INTRODUCTION

TO
MERGERS
AND
ACQUISITIONS
OF
BANKING SECTOR

1
 1. INTRODUCTION TO MERGER AND ACQUISITION
OF BANKING SECTOR

MERGERS
A merger occurs when two or more companies combines and the resulting firm
maintains the identity of one of the firms. One or more companies may merger with
an existing company or they may merge to form a new company.
Usually the assets and liabilities of the smaller firms are merged into those of larger
firms. Merger may take two forms-
1. Merger through absorption
2. Merger through consolidation.
Absorption
Absorption is a combination of two or more companies into an existing company. All
companies except one loose their identify in a merger through absorption.
Consolidation
A consolidation is a combination if two or more combines into a new company. In
this form of merger all companies are legally dissolved and a new entity is created. In
consolidation the acquired company transfers its assets, liabilities and share of the
acquiring company for cash or exchange of assets.
ACQUISITION
A fundamental characteristic of merger is that the acquiring company takes over the
ownership of other companies and combines their operations with its own operations.
An acquisition may be defined as “an act of acquiring effective control by one
company over the assets or management of another company without any
combination of companies”.
TAKEOVER
A takeover may also be defined as obtaining control over management of a company
by another company.

1.1 DISTINCTION BETWEEN MERGERS AND

ACQUISITIONS OF BANKS

2
Although they are often uttered in the same breath and used as though they were
synonymous, the terms merger and acquisition mean slightly different things.
When one company takes over another and clearly established itself as the new
owner, the purchase is called an acquisition. From a legal point of view, the target
company ceases to exist, the buyer "swallows" the business and the buyer's stock
continues to be traded.

In the pure sense of the term, a merger happens when two firms, often of about the
same size, agree to go forward as a single new company rather than remain separately
owned and operated. This kind of action is more precisely referred to as a "merger of
equals." Both companies' stocks are surrendered and new company stock is issued in
its place.

In practice, however, actual mergers of equals don't happen very often. Usually, one
company will buy another and, as part of the deal's terms, simply allow the acquired
firm to proclaim that the action is a merger of equals, even if it's technically an
acquisition. Being bought out often carries negative connotations, therefore, by
describing the deal as a merger, deal makers and top managers try to make the
takeover more palatable.

A purchase deal will also be called a merger when both CEOs agree that joining
together is in the best interest of both of their companies. But when the deal is
unfriendly - that is, when the target company does not want to be purchased - it is
always regarded as an acquisition.

Whether a purchase is considered a merger or an acquisition really depends on

whether the purchase is friendly or hostile and how it is announced. In other words,
the real difference lies in how the purchase is communicated to and received by the
target company's board of directors, employees and shareholders.

1.2 TYPES OF MERGERS

3
Mergers are of many types. Mergers may be differentiated on the basis of activities,
which are added in the process of the existing product or service lines. Mergers can
be a distinguished into the following four types:-
1. Horizontal Merger
2. vertical Merger
3. Conglomerate Merger
4. Concentric Merger

Horizontal merger
Horizontal merger is a combination of two or more corporate firms dealing in same
lines of business activity. Horizontal merger is a co centric merger, which involves
combination of two or more business units related to technology, production
process, marketing research ,development and management. Elimination or
reduction in competition, putting an end to price cutting, economies of scale in
production, research and development, marketing and management are the motives
underlying such mergers.

Vertical Merger
Vertical merger is the joining of two or more firms in different stages of production
or distribution that are usually separate. The vertical Mergers chief gains are
identified as the lower buying cost of material. Minimization of distribution costs,
assured supplies and market increasing or creating barriers to entry for potential
competition or placing them at a cost disadvantage.

Conglomerate Merger
Conglomerate merger is the combination of two or more unrelated business units in
respect of technology, production process or market and management. In other words,
firms engaged in the different or unrelated activities are combined together.
Diversification of risk constitutes the rational for such merger moves.

Concentric Merger
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Concentric merger are based on specific management functions where as the
conglomerate mergers are based on general management functions. If the activities of
the segments brought together are so related that there is carry over on specific
management functions. Such as marketing research, Marketing, financing,
manufacturing and personnel.

1.3ADVANTAGES OF MERGERS AND ACQUISITIONS

1) Accelerating a company's growth, particularly when its internal growth is

constrained due to paucity of resources. Internal growth requires that a
company should develop its operating facilities- manufacturing, research,
marketing, etc. But, lack or inadequacy of resources and time needed for
internal development may constrain a company's pace of growth. Hence, a
company can acquire production facilities as well as other resources from
outside through mergers and acquisitions. Specially, for entering in new
products/markets, the company may lack technical skills and may require
special marketing skills and a wide distribution network to access different
segments of markets. The company can acquire existing company or
companies with requisite infrastructure and skills and grow quickly.
2) Enhancing profitability because a combination of two or more companies may
result in more than average profitability due to cost reduction and efficient
utilization of resources. This may happen because of:-

1. GROWTH 0R DIVERSIFICATION: -

Companies that desire rapid growth in size or market share or diversification in the
range of their products may find that a merger can be used to fulfill the objective
instead of going through the tome consuming process of internal growth or
diversification. The firm may achieve the same objective in a short period of time by
merging with an existing firm. In addition such a strategy is often less costly than the
alternative of developing the necessary production capability and capacity. If a firm
that wants to expand operations in existing or new product area can find a suitable
going concern. It may avoid many of risks associated with a design; manufacture the
sale of addition or new products. Moreover when a firm expands or extends its
product line by acquiring another firm, it also removes a potential competitor.

5
 SYNERGY: -

3. Implies a situation where the combined firm is more valuable than the sum of
the individual combining firms. It refers to benefits other than those related to
economies of scale. Operating economies are one form of synergy benefits.
But apart from operating economies, synergy may also arise from enhanced
managerial capabilities, creativity, innovativeness, R&D and market coverage
capacity due to the complementarity of resources and skills and a widened
horizon of opportunities

merger may result in financial synergy and benefits for the firm in many ways:-

i. By eliminating financial constraints

ii. By enhancing debt capacity. This is because a merger of two companies

can bring stability of cash flows which in turn reduces the risk of
insolvency and enhances the capacity of the new entity to service a larger
amount of debt
iii. By lowering the financial costs. This is because due to financial stability,
the merged firm is able to borrow at a lower rate of interest.

Other motives For Merger

Merger may be motivated by other factors that should not be classified under
synergism. These are the opportunities for acquiring firm to obtain assets at bargain
price and the desire of shareholders of the acquired firm to increase the liquidity of
their holdings.

1. Purchase of Assets at Bargain Prices

Mergers may be explained by opportunity to acquire assets, particularly land mineral

rights, plant and equipment, at lower cost than would be incurred if they were
purchased or constructed at the current market prices. If the market price of many
socks have been considerably below the replacement cost of the assets they represent,
expanding firm considering construction plants, developing mines or buying
equipments often have found that the desired assets could be obtained where by
heaper by acquiring a firm that already owned and operated that asset. Risk could be

6
reduced because the assets were already in place and an organization of people knew
how to operate them and market their products. Many of the mergers can be financed
by cash tender offers to the acquired firm’s shareholders at price substantially above
the current market. Even so, the assets can be acquired for less than their current casts
of construction. The basic factor underlying this apparently is that inflation in
construction costs not fully rejected in stock prices because of high interest rates and
limited optimism by stock investors regarding future economic conditions.

