PROJECT REPORT On ROLE OF MERGER & ACQUISITION IN BANKING SECTOR FOR BETTER CORPORATE GOVERNANCE

Submitted To M.D. University Rohtak, For the Partial Fulfillment Of The Award of Degree Of MASTER OF BUSINESS ADMINISTRATION BATCH: 2006-2008

Under the guidance of Mrs.. REENA SHARMA Faculty Member

Submitted by: DEEPAK SHARMA ROLL NO. -13

INSTITUTE OF LAW & MANAGEMENT STUDIES GURGAON

INDEX
S NO.
1. 2. 3. 4. 5.

PARTICULARS
Declaration Acknowledgement Introduction Literature Review Overview Of The Industry Beginning of banking in the world Beginning of banking in India Reforms in banking Basic framework Objectives of the study Research methodology Source of data Limitation Scope of study 3. 4. 5. 8. 13.

7.

41.

8.

Conceptualization Merger & Acquisition Corporate Governance Framework of Corporate Governance Case Study (Global trust bank with O. B C.) 89. 94. 97. 101. 107.

47.

9. 10. 11. Analysis 12. Conclusion 13. Appendix 14. Suggestions 15. Annexure

61. 67.

16. Bibliography

109.

DECLARATION
I Deepak Sharma Roll No. 13, Class MBA, student of Institute Of Law &

Management Studies here by declare that the project entitled Role of Merger & Acquisition in Banking Sector For Better Corporate Governance is an original work and the same has not been submitted to any other institute for the award of any degree. The interim report was presented to the Supervisor on Mrs. Partibha Bhardwaj.

Signature of the Candidate

Signature of the Supervisor

Director/ Principal of the Institute

ACKNOWLEDGEMENT
In this present world of competition there is a race of existence in which those who are having will to come forward will succeed. Project is a bridge between practical and theoretical working , with this will I have joined the project . I really wish to express my gratitude towards all those people who have helped me.

I really indebted to Mr. Vijay Rathi H.O.D. M.B.A. department .I.L.M.S., Guragaon, for this kind hearted approach. His timely guidance, supervision & encouragement have helped me to get this golden opportunity.

My project guide Mrs. REENA SHARMA lecturer of I.L.M.S Guragaon, who provided me his expert advise, inspiration & moral support in spite of her busy schedule & assignments, has mainly provided my understanding of this project. I am very grateful to his kindhearted approach & encouragement, which helped me immensely in completion of this project report.

Last , but not the least, I say only this much that all are not to be mentioned but none is forgotten and I will like to extend my special thanks and gratitude to my parents who always encourage me in pursuit of excellence.

(DEEPAK SHARMA)
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In the wake of recent financial & corporate scandals corporate governance is the need of hour. In spite of the growing knowledge, not much attention has been given to corporate issues in bank.

3 CS OF BANKING ARE Capital Corporate governance Consolidation (according to Business Today)

IMPORTANCE OF CORPORATE GOVERNANCE IN BANKS

First , because banks are seen as the engines that drive the economy towards growth in developing countries

Second, due to under developed financial markets in developing countries, banks are the major source of finance for many firms.

Third, bank acts as a repository for the economys savings, apart from providing means of payment.

Fourth, after recent privatization & disinvestments of most of the banks & the reduce role of economic regulations, bank today are open for freedom in terms of how they are being run.

WHY THERE IS A NEED FOR CORPORATE GOVERNANCE IN BANKING SECTOR

There are following issues:

negative

The NPA syndrome Employees frauds Evolution of new business models Branch banking vs. unit banking Complicated financial structure Scandals have become the trend of times False picture of financial health and misleading investors. Non-compliance with statutory requirement, negative net worth, capital adequacy & low morale.

ACCORDING TO CAPIRO & LEVINE,

There are two interrelated factors of the financial intermediaries that affect corporate governance.

First, with banks being more non-transparent, there arises an agency problem. The information difference between the insiders & outsiders in banking lead to more difficulty for equity & debt holders in monitoring the managers, and in turns, it become easier forth managers to use the benefit of controls, rather the focusing on maximizing the value.

Second, heavy regulations imposed on the banks stand as an obstacle for natural corporate governance mechanism.

Directors poor decisions and ineffective board processes are to pay the price. For measuring the board performance4 against certain benchmarks set for good governance,

ACCORDING TO SHLEIFER & VISHNY DEFINE CORPORATE GOVERNANCE AS

Dealing with the ways that supplier of finance to corporations to assures themselves of getting a return on their investment. ACCORDING TO AGENCY THEORY, if managers operate independently, they make financing, investment & payout decision that are determinately to shareholders. To mitigate the conflict between managers and shareholders, the literature offers several solutions, such as monitoring by the board of directors and the block holders, compensation structure, and managerial equity investment.

Investors and depositors, regulators have direct interest in the bank performance. On a more aggregate level, regulators are concerned with the effect governance has on the performance of financial institution because the health of the overall economy depends upon the board of directors of the banking firm is placed in a crucial role in its governance structure.

One major area likely to be affected by regulation is the structure of executive compensation. Stock-based compensation motivates top management to undertake more value enhancing decision, but regulators would also want to consider how to stock option affect risk taking.

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Resolution of the financially distresses is necessary because this usually leads to liquidation, and the incumbent is removed from management.

Large grant to top executives have the potential to impact banking firms capital by way of future share repurchase. Therefore large grants of options in any given year have the potential to affect the capital base adversely in later years.

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ACC. TO MC. KINSEY CONSULTANCY THE CONTROL MODEL GOVERNANCE CHAIN

Shareholders Environment

Concentrated ownership Reliance on family, bank and public finance INSTITUTIONAL CONTEXT Under Developed new issued market

Insider board

Incentives aligned with core shareholder CORPORATE CONTEXT Inadequate minority protection

Limited takeover

Limited disclosure

Capital market Liquidity

Transparency Accountability

FIGURE:- 1

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 BEGINNING OF BANKING IN THE WORLD BEGINNING OF BANKING IN INDIA REFORMS OF BANKING IN INDIA

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BEGINNING OF BANKING IN THE WORLD

The word bank is derived from the word Bancus or Banque, that is bench. Jews, who were considered to be the early bankers, transacted their business on benches in the market. Some people trace the origin of the word bank from the German word Back meaning a joint stock fund. This seems to be better.

EARLY HISTORY OF BANKING

According to history, Babylonians had developed as banking system. The great temples were powerful of the Greek banking institutions. In ancient Greece & Rome, the practice of granting was widely prevalent. People used cheque & drafts to settle their accounts. Manu, the ancient Hindu lawgiver has written exhaustive regulations governing credit. He talks about credit installments, interest on loans and commercial papers. During the early periods, although banking business was mostly done by private individuals, many countries established in Barcelona in 1941. During 1407, the bank of Genoa was established. The bank of Amsterdam was established in 1609 to meet the needs of the merchants of the city. It accepted deposits, which could be drawn on demand. English banking may correctly be attributed to the London gold smiths. The received their valuables and fund for safe custody and issued receipts. These notes, in the course of time, became payable to bearer of demand and hence enjoyed considerable circulation. However, in the course of time, gold smiths were ruined. This lead to the growth of private banking and establishment of Banking of England in 1694

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A SHORT HISTORY OF BRITISH BANKING

The origin of modern banking in Britain can be traced back across four centuries and the history of the Royal Bank of Scotland Groups past constituents perfectly illustrates the story of the industrys development.

THE BIRTH OF BRITISH BANKING

In the 1660s London dominated Englands political and economic lie and , with a population of 450,000 was the fourth largest city in the world. The established importance of London in raising and servicing government finance and in international trade had led to the development of a relatively sophisticated money market. It was consequently here that the profession of banking emerged from the trade of goldsmith during the course of the seventeenth century.

The goldsmiths, makers and sellers of plate and jewellery, flourished after the dissolution of the monasteries in the 1530s increased the available supplies of gold. Many goldsmiths developed strong connections with the crown and , from the 1940s, most began to take in valuables for safe keeping in their vaults.

THE GROWTH OF PROVINCIAL BANKING

The number of banks in London grew during the eighteenth century, but their business was restricted and provincial banks began to flourish outside London to serve industrialists and merchants remote from the capital.

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Thomas Smith , a cloth merchant in Nottingham, began operating the earliest known provincial bank in the 1650s , by offering banking services to his customers. Most countrys banks however, were established from the mid-eighteenth century onward. Before 1750 there were only a handful of bankers in the country outside London . by 1784 this number had grown to 119 and by 1810 to a massive 650. similarly in Scotland, by 1772 there were eight banking companies operating in Scotland outside Edinburgh & Glasgow, a number that had increased to 21 by 1810. From the 1770s a more sophisticated banking infrastructure began to emerge, with the creation of a clearing house in London for settling inter-bank payments

THE ARRIVAL OF JOINT STOCK BANKING

Lancaster Banking Company , became the first British joint stock bank in 1826 , whilst other important constituents of the Royal Bank of Scotland were established soon after. These included Manchester & Liverpool District banking Company in 1829, National Provincial Bank of England in 1833 and Manchester & Sal ford bank and Ulster Banking Company in 1836.

