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MERGER AND ACQUISITION OF PUBLI C SECTOR BANKs

CONTENTS

CHAPTER NUMBER NAME

1 INTRODUTION TO MERGER &

ACQUISITION

2 GOLDEN RULES FOR MERGERS

3 MOTIVES FOR MERGERS AND

ACQUISITION

4 TYPES OF COMBINATION OF MERGER

OR AMALGAMATION

5 TYPES OF MERGERS AND ACQUISITION

6 WHY MEREGER IN BANKING

INDUSTRY?

7 PROCESS OF MERGER AND

ACQUISITION

8 CRITICAL FACTORS OF MERGER AND

ACQUISITION

9 RECOMMENDATIOSNS OF MERGER

AND ACQUISITION

10 RBI GUIDELINES FOR MERGER AND

ACQUISITION

11 INTRODUCTION TO PUNJAB NATIONAL

BANK

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12 INTRODUCTION TO NEDUNGADI BANK

13 OBJECTIVES

14 URGE TO MERGE

15 FOUNDATION FOR MERGERS IN INDIA

16 RBI GUIDELINES FOR M&A IN PNB &NB

BANK

17 PROCESS FOLLOWED BY PNB &NBBANK FOR M&A

18 NEED & REVIEW PROCESS FOR M & A

19 CORPORATION KEY TO M & A PUBLIC

SECTOR BANK

20 TECHNOLOGY A KEY TO MERGER

21 KEY MESSAGES

22 IMPACT OF MERGERS AND

AQUISITIONS

INTRODUCTION OF MERGERS &

ACQUISITIONS

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Merger i s the combina t ion o f two o r more companies

in to a single company ei ther through absorpt ion or

consol idat ion . In absorpt ion , one company absorbs another

company whereas in consol idat ion two or more companies to

f o r m a n ew co m p an y . Leg a l l y , m e r g e r s a r e a l so k n o wn a s

amalgamat ions .

Merg e r i s a l so d e fi n ed a s am al g am a ti o n. Merg e r i s t h e

f us io n o f t wo or m or e e xis ti ng c omp an ie s. Al l a ss et s,

l iab i l i t ies and the s tock of one company s tand t ransfer red to

Transferee Company in considera t ion of payment in the form

of :

i ) Equi ty shares in the t ransferee company,

i i ) Debentures in the transferee company,

i i i ) Cash, or

iv) A mix of the above modes.

AMALGAMATION

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Amalgamat ion can be def ined as the , two

c om pa ni es l os e t he ir i nd iv id ua l i de nt it y a nd a n ew

company comes into exis tence , i s known as

Amalgamat ion .

The word MERGER may be taken as an abbrevia t ion ,

which means:

M Mixing

E Ent it ies

R Resources for

G Growth

E Enrichment and

R Renovat ion

T he factors favor ing growth, enr ichment and

r eno v at i on sh ou l d b e t aken i n to d u e co ns i de r at i on

before s tepping in to the process of M&As so that the

abbrevia t ion t ru ly comes out to be f ru i t fu l .

Only then Indian banking indust ry wi l l be able to s tand

r ight for th the g lobal banking compet i t ion hurricane.

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ACQUISITION:

An acqu i s i t ion can be def ined as the two o r more

c om pa ni es m ay r em ai n i nd ep en de nt , s ep ar at e l eg al

ent i ty, but there may be change in control of

companies .

An acquis i t ion , a lso known as a takeover , i s the buying of

one company ( the target ) by another . An acquis i t ion may

be f r iendly or host i le Acquis i t ion usual ly refers to a

purchase of a smaller f i rm by a larger one. Sometimes,

however , a smal ler f i rm wi l l acqui re management cont ro l of

a larger or longer es tabl i shed banking company and keep i t s

name for the combined ent i ty .

M er ge rs a nd A cq ui si ti on s i n t he i nd us tr ia l a nd s er vi ce s

sector have brought new l i fe to the s ty le of doing business in

todays wor ld . Global iza t ion , technological changes , market

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deregula t ion and l ibera l iza t ion have dr iven the M & A wave

across the wor ld . Whi le Ind ian manufac tu re r s have adop ted

M&A as thei r business s t ra tegy for growth and have

ach ieved wor ld s t andards , the Ind ian bank ing indus t ry has

not been moving in tune wi th Indian businesses and has been

s l o wer t o r e sp o n d t o t h e h u g e g r o wt h o p p o r t u n i t i e s i n t h e

market .

I n t od ay s c on ne ct ed w or ld , b an ks w il l h av e t o b ecompet i t ive in order to face the chal lenges and leverage the

oppor tun i t i es . The u l t imate goa l s o f a bank a re to inc rease

i t s marke t power , become more d iver s i f i ed , r educe the r i sk

of enter ing a new business and redef ine the compet i t ive edge

through acqui r ing dif ferent s t reams of businesses .

C on so li da ti on w il l p ro vi de b an ks w it h n ew c ap ab il it ie s,

t echno log ies and p roduc t s , he lp to overcome en t ry bar ri e r s ,

ensure immediate entry into new markets and lower

opera t ing costs through consol idat ion of resources .

M &A i n I nd ia n b an ki ng i s n ot n ew a nd d at es b ac k f ro m

Imperia l Bank of India , which was formed by the

am a l g am a t i o n o f t h e t h r ee p r e s i d en cy b an k s t h e Ban k o f

B en ga l, t he B an k o f B om ba y a nd t he B an k o f M ad ra s i n

1921 . Few merger s have t aken p lace the rea f t e r main ly in

t he p ub li c s ec to r - p ri ma ri ly t o p ro te ct t he i nt er es ts o f

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deposi to r s o f weak p r iva te banks . The merger s were no t fo r

economic considera t ions and usual ly d is t ress mergers .

In the banking sector , impor tant mergers and acquis i t ions in

I nd ia i n r ec en t y ea rs i nc lu de t he m er ge r b et we en I DB I

( Indust r ia l Development bank of India) and i t s own

subs id ia ry IDBI Bank . The dea l was wor th $ 174 .6 mi l l ion

( Rs . 7 .6 b il li on i n I nd ia n c ur re nc y) . A no th er i mp or ta nt

m erg er w as t ha t b et we en C en tur io n B an k a nd B ank of

P un ja b. W or th $ 82 .1 m il li on ( Rs . 3 .6 b il li on i n I nd ia n

cur rency) , th i s merger l ed to the c rea t ion o f the Cen tu r ion

Ban k o f P u n j ab w i t h 2 3 5 b r an ch es i n d i f f e r en t r eg i o n s o f

I nd ia . M er ge rs a nd a cq ui si ti on s a re e ss en ti al ly m ea nt t o

a tt ai n g re at er m ar ke t s ha re ; a cq ui re a dd it io na l b ra nd s;

r ea li ze i mp ro ve d i nf ra st ru ct ur e; c re at e n ew s yn er gi es

c ap it al ize on e ff ien ci es an d e con omi es of sc al e o r t o

g lobal i ze in the shor te r span o f t ime. I t a l so he lps bus iness

c ap it al iz e o n o rg an iz at io na l s yn er gi es a nd t he re by r ea p

signi f icant f inancia l advantages . Banking the wor ld over has

b ee n e xp er ie nc in g l ar ge s ca le m er ge rs a nd a cq ui si ti on s,

e it he r b et we en t he b an ks a nd f in an ci al i ns ti tu ti on s o r b et we en b an ks a nd I T c om pa ni es . A ll t he se m er ge rs a nd

acqu is i t ions a re d r iven by mot iva t ions l ike e f f i c i ency ga ins

th rough synerg ies , economies o f sca le and scope o f the r i sk

m i ti g at i on t hr o ug h d i ve r si f ic a ti o n, co st e f fec ti v en ess e t c.

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S om et im es , n on -e co no mi c f ac to rs l ik e p re st ig e, m ar ke t

p ow er o r m ar ke t d om in an ce h av e a ls o i nf lu en ce d M &A

act ivi ty . Trade l ibe ra t ion, the concep t s o f in terna t iona l and

Globa l bank ing , pe rvas ive e f fec t s o f t echno logy have a l so

inf luenced bank mergers and acquis i t ions .

Merger i s a t oo l u se d b y c om pa ni es f or t he p ur po se o f

expand ing the i r opera t ions o f t e n a i m i n g a t a n i n c r e a s e o f

thei r long term prof i tabi l i ty . There are 15 d i f ferent types of a ct io ns t ha t a c om pa ny c an t ak e w he n d ec id in g t o m ov e

forward us ing M&A. Usua l ly merger s occur in a consensua l

(occurr ing by mutual consent ) se t t ing where execut ives f rom

t h e t a rg e t co m p an y h e lp t h ose f r om t h e p u r chaser i n a due

d i l igence process to ensure that the deal i s benef ic ia l to both

p ar ti es . A cq ui si ti on s c an a ls o h ap pe n t hr ou gh a host i le

takeover by purchasing the major i ty of outs tanding shares of

a c o m p a n y i n t h e o p e n market a ga in st t he w is he s o f t he

target ' s board .