2.Increased Managerial Skills or Technology

Occasionally a firm will have good potential that is finds it unable to develop fully
because of deficiencies in certain areas of management or an absence of needed
product or production technology. If the firm cannot hire the management or the
technology it needs, it might combine with a compatible firm that has needed
managerial, personnel or technical expertise. Of course, any merger, regardless of
specific motive for it, should contribute to the maximization of owner’s wealth.

3. Acquiring new technology –

To stay competitive, companies need to stay on top of technological developments

and their business applications. By buying a smaller company with unique
technologies, a large company can maintain or develop a competitive edge.

i. Economy of scale: This refers to the fact that the combined company can
often reduce its fixed costs by removing duplicate departments or operations,
lowering the costs of the company relative to the same revenue stream, thus
increasing profit margins.
ii. Operating economies:-arise because, a combination of two or more firms
may result in cost reduction due to operating economies. In other words, a
combined firm may avoid or reduce over-lapping functions and consolidate its
management functions such as manufacturing, marketing, R&D and thus
reduce operating costs. For example, a combined firm may eliminate duplicate
channels of distribution, or crate a centralized training center, or introduce an
integrated planning and control system

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 iii. Increased revenue or market share: This assumes that the buyer will
be absorbing a major competitor and thus increase its market power (by
capturing increased market share) to set prices.
iv. Cross-selling: For example, a bank buying a stock broker could then sell its
banking products to the stock broker's customers, while the broker can sign up
the bank's customers for brokerage accounts. Or, a manufacturer can acquire
and sell complementary products.

1.4 Procedure for evaluating the decision for mergers and

acquisitions

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

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

firm-specific information. The acquiring firm should review its objective of
8
 acquisition in the context of its strengths and weaknesses and corporate goals.
It will need industry data on market growth, nature of competition, ease of
entry, capital and labour intensity, etc. This will help in indicating the product-
market strategies that are appropriate for the company. It will also help the
firm in identifying the business units that should be dropped or added. On the
other hand, the target firm will need information about quality of management,
market share and size, capital structure, profitability, production and
marketing capabilities, etc.
2. Search and Screening:- Search focuses on how and where to look for
suitable candidates for acquisition. Screening process short-lists a few
candidates from many available and obtains detailed information about each of
them.
3. Financial Evaluation:- a merger is needed to determine the earnings and
cash flows, areas of risk, the maximum price payable to the target company
and the best way to finance the merger. In a competitive market situation, the
current market value is the correct and fair value of the share of the target
firm. The target firm will not accept any offer below the current market value
of its share. The target firm may, in fact, expect the offer price to be more than
the current market value of its share since it may expect that merger benefits
will accrue to the acquiring firm.

MERGERS
AND
ACQUISITION
IN
9
 INDIA
OF
BANKING
SECTOR

2. MERGERS AND ACQUISITION IN INDIA

Banking in India originated in the first decade of 18th century with The General
Bank of India coming into existence in 1786. This was followed by Bank of
Hindustan. Both these banks are now defunct. The oldest bank in existence in India is
the State Bank of India being established as "The Bank of Bengal" in Calcutta in June
1806. A couple of decades later, foreign banks like Credit Lyonnais started their
Calcutta operations in the 1850s. At that point of time, Calcutta was the most active

10
trading port, mainly due to the trade of the British Empire, and due to which banking
activity took roots there and prospered. The first fully Indian owned bank was the
Allahabad Bank, which was established in 1865.

By the 1900s, the market expanded with the establishment of banks such as Punjab
National Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai - both of
which were founded under private ownership. The Reserve Bank of India formally
took on the responsibility of regulating the Indian banking sector from 1935. After
India's independence in 1947, the Reserve Bank was nationalized and given broader
powers.

BEFORE LIBERALISATION
In India the companies’ act 1956 and the monopolies and restrictive trade practices
act, 1969 are statutes governing mergers among companies.
In the companies act, as procedural has been laid down, in terms of which the merger
can be effectuated. Sanction of the company court is essential perquisite for the
effectiveness of a scheme of merger.
The other statue regulating mergers was the hitherto monopolies and restrictive trade
practices act. After the amendments the status does not regulate mergers.
The regulatory provisions in the MRTP act were removed through the 1991
amendments, with a view to giving effect to the new industrial policy of liberalization
and deregulation, aimed at achieving economies of scale for ensuring higher
productivity competitiveness.

Liberalization

In the early 1990s the then Narasimha Rao government embarked on a policy of
liberalisation and gave licences to a small number of private banks, which
came to be known as New Generation tech-savvy banks, which included banks
such as UTI Bank (the first of such new generation banks to be set up), ICICI
Bank and HDFC Bank. This move, along with the rapid growth in the economy

11
 of India, kick started the banking sector in India, which has seen rapid growth
with strong contribution from all the three sectors of banks, namely,
government banks, private banks and foreign banks. The next stage for the
Indian banking has been setup with the proposed relaxation in the norms for
Foreign Direct Investment, where all Foreign Investors in banks may be given
voting rights which could exceed the present cap of 10%.

The new policy shook the Banking sector in India completely. Bankers, till this time,
were used to the 4-6-4 method (Borrow at 4%; Lend at 6%;Go home at 4) of
functioning. The new wave ushered in a modern outlook and tech-savvy methods of
working for traditional banks. All this led to the retail boom in India. People not just
demanded more from their banks but also received more.

Sarrriya Committee
In 1972 examined the restructuring of banks in greater depth and recommended that
there should be three all India banks and 5 or 6 regional banks plus a network of
cooperative or rural banks in the rural areas.
N.Vagul suggested the restructuring on the basis of location and functioning of the
bank and recommended four sets of banks in the public sector.
1) There should be district banks having the network of around 300 branches and
Rs. 250 crores or more. Their functions similar to that of commercial banks.
2) National saving banks which will be located only in urban and metropolitan
towns.
3) The third and fourth set of banks will be trade and industry banks and foreign
exchange banks and located at urban and metropolitan centers catering to
designate clientele only.
In July 1976, a commission under the chairmanship of Sh. Manubhai shah
suggested the reduction in the number of existing banks and making the smallest
nationalized banks bigger so as to have strong regional character in states of UP,
MP, Bihar, and Orissa and North east part of the country.

James Raj Committee appointed by RBI in June 1997 recommended that

1. A bank’s size should be in the range of 1000 to 1500 branches.
2. SBI group should be converted into holing company with 5 zones
subsidiaries and

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

13
out weak banks. Mergers between strong banks/FIs would make for greater economic
and commercial sense and would greater than the sum of its parts and have a force
multiplier effect. It can hence be seen from the recommendations of Narsimhan
Committee that mergers of the public sector banks were expected to emanate from the
management of the banks with government as common shareholder playing a
supportive role.

NEED
OF
MERGERS

14
 AND
ACQUISITIONS
IN
BANKING SECTOR

3.NEED FOR MERGER AND ACQUISITION

The South East Asian crisis and the earlier economic turmoil in several developing
nations demonstrated that strong banking system is critical. Throughout the world,
banking industry has been transformed from highly protected and regulated to
competitive and deregulated. Globalization coupled with technological development
has shrinked the boundaries. Trade has become transactional from international. Due

15
to this, there is no difference between domestic and foreign currency. As a result
innovations and improvement assumed greatest significance in institutional
performance.