THE EMERGENCE OF LARGE NATIONAL BANKS

Despite the success of Scotlands banks, London still dominated the nations financial system. The volume of transactions settled through London was also increasing. In 1864 National Bank of Scotland became the first Scottish bank to open a London office.

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THE EMERGENCE OF LARGE NATIONAL BANKS

Despite the success of Scotlands banks, London still dominated the nations financial system. The volume of transactions settled through London was also increasing. In 1864 National Bank of Scotland became the first Scottish bank to open a London office. The end of the nineteenth century may have seen a slower pace of change in the banking sector, but nonetheless the lending and share underwriting activities of banks had made possible vigorous industrial and commercial growth in Britain and her empire. in addition, bankers were held in high regard in their local communities as men of influence and importance.

THE BIG FIVE

In 1900 there were around 250 private and joint stock banks in Britain and London was undoubtedly the worlds largest and busiest banking center. The outbreak of the First World War heralded a period of rapid change in the banking industry. Overall the volume of banking business grew during the war and many of the private banks responded by opening additional branches, developing businesses abroad and embarking on a series of major amalgamations. Big Five-Westminster, National Provincial, Barclays, Lloyds and Midland. The smaller banks, like then Royal Bank of Scotland, were little affected by these controls.

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SHORT HISTORY OF BRITISH BANKING

The origin of modern banking in Britain can be traced back across four centuries and the history of The Royal Bank of Scotland Groups past constituents perfectly illustrates the story of the industrys development.

WAR AND CHANGE

During the Second World War, all the banks experienced similar problems as in 1914 to 1918, with controls over foreign exchange and lending priorities, and responsibility for the marketing and distribution of savings certificates and defense bonds. Meanwhile, the government signaled the softening of its hard-line opposition to bank mergers resulting in the amalgamation, announced in 1968, of the biggest High Street banks National Provincial Bank and Westminster bank. Likewise, in Scotland, in 1969 the Royal Bank of Scotland merged with National Commercial Bank of Scotland.

EXPANSION, CONSOLIDATION AND INNOVATION

In 1971, a government white paper published a scheme of monetary control, which encouraged the banks to compete more actively with one another and with other financial institutions. As a result many of the banks began to provide additional services and to sharpen their public image. During the late 1980s and early 1990s many banks developed their overseas representation, but there was also widespread retrenchment due to the impact of both the deep recession in the UK economy and the fierce competition bred by deregulation

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HISTORICAL PERSPECTIVE OF INDIAN BANKING

According to Indian banking history, The British East India Company established The Hindustan Bank in Calcutta and Bombay in 1870, was the earliest Indian Bank banking in India on modern lines started with the establishment of three presidency banks under Presidency Banks act 1876 i.e. Bank of Calcutta, Bank of Bombay and Bank of Madras.

IMPERIAL BANK OF INDIA

The first major event in the history of banking in India took place in 1919 when the presidency banks were amalgamated and Imperial bank of India was set up. Banking companies Inspection ordinance was passed in January, 1946 and in February, 1946 the Banking Companys restriction of Branches Act was passed. In 1949, the Banking companies Act was passed which was later amended to read as Banking Regulation Act.

RESERVE BANK OF INDIA

Reserve Bank of India Act was passed in 1934 & Reserve Bank of India (RBI) was constituted as an apex bank without major government ownership. Banking Regulations Act was passed in 1949. This regulation brought Reserve Bank of India under government control. Under the act, RBI got wide ranging powers for supervision &control of banks. The Act also vested licensing powers & the authority to conduct inspections in RBI

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NATIONALIZATION OF BANKS
On 19 July 1969, the Government acquiring ownership and control of 14 major banks in the country an Ordinance. This was done to bring commercial banks in to the mainstream of economic development with definite social obligations and objectives. Later, on 5 April 1980, six more commercial banks were nationalized.

REFORMS OF EARLY 1990S

After submissions of recommendations of the committee headed by Chairman Shri M. Narasimham, a comprehensive reform of the banking system was introduced in 1992-93. the main aim of the reform measures was to ensure that the balance sheets of banks reflected their actual financial health. Companies or have lent money to people who needed it for business or personal purposes. Banks now also offer a wide range of other services such as exchanging foreign currency, advising on investments and insurance and acting as executors and trustees.

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AUTOMATION IN BANKING SECTOR

In recent years there has also been considerable change in the functioning of banks. There has been an increase in the amount of technology used by these institutions e.g. some banks use cash dispensers and offer twenty four hours cash withdrawal facility, instant account details and money transfer through computer network. Because of much more competition in the banking sector, services have to be sold in ways never done earlier.

Today, customers do all their banking transactions while sitting at home. Banks are introducing Automatic Teller Machine (ATM) cards. Debit and credit cards are used as well.

This promises to change the face of banking forever.

LIBERALIZATION
There is a growing need for banking facilities due to nationwide growth, international trade and industrial liberalization which have all contributed to changes in the banking environment.

DIVERSIFYING THE PRIORITIES OF BANKS

From the regular banking operation, termed as House Keeping, balancing of books and reconciliation of inter-branch and intra-branch entries of simple money transaction, commercial banks are diversifying their priorities.

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New financial institutions like merchant banks, leasing companies, mutual funds and venture capital companies have come into existence.

Commercial banks too have joined the hub of capital market activities. There has been a transformation in the services offered by banks and this has led to considerable change in the type of manpower recruited.

With demand of profit, in the banking industry, particularly in the international banking sector the total concept of seniority and promotion has been changed.

In this scenario pay scales have gone up and the number of employees has gone down.

Banks have set right their organizational structure for efficient services. Computers have taken over and recruitment pattern has been favorable to more technical manpower.

Management graduates, Chartered Accountants, Chartered Financial Analysts are hence in greater demand in the banking sector. Presently, emphasis is on specialization and diversification. To cater to the needs of a growing industry for marketing its shares and debentures, public sector banks and financial institutions have started their own Merchant Banking divisions. Many industrial houses too have started their own Merchant Banking, companies, acting as lead managers for public issues of shares and debentures, e.g. Times Guarantee, Tata Finance etc.

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CORPORATE AND MERCHANT BANKING:

Corporate and Merchant Banking are business related activities. Corporate Banking incorporates corporate finance i.e. credit risk assessment and technical aspects such as raising capital, business mergers and acquisitions as well as all banking activities related to large organizations. While Merchant Banking implies investment management e.g. management of trusts, securities, mutual and pension funds, public issue management and international funds. Merchant Banking involves offering advisory services to corporate clients on capital structure decisions, public issue management, underwriting, raising funds through public issue from overseas markets, project appraisals besides mergers and acquisitions. With merger and acquisitions as well as joint ventures and alliances being formalized by corporate for the sake of expansion, opportunities for merchant bankers have grown.

INVESTMENT BANKING:
Investment Banking activities are associated with financial activities such as securities underwriting, markets and arranging mergers, acquisitions and restructuring. Investment bankers work in retail banking and corporate clients and institutional banking. These banks hold large financial assets as they manage dealer activities and in trading and distribution of securities. The function is advisory and the bank support financial activities through lending to customers using securities as collateral or for repurchase agreements where in they use their own securities.

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Investment banking is fund based and not only fee based while Merchant Banking, on the other hand, is fee based. The worlds top six investment banking houses manage the major portion of new issue investment-grade securities and are referred to as special bracket firms; these are Solomon Brothers, First Boston, Goodman Sachs, Morgan Stanley, Merrill Lynch, and Shearson Lehman Brothers. In India, some of the top investment Bankers is DSP Merrill Lynch, PNB Capital Services, GE Caps, IFCI Financial Services, IDBI Capital Markets, SBI Capital & JM Financial and Investment. The role of Investment Banks is to participate in direct markets by bringing financial claims for sale. They operate to help businesses and governments sell their new security issues. Once the securities are sold investment bankers make secondary markets for securities as brokers and dealers. They are largely doing underwriting business. Investment Banking can be carried on as part of the normal range of business activities. In India ICICI Bank can be regarded as investment banking.

TREASURY AND FOREX FUNCTION

With the increase in forex (foreign exchange) flow in the country and reliance of corporate on the international market in sourcing their fund requirements, the treasury and forex functions are becoming increasingly important. Since fund management is an important determinant of success of any business, treasury management has become a very important finance function. Knowledge of global money markets and financial instruments such as deposit certificates, treasury bills, forecasting, financial management and manipulation, source evaluation and

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domestic and foreign currency funds has become critical for managing the treasury profit center. Treasury and risk management ensures cost effectiveness in planning strategies in this era of deregulation. Forex marketing technically is an inter banking activity. The job entails two major responsibilities assessing various markets e.g. Stock or money markets on behalf of the bank and customer desk to advise corporate or other banks that require foreign currency. The job entails checking on current prices, keeping abreast with policies of the regulatory bodies, analyzing past trends for making predictions and bids for forex trading. The task is affected by the high volatility of the markets and involves taking risks.