SOME GOLDEN RULES OF MERGER

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One of the fundamental mot ives that ent ice mergers i s

impuls ive g rowth . Organ izat ions tha t in tend to expand need

t o ch oo se b e tween o r gan ic g r owt h o r a cqu i si t io n s d r iv en

growth. S ince the former i s very s low, s teady and re la t ively

consumes more t ime the l a t t e r i s p re fe r r ed by f i rms , which

are dynamic and ready to capi ta l ize on oppor tuni t ies .

MANA GERI AL EFFI CIEN CY :

Some acquis i t ions are mot ivated by the bel ief that the

a cq ui re r s m an ag em en t c an b et te r m an ag e t he t ar ge t s

r e so u r ce s . I n su ch ca se s , t h e v a l u e o f t h e t a r g e t f i r m wi l l

r i se under the management cont ro l of the acqui rer .

ST RA TE GY :

The s t r a t eg ic r easons cou ld d i f f e r on a case -to -case

basis and a deal to the o ther . At t imes, i f the two f i rms have

c om pl im en ta ry b us in es s i nt er es ts , m er ge rs m ay r es ul t i n

consol idat ing thei r posi t ion in the market .

MARKET ENTRY :

Firms that are cash r ich use acquis i t ion as a s t ra tegyto en te r in to new marke t o r new te r r i to ry on which

they can bui ld thei r p la t form

WHY THERE IS THE NECESSITY OF

PUBLIC SECTOR BANK MERGER?

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Th e F i n an ce Mi n i s t e r , P . Ch i d am b ar am , m ad e i t c l e a r t h a t

the Uni ted Progress ive Al l iance Government would go ahead

w it h i ts p ol ic y d ec is io n o f e nco ura gi ng mer ger s a nd

acquis i t ions for consol idat ion of publ ic sector banks (PSBs)

a s t he y we re n ece ss ar y for c om pe ti ti on in t he g lob al

f inancia l markets .

Inaugura t ing a b ranch o f the Pun jab Nat iona l Bank here , heu rg ed t he P SB s ta ff t o b ea r i n m in d t ha t " co mp et it io n,

convergence and consol idat ion wi l l be the key dr ivers of the

b an k i n g i n d u s t r y i n t h e f u t u r e . " An d i n t h i s , t h e b an k i n g

s ta f f and the management shou ld t ake the l ead in sp read ing

the message a t every l eve l as a mat t e r o f r espons ib i l i ty , he

said . There are unions, associa t ions in each bank. Each one

has a responsib i l i ty to communicate about the new dr ivers

c om pe ti ti on , c on ve rg en ce a nd c on so li da ti on o f t he

banking indust ry among the employees and s taf f . "

TYPES OF COMBINATION OF MERGERS &

AMALGAMATION; TAKEOVER &

ACQUISITIONS

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T he re i s a gre at d eal o f c on fus io n an d d isa gre eme nt

r eg ar di ng t he p re ci se m ea ni ng o f t er ms r el at in g t o t he

bus iness combina t ion , v iz . merger , acqu i s i tion , t akeover,

amalgamat ion and consol idat ion . Somet imes, these terms are

u se d i n b ro ad s en se , e nc om pa ss in g m os t d im en si on s o f

business combinat ion , whi le somet imes they are def ined in a

res t r i c t ed l ega l sense . We sha l l de f ine these t e rms keep ing

in mind the re levant legal f ramework in India .

MERGER OR AMALGAMATION :

A m er ge r i s s ai d t o o cc ur w he n t wo o r m or e c om pa ni es

c om bi ne i nt o o ne c om pa ny . O ne o r m or e c om pa ni es m ay

merge wi th an exis t ing company or they may merge to form a

new company . Laws in Ind ia use the t e rm amalgamat ion fo r

merger . For example , sec t ion 2 (1A) o f the income tax ac t ,

1 9 6 1 d e f i n e s am a l g am a t i o n a s t h e m er g e r o f o n e o r m o r e

co m p an i e s w i t h an o t h e r co m p an y o r t h e m er g e r o f t wo o r

more companies (ca l led amalgamating company or

c om pa ni es ) t o f or m a n ew c om pa ny ( ca ll ed a ma lg am at ed

company) in such a way that a l l asse ts and l iabi l i t ies of the

A ma lg am at in g c om pa ny o r c om pa ni es b ec om e a ss et s a nd

l i ab i li t ie s o f t h e am al g am a ted co mp any an d sh ar eho l de r s

ho ld ing no t l e ss than n ine- t en ths in va lue o f the shares in

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the amalgamat ing company or companies become

shareholders of the amalgamated company.

Merger or amalgamation may take two forms:

Merger through absorpt ion

Merger through consol idat ion

ACQUISITION:

A fundamenta l charac te r i s t i c o f merger ( e i the r

t h ro u gh ab so r pt i on o r co nso li d at i on ) i s t h at t h e acqu i ri n g

company (exis t ing or new) takes over the ownership of o ther

c om pa ni es a nd c om bi ne s t he ir o pe ra ti on s w it h i ts o wn

o pe ra ti on s. A n a cq ui si ti on m ay b e d ef in ed a s a n a ct of

acqu i r ing e f fec t ive con t ro l by one company over asse t s o r

management of another company wi thout any combinat ion of

companies . Thus , in an acqu i s i t ion two o r more companies

may remain independent , separa te legal ent i ty , but there may

be change in control of companies.

TAKEOVER

A t ak eo v e r m ay a l so b e d e f i n ed a s o b t a i n i n g o f

c on tr ol o ve r m an ag em en t o f a c om pa ny b y a no th er . A n

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acqu i si t io n o r t ake - ov e r d o es n o t n eces sa r il y en ta i l f u ll ,

l eg a l co n t r o l . A co m p an y can h av e e f f ec t i v e co n t r o l o v e r

ano ther company by ho ld ing minor i ty ownership . Under the

m o no p ol i es an d Rest r ic t iv e Tr ad e P r ac t ic e s Ac t, t akeo ve r

means acqu i s i t ion o f no t l e ss than 25 percen t o f the vo t ing

p ow er i n a c om pa ny . T he i nv es tm en t i n s ha re s o f o th er

companies in excess of 10 per cent of the subscr ibed capi ta l

can resul t in to thei r takeover .

TYPES OF MERGER AND ACQUISITION

Merger and acqu i s i tion depends upon the purpose fo r which

t he t ar ge t c om pa ny i s a cq ui re d. A c om pa ny w il l s ee k t o

acq u i r e t h e o t h e r co m p an y o n l y wh en i t h a s a r r i v ed a t i t s

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own in ternal s t rength . I t has to a im at a su i table combinat ion

where i t cou ld have oppor tun i t i es to supp lement i t s funds ;

secure add it ional f inanc ia l f ac il i t i es , e l imina te compet i t ion

and s t rengthen i t s market posi t ion . Based on the reason why

f i rm combine, mergers can be d iv ided in to three ca tegor ies :

( i) HORIZONTAL MERGERS:

A hor izonta l merger involves a merger between

t wo f ir ms o pe ra ti ng a nd c om pe ti ng i n t he s am e k in d o f

b u s i n e s s ac t i v i t y . Th e m a i n p u r p o se o f su ch m er g e r s i s t o

ob ta in economies o f sca le o f p roduc t ion . The economies o f

Types of Merger & Acquisition

Horizontal Mergers Vertical Mergers Conglomerate Mergers

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s ca le i s o bt ai ne d b y t he e li mi na ti on o f d up li ca ti on o f

f aci l it i es an d o p er a ti o ns an d b r oad en i ng t h e p r od u ct l i ne ,

r educ t ion in inves tment in work ing cap i t a l , e l imina t ion o f

co mp e ti t io n i n a p r od u ct , r edu c ti o n i n ad ve rt i si n g co st s ,

i nc re as e i n m ar ke t s ha re , e xe rc is e o f b et te r c on tr ol o n

market , e tc .

Hor izon ta l merger s r esu l t in decrease in the

n um be r o f f ir ms i n a n i nd us tr y a nd h en ce s uc h t yp e o f m erg e rs m ake i t e a si e r f or t h e i n du s tr y m emb ers t o j o in t

together for monopoly prof i t s . Hor izonta l mergers a lso have

a p ot en ti al t o c re at e m on op ol y p ow er o n t he p ar t o f t he

c om bi ne d f ir m e na bl in g i t t o e ng ag e i n a nt ic om pe ti ti ve

p r ac t ic e s. Hence , i n m any co un t ri e s r e st r ic t iv e b u si n es s

p r ac t ic e s l egi s la t io n o r , i n o t he r wo rd s , co mp e ti t io n l aw,

l oo ks a t e nf or ci ng s tr ic t r eg ul at io ns o n t he m er gi ng o r

in tegra t ion of compet i tors . Hor izonta l mergers of even smal l

enterpr ises may create condi t ions t r igger ing concent ra t ion of

economic power and o l igopoly .