This trend of global banking has been marked by twin phenomena of consolidation
and convergence. The trend towards consolidation has been driven by the need to
attain meaningful balance sheet size and market share in the face of intensified
competition. The trend towards convergence is driven by a move across industry to
provide most of the financial services under one roof.
Indian banking experienced wide ranging reforms in the last decade and these reforms
have contributed to a great extent in enhancing their competitiveness. The issue of
bank restructuring assumes significance from the point of view of making Indian
banking strong and sound apart its growth and development to become suitable.
International evidence also strongly indicates greater gains to banking industries after
the restructuring process. With the impending capital account convertibility, cross
border movement of financial capital would become a reality. If we cannot
consolidate our size, it is rather difficult to find reasons that could prevent Indian
banks from being swallowed by the powerful foreign banks in the long run, under the
free for all environments. The core objective of restructuring is to maintain long term
profitability and strengthen the competitive edge of banking business in the context of
changes in the fundamental market scenario. Restructuring can have both internal and
external dimensions.
The pace of change in the financial market world over and in the external economic
environment, in which we work, shows no sign of slowing down. Commercial banks
now have to think “global” to service the requirements of the highly sophisticated
multinationals that are increasingly dominated the industrial world.
Bank mergers would be the rule rather than exception in times to come and there is a
need for banks to check their premises before embanking on their future plans. There
are synergies to be leveraged through consolidation where factors such as size, spread,
technology, human resource and capital can be reconciled. We could hence think of a
situation where we have 4-5 global players which are really large, a handful of
regional banks which will gradually set to merger and some other players which will
get to acquire special niche to serve limited market. But it involves the sorting of

16
various issues such as legal, regulatory, procedural etc. This is statement of SH. V.
Leeladhar, chairman, IBA on 28th aug, 2004.
History has improved beyond doubt that strong banking systems are critical for sound
economic growth. It is important to improve the comprehensiveness and quality of the
banking system to bring efficiency in the performance of the real sector in India.
Throughout the world, banking industry has been transferred from a highly protected
and regulated situation to competitive and deregulated. Globalization coupled with
technological development has shrinked the boundaries. Financial services and
products are being provided to the customers across the length and breadth of the
globe.
Due to this, domestic and foreign currency, banking and non banking financial
services are getting closer. Correspondingly innovations and improvements assumed
greater significance in institutional performance. This trend of global banking has
been marked by twin phenomena of consolidation and convergence. The trend
towards consolidation has been driven by the need to attain meaningful balance sheet
size and market share in the face of intensified competition. The trend towards
convergence is driven by a move across industry to provide most of the financial
service viz., banking, insurance, investment etc, to the customers in
one roof. Consolidation of banking industry is critical from several aspects. The
factors inducing mergers and acquisition include technological progress, excess
capacity, emerging opportunities and deregulation of geographic, functional and
product restrictions. It may also bring the performance of public sector banks to a
remarkable level without variation between banks in public sector.
The following are the important aspects for staying in the market:
1) Competition from global majors.
2) Competition from new Indian banks.
3) Disinter mediation and competition resulting into pressure or spread.
4) Qualitative change in the banking paradigm.
5) The competencies required from a banker would be sharper information
technology and knowledge centric.
In order to compete with the new entrants effectively, Indian commercial banks need
to posses matching financial muscle, as a fair competition is possible only among the
equals. Size has therefore, assumed critically. A bank’s size is really to be determined
by the size of its balance sheet. The question before major commercial banks,

17
therefore, is how to acquire a competitive size. Mergers and acquisition route provides
a quick step forward in this direction offering opportunities to share synergies and
reduce the cost of product development and delivery. Different type of banks, even
through they themselves belong to the public sector, spend considerable time
competing themselves without increasing commensurate benefits to the system as a
whole. As a result, the focus on banks has shifted away from the areas of real
productivity. The present system is not ideal for simultaneously retaining separate
identities as well as preserving the very characteristics of competitiveness. Our banks
are really small in terms of business size or capital when compared with banks in the
west or even China.. The lesson here is to think of consolidation of our efficient banks
to build up global scale institutions. Consolidations would also enable us to go for
global technologies benefiting the customers and efficiency of our banks.
If Indian banks are to be made more effective, efficiency and comparable with their
counterparts from abroad, they would need to be more capitalized, automated and
technology oriented, even while strengthening their internal operations and systems.
Further in order to make them comparable with their competitors from abroad with
regard to the size of their capital and asset base, it would be necessary to structure
these banks. Merger and acquisitions are considered useful to achieve the requisite
size in the short run.

MERGERS
IN
INDIAN
18
 BANKING
SECTOR

MERGER IN INDIAN BANKING SECTOR

Mergers and acquisitions encourage banks to gain global reach and better synergy and
allow large banks to acquire the stressed assets of weaker banks. Merger in India
between weak/unviable banks should grow faster so that the weak banks could be
rehabilitated providing continuity of employment with the working force, utilization

19
of the assets blocked up in the weak/unviable banks and adding constructively to the
prosperity of the nation through increased flow of funds.
In the banking sector, important mergers and acquisitions in India in recent years
include the merger between IDBI (Industrial Development bank of India) and its
own subsidiary IDBI Bank. The deal was worth $ 174.6 million (Rs. 7.6 billion in
Indian currency). Another important merger was that between Centurion Bank and
Bank of Punjab. Worth $82.1 million (Rs. 3.6 billion in Indian currency), this
merger led to the creation of the Centurion Bank of Punjab with 235 branches in
different regions of India, another merger was HDFC bank and Centurion bank of
punjab.
Some of the past merged banks are Grind lay Bank merged standard charated Bank,
Times Bank with HDFC Bank, bank of Madura with ICICI Bank, Nedungadi Bank
Ltd. With Punjab National Bank and Global Trust Bank merged with Oriental Bank of
Commerce.
The small and medium sized banks are working under threats from economic
environment which is full of problem for them, viz. inadequacies of resources,
outdated technology, on systemized management pattern, faltering marketing efforts
and weak financial structure. Their existence remains under challenge in the absence
of keeping pace with growing automation and techniques obsolescence and lack of
product innovations. These banks remain, at times, under threat from large banks.
Their reorganization through consolidation/merger could offer succor to re-establish
them in viable banks of optimal size with global presence.
Merger and amalgamation in Indian banking so far has been to provide the safeguard
and hedging to weak bank against their failure and too at the initiative of RBI, rather
than to pay the way to initiate the banks to come forward on their own record for
merger and amalgamation purely with a commercial view and economic
consideration.
As the entire Indian banking industry is witnessing a paradigm shift in systems,
processes, strategies, it would warrant creation of new competencies and capabilities
on an on going basis for which an environment of continuous learning would have to
be created so as to enhance knowledge and skills.
There is every reason to welcome the process of creating globally strong and
competitive banks and let big Indian banks create big thunders internationally in the
days to come.