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BANKING FINANCIAL SECTOR & REFORMS

FINANCIAL SECTOR REFORMS 1992-94 TO 1995-96
Bank norms liberalized And banks given the freedom to

decide levels of holding of individual items of inventories and receivables.

Ceiling on term loans rose to Rs 10,000 million for projects

involving expansion/ modernization of power generation capacities.

Banks allowed setting their own interest rate on post-

shipment export credit (in Rupees) for over 90 days.

Deregulation of interest rates on loans over Rs. 200,000

against term deposits and on domestic deposits with maturity periods over two years.

to RBI approval.

Bank freed to fix their own forex open position limit subject

Guidelines

issued

to

banks

to

ensure

qualitative

improvement in their customer service.

Loan system introduced for delivery of bank credit. Banks required to

bifurcate the maximum permissible bank finance of Rs 200 million and above into loan component of 40% (short term working capital loan) and cash credit component of 60%.

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COMPETITION
Decades of non-commercial orientation, direct lending, loan waivers and increasing non-performing assets had initially made banks difficult to adjust to a market environment having strict prudential norms. However, the emerging results suggest that banks are beginning to adapt to the competitive environment and facing the challenge.

DECONTROL
Many steps were taken in 1995-96 to reduce controls and remove operational constraints in the banking system. These include interest rate decontrol, liberalization and selective removal of Cash Reserve Ratio (CRR) stipulation, freedom to fix foreign exchange open position limit and enhanced refinance facilities against government and other approved securities.

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THE RBI ISSUED GUIDELINES REGARDING THE FORMATION AND FUNCTIONING OF PRIVATE SECTOR BANKS
(IN JANUARY 1993)

I.

The banks shall be governed by the provisions of the Reserve Bank of India Act, 1934 The Banking Regulation Act, and 1949 other relevant statuaries.

II. III. IV. V.

Private sector banks are required to be registered as public limited companies in India. The authority to grant a license lies with the RBI. The shares of banks are required to be listed on stock exchanges. Preference will be given to those banks whose headquarters are proposed to be located in a centre which does not have headquarters of any bank.

VI.

Maximum voting rights of an individual shareholder would be limited to 1% of total voting rights.

VII.

The new bank would not be allowed to have as its director any person who is already a director in a banking company.

VIII.

The bank will be subject to prudential norms in respect of banking operations, accounting policies and other policies, as laid down by RBI. The bank will be required to adhere to the following:

Minimum paid up share capital of Rs. 1 bn

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 Promoters contribution as determined by the RBI capital adequate of 8% of the

risk weighted assets Single borrower and Group borrower exposure limits in force Priority sector lending Export Credit Loan Policy within overall policy guidelines laid down by the RBI.

IX.

The banks will be free to open branches anywhere once they satisfy the capital adequacy and prudential accounting norms.

X.

The banks would not be allowed to have investments in subsidiaries, mutual funds and portfolio investments in other companies in excess of 20% of the banks own paid up capital and reserves.

XI.

The banks would be required to use modern infrastructural facilities in office equipment, computer, telecommunications etc.

POLICY FOR INVESTMENT MADE IN PRIVATE BANKS

New private sector banks have not been allowed to set up in India since 1969. with a view to increasing competition in the banking industry and in line with the recommendations of then Narsimhan Committee, the government has now allowed the entry of such banks.

CLOSE MONITORING BY RBI

However, the freedom of the entry into the banking sector will be carefully managed by the RBI. The RBI will grant approvals for entry of private sector banks provided such banks offer competitive, efficient and low cost financial intermediation services, result in up gradation of technology in the banking sector, are financially viable and do not resort to

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unfair means like preemption and concentration of credit, monopolization of economic power, cross holding with industrial groups etc.

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FOREIGN INVESTMENT IN BANKING SECTOR

Under the scheme, Non Resident Indians are allowed to have primary equity in a new banking company to the extent of 40%. In the case of a foreign banking company or a finance company acting as a technical collaboration or a co-promoter, equity participation is restricted to 20%.

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REFORMS IN BANKING SECTOR TO CONTINUE

A new bill on banking sector reforms is to be introduced in Parliament to strengthen creditor rights through foreclosure and enforcement of securities by banks and financial institutions. Union Finance Minister Yashwant Sinha today stressed in parliament that reforms in the banking sector will be continued to enhance the efficiency and competitiveness of the sector.

THE FOLLOWING MEASURES HAVE EITHER BEEN TAKEN OR ARE BEING TAKEN

Public sector banks recovered Rs 12,860 cr in 2000-01 as compared with Rs.9,883 cr in the previous year and net NPAs as percentage of net advances came down to 6.7% as on March 31, 2001 as compared to 7.4% in the previous year.

To help banks and financial institutions to make provisions for NPAs as required by the RBI, additional fiscal relief is being offered, details of which will be given in part B of my speech. This will enable banks to review their lending rates.

A new bill on banking sector reforms is proposed to be introduced in parliament to strengthen creditor rights through foreclosure and enforcement of securities by banks and financial institutions. This bill will also enable securitization for money locked up in long-term loans.

A Pilot Asset Reconstruction Company will be set up by 30 June 2002 with the participation of public and private sector banks, financial institutions and multilateral

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agencies. This company will initiate measures for taking over non-performing assets in the banking sector and also0 develop a market for securitized banks.

The Deposit Insurance Credit and Guarantee Corporation (DICGC) will be converted into the Bank Deposits Insurance Corporation (BDIC) to make it an effective instrument for dealing with depositors risks and for dealing with distressed banks .Appropriate legislative changes will be proposed for this purpose.

Reforms in the financial sector have posed new challenges for the Development Finance Institutions (DFIs) like IDBI. It is proposed to make legislative changes to corporatism IDBI within the coming year to provide it appropriate flexibility. Meanwhile IDBIs tier one capital is being strengthened by conversion of existing IBRD and NIC (LTO) loans in to appropriate long-term instruments.

Consequent to certain amendments made in the year 2000, in the Companies Act 1956, directors incur disqualification for election in the case of certain defaults by the company. It is proposed to exempt nominee directors financial institutions and banks from this provision.

Three public sector banks had been classified as weak banks on the basis of criteria suggested by the committee on Banking Sector Reforms in 1997-98. two of these banks namely UCO bank United bank of India have turned around and have started making profits. Though the Indian Bank has also shown improvement, its capital adequacy ratio remains deficient. A provision of Rs 1300 cr is proposed for recapitalization support to this bank, on the basis of a commitment to government for implementing monitor able reform measures.

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In the Banking Sector, foreign banks are permitted to operate in India as fully owned branches with specific permission of the Reserve Bank of India. As recommended by the Committee on Banking Sector Reforms, it has now been decided to give an option to foreign banks to either operate as branches of their parent banks or to set up subsidiaries. Such subsidiaries will have to adhere to all banking regulations, including priority sector lending norms, applicable to other domestic banks. Necessary amendments will be proposed in the Banking Regulation Act 1949 to relax the maximum ceiling of voting rights of 10% for such subsidiaries.

The cooperative credit structure, which is critical for the agriculture sector, has low capital adequacy and high NPAs, is of urgent need of reform. A committee under the then Deputy Governor of RBI was appointed to examine its functioning closely. The recommendations of this committee have been discussed widely by chief ministers and in a joint committee of cooperation ministers under the chairmanship of Vikhe Patil reform measures such as the adoption of a Model Cooperative Act, removal of dual control between state governments and the RBI, regular conduct of elections, larger stake of the members, and proffessionalisation of management etc. have been recommended. The recapitalization formula suggested is 60:40 between the central and state government along with increases in share capital of members. States will have to consider and accept their funding share and implement the suggested measures for reform. Even though this is a state subject the government of India will go out of its way to help in the process. To start the process, Sinha said he is making a token provision of Rs 100 cr and depending on the pace of reform, provision of additional funds will be considered.

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ISSUES IN INDIAN BANKING [V LEELADHAR, DEPUTY GOVERNOR OF RBI]

Banking scenario has changed rapidly since 1990s. The decade of 90s has witnessed a sea change in the way banking is done in India. Anywhere banking and Anytime banking have become a reality. The financial sector now operates in a more competitive environment than before and intermediates relatively large volume of international financial flows. ECONOMIC OUTLOOK AND BANKING SECTORS PERFORMANCE During the last couple of years, global growth has been above the forecast in almost every region stimulated by strong monetary and fiscal measures. Inflation rate has been under control, barring some hiccup for a short period. HIGH CAPITAL INFLOWS: AN OPPORTUNITY AS WELL AS A CHALLENGE Liquidity position in the financial sector has been quite comfortable in the recent times. TECHNOLOGY IS THE KEY Technology has thrown new challenges in the banking sector and new issues have started cropping up which is going to pose certain problems in the near future. The new entrants in the banking are with computer background. Foreign banks and the new private sector banks have embraced technology right from the inception of their operations GLOBALISATION OF FINANCIAL SERVICES The surge in globalization of finance has also gained momentum with the technological advancements which have effectively overcome the national borders in the financial services business.