(II) VERTICAL MERGERS:

A ver t ica l merger involves merger between f i rms

t h at a r e i n d i ff e ren t s t ag es o f p r od u ct i on o r v a lu e ch ai n .

They are combinat ion of companies that usual ly have buyer -

s el le r r el at io ns hi ps . A c om pa ny i nv ol ve d i n a v er ti ca l

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m er ge r u su al ly s ee ks t o m er ge w it h a no th er c om pa ny o r

would l ike to takeover another company mainly to expand i t s

opera t ions by backward or forward integra t ion . The

acqu ir ing company th rough merger o f ano ther un i t a t t empts

t o r ed u ce i n v en t o r i e s o f r aw m a t e r i a l an d f i n i sh ed g o o d s ,

i mp le me nt s i ts p ro du ct io n p la ns a s p er o bj ec ti ve s a nd

economizes on working capi ta l investments . In o ther words ,

i n v er ti ca l c om bi na ti on , t he m er gi ng c om pa ny w ou ld b eei ther a suppl ier or buyer using i t s product as an

in termediary mater ia l for f inal product ion .

Fi rms in tegra te ver t ica l ly between var ious s tages

d u e r easo ns l i ke t e ch n ol o gi cal e con o mi es, e l im i na t io n o f

t ra ns ac ti on c os ts , i mp ro ve d p la nn in g f or i nv en to ry a nd

product ion , reconci l ia t ion of d ivergent in teres ts of par t ies to

a t ransact ion , e tc .

(III) CONGLOMERATE MERGERS:

Conglomerate mergers involve merger between

f i r m s en g ag ed i n u n r e l a t ed t yp es o f b u s i n e s s ac t i v i t y . Th e

basic purpose of such combinat ion i s u t i l iza t ion of f inancia l

resources . Such type of merger enhances the overa l l s tabi l i ty

of the acquirer company and creates balance in the

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companys to ta l por t fo l io of d iverse products and product ion

p rocesses and the reby r educes the r i sk o f ins tab i l i ty in the

f i rms cash f low.

Co ng l om era t e m erg ers ca n b e d i st i ng u is hed t hree

types:

Product extension mergers

Geographic market extension mergers and

Pure conglomerate mergers .

a) Product extens ion mergers are merger between f i rms in

r el at ed b us in es s a ct iv it ie s a nd m at a ls o b e c on ce nt ri c

m er ge rs . T he se m er ge rs b ro ad en t he p ro du ct l in e o f t he

f i rms.

b) Geographic market extens ion merger s invo lve a merger

b e tween t wo f i rm s o p er a ti n g i n t wo d if f er ent g eog r ap h ic

ideas .

c) Pure conglomerate mergers involve merger between two

f i rms wi th unre la ted bus iness ac t iv i t i e s . They do no t come

under product extension or market extension mergers .

With in the broader ca tegory of conglomerate mergers ,

two types of conglomerate f i rms can be d is t inguished.

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FINANCIAL CONGLOMERATES:

Financia l Conglomerates provide a f low of funds to

each seg m en t o f t h e i r o p e r a t i o n s , ex e r c i se co n t r o l an d a r e

the f inanc ia l r i sk t aker s . They under take s t r a t eg ic p lann ing

but do not par t ic ipate in opera t ing decis ions .

MANAGERIAL CONGLOMERATES:

M an ag er ia l C on gl om er at es t ra ns mi t t he a tt ri bu te s o f

f inanc ia l cong lomera tes s t i l l fu r the r . They no t on ly assume

f inanc ia l r espons ib i l i ty and con t ro l , bu t a l so p lay a ro le in

o p er a ti n g d eci s io n s, an d p ro v id e s t af f ex pe r ti s e an d s t af f

se rv ices to the opera t ing en t i t i e s . By p rov id ing manager ia l

guidance and interact ions on decis ions , manageria l

conglomerates increase the potent ia l for improving

performance.

CONSOLIDATION :

A conso l ida t ion i s a combina t ion o f two o r more

B an ki ng c om pa ni es i nt o a n ew c om pa ny . I n t hi s f or m o f

merger , a l l companies are legal ly d issolved and a new ent i ty

i s c re at ed . In a c ons ol id at io n, t he a cqu ir ed co mp any

t r an s f e r s i t s a s se t s , l i ab i l i t i e s an d sh a r e s t o t h e acq u i r i n g

company for cash or exchange of shares .

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MERITS OF CONSOLIDATION

Revenue enhancement: C on so li da ti on c an l ea d t o

i nc re as ed r ev en ue s t hr ou gh i ts e ff ec ts o n f ir m s iz e,

f ir m s co pe ( th ro ug h e it he r p ro du ct o r g eo gr ap hi c

d i ve r si f ic a ti o n) , o r m ark e t p o wer . Resea rch su gg est s

t ha t m erg ers ma y pro vi de s ome o ppo rtu ni tie s f or

r even ue en han cem en t e i th e r f r om e f fi c ien cy g a in s o r

f rom increased market power . However , many indicated

tha t r evenue enhancement due to inc reased s i ze was a

modera te ly impor tan t f ac to r mot iva t ing conso l idat ion .

T he m er ge r o f I CI CI L td . A nd I CI CI B an k c le ar ly

demons t r a tes in the Ind ian con tex t tha t conso l ida t ion

can lead to increased revenue.

Effic iencies in operations : M&As can lead to

reduct ion in costs for a var ie ty of reasons. The exis t ing

r es ea rc h l it er at ur e, w hi ch f oc us es o n c os t s av in gs

at t r ibutable to economies of scale , economies of scope,

o r more e f f i c i en t a l loca t ion o f r esources , f a i l s to f ind

much ev idence sugges t ing tha t cos t sav ings cons t i tu te

an impor tant outcome of M&As. However many pointed

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t o e co n o m i es o f s ca l e a s a v e r y i m p o r t an t m o t i v a t i n g

factor for consol idat ions .

Ab il it y t o s pre ad fi xed co st s o ver a l arg er

customer base: New t ech n ol o gi cal d eve l op m en t s

h ave en co u rag ed co nso li d at i on b ecau se o f t h ei r h i gh

f ixed cos t s and the need to sp read these cos t s ac ross a

l ar ge cu st om er ba se. A t t he s ame t ime , d ra mat ic

improvements in the speed and qual i ty of

communicat ions and informat ion processing have made

i t p o ss i bl e f or f i nan ci a l s e rv i ce p r ov i de r s t o o f fe r a

broader ar ray of products and services to large number

o f c l i en t s o v e r w i d e r g eo g r ap h i c a r ea s t h an h ad b een

feasib le in the past .

Diversi f ication of income from both products

and geographic area : The one area where

conso l ida t ion seems most l ike ly to r educe f i rm r i sk i s

t h e p o ten ti a l f o r d i ve r si f ic a ti o n g a in s , a l th o ug h ev en

here the possib i l i t ies are complex. Such gains are most

l ik el y t o a ri se d ue t o a ss et d iv er si fi ca ti on a cr os s

geographies; some gains may a lso der ive f rom

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geographic d ivers i f ica t ion on the l iabi l i t ies s ide of the

b a lan ce sh ee t . I n ad di t io n , d i ve r si f ic a ti o n g a in s m ay

resul t f rom consol idat ion across f inancia l products and

se rv i ce s . On t h e o t he r h and a f te r co nso li d at i on so me

fi rms shi f t towards r i sk ier asset por tfol ios and

consol idat ion may increase opera t ing r isks and

manager ial complex i ti es . For example , o rgan iza tiona l

d is ec on om ie s m ay o cc ur a s f in an ci al i ns ti tu ti on s become larger and more complex i f senior management

t eam s s t r ay f a r f r o m t h e i r a r ea s o f co r e co m p e t en cy .

More broadly there i s no guarantee that cost savings or

ef f ic iency gains wi l l be rea l ized .

Stabi l ization of asset qual i ty : S ma ll s iz ed b an ks

wi th weaker asse t s would f ind i t d i f fi cu l t to su rv ive in

the long run as they need to meet the addi t ional capi ta l

r equ i rements . The ex i t rou te fo r such banks wi l l be to

get absorbed by the banks wi th s t rong asse t qual i ty .

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DEMERITS OF CONSOLIDATION

Customer service : Merger of two Bankingcompanies may resu l t in d i lu t ion o f compet i t ion in

the market , adverse ly af fect ing customers in teres ts .