20
In order to achieve the INDIAN VISION 2020 as envisaged by Hon’ble president of
India Sh. A.P.J.Addul Kalam much requires to be done by banking industry in this
regard. It is expected that the Indian banking and finance system will be globally
competitive. For this the market players will have to be financially strong and
operationally efficient. Capital would be key factor in the building a successful
institution. The Banking and finance system will improve competitiveness through a
process of consolidation either through mergers and acquisitions or through strategic
alliances. There is need to restructure the banking sector in India through merger and
amalgamation in order top makes them more capitalized, automated and technology
oriented so as to provide environment more competitive and customer friendly

RISKS ASSOCIATED WITH MERGER

There are several risks associated with consolidation and few of them are as
follows: -

1) When two banks merge into one then there is an inevitable increase in the size
of the organization. Big size may not always be better. The size may get too
widely and go beyond the control of the management. The increased size may
become a drug rather than an asset.
2) Consolidation does not lead to instant results and there is an incubation period
before the results arrive. Mergers and acquisitions are sometimes followed by
losses and tough intervening periods before the eventual profits pour in.
Patience, forbearance and resilience are required in ample measure to make
any merger a success story. All may not be up to the plan, which explains why
there are high rate of failures in mergers.
3) Consolidation mainly comes due to the decision taken at the top. It is a top-
heavy decision and willingness of the rank and file of both entities may not be
forthcoming. This leads to problems of industrial relations, deprivation,
depression and demotivation among the employees. Such a work force can
never churn out good results. Therefore, personal management at the highest
order with humane touch alone can pave the way.
4) The structure, systems and the procedures followed in two banks may be
vastly different, for example, a PSU bank or an old generation bank and that of

21
 a technologically superior foreign bank. The erstwhile structures, systems and
procedures may not be conducive in the new milieu. A thorough overhauling
and systems analysis has to be done to assimilate both the organizations. This
is a time consuming process and requires lot of cautions approaches to reduce
the frictions.
5) There is a problem of valuation associated with all mergers. The shareholder
of existing entities has to be given new shares. Till now a foolproof valuation
system for transfer and compensation is yet to emerge.
6) Further, there is also a problem of brand projection. This becomes more
complicated when existing brands themselves have a good appeal. Question
arises whether the earlier brands should continue to be projected or should
they be submerged in favour of a new comprehensive identity. Goodwill is
often towards a brand and its sub-merger is usually not taken kindly.

22
23
Structure of the Organized Banking Sector in India. Number Of Banks Are In
Brackets.

MERGER STORY SO FAR

YEAR BANK MERGED WITH

1969 Bank Of Bihar State Bank Of India

1970 National Bank Of Lahore State Bank Of India
1971 Eastern Bank Ltd. Chartered Bank
1974 Krishnaram Baldeo Bank Ltd. State Bank Of India
1976 Belgaum Bank Ltd. Union Bank Of India
1984-85 Lakshmi Commercial Bank Canara Bank
1984-85 Bank Of Cochin State Bank Of India
1985 Miraj State Bank Union Bank Of India
1986 Hindustan Commercial Bank Punjab National Bank
1988 Trader’s Bank Ltd. Bank Of Baroda
1989-90 United Industrial Bank Allahabad Bank
1989-90 Bank Of Tamilnad Indian Overseas Bank
1989-90 Bank Of Thanjavur Indian Bank
1989-90 Parur Central Bank Bank Of India
1990-91 Purbanchal Bank Central Bank Of India
1993-94 New Bank Of India Punjab National Bank
1993-94 Bank Of Karad Bank Of India
1995-96 Kasinath Seth Bank State Bank Of India
1996 SCICI ICICI
1997 ITC Classic ICICI
1997 BARI Doab Bank Oriental Bank of Commerce
1998 Punjab Co-operative Bank Oriental Bank of Commerce
1998 Anagram Fianance ICICI
1999 Bareilly Corporation Bank Bank of Baroda
1999 Sikkim Bank ltd. Union Bank
2000 Times bank HDFC Bank
2001 Bank of Madura ICICI
2002 Benaras state bank Bank of Baroda
2003 Nedungadi Bank Punjab national Bank
2004 South Gujarat Local Area Bank Bank of Baroda
2004 Global Trust Bank Oriental Bank of Commerce
2005 Bank of Punjab Centurion bank
2005 IDBI bank IDBI
2008 HDFC bank Centurion bank of punjab

24
 CHALLENGES
AND
OPPORTUNITIES
IN
THE
INDIAN
BANKING SECTOR

25
7.Challenges and opportunities in Indian banking sector
In a few years from now there would be greater presence of international players in
Indian financial system and some of the Indian banks would become global players in
the coming years. Also competition is not only on foreign turf but also in the domestic
field. The new mantra for Indian banks is to go global in search of new markets,
customers and profits. But to do so the Indian banking industry will have to meet
certain challenges. Some of them are –

I. FOREIGN BANKS – India is experiencing greater presence of foreign banks

over time. As a result number of issues will arise like how will smaller
national banks compete in India with them, and will they themselves need to
generate a larger international presence? Second, overlaps and potential
conflicts between home country regulators of foreign banks and host country
regulators: how will these be addressed and resolved in the years to come? It
has been seen in recent years that even relatively strong regulatory action
taken by regulators against such global banks has had negligible market or
reputational impact on them in terms of their stock price or similar metrics.
Thus, there is loss of regulatory effectiveness as a result of the presence of
such financial conglomerates. Hence there is inevitable tension between the
benefits that such global conglomerates bring and some regulatory and market
structure and competition issues that may arise.

II. GREATER CAPITAL MARKET OPENNESS - An important feature of

the Indian financial reform process has been the calibrated opening of the
capital account along with current account convertibility. It has to be seen that
the volatility of capital inflows does not result in unacceptable disruption in
exchange rate determination with inevitable real sector consequences, and in
domestic monetary conditions. The vulnerability of financial intermediaries
can be addressed through prudential regulations and their supervision; risk
management of non-financial entities. This will require market development,
III. Enhancement of regulatory capacity in these areas, as well as human resource
development in both financial intermediaries and non-financial entities.

26
IV. TECHNOLOGY IS THE KEY – IT is central to banking. Foreign banks
and the new private sector banks have embraced technology right from their
inception and continue to do so even now. Although public sector banks have
crossed the 70%level of computerization, the direction is to achieve 100%.
Networking in banks has also been receiving focused attention in recent
times. Most recently the trend observed in the banking industry is the sharing
of ATMs by banks. This is one area where perhaps India needs to do
significant ‘catching up’. It is wise for Indian banks to exploit this globally
state-of-art expertise, domestically available, to their fullest advantage.

V. CONSOLIDATION – We are slowly but surely moving from a regime of

"large number of small banks" to "small number of large banks." The new era
is one of consolidation around identified core competencies i.e., mergers and
acquisitions. Successful merger of HDFC Bank and Times Bank; Stanchart
and ANZ Grindlays; Centurion Bank and Bank of Punjab have demonstrated
this trend. Old private sector banks, many of which are not able to cushion
their NPA’s, expand their business and induct technology due to limited
capital base should be thinking seriously about mergers and acquisitions.

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

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

27
 operations and adopt enterprise wide IT architectures. Banks need to look
towards ensuring a risk culture, which penetrates throughout the organization.

VIII. COST MANAGEMENT – Cost containment is a key to sustainability of

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

IX. RECOVERY MANAGEMENT – This is a key to the stability of the

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

X. REACH AND INNOVATION - Higher sustained growth is contributing to

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

28
XI. RISK MANAGEMENT – Banking in modern economies is all about risk
management. The successful negotiation and implementation of Basel II
Accord is likely to lead to an even sharper focus on the risk measurement and
risk management at the institutional level. Sound risk management practices
would be an important pillar for staying ahead of the competition. Banks can,
on their part, formulate ‘early warning indicators’ suited to their own
requirements, business profile and risk appetite in order to better monitor and
manage risks.
XII. GOVERNANCE – The quality of corporate governance in the banks
becomes critical as competition intensifies, banks strive to retain their client
base, and regulators move out of controls and micro-regulation. The objective
should be to continuously strive for excellence. Improvement in policy-
framework, regulatory regime, market perceptions, and indeed, popular
sentiments relating to governance in banks need to be on the top of the agenda
– to serve our society’s needs and realities while being in harmony with the
global perspective.

