and the possible merger with ICICI may well be on the backburner. The merger would pitchfork ICICI Bank as the leading private sector bank. The merger may be viewed favorably since Bank of Madura has focused strengths and a reasonably good quality balance sheet.

41

It is quite likely that the swap ratio may be fixed in a manner that holds out a good deal for the shareholders of Bank of Madura. This may also be influenced by the fact that the Bank of Madura stock has gained sharply by around 70 per cent in the past fortnight in the homestretch to the deal. As the acquisition is to be financed by issuance of stock, the rise in the market capitalization of Bank of Madura may mean a higher degree of equity issuance by ICICI Bank. But the price may well be worth paying as this is the only way that ICICI Bank may be able to get control over banks with reasonable quality balance sheets that could make a difference in the medium to longterm. Bank of Madura had assets of Rs 3,988 crore and deposits of Rs 3,395 crore as of March 2000. The fact that the bank has a capital adequacy of 15.8 per cent with shareholder funds of Rs 263 crore may mean that ICICI Bank (post-merger phase) will have more leeway to pursue growth without expanding the equity base (other than paying for the acquisition). Strong capital adequacy, a strong beachhead on the Internet arena, a revamped IT architecture, a growing retail client base through a brick-and-click strategy, and improving asset quality and earnings growth are positive features as far as ICICI Bank is concerned. Despite these factors, the share had been on a downtrend from after touching a high of Rs 271, eight months ago. The uptrend then was on the back of the announcement of its ADR issue and new technology initiatives. The subsequent downtrend was triggered by the possibility of the merger with its parent. There is continuing concern on asset quality of ICICI. It has been a stated goal of the ICICI group to go in for universal banking. It is clear that once regulatory hurdles are removed, such a possibility becomes distinctly feasible. But Given the battering that bank stock took, ICICI may now hesitate to pursue this path. Also ICICI Bank is the most visible investor-friendly face for the group in terms of returns to shareholders and it may well be maintained as a separate entity. In this backdrop, the stock may hold scope for improvement in the valuation of the stock.

42

Financial standing of ICICI Bank & Bank of Madura

Parameters

ICICI Bank 1998-1999 1999-2000 1129.90 9866.02 5030.96 105.43 196.81 19.64%

Bank of Madura 1998-1999 211.32 3013.00 1393.92 30.13 11.08 18.83% 1999-2000 247.83 3631.00 1665.42 45.58 11.08 14.25%

Net worth Total Deposit Advances Net Profit Share Capital Capital Ratio Gross Advances

308.33 6072.94 3377.60 63.75 165.07

Adequacy 11.06%

/ 4.72%

2.54%

8.13%

11.09%

Gross NPs Net Advances / Net NPs 2.88% 1.53% 4.66% 6.23%

Source: Complied from Annual Report (March 2000) of ICICI Bank & Bank of Madura.

Crucial Parameters: - How they stand Name of the Bank Book value of bank on the day of merger 183.0 58.0 Bank of Madura ICICI Bank

announcement Market price on the day announcement of merger

183.0

169.90

43

Earnings

per

share

38% 55% 1.73

5.4 15% 783

Dividend paid (in%) P/E Ratio

The Generation Gap:- the merger of 57 year old BOM sooth bared old generation bank with a fast growing technology say new Generation bank will help the latter and the start merger is likely to bring cheer to shareholder and bank employees of BOM and some amount of discomfort and anxiety to those of ICICI bank. The scheme of amalgamation will increase the equity bank of ICICI Bank to RS 220.36 CR. ICICI Bank will issue 235.4-lakh share of RS 10 each to the shareholder of BOM. The merger entity will have an increase of a net base over RS 160 billion and deposit base of RS 131 billion. The merged entity will have 360 branches and a similar number of ATMs across the country and also enable the ICICI to serve a large customer bone of 1.2 million customers of BOM through a wider network, adding to 2.7 million.