In banking indust ry the same may lead to monopoly

affect ing the customer services . The larger

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under tak ing , consequen t on merger , may exerc i se a

marke t power to the de t r imen t o f i t s cus tomers and

suppl iers .

Elimination of competition : In a

merger /amalgamat ion , an indiv idual under taking, be

i t an actual or potent ia l compet i tor , may get

e l iminated . Or , a large uni t may take in to i t s fo ld an

e ff ici en t a nd g ro win g m edi um or s mal l- siz ed

under taking.

Depositors interests: After the col lapse of a

major pr ivate sector bank, and i t s subsequent merger

in Ju ly 2004 wi th a publ ic sector bank, deposi tors of pr ivate bank heave a col lec t ive s igh of re l ief . : the i r

m on ey i s s af e. A ut ho ri ti es s ay t ha t i n t he p as t,

d epo s it o rs h ave n eve r l o st m o ney a f te r b ank r u ns

that led to mergers and amalgamat ions . I s the c la im

correct? Not rea l ly . However i t has been repor ted in

t he p as t t hat ma ny de pos it or s of t he e rs twh il e

Benares Sta te Bank Ltd. (BSBL) , which was

a ma lg am at ed w it h b an k o f B ar od a i n J un e 2 00 2,

have not got back a l l the i r money. People who have

deposi t s wor th more than rs .1 lakh have got back a t

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most 85 .15% . This ra ises two very important

q u es t io n s: j u st h o w sa fe a re t h e r s .1 5 93 0 00 c r or e

wor th of bank deposi t s ion India? And who is rea l ly

responsib le for ensur ing safe ty of bank deposi t s?

In mos t o f the cases , though merger s o f banks a re

objected towards safeguarding or protect ing the in teres t

o f t he d ep os it or s, o ne w ay o r o th er , i n m os t o f t he

case s , d epo s it o rs h ave su ff e red i n t h e am al g am a ti o np r ocess . Th e d epo s it o rs o f t h e BS BL were ad ve r se l y

af fected in the amalgamat ion .

These adverse fea tures may or may not be

outweighed by the posi t ive fea tures of mergers such as

economies o f sca le, s t ab il i ty th rough d ivers i f ica t ion ,

u t i l i za t ion o f id le funds , nur s ing a s i ck un i t o r be t t e r /

opt imal u t i l iza t ion of capaci ty .

WHY MERGERS IN BANKING INDUSTRY?

W e h av e e ar li er s ee n t ha t v al ue m ax im iz at io n i s t he k ey

rat ionale for M&A in banks. As I ment ioned ear l ier , th is can

be ach ieved th rough a r educ t ion in cos t o r an inc rease in

re ve nu e . L et u s s ee h ow c on so li da ti on c ou ld h el p t o

achieve these object ives:

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ACHIEVING COST REDUCTION:

a) Cost reduction through economy of Scale-

Co nso li d at i on h e lp s i n s cal i ng i n u p o p er a ti o ns , t h er e b y

reducing per uni t cost

b) Cost reduction through economy of Scope - Th i s i sach ieved th rough synergy involved in the ab i l ity to o f fer

mul t ip le products us ing the same inf ras t ructure .

Example: Banks can of fer insurance and investment products

us ing the i r b ranch ne twork and the reby ach ieve economy of

scope

c )Cost reduction through rat iona li zation o f man

power :The merged en t i ty wi l l be ab le to iden t i fy the r igh t

p er so ns t o m an c ri ti ca l f un ct io ns f ro m a l ar ge r p oo l o f

human resources .

d) Reduction in r isk. The merged en t i ty wi l l be ab le to

r ed uc e cr ed it r is k thr oug h sp rea di ng i t a cr os s wi der

geographies or product range.

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e) Cost reduct ion through possible reduct ion in tax

obl igat ions

f ) C he ap er s ou rc in g o f i np ut s w it h i nc re as ed b ar ga in in g

power with vendors and suppliers

g ) Abi l i ty to en te r new bus iness a reas wi th r educed in i t i a lcost as compared to a new set up .

Inc reasing Rev enu e :

a ) A b i g g e r e n t i t y w i l l b e a b l e t o s e r v e a l a r g e c u s t o m e r

bet ter . By of fer ing more services and taking b igger share in

t he b us in es s o f t he c us to me r t he b an k w il l b e ab le to

increase the revenue per customer

b) Product d ivers i f ica t ion wi l l fac i l i ta te one s top shopping

by the banks customers.

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c) A larger customer base wi l l genera te more revenue

d ) Gr ea t e r v i s i b i l i t y i n t h e m ar k e t p l ace w i l l en h an ce t h e

abi l i ty to a t t rac t new customers .

e ) A b ig ge r s iz e a nd s ha re i n t he m ar ke t w il l b oo st t he

b ank s ab il i ty t o r ai se pro du ct pr ic es w it ho ut l os in g

customersf ) Th e m er g ed en t i t y w i l l b e ab l e t o t ak e b i g g e r r i sk an d

reap i t s rewards .

PROCESS OF M&As

Gene r al l y, t h e m erg e r t r an sac t io n i n cl u des t h e f o ll o wi n g

steps:

Screening and invest igation of merger

proposal: When there i s an intent ion of

a cqu i si t io n o r m erg e r o f o t he r b u si n es s u n it , t h e

p r imary s t ep i s tha t o f sc reen ing and mot ive needs

t o b e j ud ge d a ga in st t hr ee s tr at eg ic c ri te ri a i .e .

b u si n es s f i t m anag em ent an d f i nan ci a l s t ren gt h .

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On ce t h e p r o p o sa l f i t i n t o t h e s t r a t eg i c m o t i v e o f

the acqui rer , then the proposed acqui rer wi l l co l lec t

a ll r el ev an t i nf or ma ti on r el at in g t o t he t ar ge t

co mp any ab ou t sh ar e p r ice m o vem en t s, e a rn i ng s ,

d iv idends, market share , management , shareholding

pa t t ern , gear ing , f inanc ia l pos i tion , benefi t s f rom

proposed acquis i t ion e tc . th is form of invest igat ion

wi l l b r ing ou t the s t r eng ths and the weaknesses o f both ones own company and the perspect ive merger

cand i da t e. Th e acqu i re r co mp any sh ou l d n o t o n ly

c on si de r t he b en ef it s t o b e o bt ai ne d b ut a ls o b e

care fu l abou t the a t t endant r i sks. I f the p roposa l i s

v iab le a f t e r th rough ana lys i s f rom a l l ang les , then

the mat ter wi l l be car r ied fur ther .

Negot ia t ion s tage : The negot ia t ion i s an

i mp or ta nt s ta ge i n w hi ch t he b ar ga in i s m ad e i n

order to secure the h ighes t p r i ce by the se l l e r and

t he a cq ui re r k ee n t o l im it t he p ri ce of t he b id .

Be fo r e t h e n ego t ia t io n s s t ar t , t h e s e ll e r n eed s t o

decide the minimum pr ice acceptable and the buyer

n eed s t o d ec i d e t h e m ax i m u m h e i s r e ad y t o p ay .

Af ter the considera t ion i s decided then the payment

t er ms a nd e xc ha ng e r at io o f s ha re s b et we en t he

companies wi l l be dec ided the exchange r a t io i s an

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i m po r tan t f act o r i n t h e p r ocess o f am al g am a ti o n.

Th i s has to be worked ou t by va lu ing the shares o f

the bo th , t r ansfe ro r and t r ansfe ree company as pe r

t he n or ms a nd m et ho ds o f v al ua ti on of s ha re s.

Approved valuer or a f i rm of Char tered Accountants

w i ll ev al u at e t h e sh ar e s o n t h e b a si s o f au di t ed

accounts as on the t ransfer date .

Approval of proposal by Board of Directors :D ec id in g u po n t he c on si de ra ti on o f t he d ea l a nd

te rms o f payment, then the p roposa l wi l l be pu t fo r

t he B oa rd o f D ir ec to r s a pp ro va l. T he R BI h as

st ipula ted that merger of banks should have the

consent of two- th i rd major i ty of the members on thei r

boards and not jus t those present a t the board meet ing

alone.

Approval of shareholders : Two- th i rd major i ty

of the shareholders of each bank should approve the

dra f t scheme of merger , a f t e r necessa ry c lea rances

by their board of director s.

Approval of RBI : Approvals f rom the RBI is must be fo re the merger as RBI i s the apex body in caseof banking sector .

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Approval of respective high court (s):

A pp ro va l o f r es pe ct iv e h ig h c ou rt o f s el le r a nd

acquirer , conf i rming the scheme of amalgamat ion i s

r equ i red . The cour t sha l l i s sue o rder s fo r wind ing

up of the amalgamating company wi thout

di ss olu ti on o n re ce ip t of t he r ep or ts f ro m th e

off ic ia l l iquidator and the Regional d i rec tor that the

af fa i r s of the amalgamat ing company have not been

conducted in a manner pre judic ia l to the in teres ts of

i t s members or to publ ic in teres t .