29
FUTURE SCENARIO
The future outlook of the Indian banking industry is that a lot of action is set to be
seen with respect to M & A’s, with consolidation as a key to competitiveness being
the driving force. Both the private sector banks and public sector banks in India are
seeking to acquire foreign banks. As an example, the State Bank of India, the largest
bank of the country has major overseas acquisition plans in its bid to make itself one
of the top three
Banks in Asia by 2008, and among the top 20 globally over next few years. Some of
the PSU banks are even planning to merge with their peers to consolidate their
capacities. In the coming years we would also see strong cooperative banks merging
with each other and weak cooperative banks merging with stronger ones.

While there would be many benefits of consolidation like size and thereby economies
of scale, greater geographical penetration, enhanced market image and brand name,
increased bargaining power, and other synergies; there are also likely to be risks
involved in consolidation like problems associated with size, human relations
problems, dissimilarity in structure, systems and the procedures of the two
organizations, problem of valuation etc which would need to be tackled before such
activity can give enhanced
value to the industry.

30
REGULATIONS
REGARDING
MERGERS
AND
ACQUISITION
OF
BANK

31
8.BANK MERGER/AMALGAMATION UNDER
VARIOUS ACTS
The relevant provisions regarding merger, amalgamation and acquisition of banks
under various acts are discussed in brief as under:
Mergers- banking Regulation act 1949
Amalgamations of banking companies under B R Act fall under categories are
voluntary amalgamation and compulsory amalgamation.
Section 44A Voluntary Amalgamation of Banking Companies.
Section 44A of the Banking Regulation act 1949 provides for the procedure to be
followed in case of voluntary mergers of banking companies. Under these provisions
a banking company may be amalgamated with another banking company by approval
of shareholders of each banking company by resolution passed by majority of two
third in value of shareholders of each of the said companies. The bank to obtain
Reserve Bank’s sanction for the approval of the scheme of amalgamation. However,
as per the observations of JPC the role of RBI is limited. The reserve bank generally
encourages amalgamation when it is satisfied that the scheme is in the interest of
depositors of the amalgamating banks.
A careful reading of the provisions of section 44A on banking regulation act 1949
shows that the high court is not given the powers to grant its approval to the schemes
of merger of banking companies and Reserve bank is given such powers. Further,
reserve bank is empowered to determine the Markey value of shares of minority
shareholders who have voted against the scheme of amalgamation. Since nationalized
banks are not Baking Companies and SBI is governed by a separate statue, the
provisions of section 44A on voluntary amalgamation are not applicable in the case of
amalgamation of two public sector banks or for the merger of a nationalized bank/SBI
with a banking company or vice versa. These mergers have to be attempted in terms
of the provisions in the respective statute under which they are constituted. Moreover,
the section does not envisage approval of RBI for the merger of any other financial
entity such as NBFC with a banking company voluntarily.
Therefore a baking company can be amalgamated with another banking company
only under section 44A of the BR act.

32
Sector 45- Compulsory Amalgamation of banks
Under section 45(4) of the banking regulation act, reserve bank may prepare a scheme
of amalgamation of a banking company with other institution (the transferee bank)
under sub- section (15) of section 45. Banking institution means any banking
company and includes SBI and subsidiary banks or a corresponding new bank. A
compulsory amalgamation is a pressed into action where the financial position of the
bank has become week and urgent measures are required to be taken to safeguard the
depositor’s interest. Section 45 of the Banking regulation Act, 1949 provides for a
bank to be reconstructed or amalgamated compulsorily’ i.e. without the consent of its
members or creditors, with any other banking institutions as defined in sub
section(15) thereof. Action under there provision of this section is taken by reserve
bank in consultation with the central government in the case of banks, which are
weak, unsound or improperly managed. Under the provisions, RBI can apply to the
central government for suspension of business by a banking company and prepare a
scheme of reconstitution or amalgamation in order to safeguard the interests of the
depositors.
Under compulsory amalgamation, reserve bank has the power to amalgamate a
banking company with any other banking company, nationalized bank, SBI and
subsidiary of SBI. Whereas under voluntary amalgamation, a banking company can
be amalgamated with banking company can be amalgamated with another banking
company only. Meaning thereby, a banking company can not be merged with a
nationalized bank or any other financial entity.
Companies Act
Section 394 of the companies act, 1956 is the main section that deals with the
reconstruction and amalgamation of the companies. Under section 44A of the banking
Regulation Act, 1949 two banking companies can be amalgamated voluntarily. In
case of an amalgamated of any company such as a non banking finance company with
a banking company, the merger would be covered under the provisions of section 394
of the companies act and such schemes can be approved by the high courts and such
cases do not require specific approval of the RBI. Under section 396 of the act, central
government may amalgamate two or more companies in public interest.
State Bank of India Act, 1955
Section 35 of the State Bank of India Act, 1955 confers power on SBI to enter into
negotiation for acquiring business including assets and liabilities of any banking

33
institution with the sanction of the central government and if so directed by the
government in consultation with the RBI. The terms and conditions of acquisition by
central board of the SBI and the concerned banking institution and the reserve bank of
India is required to be submitted to the central government for its sanction. The
central government is empowered to sanction any scheme of acquisition and such
schemes of acquisition become effective from the date specified in order of sanction.
As per sub-section (13) of section 38 of the SBI act, banking institution is defined as
under “banking institution” includes any individual or any association of individuals
(whether incorporated or not or whether a department of government or a separate
institution), carrying on the business of banking.
SBI may, therefore, acquire business of any other banking institution. Any individual
or any association of individuals carrying on banking business. The scope provided
for acquisition under the SBI act is very wide which includes any individual or any
association of individuals carrying on banking business. That means the individual or
body of individuals carrying on banking business. That means the individual or body
of individuals carrying on banking business may also include urban cooperative banks
on NBFC. However it may be observed that there is no specific mention of a
corresponding new bank or a banking company in the definition of banking institution
under section 38(13) of the SBI act.
It is not clear whether under the provisions of section 35, SBI can acquire a
corresponding new bank or a RRB or its own subsidiary for that matter. Such a power
mat have to be presumed by interpreting the definition of banking institution in widest
possible terms to include any person doing business of banking. It can also be argued
that if State Bank of India is given a power to acquire the business of any individual
doing banking business it should be permissible to acquire any corporate doing
banking business subject to compliance with law which is applicable to such
corporate. But in our view, it is not advisable to rely on such interpretations in the
matter of acquisition of business of banking being conducted by any company or
other corporate. Any such acquisition affects right to property and rights of many
other stakeholders in the organization to be acquired. The powers for acquisition are
therefore required to be very clearly and specifically provided by statue so that any
possibility of challenge to the action of acquisition by any stakeholder are minimized
and such stakeholders are aware of their rights by virtue of clear statutory provisions.

34
Nationalised banks may be amalgamated with any other nationalized bank or with
another banking institution. i.e. banking company or SBI or a subsidiary. A
nationalized bank cannot be amalgamated with NBFC.
Under the provisions of section 9 it is permissible for the central government to merge
a corresponding new bank with a banking company or vice versa. If a corresponding
new bank becomes a transferor bank and is merged with a banking company being the
transferee bank, a question arises as to the applicability of the provisions of the
companies act in respect to the merger. The provisions of sec. 9 do not specifically
exclude the applicability of the companies act to any scheme of amalgamation of a
company. Further section 394(4) (b) of the companies act provides that a transferee
company does not include any company other than company within the meaning of
companies act. But a transferor company includes anybody corporate whether the
company is within the meaning of companies act or not. The effect of this provision is
that provision contained in the companies act relating to amalgamation and mergers
apply in cases where any corporation is to be merged with a company. Therefore if
under section 9(2)(c) of nationalization act a corresponding new bank is to merged
with a banking company( transferee company), it will be necessary to comply with the
provisions of the companies act. It will be necessary that shareholder of the transferee
banking company ¾ the in value present and voting should approve the scheme of
amalgamation. Section 44A of the Banking Regulation Act which empowers RBI to
approve amalgamation of any two banking companies requires approval of
shareholders of each company 2/3rd in value. But since section44A does not apply if a
Banking company is to be merged with a corresponding new bank, approval of 3/4th in
value of shareholders will apply to such merger in compliance with the companies act.