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INDIAN BANKS AT THE GLOBAL STAGE: A REALITY CHECK

As per Indian Banks' Association report Banking Industry Vision 2010, 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. WHAT IS BEING DONE TO PREPARE INDIAN BANKS TO MEET GLOBAL CHALLENGE? Indian banking sector has already implemented internationally followed prudential accounting norms for classification of assets, income recognition and loan loss provisioning. SUPPORTING REGULATORY FRAMEWORK RBI has suitably changed the countrys regulatory framework from time to time to support Indian financial institutions to withstand the competitive pressures placed on them by increasing globalization. CONSOLIDATION AND MOVE TOWARDS UNIVERSAL BANKING We are slowly but surely moving from a regime of large number of small banks to small number of large banks.

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GOVERNMENT AND RBI REGULATIONS

All commercial banks face stiff restrictions on the use of both their assets and liabilities.40% of loans must be directed to Priority Sectors and the high liquidity ratio and cash reserve requirements severely limit the availability of deposits for lending. The RBI requires that domestic Indian banks make 40% of their loans at concessional rates to priority sectors selected by the government. These sectors consist largely of agriculture, exporters, and small businesses. Since July 1993, foreign banks have been required to make 32% of their loans to these priority sectors. Within the target of 32%, two sub-targets for loans to the small-scale sector (minimum of 10%) and exports (minimum of 12%) have been fixed.

Foreign banks, however, are not required to open branches in rural areas, or to make loans to the agricultural sector.

(SOURCE: GOVERNMENT OF INDIA ECONOMIC SURVEY)

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NEED TO PONDER
Debates on Indias slowdown focus on the manufacturing sector which is dangerously misleading: one of the biggest areas of worry about Indias banking sector. Stories about the real health of Indian banks get less publicized because banks are still overwhelmingly owned, controlled and directed by the government, i.e. the ministry of finance(MOF). Banks have no effective mouthpiece either

GREY FUTURE
One more reason being the opacity of the RBI. This doesnt mean a forecast of doom for the Indian banking sector the kind that has washed out South East Asia. And also not because Indian banks are healthy. We still have no clue about the real non-performing assets of financial institutions and banks. Many banks are now listed. That puts additional responsibility of sharing information. It is now clear that it was the financial sector that caused the sensational meltdown of some Asian nations. India is not Thailand, Indonesia and Korea. Borrowed investment in property in India is low and property prices have already fallen, letting out steam gently. Our micro-meltdown has already been happening.

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CONCLUSION
Still, there are several other worries about the banking sector, mainly confusion over ownership and control. Sometimes soon India will be forced to apply the norms of developed countries and many banks (including some of the biggest) will show very poor return ratios and dozens of banks will be bankrupt. When that happens the two popular reasons to defend bad banks will disappear. These are:

To save face in the remote hope of that fortunes will revive Some banks are too big to be allowed to fail faring social upheaval.

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FINANCIAL SECTOR REFORMS THROUGH CONSOLIDATION

There has been a tectonic change in some component of the financial sector in the last decade or so. The capital markets have seen phenomenal changes in technology, regulations, instruments and institutions. The banking sector also has witnessed important changes in terms of regulations and instruments. From the period of segmentation in the 1960s and 1970s, capital markets and banking sector entered the period of consolidation in the period of 1990s

INTEGRATING THE MARKET WILL FACILITATES

Reduction in the interest cost and hence benefits the ultimate consumer Enhancing the credit delivery mechanisms Introduction of the rating processes at retail level Creating level playing field when global players enter retail Reversing the inverse relationship between the size of borrowing and the cost of borrowing.

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 OBJECTIVE OF THE STUDY RESEARCH METHODOLOGY SOURCE OF THE DATA SCOPE OF STUDY LIMITATION OF STUDY

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OBJECTIVE OF THE STUDY

Each study is carried out with some objectives and the objectives of this report are:

To study that how Merger & Acquisitions leads or helps in Corporate Governance.

Encouraging factors for the said merger.

Analyze parameters for evaluation of both the companies.

To find it out the basis of merger and acquisition.

To trace it out the related issues in both pre and post merger case.

To study why the banks are going towards Merger & Acquisitions.

To study the measures taken by the government to increase Merger & Acquisition in Banking Sector.

42

RESEARCH METHODOLOGY
Research Methodology refers to the methods the researcher use in performing research operations. The research methods which are going to be used are:

1) Explorative research 2) Case study (comparative analysis) i. Whole case is divided into parts. ii. Organizations position before merger & acquisition traced. iii. Organizations position after merger & acquisition traced. iv. Comparison of both. v. Comparative evaluation of results is given.
In the explorative research, our objective is going to:

i. ii.
problem.

Expand understanding of the dilemma or problem. Gather background information on topic to refine the research

iii.

Identify sources for and actual questions that might be used as Measurement questions.

Explorative phase begin with the literature search-a review of books as well as articles in journals or professional literature that relates to our dilemma. A literature search requires that use of library online catalog and one or more bibliographic databases or indexes. For some topics it may be useful to consult a handbook or specialized encyclopedia first to establish a list of key terms, people or events that have influenced our topic and also to

43

determine what the major publications are and who the foremost authors are. Other reference materials should be incorporated into research strategy as needed.

SOURCE OF DATA
The various types of secondary data carry out the study.

Magazines

Business Today

Business World

India Today

Newspapers

Economic times

Business standard

Web sites

www.yahoo.com

www.google.com

www.SEBI.org

44

www.RBI.org

45

SCOPE OF THE STUDY

As in the era of consolidation in the banking sector this study will surely be very helpful to various concerned individuals.

Study will be useful for the management students. Researchers and scholars can carry on the further study. No study is really complete in itself similarly this study is open for the students who are interested in further study.

46

LIMITATIONS OF THE STUDY

Every study has some limitations. This project has also some problems such as:

Lack of comprehensiveness due to time constraints.

All the data available in Secondary form.

Only quantitative aspects of corporate governance are taken into consideration due to time consideration.

There is a subjective judgment in analysis.

47

48

MERGER & ACQUISITION

The phase merger &acquisition (M & A ) refer to the aspect of business strategy & management dealing with the merging and/ or acquiring of different companies. Usually these occur in a friendly setting where officers I each company involved come together to go through due diligence process to ensure a successful merge between all the parties involved. On other occasions, acquisition can happen through hostile takeover via absorbing the majority of outstanding shares in the open stock market.

FINANCING M & A
Various methods of financing M&A deals exist :

A Stock swap involves issuing stock to exchange for the shares of the other company.

A Cash deal involves buying a target company with cash. In some cases, a company may acquire another company by issuing junk bonds to raise funds.

49

DIFFICULTIES IN M&A
For achieving a greater extent of corporate governance, merger & acquisition is one of the ways. But its not so easy; various types of problems are faced by the organization in this type of procedure. There difficulties are:

1. SECRECY
Secrecy is maintained from bankers, suppliers, employees, customers & others so that the negative reactions can be minimized.

2. SLOW, EXPENSIVE & DIFFICULT

A transaction generally requires six to nine months & many steps to meet all the legal procedure.

3. HARD TO FIND BUYER

Its very difficult to find a potential buyer fir the multimillion dollar corporations, so that adequate consideration can be measured.

4. NEGOTIATION & POTENTIAL OF THE COMPANY

More difficulty arises at the time of the negotiation & the measurement of the net worth of the business.

5. EXPENSIVE SERVICES
Professional middleman (intermediaries, business brokers & investment bankers) charge a high rate as their fees.

6. INEFFICIENCY
Middlemen operate inefficiently because of the slow & limiting nature of having too much rely upon telephonic communication.

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WHY DOES ORGANIZATIONS GOES FOR MERGER & ACQUISITION

SYNERGY

Synergy is the magic force that allows for enhanced cost efficiencies of the new business. Synergy takes form of revenue enhancement & cost saving.

STAFF REDUCTION Merger tends to mean job losses from accounting, marketing & other departments.

ECONOMIES OF SCALE A bigger company places a bigger order of various items & can save more cost & in better negotiation position.

ACQUIRING NEW TECHNOLOGY To stay competitive , companies need to stay on top of technological development. By buying a smaller company with unique technology, a larger company can develop a competitive edge.

VISIBILITY

IMPROVED

MARKET

REACH

&

INDUSTRY

A merge may extend two companies marketing & distribution opportunities. Capital can raise easily in a bigger company than a smaller company.