Managing rural branches: ICICI major branches are in major and cities, where as BOM spreads its wings mostly in semi urban and city segments of south India. There in a task ahead lying for the merged entity to increase dramatically the business mix of rural branches of BOM. On the other hand due to Geographical location of its branches and level of competition. ICICI Bank will have a tough time to cope with. Managing software: Another task which stand on the way is technology while ICICI bank which is fully automatic. Quality of assets:- the nature of assets a bank is holding would signify its operational efficiency. Usually the level of Non performing Assets ( NPAS) judges the quality of

44

assets. The lower the NAPS to total advances or total assets the better the quality is and vice versa. Staff productivity: - One of the key area where banks can develop competition advantage. The measurement of staff productivity becomes one of the essential factors while measuring the performance of the banks. Liquidity:- While assessing the liquidity of a bank the most sought ratio is net loans to total assets. A rise in the net loans to total assets may be considered as a fall in the liquidity of the bank. Book Value per share:- It is simply the net worth of the company (which is equal to the paid up equity capital plus resource and surplus) divided by the number of outstanding equity shares. Earnings per share:- specific valuation per unit of investment given by Net income after income taxes and after dividends on preferred stock of the company. Net work:- Book value of a company is common stock, surplus, resources and retained earnings. Profitability: - the most crucial ratio in measuring the profitability is net profit of the bank. The ratio such as Net Interest Income (NIL) and Net Interest Margin (NIM) measure sustenance ability of the bank based on the spread. Entity is using the package, Banks 2000, BOM computerized 90 percent of its business and was converted with ISBS software.

The BOM branches are supposed to switch over to Banks 2000. Though it is not a difficult task, with 80% computer literate staff would need effective retraining which involves a cost. The ICICI Bank need to invest RS 50 core for upgrading BOMs 263 branches.

Managing Human Resources: One of the greatest challenges before ICICI Banks is managing human resources. When the head count of ICICI Bank is taken it in less than 1500 employees on the other hand BOM has over 2500. The merged entity will have bout 4000 employees which will make it one of the largest banks among the new generation private sector banks. Th staff of ICICI Banks are drawn from

45

75 various banks mostly young qualified professionals with computer background and prefer to work in metro or by either with good remuneration packages. While under the influence of tread unions most of the BOM employees have low career aspiration. The announcement by H.N. signor, CEO and MD of ICICI, that three would be no VRS or retrenchment, creates a new hope amongst the BOM employees. It is a tough task ahead to manage. On the other hand their pay would be revised upwards. Managing Client Base The clients base of ICICI Bank after merger, will be as 2.7 Million from it past 0.5 Million, as accumulation of 2.2 Million from BOM. The nature and quality of clients is not of uniform quality. The BOM had built up it client base for a long time, in a hard way, on the basis of personalized services. In order to deal with the BOM clientele, the ICICI Bank needs to redefine its strategies to suit to the new clientele. The sentiments or a relationship of small and medium borrower is hurt it may be difficult for them to reestablish the relationship which could also hamper the image of the bank. Recommendation of Narasimham Committee on banking sector reforms Globally, the banking and financial systems have adopted information and communications technology. This phenomenon has largely by passed the Indian banking system, and the committee feels that requisite success needs to be achieved in the following areas:Banking automation Planning, Standardization of electronic payment systems Telecom infrastructure

Merger between banks and dfls and nbfcs need to be based on synergies and should make a sound commercial sense. Committee also opines that merger between strong banks would make for greater economic and commercial sense and would be a case where the whole is greater than the sum of its party and have a force multiplier effect. It also have merger should not be seen as a means of bailing out weak banks.

46

 A weak bank could be nurtured into healthy units. Merger could also be a solution to a after cleaning up their balances sheets it only say if these is no Voltaire response to a takeover of such bank, a restructuring commission for such PSB, can consider other options such as restructuring , merger and amalgamations to it not closure. The committee also options that while licensing new private sector banks, the initial capital requirement need to be review. It also emphasized on a transparent mechanism for deciding the ability of promoter to professionally manage the bank. The committee also feels that a minimum threshold capital for old private banks also deserved threshold capitals. The committee also opined that a promoter group couldn't hold more that 40 percent of the equity of a bank. The Narasimham Committee also suggested that the merger could be a solution to Weak banks Coney after clearing up the balance sheets) with a strong public sector bank. Source: Narasimham Committee report on banking sector reforms.