Acquisition of co-operative banks with Other Entities

Co-operative banks are under the regulation and supervision of reserve bank of India
under the provision of banking regulation act 1949(as applicable to cooperative
banks). However constitution, composition and administration of the cooperative
societies are under supervision of registrar of co-operative societies of respective
states (in case of Maharashtra State, cooperative societies are governed by the
positions of Maharashtra co operative societies act, 1961)
Amalgamation of cooperative banks

35
Under section 18A of the Maharashtra State cooperative societies act 1961(MCS Act
) registrar of cooperatives societies is empowered to amalgamate two or more
cooperative banks in public interest or in order to secure the proper management of
one or more cooperative banks. On amalgamation, a new entity comes into being.
Under sector 110A of the MCS act without the sanction of requisition of reserve bank
of India no scheme of amalgamation or reconstruction of banks is permitted.
Therefore a cooperative bank can be amalgamated with any other entity.

Acquisition OF MULTISTATE COOPERATIVE BANKS WITH OTHER

ENTITIES
Voluntary Amalgamation
Section 17 of multi state cooperative society’s act 2002 provides for voluntary
amalgamation by the members of two or more multistage cooperative societies and
forming a new multi state cooperative society. It also provides for transfer of its assets
and liabilities in whole or in part to any other multi state cooperative society or any
cooperative society being a society under the state legislature. Voluntary
amalgamation of multi state cooperative societies will come in force when all the
members and the creditors give their assent. The resolution has been approved by the
central registrar.
Compulsory Amalgamation
Under section 18 of multi state cooperative societies act 2002 central registrar with
the previous approval of the reserve bank, in writing during the period of moratorium
made under section 45(2) of BR act (AACS) may prepare a scheme for amalgamation
of multi state cooperative bank with other multi state cooperative bank and with a
cooperative bank is permissible.
Amalgamation of Regional Rural Banks with other Entities
Under section 23A of regional rural banks act 1976 central government after
consultation with The National Banks (NABARD) the concerned state government
and sponsored banks in public interest an amalgamate two or ore regional rural banks
by notification in official gazette. Therefore, regional rural banks can be amalgamated
with regional rural banks only.
Amalgamation of Financial Institution with other entities

36
Public financial institution is defined under section 4A of the companies’ act 1956.
Section 4A of the said act specific the public financial institution. Is governed by the
provisions of respective acts of the institution
Acquisition of non-Banking financial Companies (NBFC’s) with
other entities
NBFCs are basically companies registered under companies’ act 1956. Therefore,
provisions of companies act in respect of amalgamation of companies are
applicable to NBFCs.
Voluntary Acquisition
Section 394 of the companies’ act 1956 provides for voluntary amalgamation of a
company with any two or more companies with the permission of tribunal. Voluntary
amalgamation under section 44A of banking regulation act is available for merger of
two” banking companies”. In the case of an amalgamation of any other company such
as a non banking finance company with a banking company, the merger would be
covered under the provisions of section 394 of the companies act such cases do not
require specific approval of the RBI.
Compulsory Acquisition
Under section 396 of the companies’ act 1956, central government in public interest
can amalgamate 2 or more companies. Therefore, NBFCs can be amalgamated with
NBFCs only.

37
 MERGER OF
HDFC BANK AND CENTURIAN
BANK OF
PUNJAB
A CASE STUDY

38
9.MERGERS OF HDFC BANK AND CENTURIAN BANK
OF PUNJAB
HDFC BANK
The Housing Development Finance Corporation Limited (HDFC) was amongst the
first to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set
up a bank in the private sector, as part of the RBI's liberalisation of the Indian
Banking Industry in 1994. The bank was incorporated in August 1994 in the name of
'HDFC Bank Limited', with its registered office in Mumbai, India. HDFC Bank
commenced operations as a Scheduled Commercial Bank in January 1995. The
following year, it started its operations as a Scheduled Commercial Bank. Today, the
bank boasts of as many as 1412 branches and over 3275 ATMs across India.
Amalgamations
In 2002, HDFC Bank witnessed its merger with Times Bank Limited (a private sector
bank promoted by Bennett, Coleman & Co. / Times Group). With this, HDFC and
Times became the first two private banks in the New Generation Private Sector Banks
to have gone through a merger

About Centurion Bank of Punjab

Centurion bank of Punjab is a new generation private bank offering a wide spectrum
of retail, SME and corporate banking products and services. It has been among the
earliest banks to offer a technology enabled customer interface that provides easy
access and superior customer service.
Centurion Bank of Punjab has a nationwide reach through its network of 241 branches
and 389 ATMs.The bank aims to serve all the banking and financial needs of its
customers through multiple delivery channels, each of which is supported by state of
the art technology architecture.
Centurion Bank of Punjab was formed by the merger of Centurion Bank and Bank of
Punjab, both of which had strong retail franchises in their respective markets.
Centurion Bank had a well managed and growing retail assets business, including
leadership positions in two wheeler loans and commercial vehicles loans and a strong
capital base. The shares of the bank are listed on the major stock exchanges in India
and also on the Luxembourg Stock exchange

39
MERGER POSITION
HDFC Bank Board on 25th February 2008 approved the acquisition of Centurion
Bank of Punjab (CBoP) for Rs 9,510 crore in one of the largest merger in the financial
sector in India. CBoP shareholders will get one share of HDFC Bank for every 29
shares held by them.
HDFC Bank and Centurion Bank of Punjab have agreed to the biggest merger in
Indian banking history, valued at about $2.4 billion. It is likely the beginning of a
wave of M&A deals in the financial services industry, as India prepares to ease
restrictions on bank ownership in 2009.

This will be HDFC Bank’s second acquisition after Times Bank. HDFC Bank will
jump to the 7th position among commercial banks from 10th after the merger.
However, the merged entity would become second largest private sector bank.

The merger will strengthen HDFC Bank's distribution network in the northern and the
southern regions. CBoP has close to 170 branches in the north and around 140
branches in the south. CBoP has a concentrated presence in the in the Indian states of
Punjab and Kerala. The combined entity will have a network of 1148 branches.
HDFC will also acquire a strong SME (small and medium enterprises) portfolio from
CBoP. There is not much of overlapping of HDFC Bank and CBoP customers.

The entire process of the merger had taken about four months for completion. The
merged entity will be known as HDFC Bank. Rana Talwar's Sabre Capital would hold
less than 1 per cent stake in the merged entity from 3.48 in CBoP, while Bank
Muscat's holding will decline to less than 4 per cent from over 14 per cent in CBoP.
HDFC shareholding falls to will fall from 23.28 per cent to around 19 per cent in the
merged entity.
Rana Talwar, chairman of Centurion Bank of Punjab, says, “I believe that the merger
with HDFC Bank will create a world-class bank in quality and scale and will set the
stage to compete with banks both locally as well as on a global level.”