51

MERGER
A merger in business or economy refers to the combination of two companies into one larger company. Such actions are commonly voluntary and often involves stock swap. In many instances a merger resemble a takeover but results in a new company name. (often combining the names of the original companies and in new branding)

CLASSIFICATION OF MERGERS

HORIZONTAL MERGER

VERTICAL MERGER

CONGLOMERATE MERGER

MARKET -EXTENSION PRODUCTEXTENSION

PURCHASE MERGER CONSOLIDATION MERGERS

Horizontal merger take place where two-merging companies both produce similar product in the same industry. Vertical merger occur when two firms, each working at different stages in the production of the same goods, combine.

Market-extension occurs when two companies that sell the same products in different markets merge.

52

Product-extension occurs when two companies that sell the different but related products in the same market merge.

Conglomerate merger take place when the two firms operate in different industry & have no common area. There are two types of merger:

Purchase mergers occurs when one company purchase other company. The purchase is made either by cash or through the issue of some kind of debt instrument, and the sale is taxable.

Consolidation mergers occur when a brand new company is formed and both companies are bought & combined under the new entity. Tax terms are the same as those of a purchase merger.

FAMOUS MERGERS

Bank of America/ Fleet Boston Global Trust Bank/ Oriental Bank of Commerce Nedungadi Bank/ Punjab National Bank Bank of Madura/ ICICI Bank

53

ACQUISITIONS
When a company takes over another one and clearly becomes the new owner, the purchase is called as an acquisition From a legal point of view, the target company ceases to exist and the buyer swallows the business, and stock of the buyer continues to be traded.

WAYS OF ACQUISITION

CONSIDERATION

BY ASSETS

REVERSE MERGER

I.

Consideration- A company can buy another company with cash, with stock, or a combination of two.

II.

By assets- In a smaller deal, a company can acquire all the assets of another company

III.

Reverse Merger-In this type of acquisition, a deal that enables a private company to get publicly listed in a relatively short time period.

SCHEME OF MERGER & ACQUISITION Whenever two or more companies agree to merge with each other, they have to prepare a scheme of amalgamation. The main content of model scheme:

Description of the transfer and transferee company and the business of the transferor.

54

 Their authorized, issued and subscribed/ paid up capital. Change of name, object clause and accounting year. Protection of employment Dividend position and prospectus
Management , board of directors, their number and participation of Transferee companys director on the board.

Application u/s 391 and 394 of the companies act, 1956,to obtain high courts
approval.

Expenses of amalgamation. Conditions of the schemes to become effective and operstive , effective date of
amalgamation.

The basis of merger and acquisition in the scheme should be the reports of the valuers of asset of both the merger partner companies.

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CORPORATE GOVERNANCE
Corporate governance is about promoting corporate fairness, transparency and accountability.

ACCORDING TO WELFENSON, PRESIDENT OF THE WORLD BANK QUOTED BY FINANCIAL TIMES

Corporate governance deals with the way in which supplies of finance to corporations assure themselves of getting a return on their investment. Corporate governance is a system by which business corporations are directed and controlled.

CORPORATE GOVERNANCE IN BANKING SECTOR

In the wake of recent corporate scandals, corporate governance practices have received heightened attention. Shareholder, creditors, regulators and academic are examining the decision-making process in corporations and other organizations, and are posing changes in governance structure to enhance accountability and efficiency.

Therefore in order to evaluate reforms of the governance structure of banking firms, it is important to understand the current government practices.

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BAD CORPORATE GOVERNANCE PRACTICE IN THE FOAM OF

Fraudulent and false accounting (in case of GTB) Complicated financial systems To create a false picture of financial health and misleading investors. Hide its real financial position (in case of GTB) Scandals have become the trend of times (Ketan Parekh scam in GTB) Inflated profits and high debts Complicated financial structure (Enron, worldcom) Masking true financial position (in case of GTB) Very high NPA The morale of the work force was very low The continuous losses had totally eroded into net worth The bank: losses, week governance, non compliance with statutory requirement, negative net worth, negative capital adequacy and low morale

HRD was tremendously neglected.

ISSUED RAISED FROM BAD CORPORATE GOVERNANCE

57

Bankruptcy Its dealt a strong blow to those analysts who smugly claimed for something It brought the role of auditors sharply into focus It exposed the peculiarities of the Indian Banking Environment.

FOR BETTER CORPORATE GOVERNANCE THE FOLLOWING INFORMATION AND REPORT SHOULD PLACE BEFORE THE BOARD
Annual operating plans and budgets, together with updated
long term plans

Capital budgets, manpower and overhead budgets Quarterly results for the company as a whole and its operating
division or business segment

Internal audit report, including cases of theft and dishonesty of

a material nature.

Show cause, demand and prosecution notices received from

revenue authorities that is considered to be materially important(material nature of any exposure that exceeds 1 % of the companys net worth).

Reports to fatal and serious accidents, dangerous occurrences,

any any affluent and pollution problem.

58

 Default in payment of interest or non-payment of the principal

on any public deposit, and / or any secured creditor or financial institutions.

Any issue which involves possible public or product liability

claims of a substantial nature, including any judgment or order which may have either passed structure on the conduct of the company, or taken an adverse view regarding another enterprise that can have negative implications for the company.

Detail of any joint venture or collaboration agreement. Transactions that involve substantial payment for achieving
goodwill, improving brand equity, and for acquiring intellectual property.

Recruitment and remuneration of senior officers just below the

board level, including appointment and removal of the chief financial officer and the company secretary.

Labor problems and their proposed solutions. Quarterly details of foreign exchange exposure and the steps
taken by management to limit the risks of adverse exchange rate movement.

59

ACCORDING TO BUSINESS TODAY, NOVEMBER 1999

BOARD STRUCTURE AND PROCESSES FOR GOOD GOVERNANCE
STRUCTURE PROCESSES

Limit the size of board so that each director can contribute, and avoid coalitions

Develop guidelines for the use of committees to ensures the basic task fulfilled and complex topics are explored in sufficient depth Rotate directors through the various committees to ensure the mix of views

Separate the role of CEO and chairman to avoid potential conflict of interests

Avoid inside directors on the committees so that executives do not audit, evaluate, and reward themselves

Ensures the outside directors, as a group, meet alone on a specific number of occasions every year

Ensure the majority of outside directors so that tough questions are asked Require directors to redesign upon retirement, or upon changes in employment and responsibilities Limit the number of other board of directors on which directors can serve

Choose a lead director to prevent insiders from dominating the agenda Ensure unrestricted access for board to management so that information is not filtered Establish additional models of information flow to ensure sufficient information

Impose term limits to introduce fresh and potentially critical viewpoints while avoiding groupthinks Establish a set of qualification for directors, and use them to screen new candidate 60

Establish an orientation program so that new directors can contribute quickly

Develop effective recruitment and evaluation process for the board

Impose a retirement age to maintain a mix Ensure that the management reports of skill, energy, enthusiasm and regularly to the board of succession commitment planning

SOURCES: BUSINESS TODAY, NOVEMBER 7, 1999

FIGURE-2

61

62

FRAMEWORK OF CORPORATE GOVERNANCE

On the basis of the above recommendations of the various institutions and prediction, the following framework is prepared. HOW MERGER AND ACQUISITION LEADS TO CORPORATE GOVERNANCE Merger and acquisition leads to total change in every aspect of the new organization and these changes leads to more transparency by the following ways: HOW MERGER AND ACQUISITION LEADS TO CORPORATE GOVERNANCE STRUCTURE OF BOARD OF DIRECTORS PROPER RECRUITME REPORTING NT PROCESS AND INFORMATION PROPER MEETING PROCEDURE OF LENDING

All relevant decisions should place before the shareholders in the meetings Less number of directors to reduce coalitions New scope and sources for the various type of information is developed Recruitment should base upon the skills and qualifications of the candidate All relevant decisions should place before the shareholders in the meetings Requirement of lending should be complete, so that claim can be made

More outside directors that more transparency could bring by more of questioning about remuneration, expenses, etc.

Proper information about daily working of the firm

Qualification should be decide for the directors

Attendances should be compulsory for the directors

Various factors should considered (credibility, capacity, project requirement, profitability, etc

63

FIGURE-3

HOW THESE PROCEDURE LEADS TO CORPORATE GOVERNANCE

All these amendments leads to corporate governance in the banking sector by the following ways: STRUCTURE OF BOARD OF DIRECTORS PROPER RECRUITMENT REPORTING PROCESS AND INFORMATIO N PROPER MEETING PROCEDURE OF LENDING

By raising more queries about remuneration, dividends, nonperforming asset etc.

Daily information, so that defaults can be traced at early stage about NPAs , expenses, lending etc.

Well-qualified and optimum number of employees should be taken to avoid scams and manipulations in the records.

Problems should place in the meeting so that effective decisions could be taken, and no body can take advantage of weaknesses

Lending should be done to worthwhile persons and projects, so that the rate of non performing assets can be reduced.