Approval of central government : Declara t ion

of the cent ra l government on the recommendat ion

made by the spec i f i ed Author i ty under sec t ion 72A

of the income tax act , i f appl icable .

Integration stage : Th e s t ru c tu r al an d cu lt u ra l

as pe ct s o f t he t wo o rga ni za ti on s, i f c are ful ly

in tegra ted in the new organ iza t ion wi l l l ead to the

successful merger and ensure that expected benef i t s

of merger are rea l ized .

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CRITICAL FACTORS FOR MERGERS ANDACQUISITIONS

WHY DO MERGERS FAIL?

1. Excessive premium

In a compet i t ive b idd ing s i tua t ion , a company may t end to

p ay m or e . Of ten h i gh est b i dd e r i s o n e wh o o v er e st i ma t es

value out of ignorance. Though he emerges as the winner , he

happens to be in a way the unfor tunate winner . This i s ca l led

winners curse hypothesis . When the acqui rer fa i l s to achieve

t h e syne r gi e s r equ i red co mp ensa ti n g t h e p r ice , t h e M& As

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fa i l s . More you pay for a company, the harder you wi l l have

to work to make i t wor thwhi le fo r your shareho lder s . When

t he pr ic e p ai d is to o m uc h, h ow w ell th e d ea l ma y be

executed , the deal may not create value .

2. Size Issues

A mismatch in the s ize between acqui rer and target has been

f oun d t o l ea d to po or a cq ui si ti on p erf or ma nce . Ma ny

acqu i s i t ions f a i l e i the r because o f ' acqu i s i t ion ind iges t ion '

th rough buying too b ig t a rge t s o r f a i l ed to g ive the smal le r

acquis i t ions the t ime and a t tent ion i t requi red .

3. Lack of researchAcquis i t ion requi res gather ing a lo t of data and informat ion

and analyzing i t . I t requi res extensive research . A care less ly

c ar ri ed o ut r es ea rch a bou t t he ac qui si ti on c aus es th e

dest ruct ion of acqui rer ' s weal th .

4. Diversif ication

Very few f i rms have the ab i l i ty to success fu l ly manage the

d i ve r si f ied b u si n es ses . Un re l at ed d i ve rs i fi c at i on h a s b een

assoc ia ted wi th lower f inanc ia l pe r fo rmance , lower cap i t a l

product iv i ty and a h igher degree of var iance in per formance

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f or a v ar ie ty o f r ea so ns i nc lu di ng a l ac k o f i nd us tr y o r

geograph ic knowledge , a l ack o f focus as we l l a s pe rce ived

inabi l i ty to gain meaningful synergies . Unrela ted

acqu i s i t ions , which may appear to be very p romis ing , may

turn out to be b ig d isappointment in rea l i ty .

5. Previous Acquisition Experience

While p rev ious acqu i s i t ion exper ience i s no t necessa r i ly a

requi rement for future acquis i t ion success , many

unsucces sful acquirers usual ly have l i t t le previous

acqu i si t io n ex pe r ien ce . P r ev i ou s ex pe r ien ce w i ll h e lp t h e

acquirers to learn f rom the previous acquis i t ion mistakes and

he lp them to make success fu l acqu i s i t ions in fu tu re . I t may

a ls o he lp th em b y t ak ing a dvi ce i n or de r t o ma xi mi ze

chances o f acqu i s i t ion success . Those se r i a l acqu i re r s , who

possess the in house sk i l l s necessary to promote acquis i t ion

success as wel l t ra ined and competent implementa t ion team,

are more l ikely to make successful acquis i t ions .

6. Poor Cultural Fits

Cu l t u r a l f i t b e t ween an acq u i r e r an d a t a r g e t i s o n e o f t h e

m o s t n eg l ec t ed a r ea s o f an a l y s i s p r i o r t o t h e c l o s i n g o f a

d ea l. H ow eve r, cu lt ur al du e di li gen ce i s e ve ry bi t a s

i mp or ta nt a s c ar ef ul f in an ci al a na ly si s. W it ho ut i t, t he

chances are great that M&As wi l l quickly amount to

m is un de rs ta nd in g, c on fu si on a nd c on fl ic t. C ul tu ra l d ue

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di l igence invo lve s t eps l ike de te rmin ing the impor tance o f

cu l ture , a ssess ing the cu l tu re o f bo th t a rge t and acqu i re r. I t

i s u se fu l t o k no w t he t ar ge t m an ag em en t b eh av io r w it h

respect to d imensions such as cent ra l ized versus

d ecen tr a li z ed d eci s io n m aki n g, sp eed i n d eci s io n m aki n g,

t ime hor izon for decis ions , level of team work, management

of conf l i c t , r i sk o r i en ta t ion , openness to change , e t c . I t i s

necessary to assess the cul tura l f i t be tween the acqui rer andta rge t based on cu l tu ra l p ro f i l e . Po ten t i a l sources o f c l ash

m u s t b e m an ag ed . I t i s n eces sa r y t o i d en t i f y t h e i m p ac t o f

cu l tu ra l gap , and deve lop and execu te s t r a t eg ies to use the

in fo rmat ion in the cu l tura l p ro f i l e to assess the impac t tha t

the d i f ferences have.

7. Poor Organization Fit

O rg an iz at io na l f it i s d es cr ib ed a s " th e m at ch b et we en

ad mi n is t ra t iv e p r ac t ic e s, cu lt u ra l p r ac t ic e s an d p e rso nn e l

charac te r i s t i c s o f the t a rge t and acqu i re r . I t i n f luences the

ease wi th which two o rgan izat ions can be in tegra ted dur ing

implementat ion . Mismatch of or ig inat ion f i t leads to fa i lure

of mergers .

8. Faulty evaluation

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At t imes acqui rers do not car ry out the deta i led d i l igence of

t h e t a r g e t co m p an y . Th ey m ak e a wr o n g a s se s sm en t o f t h e

b en e f i t s f r o m t h e acq u i s i t i o n an d l an d u p p ay i n g a h i g h e r

price.

9. Incomplete and Inadequate Due Dil igence

L a ck o f d ue d il ig en ce i s l ac k o f d et ai le d a na ly si s o f a ll

i m po r tan t f eat u re s l i ke f i nan ce , m anag em ent , c apab il i ty ,

physical asse ts as wel l as in tangible asse ts resul t s in fa i lure .

I SP AT S te el i s a c or po ra te a cq ui re r t ha t c on du ct s M &A

act iv i t ies af ter e laborate due d i l igence.

10. Merger between Equals

M er ge r b et we en t wo e qu al s m ay n ot w or k. T he D un lo p

P i re l li m e rg e r i n 1 9 64 , wh ich c r ea t ed t h e wor l d' s s eco n d

l ar ge st t ie r co mp any , e nd ed i n a n e xpe ns iv e d iv or ce .

Manufactur ing p lants can be in tegra ted easi ly , human beings

cannot . Merger of equals may a lso create ego c lash .

11. Over Leverage

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Cash acquis i t ions resul t s in the acqui rer assuming too much

debt . Future in teres t cost consumes too great a por t ion of the

acquired company 's earnings (Business India 2005) .

12. Incompatibil ity of Partners

Al li ance b e tween t wo s t ro n g co m p an i es i s a s a fe r b e t t h an

b et we en t wo we ak par tn er s. F req uen tl y m an y s tr on g

c om pa ni es a ct ua ll y s ee k s ma ll p ar tn er s i n o rd er t o g ai n

co nt r ol wh il e weak co mp ani e s l o ok f o r s t ro n ge r Bank i ng

Company.

13. Lack of Proper Communicat ion

Lack o f p r op e r co mm u ni cat i on a f te r t h e an no u ncemen t o f

M& As wi l l c r ea t e l o t o f u n ce r t a i n t i e s . Ap a r t f r o m g e t t i n gdown to business quickly companies have to necessar i ly ta lk

t o e mpl oye es a nd c ons ta nt l y. R eg ard le ss of ho w w el l

execu t ives communica te dur ing a merger o r an acqu i s i t ion ,

uncer ta in ty wi l l never be comple te ly e l imina ted . Fa i lu re to

m anag e co mm u ni cat i on r e su l ts i n i n accur a te p e rcept i on s ,

los t t rus t in management , morale and product iv i ty problems,

safe ty problems, poor customer service , and defect ion of key

people and customers . I t may lead to the loss of the suppor t

of key s takeholders a t a t ime when that suppor t i s needed the

most .