According to HDFC Bank Managing Director and Chief Executive Officer Aditya
Puri, Integration will be smooth as there is no overlap. In an interview, he mentioned
that at 40% growth rate there will be no lay-offs. The integration of the second rung
officials should be smooth as there is hardly any overlap.

40
The boards of the two banks had meet on February 28 to consider the draft scheme of
amalgamation, which will be subject to regulatory approvals. HDFC Bank will
consider making a preferential offer to its parent Housing Development Finance Corp
Ltd (HDFC). The move would allow HDFC to maintain the same level of
shareholding in the bank.

HIGHLIGHTS OF THE MERGER- HDFC AND

CENTURION BANK OF PUNJAB

1) HDFC bank is merged with Centurion Bank of punjab

2) New entity is named as “HDFC bank itself”.

3) The merger will strengthen HDFC Bank's distribution network in the northern

and the southern regions.

4) HDFC Bank Board on 25th February 2008 approved the acquisition of

Centurion Bank of Punjab (CBoP) for Rs 9,510 crore

41
MERGER OF
IDBI
AND
IDBI BANK
A CASE STUDY

42
10.Merger of IDBI and IDBI bank

IDBI BANK

The Industrial Development Bank of India Limited commonly known by its

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

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

43
Merger position

On April 2, 2005, the merger of IDBI Bank Ltd. (IDBI Bank), the banking subsidiary
of Industrial Development Bank of India (IDBI) with its parent company (IDBI held
57% stake in IDBI Bank) was announced. However, the merger was to be effective
retrospectively from October 1, 2004. The swap ratio was established at 1:1.42 , that
is, IDBI issued 100 equity shares for every 142 equity shares held by the shareholders
in IDBI Bank. The merged entity was to be called IDBI Ltd...

IDBI, one of India's leading Development Financial Institutions (DFI), .merged with
IDBI bank, its banking subsidiary, in a move aimed at consolidating businesses across
the value chain and realizing economies of scale.

M Damodaran is IDBI chairman he confirm that the merger would benefit both IDBI
and IDBI Bank. “The rationale of the merger is extremely compelling because the
bank needs capital to grow and gets to use a name that has great brand value. They
can start operations as a full-fledged bank without incurring expenditure on setting up
branches, inducting technology, or bringing in new people,” Damodaran said.

A new entity, IDBI Ltd, will become the holding company with two strategic business
units — IDBI, which will function as a development finance company, and IDBI
Bank, which will be the retail arm. IDBI Home Finance, which was acquired from the
Tatas, would also be merged into IDBI.

MERGER
44
 OF
BANK OF PUNJAB
AND
CENTURION BANK
A CASE STUDY

11.MERGERS OF CENTURIAN BANK

AND BANK OF PUNJAB
45
BANK OF PUNJAB
a) It was incorporated on may27, 1994 under the companies act, 1956.
b) The registered office of the bank was situated at SCO 46-47, sector 9-D,
Madhya Marg, Chandigarh- 160017.
c) It is banking company under the provisions of regulation act, 1949.
d) The objects of bank are banking business as set out in its memorandum
and articles of association.
e) The bank is a new private sector bank in operating for more than 10 years,
with a national network of 136 branches( including extension counters)
having a significant presence in the most of the major banking sectors of
the country. The transferor bank offers a host of banking products catering
to various classes of customers ranging from small and medium enterprises
to large cooperates.
f) The bank is listed on the stock exchange, Mumbai, the national stock
exchange of India limited and the Ludhiana stock exchange.

CENTURION BANK
a) It was incorporated on june30, 1994 under the companies act, 1956.
b) The registered office of the Bank was situated at Durga Niwas, Mahatma
Gandhi Road, Panaji, 403001, Goa.
c) It is a banking company under the provisions of banking regulation act, 1949.
d) The objectives of transferee bank are banking business as set out in its
memorandum and articles of association.
e) The bank is a profitable and well capitalized new private sector bank having a
national presence of over 99 branches( including extension counter)
f) It has a significant presence in the retail segment offering a range of products
across various categories.
g) The bank is listed on the stock exchange, Mumbai and the National stock
exchange of India limited, Mangalore stock exchange of India limited,
Mangalore stock exchange and its global depository receipts are listed on the
Luxembourg stock exchange.
The amalgamation of the Transferor bank (BOP) with the transferee bank (centurion)
is effected subject to the terms and conditions embodied in the scheme of merger

46
pursuant to section 44A of banking regulation act, 1949( hereinafter “the act”). In
terms of section 44A of the said act, a resolution is required to be passed by a
majority in number and two-third in the value of the members of the Transferor and
the Transferee Bank, present rather in person or by proxy at the respective meetings.
As both the companies are banking companies, the amalgamation is regulated by the
provisions of the act and would require the sanction of the reserve bank of India under
the said act. The provisions of section 391-394 of the companies’ act, 1956 relating to
amalgamation are not applicable to the amalgamation of the transferor bank with the
transferee bank and therefore the scheme is not be required to be sanctioned by a high
court under the provisions of the companies act, 1956.

About Centurion Bank of Punjab

Centurion bank of Punjab is a new generation private bank offering a wide spectrum
of retail, SME and corporate banking products and services. It has been among the
earliest banks to offer a technology enabled customer interface that provides easy
access and superior customer service.
Centurion Bank of Punjab has a nationwide reach through its network of 241 branches
and 389 ATMs.The bank aims to serve all the banking and financial needs of its
customers through multiple delivery channels, each of which is supported by state of
the art technology architecture.
Centurion Bank of Punjab was formed by the merger of Centurion Bank and Bank of
Punjab, both of which had strong retail franchises in their respective markets.
Centurion Bank had a well managed and growing retail assets business, including
leadership positions in two wheeler loans and commercial vehicles loans and a strong
capital base. Bank of Punjab brings with it a strong retail deposit customer base in
North India in addition to a sizable SME and agriculture portfolio.
The shares of the bank are listed on the major stock exchanges in India and also on
the Luxembourg Stock exchange. Among centurion bank of Punjab’s greatest
strengths is the fact that it is a professionally managed bank with a globally
experienced and capable management team. The day to day operations of the bank are
looked by Mr. Shilnder bhandari, managing Director & CEO, assisted by a senior
management team, under the overall supervision and control of the Board of directors.
Mr. Rana Talwar is the chairman of the board. Some of our major shareholders are

47
saber capital, Bank Muscat and Keppel Corporation, Singapore are represented on the
Board.
The book value of the bank would also go up to around Rs 300 crores. The higher
book value should help the combine entity to mobilize funds at lower rate.
The combined bank will be full service commercial bank with a strong presence in the
Retail, SME and Agricultural segments.

Share holding pattern of Centurion Bank of Punjab

After the merger shareholding of Bank of Punjab (BOP) promotes will shrink to 5%.
The family of Darshanjit Singh which promoted Bop currently holds 15.62% while
associates hold another 11.40% the promoter stake will now fall down to around 5%
ad for associate that would be 7-8%.
The major shareholder of the centurion bank, bank of Muscat’s stake will fall to
20.5% from 25.91%, Keppel’s stake will be at 9% from current level of 11.33% and
Rana Talwar’s capital will have a stake of 4.4% as against 5.61%.
The promoters of BoP and major stakeholders of centurion bank will have a combine
stake of around 42% in the merged entity- centurion bank of Punjab.
The costs of deposit of Bop were lower than Centurion; While Centurion had a net
interest margin of around 5.8%. The net interest margin of the merged entity will be at
4.8%.
The combined entity will have adequate capital of 16.1% to provide for its growth
plans. Centurion banks capital adequacy on a standalone basis stood at 23.1% while
Bank of Punjab figure stood at 9.21%.
The performance net worth of combined entity as at march 2005 stood at Rs. 696
crores with centurion’s net worth at Rs. 511 crore and Bank of Punjab’s net worth at
Rs. 181 crore, and combine entity( centurion Bank of Punjab) will have total asset
9395 crore, deposit 7837 crore and operating profit 43 crore.
The merged entity will have a paid up share capital of Rs. 130 cr and a net worth of
Rs. 696 cr.
The merged entity will have 235 Branches and extension counters, 382 ATMs and 2.2
million customers.