FIGURE-4

64

CORPORATE GOVERNANCE CAN BE SEEN IN THE FORM OF

A large number of criteria can be used for measuring the corporate governance in the banking firm. MORE SATISFIED EMPLOYEES

3TG IMPROVEMENT IN THE NET PROFIT

REDUCTION IN NON PERFORMING ASSET

MORE LOANS AND ADVANCES

CORPORATE GOVERNANCE

INCREASE IN DEPOSITS AND CUSTOMERS/ INCREASE IN CREDIBILITY

SOUND FINANCIAL POSITION

MEETING SOCIAL NEEDS EFFECTIVELY

FULFILLING STATUTORY REQUIREMENT

FIGURE-5

65

GOVERNMENT FRAMEWORK FOR MERGER AND ACQUISITION IN BANKING SECTOR

Government is providing various types of incentives and as a whole framework for the merger and acquisition in the banking sector, for the purpose of increasing the rate of growth in the economy because financial sector shows the real position of a country.

Approval for the consolidation of banks is given after the full fledge consideration of the various stakeholders. That is :

Shareholders Employees General Public Etc.

Providing tax benefits to the bank, which acquires the weak bank. Regulatory practices-supervision and regulation on a legal entity basis to align the reporting requirements and inspection systems with.

Framework regarding risk management and internal controls.

The restructuring and consolidation that are under way in international banking systems have been motivated by a number of developments in the past decade or so, among which four stand out:

The deregulation of international and domestic financial markets. Improvements in communications and computational technology. 66

Significant asset-quality-driven problems in many banking systems, and A growing recognition of the costs and distortions associated with official support for banking institutions.

These mutually reinforcing developments have both provided the impetus for banking restructuring. Changes in the supervisory and regulatory framework have been an important source of pressure for industry consolidation and restructuring . such changes include the

Liberalization of domestic Cross-border banking activities Easing of segmentation barriers within national financial systems.

67

68

PRE-MERGER

- PART-1 COUNT DOWN TO COLLAPSE OF GLOBAL TRUST

PART-II RBIs SCHEME OF AMALGAMATION OF GTB WITH OBC

PART-IV CLARIFICATIONS ISSUED BY RESERVE BANK OF INDIA

PART-III GTB PLACED UNDER MORATORIUMNOTIFICATION OF RBI

PART-V WHY DID THE RBI WAIT THIS LONG

PART-VI DOUBTS OF STAKEHOLDERS

PART-VIII THE MERGED BALANCE SHEET

PART-VII GLOBAL TRUST BANK IS NOW ORIENTAL BANK OF COMMERCE

PART-IX COST OF MERGING GLOBAL TRUST BANK

69

70

PART-I
COUNTDOWN TO COLLAPSE OF GLOBAL TRUST BANK
This was a crisis in the making for the last three years. KETAN PAREKH SECURITIES SCAM OF 2001 The genesis of the GTB collapses lies in now ousted promoter Ramesh Gellis involvement in the Ketan Parekh securities scam of 2001, when he gave huge unsecured loans to the stock broker and group companies of Zee Telefilms.

March 31, 2002 GTBs audited balance sheet for march 31,2002, showed net worth of Rs.400.4 cr. & a profit of Rs. 40 cr. However, RBIs inspection revealed that net worth is negative.

LARGE VARIANCE IN GTBS FINANCIAL POSITION AS

REPORTED BY AUDITORS In view of very large variance in the assessment of GTBs financial position as reported by auditors and by RBIs inspectors, an independent chartered accountant was appointed to reconcile the position.

UNDESIRABLE ACTIVITIES GTB was placed under directions relating to certain types of advances, certain premature withdrawl of deposits, declaration of dividend and its capital market exposure. RBI also started monitoring GTB on monthly basis.

71

LOSSES IN ANNUAL ACCOUNTS For statutory audit, RBI permitted GTB, time up to September 30, 2003 to publish the annual accounts. STOCK PERFORMANCE The two possible scenarios discussed above are calling off the merger and revision in the swap ratio. Both the cases seem to be positive for the stock of UTBK, which has already been hammered by over 40% since the merger announcement. All the negatives seem to be more or less factored in the current price levels. We are still positive on the fundamentals of UTI bank and expect the bank to achieve our projected growth rates. However, given the uncertainty over the ongoing developments, any fresh exposure to the stock shall be avoided. If the concerned issues relating to the merger are not solved soon, the stock could also turn out to be an underperformer.

72

Chart1: Price movements of UTBK, GTB and BSE Sensex over the last 4 months

Source: Indiainfoline ON MARCH 31, 2005,

ITEMS

BALANCES (CR.)

Deposits Advances Gross NPA Provision (against bad loan)

7342 3528 1032 298

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RBI ISSUED PRESS RELEASE, WHICH SAID: Even though the financial statements show an overall loss, the bank has made an operating profit for the year 2002-03. The RBI welcomes the decision taken by the GTB and its board to clean up the balance sheet.

RBIs INSPECTION But RBIs inspection showed that banks net worth has further eroded and capital adequacy ratio (CAR) was negative. Thereafter, government on the 24th July placed GTB under moratorium for three months on application from RBI. Therefore sudden decision of RBI and government of India to place GTB under moratorium caught more than 8.5 lakh customers of the bank unaware and shocked. The moratorium is aimed at freezing the assets and liabilities of the bank in order to protect the banks health from further deterioration.

74

PART-II
RESERVE BANK OF INDIAS SCHEME OF AMALGAMATION OF GLOBAL TRUST BANK WITH ORIENTAL BANK OF COMMERCE
Global Trust Bank Ltd., (GTB) was placed under of Moratorium on July 24, 2004. The option available with Reserve Bank was to compulsory merger under section 45 of the Banking Regulation Act, 1949. The government of India has sanctioned the scheme for amalgamation of the global trust bank ltd. With the oriental bank of commerce. The amalgamation came into force on August 14, 2004. Before the wide interest of the different parties had considered i.e.

Oriental bank of Commerce (OBC) interest was examined by the RBI keeping in view its financial parameters.

Its retail network and its synergies Strategic advantages Considered the interests of the millions of depositors of GTB Evaluated the bank;s strengths and weaknesses, the RBI prepared draft scheme of amalgamation of GTB with OBC.

75

PART-III
GLOBALTRUST BANK PLACED UNDER MORATORIUMNOTIFICATION OF RESERVE BANK OF INDIA
On an application by the Reserve Bank of India, the Central Government has today issued an Order of Moratorium in respect of the Global Trust Bank Ltd. The Order of Moratorium has been passed by the Central Government in public interest, in the interest of depositors and the banking system.

PROVISIONS FOLLOWED DURING THE PERIOD OF MERGER:The moratorium will be effective from the close of business on Saturday, July 24,2004 up to and inclusive of October 23, 2004 or an earlier date.

During the period, the Reserve Bank of India will consider the various options, including amalgamation of the Global Trust Bank Ltd.

Finalize the plans in public interest and with a view to ensuring that the public deposits are protected.

During the period of moratorium, the bank will be permitted to make only those payments that have been specified in the Order of Moratorium and the depositors of the Global Bank Ltd.

Depositors were permitted to withdraw up to Rs.10000 (Rs.ten thousand only) from their savings bank account or current account or any other deposit account through any other of the branches of the bank.

76

For the present, withdrawals through ATMs of the bank/ATMs shared with other banks will not be permitted so as to give effect to the monetory ceiling prescribed in the moratorium, but the customers can make withdrawals upto the limit specified at any of the banks branches.

Any requirement of cash at the branches of the bank for making permitted payments will be ensured in full by the Reserve Bank of India since cash balances are maintained with it by the Global Trust Bank Ltd.

WHAT IS IN STORE FOR CUSTOMERS?

The decision of the government to impose a moratorium on Global Trust Bank is not Liquidation of the bank. In a moratorium, government imposes a freeze on the banks liabilities so that bank is not able to grant any loan or advances, incur any liability, make any investment or disburse any amount. In the present case, the government has allowed the depositors of GTB to withdraw only up to Rs. 10000.

RBI has clarified that during the period of moratorium it will consider various options to protect depositors and their money, including amalgamation of GTB with another bank.

RBI has appointed three directors on the board of GTB. It has also given an assurance that any requirement of cash at the branches of the bank for making permitted payments will be met in full by the RBI, since cash balances are maintained with it by the GTB.

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PART-IV
CLARIFICATIONS ISSUED BY RESERVE BANK OF INDIA:RBI reiterates that the objective of the moratorium is to protect the interests and safety of funds of all depositors. Necessary actions are being initiated to ensure the return of normalcy.

All the branches of Global Trust Bank Ltd. will continue to remain open as per their normal working hours to help their customers and enable them to make the permitted withdrawals.

RBI stands by its assurance to meet any requirement of cash at the branches of the bank for making permitted payments under the Order of moratorium.

It is also clarified that the D-mat accounts and Safe Deposit Lockers of customers will be allowed to be operated as usual.

The Reserve Bank of India has set up help lines to assist the members of public at Mumbai and Hyderabad.