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14. Fai lure of Leadership Role

S ome of t he rol e le ad er shi p s ho uld t ak e s er io us ly a re

model ing , quant i fying s t ra tegic benef i t s and bui ld ing a case

f or M &A a ct iv it y a nd a rt ic ul at in g a nd e st ab li sh in g h ig h

s tandard fo r va lue c rea t ion . Walk ing the t a lk a l so becomes

very impor tant dur ing M&As.

Research Shows That In Most Cases Mergers Fail To Deliver Against

Their Expectations, Whatever The Rationale

38

Poor deal

Unrealistic synergies

Price too high

Competitor reactions

70

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60-70

RECOMMENDATIONS FOR A SUCCESSFUL

MERGER

P eo p l e i n v o l v ed i n an M& A d ea l en d u p w i t h t o n s o f d ea l

fees and bonuses . They a lso f requent ly f ind thei r name in the

newspaper s , pa r t i cu la r ly i f the merg ing companies a re b ig

en ou g h. To b eco m e a su ccess f ul M& A b an k er yo u sh o u ld

h ave qu al i ti es l ike c om mu ni ca ti on s ki l ls , a p le as in g

per sona l i ty , a head fo r r e l a t ionsh ips , the knowledge o f l aw

o f t he l an d ( es pe ci al ly t he l eg is la ti ons p er t ai ni ng t o

39

Good deal poorly implemented

Poor integration management

Failure to address cultural

differences

Customer losses

Poor communication

Poor tracking

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takeovers , share t ransfers and buybacks) and sound

analyt ica l sk i l l s .

COMMUNICATION SKILL

A s a b a n k e r y o u m i g h t h a v e t o d o t o u g h n e g o t i a t i o n s i n

o rd er t o b ri ng a bo ut t he d ea l. T hi s r eq ui re s g oo d o ra l

communicat ion abi l i t ies and a c lear th inking. In the process

of nego t i a t ions , numerous o f fe r s and coun te r -o f fe r s would

b e m ad e. D ee p a na ly ti ca l s ki ll s a nd q ui ck t hi nk in g a re

n eed ed t o i m med ia t el y u n de r st and t h e i m pl i ca t io n s o f a l l

s uc h t er ms . S tr on g m en ta l a bi li ti es a nd p er so na li ty i s

necessa ry fo r qu ick dec i s ion-making . The work a l so en ta i l s

good deal of d ip lomacy and pat ience so that the deal doesn t

fa i l due to the imper t inence of the in termediary .

TEAM WORK

On e sh o u l d a l so b e a g o o d t eam wo r k e r . Ap a r t f r o m

the members o f your own organ izat ion , you a l so need

to work wi th the execut ives/management of the c l ient .

Whi le working out the deta i l s of the deal , one a lso hasthe o ther companys o f f i c i a ls on the t eam. Moreover ,

the banker has to work wi th s imi la r banker s o f o ther

investment banks who might be r epresen ting bo th the

companies .

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FINANCIAL SKILLS

Sound f inancia l sk i l l s are requi red as many aspects

o f the merger a re numer ica l in na tu re . You might even

h av e t o i d en t i f y t h e syn e r g i e s i n v o l v ed i n t h e m er g e r

( t h e t h eo r y o f syn e r g y says 2 + 2 = 5 , n o t j u s t f o u r ) .

Lega l k n owl ed g e, d o cu m en t at i on sk il l s an d t axa t io n

knowledge a re h igh ly welcome. For o r ig ina t ing dea l s ,

s t ra tegic th inking and creat iv i ty in ident i fying business

synergies are essent ia l . Addi t ional ly , a l l o ther abi l i t ies

l ike work ing fo r long hour s , f ly ing f rom an a i rpor t to

a no th er ( so me ti me s i nt er na ti on al ly ), s us ta in in g o n

pathet ic desktop lunches e tc . , would a lso be helpful .

EFFECTIVE PLANNING

Su cc es s i n m er ge rs a nd a cq ui si ti on s c or re la te s

di rect ly wi th the level of p lanning that goes in to them.

Careful and ear ly p lanning has been shown to inf luence

the success of a merger . P lans need to include rea l i s t ic

goa l s and r easonab le t imef rames , and shou ld cover a l l

t h e k ey a spec ts o f an o rg ani zat i on i n cl u di n g p eop l e,

s ys te ms a nd or ga ni za ti on al p roc es se s. E ff ec ti ve

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p l ann ing l eads the way to a smoother implementa t ion

p r o cess an d m ax i m i zes t h e ch an ces o f su cces s o f t h e

merging organizat ion .

RETAINING KEY PEOPLE

Th e r e ten ti o n o f a t a len ted wor k fo rce , wh ich i s

o ft en a m aj or r ea so n b eh in d t he d ec is io n t o m er ge ,

s ho ul d t ak e p ri or it y d ur in g t he m er ge r p ro ce ss , a nd

m anag em ent n eed s t o ad op t m easu re s t o i m pr o ve t h e

re tent ion ra te of the best people in the merging

companies .

MANAGING CULTURAL DIFFERENCES

Co m p an i e s t h a t a r e m er g i n g n eed t o b e awar e o f

c ul tu ra l d if fe re nc es b et we en t he m a nd n ee d t o f in d

pract ica l ways of reconci l ing those d i f ferences . With an

i nc re as in g t re nd t ow ar ds g lo ba l m er ge rs , l an gu ag e

bar r i e r s a l so need to be t aken in to cons idera t ion , and

companies should consider providing language t ra in ing

t o t h e i r em p l o yees i f t h i s c an b en e f i t t h e i n t eg r a t i o n

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p r ocess . S u ccess f ul l y i n teg ra t in g t h e t wo cu lt ur e s o f

t he m er gi ng c om pa ni es i s a n e ss en ti al s te p t ow ar ds

ach iev ing a success fu l pa r tner sh ip. In o rder to do th i s ,

cu l tu ra l awareness and sens i t iv i ty a re c ruc ia l to avo id

p o ten ti a l c l ash es an d m i su n de r st and i ng s b e tween t h e

people in the two companies

RBI GUIDELINES ON MERGERS &

ACQUISITIONS OF BANKS

With a v iew to fac i l i ta t ing consol idat ion and emergence

o f s tr on g e nt it ie s a nd p ro vi di ng a n

avenue for non d isrupt ive exi t of

weak / un v iab le en ti t ie s i n t h e b ank i ng

s ec to r, i t h as b ee n d ec id ed t o f ra me

guidel ines to encourage

merger /amalgamat ion in the sector .

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Al t h o u g h t h e Ban k i n g Reg u l a t i o n Ac t , 1 9 4 9 d o es n o t

e mp ow er R es er ve B an k t o f or mu la te a s ch em e w it h

regard to merger and amalgamat ion o f banks, the S ta te

Governments have incorporated in thei r respect ive Acts

a p rov i s ion fo r ob ta in ing p r io r sanc t ion in wr i t ing , o f

RBI fo r an o rder , in te r - a l i a , fo r sanc t ion ing a scheme

of amalgamat ion or reconst ruct ion .

The request for merger can emanate from banksr eg is te re d u nd er t he s am e S ta te A ct o r f ro m b an ks

regis tered under the Mul t i S ta te Co-operat ive Socie t ies

Ac t ( Cen t r a l Ac t ) f o r t ak eo v e r o f a b an k / s r eg i s t e r ed

u nd er S ta te A ct . W hi le t he S ta te A ct s s pe ci fi ca ll y

provide for merger of co-operat ive socie t ies regis tered

under them, the pos i t ion wi th r egard to t ake over o f a

co-opera t ive bank r eg i s t e red under the S ta te Ac t by a

co-operat ive bank regis tered under the CENTRAL.

Al though the re a re no spec i f i c p rov i s ions in the S ta te

Acts or the Centra l Act for the merger of a co-operat ive

socie ty under the Sta te Acts wi th that under the Centra l

Act , i t i s fel t tha t , i f al l concerned including

admin i s t r a to r s o f the concerned Act s a re ag reeab le to

order merger/ amalgamation, RBI may consider

proposals on mer i t s leaving the quest ion of compl iance

wi th re levant s ta tu tes to the adminis t ra tors of the Acts .

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In other words , Reserve Bank wi l l confine i t s

e xa mi nat io n o nly t o f i nan ci al a spe ct s a nd t o th e

i n t e r e s t s o f d ep o s i t o r s a s we l l a s t h e s t ab i l i t y o f t h e

f inancia l system whi le consider ing such proposals .

V a l u a t e s t h e b a n k s o n t h e b a s i s o f i t s s h a r e c a p i t a l ,

m ar ke t c ap it al , a ss et s a nd l ia bi li ti es , i ts r ea ch a nd

ant ic ipated growth and sends i t s repor t to the respect ive

banks.Once the valuat ion i s accepted by the respect ive banks,

they send the proposal a long wi th a l l re levant

do cum ent s s uch a s Bo ard ap pro val , sh are hol de rs

approval , va luat ion repor t e tc to Reserve Bank of India

and o ther r egu la to ry bod ies such Secur i ty & exchange

board o f India ( SEBI ) for thei r approval .

