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CHAPTER 6

Mergers and Acquisitions in the Indian Banking Sector

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In general bank is considered to be a financial institute which has been given the
authenticity by the state or central government to accept deposits, give out loans and
make investments in securities. The major role of banks is the expansion of the economy,
growth of investments sectors. Nowadays, the banking sector is undergoing a lot of
changes due to globalization. These changes have created a great impact on the banks,
both structurally and strategically.

The word Bank has been derived from the Italian word Banca, which means a bench.
In Europe, the money lenders would display their coins to the customers on the benches
and hence was derived the definition of a bank. Since the year 1991 the Indian Banking
industry was divided into two eras, the pre-liberalization as well as the postliberalization era.

On account of the effects of globalization, the banking industry is undergoing many


changes with regard to regulations. These changes have affected the banking sector in a
structural way. The dynamic environment has led to the adaption of many changes in this
sector so as to remain efficient. One of the most important strategies is merger or
Acquisition. The changing times has led the Indian banks to move from many small
banks to a system where there are larger banks but smaller in number.

Historical background of Indian banks


In the year 1870, bank of Hindustan was set up. Later under the Presidency banks Act
1876, three presidency banks namely the Bank of Calcutta, Bank of Bombay and Bank of
Madras were set up. These banks laid down the foundation of modern banking in India.
In the year 1921, all the three banks merged and formed the Imperial bank of India. The
RBI was not established and therefore these banks carried out the Central Bank functions
but limited in numbers.

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They were engaged in commercial banking business of all types but they did not engage
in dealing with foreign exchange.

In the year 1934, the Reserve bank of India act was passed, and the RBI was given the
status of an apex body. Later in 1949, the Banking regulation act was passed which
brought RBI under Government control.

The RBI was authorized to control and supervise the commercial banks. Besides the act
empowered RBI to conduct timely inspections of the commercial banks. The RBI
acquired control of the Imperial Bank of India in 1955 which came to be known as The
State Bank of India, SBI in the year 1959 took over eight private banks. In 1969, the
govt. of India nationalized 14 banks. Later in 1980.government acquired six more banks
.Bank is the backbone of growth of a countrys economy. The Indian banks have faced
many economic crises. A lot of changes were brought about by means of rules and
regulations which prevented Indian banks from the economic crisis. In the recent times,
the banking scenario in India has become very dynamic. The Reserve Bank of India was
nationalized in 1949. Also the Bank regulation act empowered RBI to inspect and control
all the commercial banks in India. Also, as per the Banking regulations act no new banks
or branch could be opened without a license from Reserve Bank of India as well as no
two banks could have common directors. In 1990s, a few private sector banks were
given the license during Narsimha Rao government.

Banking Industry in India is controlled by the Reserve Bank. It consists of commercial


banks and co-operative banks. The commercial banks consist of scheduled and
unscheduled commercial banks.

According to the Section 25 of the Banking Act of 2009, a written approval has to be
obtained by the bank from the registrar so that arrangement for the transfer or disposal of
the securities or the amalgamation or merger with other organizations with respect to
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which the whole or part of the business will be transferred to that organization. Also,
Section 25 of Banking Act of 2009 requires a bank to obtain written consent from the
registrar and the banking companies which are going through Mergers or Acquisitions
continue to carry on the transactions in their old names and the licenses. They are not
allowed to embark on further expansion of the branch until the final approval of the
registrar is obtained to affect the merger or Acquisition activity. Banking Act of 2009
does not lay down any specifications for the processing of applications of Mergers and
Acquisitions. However, Banking Act of 2009 does not specify any time limit for the
processing of applications for the merger and Acquisition activities but the registrar is of
the opinion that most of the applications of merger or Acquisition should be processed
within 90 days after the applications are received by the examiner. However, this time
period may be extended up to further 45 days if there are any issues raised by the
applicant regarding the complexity of the applications. The final decision shall be
communicated by the registrar within a period of 5 business days.

The merger or Acquisition applications shall be accompanied by the information that is


stipulated in Section 7 and the registrar has the power to obtain additional information if
he feels necessary for the review. Moreover, there are two stages of merger or
Acquisition approval i.e. the pre-merger or Acquisition approval and the final approval.

The pre-merger consent of the registrar gives the banks a No Objection consent and the
approval enables the merging companies to proceed with their negotiations and enter into
the agreements of their transactions. But the consummation of the bank merger will take
place only with the final approval of the registrar.

All the agreements as well as appointments and legal documents entered into in favor of
banks or financial institutions that are in force prior to the merger shall remain in effect.
The pre-merger consent stage requires the following documents:

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1. An application by the banks opting for merger to the registrar signed by the
managing director.
2. The successor banks proposed name.
3. A statement stating objective of the merger.
4. A copy of the agreement of the proposed merger.
5. A copy of the articles of association and memorandum of association of banks
opting for Mergers.
6. A resolution by the board of directors of the merging banks giving the authority to
the management to further proceed with the merger negotiations.
7. The successor banks list of new shareholders along with their addresses and
information about their shareholdings.

The registrar if deemed necessary may grant the final approval of the merger or
Acquisition to the companies with certain conditions.
A few more documents need to be submitted for final approval.
1. An application by the banks opting for merger or Acquisition addressed to the
Registrar as well as bearing the signature of the Managing Director and the
Chairman of the merging companies.
2. The successor banks proposed memorandum of association.
3. The successor banks Registration certificate.
4. Resolution of the Board from the merging banks regarding the approval of
merger.
5. Resolution of the shareholders approving the merger.
6. List of shareholders with their addresses and shareholdings.

Process of Restructuring of weak banks


Merger is a root that has been adopted by the Government of India to restructure weak
banks. The merger of many weak banks has taken place for the protection of the interest
of depositors. If any bank shows very serious symptoms of sickness like that of huge
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NPA, the RBI imposes moratorium as per Section 45 of the Banking Regulation Act of
1949. During this period, the RBI identifies the prevailing strong banks and prepares
schemes of Mergers. As per the scheme, the bank that is acquiring takes over all the
assets and liabilities of the weak bank and gives an assurance of payment to the
depositors if they wish to withdraw their claims.

Out of the 21 Mergers so far taken place, there have been thirteen forced Mergers. The
major motive behind these forced Mergers is to give protection to the weak banks.
The Banking system of many economies is broken into fragments which are in terms of
number and size of institutions, the use of latest technology etc. In Asia, most of the
banks are owned by families but in central Europe the banks are owned by the
government. The crisis in banks has weakened the financial system of many countries.
However, the natural alternative is to bring about an improvement in the structure and
efficiency of the banks and that was possible only through Mergers and Acquisitions. The
Mergers in central Europe are driven by markets but in most of the countries it is
government driven. The serious banking crisis has led to consolidations in most of the
South-East Asian countries.

Indias Experience
The RBI has appointed several committees to improve the efficiency of commercial
banks. The committees have laid an emphasis on continuing the merger trend of the
banking sector in India. There are two types of Mergers that have been experienced in
India: the forced Mergers and the voluntary Mergers.

The forced Mergers are mainly initiated by RBI and their main aim is to protect the
interest of the weak banks. The voluntary merger takes place with the market motivation.
The case of forced merger normally takes place by the target banks especially the private
sector banks that suffer from inadequate availability of capital.

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