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RBIs INSPECTION
But RBIs inspection showed that banks net worth has further eroded and capital adequacy ratio ( CAR ) was negative. Thereafter, government on the 24th July placed GTB under moratorium for three months on application from RBI. Therefore sudden decision of RBI and Government of India to place GTB under Moratorium caught more than 8.5 lakh customers of the bank unaware and shocked. The moratorium is aimed at freezing the assets and liabilities of the bank in order to protect the banks health from further deterioration.

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PART-V WHY DID THE RBI WAIT THIS LONG

GTBs, and Gellis links to Ketan Parekh were apparent way back in 2001. in late 2002, RBI inspections had already discovered serious problems in the way the bank accounted for non-performing loans made to Ketan Parekh. In fact, the RBI wrote a letter of complaint to the Institute of Chartered Accountants of India about Lovelock & Lewes, GTBs auditors for 2001-02. For 2002-03, GTBs new auditors, Price water house Coopers, heavily qualified the balance sheet. (PWC and Lovelock & Lewes have a strategic tie-up and are practically the same.)

By end-2003 or early 2004, an RBI inspection team had discovered the facts that were to be trotted out six months later to justify the OBC-GTB merger negative net worth and capital adequacy ratio, and vastly understated volume of bad loans. This is despite GTB managing to make some recoveries of its bad loans (around Rs 150 crore).

The RBI clearly dilly-dallied. It new about the serious problems in GTB for the last 2-3 years as pointed out in its inspection report. It also had nominees on the board. The central bank would have like to justify itself by saying that after it came to know the facts in January 2004 , it gave the promoters time to find a white knight before moving in. however, the real reason may lie with the ballot box. It was one of the financial sectors worst kept secrets that Gelli was thick with to the Andhra Pradesh chief minister Chandrababu Naidu. Right from the Ketan Parekh days of 2001 and through the Joint 80

Parliamentary Committee inquires in to the scam, Naidu had backed him to the hilt. With such a powerful backer, there was little the RBI could do, even if it had wanted to. Once Naidu went out of power in May, it was clear that the RBI felt far more comfortable in taking Gelli on.

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PART-VI
DOUBTS OF STAKEHOLDERS
Did the auditors of Global Trust Bank, Price water house Coopers (PwC), fail to blow the whistle? No, PwC submitted a heavily qualified report on 30 September 2003 The audit report points out that accounts are prepared on a going concern basis even though the net worth of the bank has been substantially eroded after considering the loss for the year on account substantial provision against non-performing assets, taking into account managements assessment of growth of business, infusion of capital. These accounts do not include adjustments aforesaid in case the managements business plans do not materialize But why did PwC give a qualified report instead of giving a disclaimer? In case the principle of going concern does not hold or it is not possible to arrive at an opinion, the auditor is supposed to give a disclaimer and not express his opinion. In GTBs case there were many ifs and buts. For example,

Accounts were prepared on going concern basis even though the net worth had
been substantially eroded

Advances worth Rs 311.61 crore were considered good though the loans were
not fully secured;

No provision was made for assets valued at Rs 181.75 crore as the bank can
hold the property for seven years;

Accounting method is consistent except in case of the additional provision

through statutory reserve permitted by the RBI; and

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 The accounts give a fair view subject to points (relating to Rs 311.61 crore and
Rs 181.75 crore). The impact of which is indeterminate.

WHY DOES IT APPEAR THAT ICAI HAS NOT BEEN PROACTIVE?

PwC had submitted its eligibility for reappointment for 2003-04. it was not reappointed by GTB, but neither did the latter complain to the Institute of Chartered Accountant of India. The new auditor Bhasker Rao & Company took up the audit.

The results for the quarter ended December 2003 continued to be prepared on a going concern basis, though net worth was negative. ICAI sees it sufficient to act on the basis of complaints as ithas now shot off letters to the firms after RBI pointed out the deficiencies of the banks auditors PwC and Lovelock & Lewes.

Such crisis raises serious questions on the transparency in the private sector banks and the credibility of their financial statements.

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PART-VII GLOBAL TRUST BANK IS NOW ORIENTAL BANK OF COMMERCE

The Government of India has sanctioned the scheme for amalgamation of the Global Trust Bank Ltd. With the Oriental Bank of Commerce. The amalgamation will come in to force on August 14, 2004. All the branches of Global Trust Bank Ltd with function as branches of Oriental Bank of Commerce with effect from this date. Customers/Depositors of GTB Customers, including depositors of the Global Trust bank Ltd. Will be able to operate their accounts as customers of Oriental Bank of Commerce with effect from August 14, 2004. Oriental Bank of Commerce is making necessary arrangements to ensure that service, as usual, is provided to the customers of the Global Trust bank Ltd. PRO-DATA PAYMENT .IF ANY SURPLUS REMAINS If any surplus remains after meeting all the liabilities out of the realization of the assets of the Global Trust bank Ltd., the shareholders may receive pro-data payment. INCOME TAX EXEMPTIONS As part of the merger proposal, the OBC would get income tax exemptions in transferring the assets of GTB in its book during the merger process, while all the bad debts of the merged entity would be adjusted against the cash balances and reserves of the Hyderabadbased bank.

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PART-VIII
THE MERGED BALANCE SHEET:Post write-offs, OBCs books will be stronger. OBC GTB Capital c Reserve /surpluses Deposits 192.54 Total Cash/Bank OBC GTB 2524.22 804.84 Total 3329.06 17425.83 18953.35

121.36 192.54

1916.10 -118.91 1919.25

Investments 14780.54 2645.29 3276.11

COST OF MERGING GLOBAL TRUST BANK

Loans

29809.10 6920.92 36730.02 Advances & 15677.24

HOW MUCH WILL GTB COST OBC?

Borrowings 1166.02 302.06 1468.08 Deferred tax 5.00 Assets Deferred tax N.A. 93.36 98.36

(Rs crore)
632 (approx.)
465.68 1299.56

Possible write off* ( Net NPA- Recoverable)

38.62 38.62

Receivables 833.18

(-) Tax benefit on write off Liabilities

Current

226
Net Fixed Assets 145.29

Cost after write off

Liabilities

914.42 168.20 1082.62

406

300.80

446.09

(-) Tax benefit on write off of accumulated losses**

Provisions

95
Intangible/ DRE not Written off 33998.18 32.71

Net cost

N.A.

153.83 153.83

311 459

N.A.

32.71

OBCs tax provision for 03-04 Possible tax benefit as above

Total

33998.1 7586.08 41584.96 Total 8 85

7586.08

41584.96

PART-IX COST OF MERGING GLOBAL TRUST BANK

FIGURE:- 9

86

87

POSITION AFTER THE MERGER ACCORDING TO BUSINESS TODAY JANUARY 2006

Experts and analyst had an opinion that OBC was a 58,000 cr company, one of the countrys most successful public sector banks, had been sold a lemon , but this argument cut no ice OBC is confident of turning around the GTB within one year. According to OBC chairman B.D. Narang, Gtb suited it because of synergies. While weaknesses of GTB has been bad assets, strength of OBC is recovery.

BENEFITS OF OBC
Since the GTB is a south-based bank, it would give OBC the much-needed edge in the southern part of the country. Both the banks have a common core banking solution Finale, which will help in the consolidation.

GTBs 275 ATms multiplied its strength of 72 by a factor of almost five folds & make it the 3rd largest ATM operator in PSU banks.

103 branches are added to exixting 1013 branches Larger customer base After accounting for the tax gains the merger of GTB, the total losses come to Rs. 704.6 cr.

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POST MERGER BALANCE SHEET

FIGURE:- 10

89

90

ANALYSIS
GLOBAL TRUST BANK/ ORIENTAL BANK OF COMMERCE
REASONS BEHIND THE MERGER

ketan Parekh Scam Huge NPA Negative Net Worth Inappropriate Audit INCREASE IN NETWORK

BRANCHES

ATM

91

REASONS BEHIND THE MERGER

3500 3000 2500 2000 1500 1000 500 0 BRANCHES ATM

POSTMERGER PREMERGER

COMPARISON OF BALANCE SHEET

LIABILITY SIDE

LIABILITY SIDE COMPARISON

90000 80000 70000 60000 50000 40000 30000 20000 10000 0 CAPITAL DEPOSITS CURRENT LIABILITY/ PROVISION

PRE-MERGER PRE-MERGER

92

CAPITAL RESERVE/ DEPOSITS BORROWING SURPLUS PREMERGER POSTMERGER % CHANGE NIL +29% +16% -5% 192 2480 42590 1400 192 1919 36730 1468

CURRENT LIABILITY/ PROVISION 1270

1700

+39%

FIGURE:- 12

ASSET SIDE
A SSET SIDE CO PA M RISO N 45000 40000 35000 30000 25000 20000 15000 10000 5000 0

PRE-M ERG ER PRE-M ERG ER RECEIVABLES CASH/ BANK INTANGIBLE ADVANCE/

LOAN

CASH/ BANK

INVES TMEN TS

ADVAN- DEFECE/ LOAN 93 RRED TAX

ASSET

RECEIVABLE S

NET FIXED ASSET

INTANGIBLE ASSET

LIAB.