Changes after the merger While, BOM had an attractive business per employee figure of Rs.202 lakh, a better technological edge and had a vast base in southern India when compared to Federal bank. While all these factors sound good, a cultural integration would be a tough task ahead for ICICI Bank. ICICI Bank has announced a merger with 57-year-old Bank of Madure, with 263 branches, out of which 82 of them are in rural areas, with most of them in southern India. As on the day of announcement of merger) 09-12-00), Kotak mahindra group was holding about 12 percent stake in BOM, the Chairman BOM, Mr.K.M. Thaiagarajan, along with his associates was holding about 26 percent stake, Spic groups has about 4.7 percent, while LIC and UTI were having marginal holdings. The merger will give ICICI Bank a hold on South India market, which has high rate of economic development. The board of Director at ICICI has contemplated the following synergies emerging from the merger:

47

Financial Capability: The amalgamation will enable them to have a stronger financial and operational structure, which is supposed to be capable of greater resourger/deposit mobilization. ICICI will emerged one of the largest private sector banks in the country. Branch network: The ICICIs branch network would not only 264, but also increases geographic coverage as well as convenience to its customers. Customer base: The emerged largest customer base will enable the ICICI bank to offer banking financial services and products and also facilitate cross-selling of products and services of the ICICI groups. Tech edge: The merger will enable ICICI to provide atms, Phone and the Internet banking and finical services and products and also facilitate cross-selling of products and services of the ICICI group. Focus on Priority Sector: The enhanced branch network will enable the Bank to focus on micro-finance activities through self-help groups, in its priority sector initiatives through its acquired 87 rural and 88 semi-urban branches. Source: Report submitted at EGM on January 19, 2001.

THE SWAP RATIO: The swap ratio has been approved in the ratio of 1:2 two shares of ICICI Bank for every one share of Bank of Madura.

48

Case 2:Merger of Centurian Bank and Bank Of Punjab

BANK OF PUNJAB a) It was incorporated on may27, 1994 under the companies act, 1956.

b) The registered office of the bank was situated at SCO 46-47, sector 9-D, Madhya Marg, Chandigarh- 160017. c) It is banking company under the provisions of regulation act, 1949. d) The objects of bank are banking business as set out in its memorandum and articles of association. e) The bank is a new private sector bank in operating for more than 10 years, with a national network of 136 branches( including extension counters) having a significant presence in the most of the major banking sectors of the country. The transferor bank offers a host of banking products catering to various classes of customers ranging from small and medium enterprises to large cooperates. f) The bank is listed on the stock exchange, Mumbai, the national stock exchange of India limited and the Ludhiana stock exchange.

CENTURION BANK a) It was incorporated on june30, 1994 under the companies act, 1956. b) The registered office of the Bank was situated at Durga Niwas, Mahatma Gandhi Road, Panaji, 403001, Goa. c) It is a banking company under the provisions of banking regulation act, 1949. d) The objectives of transferee bank are banking business as set out in its memorandum and articles of association. e) The bank is a profitable and well capitalized new private sector bank having a national presence of over 99 branches( including extension counter) f) It has a significant presence in the retail segment offering a range of products across various categories.

49

g) The bank is listed on the stock exchange, Mumbai and the National stock exchange of India limited, Mangalore stock exchange of India limited, Mangalore stock exchange and its global depository receipts are listed on the Luxembourg stock exchange. The amalgamation of the Transferor bank (BOP) with the transferee bank (centurion) is effected subject to the terms and conditions embodied in the scheme of merger pursuant to section 44A of banking regulation act, 1949( hereinafter the act). In terms of section 44A of the said act, a resolution is required to be passed by a majority in number and two-third in the value of the members of the Transferor and the Transferee Bank, present rather in person or by proxy at the respective meetings. As both the companies are banking companies, the amalgamation is regulated by the provisions of the act and would require the sanction of the reserve bank of India under the said act. The provisions of section 391-394 of the companies act, 1956 relating to amalgamation are not applicable to the amalgamation of the transferor bank with the transferee bank and therefore the scheme is not be required to be sanctioned by a high court under the provisions of the companies act, 1956. About Centurion Bank of Punjab Centurion bank of Punjab is a new generation private bank offering a wide spectrum of retail, SME and corporate banking products and services. It has been among the earliest banks to offer a technology enabled customer interface that provides easy access and superior customer service. Centurion Bank of Punjab has a nationwide reach through its network of 241 branches and 389 ATMs.The bank aims to serve all the banking and financial needs of its customers through multiple delivery channels, each of which is supported by state of the art technology architecture. Centurion Bank of Punjab was formed by the merger of Centurion Bank and Bank of Punjab, both of which had strong retail franchises in their respective markets. Centurion Bank had a well managed and growing retail assets business, including leadership positions in two wheeler loans and commercial vehicles loans and a strong capital base. Bank of Punjab brings with it a strong retail deposit customer base in North India in addition to a sizable SME and agriculture portfolio. The shares of the bank are listed on the major stock exchanges in India and also on the Luxembourg Stock exchange. Among centurion bank of Punjabs greatest strengths is the fact that it is a professionally managed bank with a globally experienced and capable management
50