DETAILED CASE STUDY OF PUNJAB

NATIONAL BANK & NEDUNGADI BANK

PUNJAB NATIONAL BANK

Introduction:

P un ja b N at io na l B an k ( PN B) w as e st ab li sh ed i n 1 89 5 a t

Lah o r e . P NB h as t h e d i s t i n c t i o n o f b e i n g t h e f i r s t I n d i an

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b an k t o h av e b ee n s ta rt ed s ol el y w it h I nd ia n c ap it al . I n

1969 , Pun jab Nat ional Bank was na t iona l i zed a long wi th 13

other banks

Punjab Nat iona l Bank se rves over 3 .5 c ro re cus tomers and

has the l a rges t b ranch ne twork in Ind ia - 4062 b ranches and

447 extension counters spread a l l over the country . Punjab

Nat iona l Bank has ach ieved many awards and d i s t inc t ions .

Major among them are :

R an ke d 2 1s t a mo ng st t op 5 00 c om pa ni es b y t he l ea di ng

f inancia l dai ly , Economic Times.

R an ke d a s 3 23 rd b ig ge st b an k i n t he w or ld b y B an ke rs

Almanac (January 2006) , London.

Earned 9 th p lace among Ind ia ' s Most Trus ted top 50 se rv ice

brands in Economic Times- A.C Nielson Survey.

R ank ed 36 8 a mo ng st th e t op 1 000 b ank s i n t he w or ld

according to "The Banker" London.

Golden Peacock Award for Excel lence in Corporate

Governance - 2005 by Inst i tu te of Directors .

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FICCI ' s Rura l Deve lopment Award fo r Exce l l ence in Rura l

Development - 2005.

Th e Co m p an y d ec i d ed t o ex p an d i t s c ap i t a l b a se & cam e

wi t h an I P O o f Rs 3 . 5 c r o r e sh a r e s a t an o f f e r p r i ce o f Rs

30 / - pe r share aggrega t ing Rs 105 c ro re in Ju ly 2000 . Th i s

increased the pa id up cap i t a l o f the Company to Rs 135 .01

crores and r educed the ho ld ing o f Pun jab Nat iona l Bank to

74.07%.

NEDUNGADI BANK

I t i s a Kerala-based bank paving the way for the Delhi -

based banks expans ion in the sou thern s t a t e . On Feb .

1. T he Pu nj ab N ati on al Ba nk t od ay t ook ov er t he

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N ed un ga di B an k L im it ed ( NB L) , t he o ld es t p ri va te

sector bank in Kerala , wi th a l l i t s 174 branches

wo rk i ng a s P NB b r an ches . An no u nc i ng t h e t akeo ve r ,

the PNB Chairman, S . S . Kohl i , assured fu l l pro tect ion

to the customers and deposi tors

EAST AND West may not readi ly meet , but a merger of

nor th and south i s on the cards . Kerala-basedNedungad i Bank has announced tha t i t i s r eady fo r the

merger wi th Punjab Nat ional Bank.

Th e B oa rd h as a pp ro ve d t he m er ge r o f N ed un ga di

Bank wi th PNB. We have to do the due d i l igence now,

PNB chairman S S Kohl i .

The merger move fo l lows the Reserve Bank no t i fy ing

the d ra f t scheme of amalgamat ion o f Nedungad i Bank

wi th PNB on November 14 .

T he RB I ha d pl ac ed t he Ker ala -ba se d b ank u nde r

m or at or iu m u p t o F eb ru ar y 1 , 2 00 3, a nd r es tr ic te d

deposi tors f rom wi thdrawing more than Rs 5 ,000 in th is

period.

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The probable object ives behind mergers and

acquis i t ions may be h ighl ighted as g iven below:

1 ) T o o v e r c o m e t h e p r o b l e m o f s l o w p a c e o f g r o w t h a n d profi tabi l i ty due to widening of banking industry.

2 ) T o r e v i v e a l o s s - m a k i n g b a n k a s i t m a y n o t b e a b l e t o

res tore the Non Per forming Assets (NPAs) on i t s own.

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3 ) To u t i l i z e t h e u n d e r u t i l i z ed m ar k e t p o wer i n t e r m s o f

r eg io na l o r g eo gr ap hi ca l c ov er ag e i n t he b es t p os si bl e

manner .

4 ) T o a ch ie ve s om e s or t o f d iv er si fi ca ti on .( th is h ap pe ns

when the merger i s ver t ica l or conglomerate)

5 ) T o l im it c om pe ti ti on a nd p re ve nt o ve rc ro wd in g a nd

mushrooming up of many banks.

6 ) T o g a i n e c o n o m i e s o f s c a l e a n d i n c r e a s e i n i n c o m e i n proport ion to less amount of investment .

7) To u t i l ize under u t i l ized resources . The resources include

human, physical or manager ia l sk i l l s .

8) To carve a n iche for onesel f as a s t ra tegic empire bui lder

amass vast economic power

URGE TO MERGE

In the r ecen t pas t the re has been a lo t o f t a lk abou t Ind ian

Banks l ack ing in sca le and s i ze . Th i s i s the on ly bank f rom

India to make i t to the l i s t of Top 100 banks, g lobal ly . Most

o f the PSBs a re e i the r look ing to p ick up a smal le r bank o r

wai t ing to be p icked up by a larger bank.

T h e c e n t r a l g o v e r n m e n t a l s o s e e m s t o b e g a m e a b o u t t h e

issue and i s seen to be encouraging PSBs to merge or acqui re

o th er b an ks . G lo ba l e vi de nc e s ee ms t o s ug ge st t ha t e ve n

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though the re i s g rea t en thus iasm when companies merge o r

g e t a cqu i red , m a jo r it y o f t h e m erg e rs / acq ui s it i on s d o n o t

real ly work .

S o i n t h e z e a l t o m e r g e w i t h o r a c q u i r e a n o t h e r b a n k t h e

P S Bs sh o u l d n o t l e t t h e i r co m m o n sen se t ak e a b ack sea t .

B ef or e a m er ge r i s c ar ri ed o ut c ul tu ra l i ss ue s s ho ul d b e

looked in to . A bank based pr imar i ly out of Nor th India mightwant to acqui re a bank based pr imar i ly out of South India to

increase i t s geograph ica l p resence bu t the i r cu l tu res migh t

be very d i f f e ren t . So the in tegra t ion p rocess migh t become

very d i f f i cu l t . Techno log ica l compat ib i l i ty i s ano ther i s sue

tha t needs to be looked in to in de ta il s be fo re any merger o r

acquis i t ion i s car r ied out .

Th e b an k s m u s t n o t j u s t m e r g e b ecau se ev e r yb o d y a r o u n d

them is merging. As Keynes wrote ,

"Worldly wisdom teaches us that i t ' s bet ter for reputat ion

to fa i l convent ional ly than succeed unconvent ional ly".

Banks should avoid fal l ing into this trap.

Merger of unequals

PNBNedungadi Bank

(as a % of PNB)

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Networth 3,216.24 cr Negative

Branches 3,870 4.5Deposi ts 64,123 cr 2 .2

Advances 34,369 cr 2 .2

Net NPAs 1,810 cr 13.2

Income 7,734 cr 2 .9

Profi t 562 cr 0 .2

as of FY02

PRICE FOR ACQUISITION WOULD LARGELY

DEPEND UPON:

a) S t rength of se l l ing company

b) Number of bidders

c) Possess ion of ins ide informat ion

d) Mot ives of buyers

e) Macro economic rea l i t ies and condi t ions

UNCERTAIN BLOCKS IN M & A :

1 . Inaccura te es timat ion o f marke t po ten t i al

2 . Overes t imat ion of synerg ies

3 . Va lu a ti o n p i tf a ll s

4 . H i dd en L i ab i li t ie s

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5 . S i ze m i sm a tch

6 . Cul tura l d i f fe rences

7 . Implementa t ion de lays

8 . Poor pub l ic re l a t ions

9 . Confl i c t o f In te res t

10. What you see i s not what you get

POSITIVE ASPECTS OF MERGERS AND

ACQUISITIONS

Enhance ent i ty value

Increase leveraging capabi l i ty

Lower cost of capi ta l

Cash in- f lows

Cheaper working capi ta l

Tax benef i t s

NEGATIVE ASPECTS OF MERGERS AND

ACQUISITONS

Valuat ion p i t fa l l s

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Hidden l iabi l i t ies

Size mismatch

Limited funding opt ions

Unviable t ransact ion cost

FOUNDATION FOR MERGERS IN

INDIA

We w i l l n o w ex am i n e so m e o f t h e u n d e r l y i n g f ac t o r s

b eh in d t he w av e o f m er ge rs a nd a cq ui si ti on s i n I nd ia i n

recent t imes.