PREMERGER

3329

17426

18953

99

1300

446

32

POSTMERGER

4400

19300

22957

24

1220

445

16

% CHANGE

+32%

+11%

+21%

-76%

-6%

-0.3%

-50%

BENEFITS DERIVED FROM MERGER AND ACQUISITION

After studying various cases of mergers in the banking sector a large number of benefits can be seen which are as follows:

Better corporate governance.

( Global Trust Bank / Oriental Bank Of Commerce)

Increase in the network / branches.

( Bank Of madura / ICICI)

Increase in customer base.

( Bank Of America / Fleet Boston)

Reduction in NPA. 94

( Nedungadi Bank / Punjab National Bank)

Compliance with statutory requirement.

(Global Trust Bank / Oriental Bank Of Commerce)

Fulfilling more responsibility towards society.

(Bank Of madura / ICICI)

Improve in financial position.

(Global Trust Bank / Oriental Bank Of Commerce)

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CONCLUSION
After merger of the Global Trust Bank and Oriental Bank of Commerce following changes has been take place:

Change in management New ways of providing services to customers. (e-payment-railway tickets ) Change in debt recovery policy.

After analyzing the whole case of merger of the Global Trust Bank with Oriental Bank of Commerce following conclusions can be drawned.

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The quantitative factors thatare taken as the criteria for measuring the corporate governance after the consolidations can be achieved in a better manner, like:

Net profits Increase in deposits / credibility Increase in customer base / network More loans and advances

ALL OF THESE SHOWN IMPROVEMENT AFTER MERGER DUE TO BETTER PRACTICE OF

Fulfilling statutory requirement Sound financial position

CORPORATE GOVERNANCE

Reduction in Non Performing Assets (ANNOUNCED AS A 0% NPA BANKORIENTAL BANK OF COMMERCE ACC. TO BUSINESS STANDARD)

SHOWN A GREAT DECLINE IN NPA

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98

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THERE IS ANOTHER EXAMPLE TO SUPPORT THE STUDY

BANK OF AMERICA BUYS FLEETBOSTON
BOSTON, Oct. 27, 2003

FleetBoston's headquarters (AP)

(CBS/AP) Bank of America Corp. announced an agreement Monday to buy FleetBoston Financial Corp., a deal initially valued at $47 billion that would swallow up the last of the big Boston banks that made the city a financial center from the earliest days of the

100

Republic. The agreement, if approved by shareholders and regulators, would create the nation's second-biggest banking company. Bank of America, currently No. 3, would have about 33 million customers and 2.5 million business clients in 35 countries. The deal would also bring Bank of America into New England and eliminate the Fleet name. The combined bank will have about 5,200 branches; Bank of America already has more branches than any other U.S. bank. No. 2 Wells Fargo has about 3,000. "It's going to be one of the dominant banks in the U.S. banking industry over the next 25 years," said Gerard Cassidy, an industry analyst with RBC Capital Markets. "It's going to have branches in cities that it didn't have them before, primarily places in the Northeast New York, Boston, along the northeast coast and New England," said CBS MarketWatch editor Greg Morcroft.

Bank of America, based in Charlotte, N.C., will pay $45 a share for Fleet, or about $13 more than FleetBoston's closing price on Friday. In trading Monday on the New York Stock Exchange, FleetBoston shares climbed to $39.20, while Bank of America shares fell to $73.57, down $8.29, or 10 percent. That reduced the value of the offer to $42.9 billion. Lewis will be chief executive of the merged company, to be headquartered in Charlotte. Gifford will be chairman of the board. The deal, already approved by both boards of directors, is expected to be completed in the first half of 2004. Bank of America said it expects the merger to save $1.1 billion.

Analyst John McCune of SNL Financial Corp. said the deal could also signal a new round of bank mergers with large regional banks joining forces with big financial services as the only way to compete.

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SIMILAR EXAMPLES OF MORATORIUMS ON WEAK BANKS

Following is the list of similar moratoriums on weak banks, which finally resulted in their mergers with major public sector banks:

1) Nedungadi bank in 2002, which was later, merged with Punjab National Bank. 2) Banaras State Bank in UP in 2000. To protect the interest of depositors, the bank
was merged with bank of baroda (BOB).

3) In 1993, the government had imposed a moratorium on the depositors of new Bank
of India. The bank was later merged with PNB.

4) United Commercial Bank in early 1990s was later merged with United Bank of
India.

5) In the early 1990s , Lakshmi Commercial Bank also faced moratoriums and was
merged with Canara Bank.

6) Early 1990s , Karur Central Bank in Kerala was merged with Bank of India. 7) Hindustan Commercial Bank faced the moratorium in 1988 and was merged with
PNB.

8) Bank of Thanjavur in Tamil Nadu in the late 1980s was later merged with Indian
Bank.

9) In 1980s, Bank of Cochin in Kerala was put under moratorium before merging it
with State Bank of India.

10) In 1969, Indo Commercial Bank was merged with PNB.

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103

SUGGESTIONS

EXISTING GOVERNANCE AND SCOPE FOR IMPROVEMENT

CORPORATE GOVERNANCE MECHANISM LARGE BLOCK HOLDERS Likely to be the most Strengthen rules & In developing country like India Scope intervention for policy

important mechanism

governance protecting minority investors interest

MARKET FOR CORPORATE CONTROL

Important when ownership Remove some managerial is strongly concentrated; can defenses; disclosure of

still take place through debt ownership and control contracts

EXECUTIVE COMPENSATION

Less

important

when Disclosure of compensation

controlling owner can hire schemes, conflicts of interest and fire and has private rules benefits

104

PROXY FIGHTS

Effective when ownership is Technology strongly concentrated

improvement

for communicating with and among shareholders;

disclosure of ownership and control

BOARD ACTIVITY

Influential when controlling Introduce

element

of

owner can hire and fire independence of directors; board members training disclosure of of directors; voting;

cumulative voting possibly

SHAREHOLDER ACTIVISM

Potentially important, particularly in large firms with dispersed shareholders.

Encourage interaction among shareholders. Strengthen minority rotection. Enhance governance of institutional investors.

105

EMPLOYEE MONITORING

Potentially particularly in

important, Disclosure of information to smaller employees ; possibly require board representation; assure flexible labor markets.

companies with high skilled human capital where threat of leaving is high LITIGATION

Depends critically on quality Facilitate of general , enforcement among but

communication shareholders;

environment

can encourage class-action suits with safeguards against

sometimes work.

excessive litigation MEDIA AND SOCIAL CONTROL Potentially important, but Encourage competition in depends on competition and diverse control of

among and independence of media; media. campaign public.

active can

public empower

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REPUTATION AND SELF ENFORCEMENT

Important

when

general Depends

on

growth

enforcement is weak, but opportunity and scope for stronger when environment rent is stronger seeking. Encourage in factor

competition markets.

BILATERAL PRIVATE ENFORCEMENT MECHANISM

Important, as they are more Requiring functioning civil/ specific, but do not benefit commercial courts outsiders downsides. and can have

107

ARBITRATION, AUDITORS, AND OTHER MULTILATERAL AGREEMENT

Potentially important, often Facilitate the formation of the origin of public law ; but private the enforcement problem mechanism often remains ; audits avoid third party

(sometimes public with

forming deal

sometimes abused; watch alternatives); conflicts of interest

conflicts of interests; ensure competition.

COMPETITION

Determines

scope

for Open up all factor markets

potential mistreatment of to competition , including factors of production, from abroad.

including financing.

108

109

ANNEXURE

S. NO.

TOPIC

I.

Control Model

of Governance chain- Mc.

II. Table of board

structure and processes of good governance

III.

Table

of how merger & acquisition leads to corporate governance

IV.

Table

of how these procedure leads to corporate governance

110

V. Table of
corporate governance can be seen in the form of

VI.

Pre-

merger Scenario

VII.

Merge

d balance Sheet

VIII.

Cost of

Merging Global Trust Bank

IX.

Post

Merger balance Sheet

X. Reasons
behind Merger

XI.

Compa

rison of Balance Sheet Liability Side Asset Side

111

112

113

BIBLIGRAPHY
I.M. Panday, Financial Management, New Delhi, Vikas Publishing House Private Limited, 1999, 8th edition,

M. Y. Khan & P.K. Jain, Financial Management, Text, Problems& Cases, New Delhi, Tata MC Graw-Hill, Publishing Company Limited, 1981, 4th edition,

M. Y. Khan, Financial Services , New Delhi, Tata MC Graw-Hill, Publishing Company Limited, 3rd edition

D.K. Goel & Rajesh Goel, Financial Management, New Delhi, Avichal Publishing Company, 2000, 4th edition

OTHERS

http://www. telegraphindia.com/1040824/asp/business/story_3665775.asp

http://www. businessworldindia.com/index_archives.aspx?Editionld=62

http://www.moneycontrol.com/backends/News/frontend/news_detail.php? autono=158300

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