MERGER POSITION

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Private Banks is taking to the consolidation route in a big way. Bank of Punjab (BOP)
and Centurion Banks (CB) have been merged to form Centurion Bank of Punjab
(CBP). Private Banks is taking to the consolidation route in a big way. Bank of
Punjab (BOP) and Centurion Banks (CB) have been merged to form Centurion Bank
of Punjab (CBP).
elements of both, he added. Centurion Bank has a presence in south and west and
Bank of Punjab has a strong presence in the north. “The merger will give us scale
geographical reach and entry into new products segments” said the official.
Bank of Punjab is strong in small and medium enterprises (ME) business in the north,
with good retail assets and an agriculture portfolio as well as deposit franchisee
Centurion Bank has a capital, ability to generate retail assets, risk management
systems and good treasury division. Market players except the swap ratio 2:1, said
sources. For very two stocks of Centurion bank, a shareholder will
RBI approved merger of Centurion Bank and Bank of Punjab effective from October
1, 2005. The merger is at swap ratio 9:4 and the combined bank is called Centurion
bank of Punjab. The merger of the banks will have a presence of 240 branches and
extension counters, 386 ATMs, about 2.2 million customers. As on March 2005, the
net worth of the combined entity is Rs 696 crore and the capital adequacy ratio is
16.1% in the private sector, nearly 30 banks are operating. The top five control nearly
65% of the assets. Most of these private sector banks are profitable and have adequate
capital and have the technology edge. Due to intensifying competition, access to low
cost deposits is critical for growth. Therefore, size and geographical reach becomes
the key for smaller banks. The choice before smaller private banks is to merge and
form bigger and viable entities or merge into a big private sector bank. The proposed
merger of bank of Punjab and Centurion Bank is sure to encourage other private
sector banks to go for the M&A road for consolidation.
The merger of Centurion bank and Bank of Punjab, both of which had strong retail
franchises in their respective markets, formed centurion bank of Punjab. Centurion
bank had a well managed and growing retail assets business, including leadership
positions in 2 wheeler loans and commercial vehicle loans, and a strong capital base.
Bank of Punjab brings with it a strong retail deposit customer base in North India in
addition to a sizeable SME and agricultural portfolio. The shares of the bank are listed
on the major stock exchanges in India and also on the Luxembourg stock exchange.
Bank of Punjab has net non- performing assets of around Rs 110.45 crore as on March
2004, which will be carried to Centurion Banks books after merger. Both the brands
are strong in their respective geographers and business hence the merged entity will

49
have the elements of both, he added. Centurion Bank has a presence in south and west
and Bank of Punjab has a strong presence in the north. “The merger will give us scale
geographical reach and entry into new products segments” said the official.
Bank of Punjab is strong in small and medium enterprises (ME) business in the north,
with good retail assets and an agriculture portfolio as well as deposit franchisee
Centurion Bank has a capital, ability to generate retail assets, risk management
systems and good treasury division. Market players except the swap ratio 2:1, said
sources. For very two stocks of Centurion bank, a shareholder will get one stock of
Bank of Punjab. The merged entity will have a asset base of Rs.10, 000 crore, said a
senior bank official. The depository base of entity will be around Rs. 7165.67 crore
and advances will be around Rs. 3909.87 crore. The organization structure for the
combined bank is in place and the grades and incentives across the organization have
largely been realigned. Centurion bank of Punjab said in a statement. ” The operations
of the bank have been integrated across the entire network.”
“A decision has been taken on a common system for the banks and a phased
migration has been planned to ensure minimum disruption of customer service and
operation across the bank”’ Centurion Bank of Punjab Said.

HIGHLIGHTS OF THE MERGER- CENTURION BANK

AND BANK OF PUNJAB

1. Bank of Punjab is merged into Centurion Bank.

2. New entity is named as “Centurion Bank of Punjab”.

3. Centurion Bank’s chairman Rana Talwar has taken over as the chairman of the

merged entity.

4. Centurion bank’s MD Shailendra Bhandari is the MD of the merged entity.

5. KPMG India pvt ltd and NM Raiji & Co are the independent values and

ambit corporate finance was the sole investment banker to the transaction.

6. Swap ratio has been fixed at 4:9 that is for every four shares of Rs 10 of

Bank of Punjab, its shareholders would receive 9 shares of Centurion Bank.

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 7. There has been no cash transaction in the course of the merger; it has been

settled through the swap of shares.

8. There is no downsizing via the voluntary retirement scheme.

In the opinion of the Board of Directors of Bank of Punjab the following are amongst
others, the benefits that are expected to accrue to the members from the proposed
scheme:

(a) Financial Capability: The amalgamation is expected to enable the merge

Entity to have a stronger financial and business profile, which could be synergized
to both for resources and mobilization and asset generation.
(b) Branch Network: As a result of the amalgamation, the branch network of the
merged entity would increase to 235 branches, providing increased geographic
coverage, particular in the southern India and giving it a larger national foot print
as well as convenience to its customers.
(c) Retail Customer Base: The amalgamation would enable the merged entity to
increase its retail customer base. This larger customer base will provide the
merged entity enhanced opportunities for offering banking and financial services
and products and facilitate cross selling of products and services.
(d) Use of Technology: Post amalgamation, the merged entity would be able to
provide through its branches, ATMs, phone and the internet banking and financial
services and products to a larger customer base, with expected savings in costs
and operating expenses.
(e) Larger Size: the larger asset base of the merged entity will put the merged
entity amongst the bigger players in the private sector banking space.
(f) International Listing: The members will become shareholders of an
internationally listed entity which has the advantage of greater access to raising
capital.

CONCLUSION:

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Growth is always essential for the existence of a business concern. A business is
bound to die if it does not try to expand its activities. The expansion of a business may
be in the form of enlargement of its activities or acquisition of ownership. Internal
expansion results gradual increase in the activities of the concern. External expansion
refers to “business combination” where two or more concerns combine and expand
their business activities.
Looking at the global trend of consolidation and convergence , it is need of the hour
to restructure the banking structure in India through mergers and acquisition in order
to make them more capitalized, automated and technology oriented so as to provide
environment more competitive and customer friendly .Few more impediment for
paving the way towards mergers and acquisition on commercial consideration and
mutual arrangement, such as government shareholding of public sector banks, legal
provisions related to banking and industrial matter should immediately be resolved if
at all the place of merger and acquisition has to be accelerated in Indian banking
sector .

52
Bibliography

Books
1. Finance and profits:- N.J.Yasaswy
2. Financial management and policy:-James Horne
3. Financial management:-P.K Jain
4. Financial management:- , Ravi.M.Kishore
5. Financial management:-Subir Kumar Banarjee
6. Merger and acquisition :- C.H.Rajeshwar

Paper
Economics times

Web
www.google.com
www.deccanherald.com

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