team. The day to day operations of the bank are looked by Mr. Shilnder bhandari, managing Director & CEO, assisted by a senior management team, under the overall supervision and control of the Board of directors. Mr. Rana Talwar is the chairman of the board. Some of our major shareholders are saber capital, Bank Muscat and Keppel Corporation, Singapore are represented on the Board. The book value of the bank would also go up to around Rs 300 crores. The higher book value should help the combine entity to mobilize funds at lower rate. The combined bank will be full service commercial bank with a strong presence in the Retail, SME and Agricultural segments. Share holding pattern of Centurion Bank of Punjab After the merger shareholding of Bank of Punjab (BOP) promotes will shrink to 5%. The family of Darshanjit Singh which promoted Bop currently holds 15.62% while associates hold another 11.40% the promoter stake will now fall down to around 5% ad for associate that would be 78%. The major shareholder of the centurion bank, bank of Muscats stake will fall to 20.5% from 25.91%, Keppels stake will be at 9% from current level of 11.33% and Rana Talwars capital will have a stake of 4.4% as against 5.61%. The promoters of BoP and major stakeholders of centurion bank will have a combine stake of around 42% in the merged entity- centurion bank of Punjab. The costs of deposit of Bop were lower than Centurion; While Centurion had a net interest margin of around 5.8%. The net interest margin of the merged entity will be at 4.8%. The combined entity will have adequate capital of 16.1% to provide for its growth plans. Centurion banks capital adequacy on a standalone basis stood at 23.1% while Bank of Punjab figure stood at 9.21%. The performance net worth of combined entity as at march 2005 stood at Rs. 696 crores with centurions net worth at Rs. 511 crore and Bank of Punjabs net worth at Rs. 181 crore, and

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combine entity( centurion Bank of Punjab) will have total asset 9395 crore, deposit 7837 crore and operating profit 43 crore. The merged entity will have a paid up share capital of Rs. 130 cr and a net worth of Rs. 696 cr. The merged entity will have 235 Branches and extension counters, 382 ATMs and 2.2 million customers. MERGER POSITION Private Banks is taking to the consolidation route in a big way. Bank of Punjab (BOP) and Centurion Banks (CB) have been merged to form Centurion Bank of Punjab (CBP). Private Banks is taking to the consolidation route in a big way. Bank of Punjab (BOP) and Centurion Banks (CB) have been merged to form Centurion Bank of Punjab (CBP). elements of both, he added. Centurion Bank has a presence in south and west and Bank of Punjab has a strong presence in the north. The merger will give us scale geographical reach and entry into new products segments said the official. Bank of Punjab is strong in small and medium enterprises (ME) business in the north, with good retail assets and an agriculture portfolio as well as deposit franchisee Centurion Bank has a capital, ability to generate retail assets, risk management systems and good treasury division. Market players except the swap ratio 2:1, said sources. For very two stocks of Centurion bank, a shareholder will RBI approved merger of Centurion Bank and Bank of Punjab effective from October 1, 2005. The merger is at swap ratio 9:4 and the combined bank is called Centurion bank of Punjab. The merger of the banks will have a presence of 240 branches and extension counters, 386 ATMs, about 2.2 million customers. As on March 2005, the net worth of the combined entity is Rs 696 crore and the capital adequacy ratio is 16.1% in the private sector, nearly 30 banks are operating. The top five control nearly 65% of the assets. Most of these private sector banks are profitable and have adequate capital and have the technology edge. Due to intensifying competition, access to low cost deposits is critical for growth. Therefore, size and geographical reach becomes the key for smaller banks. The choice before smaller private banks is to merge and form bigger and viable entities or merge into a big private sector bank. The proposed merger of bank of Punjab

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and Centurion Bank is sure to encourage other private sector banks to go for the M&A road for consolidation. The merger of Centurion bank and Bank of Punjab, both of which had strong retail franchises in their respective markets, formed centurion bank of Punjab. Centurion bank had a well managed and growing retail assets business, including leadership positions in 2 wheeler loans and commercial vehicle loans, and a strong capital base. Bank of Punjab brings with it a strong retail deposit customer base in North India in addition to a sizeable SME and agricultural portfolio. The shares of the bank are listed on the major stock exchanges in India and also on the Luxembourg stock exchange. Bank of Punjab has net non- performing assets of around Rs 110.45 crore as on March 2004, which will be carried to Centurion Banks books after merger. Both the brands are strong in their respective geographers and business hence the merged entity will have the elements of both, he added. Centurion Bank has a presence in south and west and Bank of Punjab has a strong presence in the north. The merger will give us scale geographical reach and entry into new products segments said the official. Bank of Punjab is strong in small and medium enterprises (ME) business in the north, with good retail assets and an agriculture portfolio as well as deposit franchisee Centurion Bank has a capital, ability to generate retail assets, risk management systems and good treasury division. Market players except the swap ratio 2:1, said sources. For very two stocks of Centurion bank, a shareholder will get one stock of Bank of Punjab. The merged entity will have a asset base of Rs.10, 000 crore, said a senior bank official. The depository base of entity will be around Rs. 7165.67 crore and advances will be around Rs. 3909.87 crore. The organization structure for the combined bank is in place and the grades and incentives across the organization have largely been realigned. Centurion bank of Punjab said in a statement. The operations of the bank have been integrated across the entire network. A decision has been taken on a common system for the banks and a phased migration has been planned to ensure minimum disruption of customer service and operation across the bank Centurion Bank of Punjab Said.

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HIGHLIGHTS OF THE MERGER- CENTURION BANK AND BANK OF PUNJAB 1. Bank of Punjab is merged into Centurion Bank. 2. New entity is named as Centurion Bank of Punjab. 3. Centurion Banks chairman Rana Talwar has taken over as the chairman of the merged entity. 4. Centurion banks MD Shailendra Bhandari is the MD of the merged entity. 5. KPMG India pvt ltd and NM Raiji & Co are the independent values and ambit corporate finance was the sole investment banker to the transaction. 6. Swap ratio has been fixed at 4:9 that is for every four shares of Rs 10 of Bank of Punjab, its shareholders would receive 9 shares of Centurion Bank. 7. There has been no cash transaction in the course of the merger; it has been settled through the swap of shares. 8. There is no downsizing via the voluntary retirement scheme. In the opinion of the Board of Directors of Bank of Punjab the following are amongst others, the benefits that are expected to accrue to the members from the proposed scheme: (a) Financial Capability: The amalgamation is expected to enable the merge Entity to have a stronger financial and business profile, which could be synergized to both for resources and mobilization and asset generation. (b) Branch Network: As a result of the amalgamation, the branch network of the merged entity would increase to 235 branches, providing increased geographic coverage, particular in the southern India and giving it a larger national foot print as well as convenience to its customers. (c) Retail Customer Base: The amalgamation would enable the merged entity to increase its retail customer base. This larger customer base will provide the merged entity enhanced
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opportunities for offering banking and financial services and products and facilitate cross selling of products and services. (d) Use of Technology: Post amalgamation, the merged entity would be able to provide through its branches, ATMs, phone and the internet banking and financial services and products to a larger customer base, with expected savings in costs and operating expenses. (e) Larger Size: the larger asset base of the merged entity will put the merged entity amongst the bigger players in the private sector banking space. (f) International Listing: The members will become shareholders of an internationally listed entity which has the advantage of greater access to raising capital.

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Case 3:Merger of IDBI and IDBI Bank

IDBI BANK The Industrial Development Bank of India Limited commonly known by its acronym IDBI is one of India's leading public sector banks and 4th largest Bank in overall ratings. RBI categorized IDBI as "other public sector bank".It was established in 1964 by an Act of Parliament to provide credit and other facilities for the development of the fledgling Indian industry. It is currently the tenth largest development bank in the world in terms of reach with 975 ATMs, 568 branches and 352 centers.[1] Some of the institutions built by IDBI are The National Stock Exchange of India (NSE), The National Securities Depository Services Ltd. (NSDL) and the Stock Holding Corporation of India (SHCIL) IDBI BANK , as a private bank after government policy for new generation private banks.

IDBI
The Industrial Development Bank of India (IDBI) was established on July 1, 1964 under an Act of Parliament as a wholly owned subsidiary of the Reserve Bank of India. In 16 February 1976, the ownership of IDBI was transferred to the Government of India and it was made the principal financial institution for coordinating the activities of institutions engaged in financing, promoting and developing industry in the country. Although Government shareholding in the Bank came down below 100% following IDBIs public issue in July 1995, the former continues to be the major shareholder (current shareholding: 52.3%). During the four decades of its existence, IDBI has been instrumental not only in establishing a well-developed, diversified and efficient industrial and institutional structure but also adding a qualitative dimension to the process of industrial development in the country

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Merger position On April 2, 2005, the merger of IDBI Bank Ltd. (IDBI Bank), the banking subsidiary of Industrial Development Bank of India (IDBI) with its parent company (IDBI held 57% stake in IDBI Bank) was announced. However, the merger was to be effective retrospectively from October 1, 2004. The swap ratio was established at 1:1.42 , that is, IDBI issued 100 equity shares for every 142 equity shares held by the shareholders in IDBI Bank. The merged entity was to be called IDBI Ltd... IDBI, one of India's leading Development Financial Institutions (DFI), .merged with IDBI bank, its banking subsidiary, in a move aimed at consolidating businesses across the value chain and realizing economies of scale. M Damodaran is IDBI chairman he confirm that the merger would benefit both IDBI and IDBI Bank. The rationale of the merger is extremely compelling because the bank needs capital to grow and gets to use a name that has great brand value. They can start operations as a fullfledged bank without incurring expenditure on setting up branches, inducting technology, or bringing in new people, Damodaran said. A new entity, IDBI Ltd, will become the holding company with two strategic business units IDBI, which will function as a development finance company, and IDBI Bank, which will be the retail arm. IDBI Home Finance, which was acquired from the Tata's, would also be merged into IDBI.

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Case 4:MERGER OF ICICI BANK WITH SANGLI BANK

The merger that was announced on APRIL 18, 2007 between ICICI Bank and SANGLI Bank.All branches of Sangli Bank functions as branches of ICICI Bank from April 19, said the Reserve Bank of India. Sangli Bank is an unlisted private bank headquartered at Sangli in Maharashtra. As on March 31, 2006, Sangli Bank had deposits of Rs. 2,004 crore, advances of Rs. 888 crore, net NPA (nonperforming assets) ratio of 2.3 per cent and capital adequacy of 1.6 per cent. Its loss at the end of 2005-06 amounted to Rs. 29 crore. It has 198 branches and extension counters, including 158 branches in Maharashtra and 31 branches in Karnataka. About 50 per cent of the total branches are located in rural and semi-urban areas and 50 per cent in metropolitan and urban centres. The bank has about 1,850 employees. ICICI Bank is the second largest bank in India and the biggest in terms of market capitalisation. As on September 30, 2006, ICICI Bank had total assets of Rs. 282,373 crore. In the six months ended September 30, 2006, it made a net profit of Rs. 1,375 crore. It had 632 branches and extension counters and 2,336 ATMs as on that date, and is in the process of setting up additional branches and ATMs pursuant to authorisations granted by the RBI. It has about 31,500 employees. ICICI Bank offers a wide range of financial products and services directly and through subsidiaries in the areas of life and general insurance, asset management and investment banking. Its shares are listed on the Bombay Stock Exchange Limited and the National Stock Exchange of India Limited and its American Depositary Shares are listed on the New York Stock Exchange

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CONCLUSION
Growth is always essential for the existence of a business concern. A business is bound to die if it does not try to expand its activities. The expansion of a business may be in the form of enlargement of its activities or acquisition of ownership. Internal expansion results gradual increase in the activities of the concern. External expansion refers to business combination where two or more concerns combine and expand their business activities.

Looking at the global trend of consolidation and convergence , it is need of the hour to restructure the banking structure in India through mergers and acquisition in order to make them more capitalized, automated and technology oriented so as to provide environment more competitive and customer friendly . Few more impediment for paving the way towards mergers and acquisition on commercial consideration and mutual arrangement, such as government shareholding of public sector banks, legal provisions related to banking and industrial matter should immediately be resolved if at all the place of merger and acquisition has to be accelerated in Indian banking sector.

Although a lot of roadblocks are faced in the process of acquisitions, concentrated efforts by both companies involved to focus on the key aspects like managing cultural differences, addressing employee concerns and retaining the best people will ultimately prove to be of essence in ensuring success of the acquisition or merger and acquisition.

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BIBLIOGRAPHY
Books Finance and profits:- N.J.Yasaswy Financial management and policy:-James Horne Financial management:-P.K Jain Financial management:-Subir Kumar Banarjee Merger and acquisition :- C.H.Rajeshwar

Web www.icicibank.com www.globalhrnews.com www.banknetindia.com www.academicjournals.com www.wikipedia.com

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