DIVERSIFICATION

Divers i f ica t ion a form of inorganic growth may be

achieved by buying the f i rms a l ready serving the target

marke t s ( acqu i s i t ion) o r by es tab l i sh ing new fac i l i t i e s

in the target areas . Divers i f ica t ion can be used as a tool

to hedge r i sk .

ECONOMIES OF SCALE

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W he n t he i nd us tr y r ea ch es t he m at ur it y s ta ge

(where the growth i s s tagnated) or i s in recession , there

i s c on so li da ti on i n t he i nd us tr y t o c ut c os ts . T hi s

happens by means of f ragmented p layers being acqui red

by big f i rms or some big f i rms merging together .

EARLY ENTRY AND MARKET

PENETRATION

An ear ly mover s t r a t egy can r educe the l ead t ime

t ak en i n e st ab li sh in g t he f ac il it ie s a nd d is tr ib ut io n

channels . So , acqui r ing companies wi th good

manufactur ing and d is t r ibut ion networks or few brands

o f a c o m p a n y g i v e s t h e a d v a n t a g e o f a r a p i d m a r k e t

s ha re. IC ICI , w hic h h as p os it ion ed i t se lf f r om a

wh ole sa le l end er t o a f i nan ci al su per mar ket , h as

acquired ITC Class ic F inance and Anagram Finance in a

b id to pene t r a te the r e ta i l marke t . These acqu i s i t ions

h av e h el pe d I CI CI t o o bt ai n q ui ck a cc es s t o a w el ld ispersed d is t r ibut ion network.

TAX ADVANTAGES

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Some acquis i t ions are made wi th the so le in tent ion

to get a tax sh ie ld . This i s more so in case of acqui r ing

of s i ck bank ing companies where the acqu i re r ge t s the

t ax sh i e l d i n t h e f o r m o f u n c l a i m ed d ep r ec i a t i o n an d

car ry forward losses .

REGULATORY CONSIDERATIONS

I nd ia n g ov er nm en t, i n a b id t o p ro te ct t he d om es ti c

indus t ry , d id no t encourage the founda t ion o f fu l ly -owned

subsid iar ies by fore ign f i rms. So, looking at the

disadvantages associa ted wi th the format ion of subsid iar ies ,

f or ei gn f ir ms h av e g en er al ly l oo ke d a t j oi nt v en tu re s o r

acquis i t ions of major i ty s takes in the Indian f i rms. This can

also be a quick ent ry s t ra tegy.

SIZE

I n t he g lo ba l b us in es s, s iz e h as b ec om e o ne o f t he

impor tan t pa ramete r s fo r compet i t ion . Take the example o f

lending business in India where Fls and banks are compet ing

wi th each o ther by enter ing in to each o ther ' s business . There

has been some consol idat ion to increase the s ize . An a t tempt

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t o a ch ie ve g lo ba l e co no mi es o f s ca le c an b e s ee n i n t he

merger of SCICI wi th ICICI .

RULES FOR SUCCESFUL MERGER:

According to Peter Drucker (1981) ,

economica l ly sens ib le merger s mus t fo l low f ive ru les . The

Drucker f ive commandments for successful acquis i t ions are :

1 . Acquirer must cont r ibute something to the acqui red .

2 . A common core of uni ty i s requi red .

3 . Acquirer must respect the business of the acqui red f i rm.

4 . A cq ui ri ng c om pa ny m us t b e a bl e t o p ro vi de t he t op

management to the acqui red company.

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5 . Wi th in the f i r s t year o f merger , management in bo th the

companies should receive promot ion across the ent i t ies .

RBI Guidelines for PUNJAB NATIONAL

BANK

AND NEDUNGADI BANK

T HE R es er ve B an k o f I nd ia t od ay u nv ei le d t o

publ ic a draf t scheme to merge the Kerala-based Nedungadi

Bank wi th Pun jab Nat iona l Bank (PNB) . The scheme would

be avai lable to the public f rom both the banks.

The proposed scheme of amalgamat ion of fers fu l l pro tect ion

of a l l publ ic deposi t s in the o ld pr ivate sector bank. The RBI

sa id i n a n o ti f ic a ti o n t h a t i t h ad g o t s eve r al r equ est s f r omdeposi to r s o f Nedungad i Bank to a l low them to wi thdraw in

ex cess o f Rs 5 , 0 0 0 f o r v a r i o u s p e r so n a l an d o t h e r r ea so n s

and tha t i t would cons ider these r eques t s on a case - to -case

basis depending on the genuineness.

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A ll t he E mp lo ye es o f t he N ed un ga di B an k w il lbecome the Employee o f the Pun jab Nat iona l Bank on the same pay and terms.

Ent i re paid up capi ta l of the Nedungadi Bank wi l lbe t reated as the bad and doubtful debts and

Deprecia t ion .

Al l t he as se ts , l i abi li ti es , p ow ers , c la im s a nddemand wi l l be t ransfer red to Punjab Nat ional Bankf rom data to be not i f ied by the RBI .

T h e b o o k s o f t h e N e d u n g a d i B a n k w i l l b e c l o s e da nd t he b al an ce d b al an ce s he et p re pa re d a s o n

November 2,2002.

The draf t merger proposal might requi re theI nt er ve nt io n t o m in im is e t he p os si bl e l os s t ha tcould resul t Punjab Nat ional Bank.

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THE MERGER AND ACQUISITION PROCESS

The M&A process can be d iv ided in to a p lann ing s t age and

an implementat ion s t age . The p lanning s t age cons is t s o f the

development of the business and the acquis i t ions p lans . The

i mp le me nt at io n s ta ge c on si st s o f t he s ea rc h, s cr ee ni ngc on ta ct in g t he t ar ge t, n eg ot ia ti on , i nt eg ra ti on a nd t he

evaluat ion act iv i t ies . In shor t the process of acquis i t ion can

be summarized in the fol lowing steps:

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Acquisition Plan

Search

Screen

First Contact

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MERGER & ACQUISITIONS PROCESS

Business Plan

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DEVELOPING THE BUSINESS PLAN

Decis ion on a merger or an acquis i t ion i s a

s t ra tegic choice . The acquis i t ion s t ra tegy should f i t the

banking companys s t ra tegic goals of increasing the net

cash f low and reduce r i sk. A business p lan

communicates o r v i s ion fo r the f i rm and a s t r a tegy fo r

achieving that miss ion .

BUILDING THE ACQUISITION PLAN

Af te r a p ro p er an al y si s o f t h e v a ri o us av ai l ab l e

opt ions i f i t i s determined that a merger or an

Integrating Plan

Closing

Integration

Negotiation

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a cq ui si ti on p ro ce ss i s a pp ro pr ia te t o i mp le me nt t he

business s t ra tegy, then an acquis i t ion p lan i s prepared .

THE SEARCH PROCESS

After the f i rm has developed a v iable business p lan that

acqui res an acquis i t ion rea l ize the f i rms s t ra tegic d i rec t ion

an d an acq u i s i t i o n p l an , t h e sea r ch f o r t h e r i g h t c an d i d a t e

for acquis i t ion begins .

THE SCREENING PROCESS

The sc reen ing p rocess s t a r t s wi th the r educ t ion o f the

i n it i al l i st o f p o ten ti a l c and i da t es i d en t if i ed b y u s in g t h e

pr imary cr i ter ia such as the s ize and the type of indust ry . In

a ddi ti on t o th e pr imar y c ri ter ia em pl oye d, se con dar y

se lec t ion c r i t e r i a inc lude a spec i f i c marke t segment wi th in

t he i nd us tr y o r a s pe ci fi c p ro du ct l in e w it hi n t he m ar ke t

segm ent . O t he r m easu re s l i ke t h e f ir m s p r of i tab il i ty , t h e

market share e tc are a lso used in the screening process .

First Contact

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The contact phase of the process involves meet ing

t he a cq ui si ti on c an di da te a nd p ut ti ng f or wa rd t he

proposal of acquisi t ion.

NEGOTIATION

Th e n eg o t i a t i o n p h ase o f t h e acq u i s i t i o n p r o ces s

co ns i st s o f m any ac ti v it i es co nd u ct ed s i mu l tan eo u sl y

b y t h e v a r i o u s m em b er s o f t h e acq u i s i t i o n t e am . Th e

actual purchase considera t ion i s determined dur ing th is

phase . This i s d i f ferent f rom the pre l iminary valuat ion

o f t h e t a r g e t co m p an y m ad e wh en t h e f i r s t co n t ac t i s

m ade . I m pr o vi n g t h e p re l im i na r y v a lu a ti o n b a sed o n

new informat ion revealed dur ing due d i l igence provides

t he s ta rt in g p oi nt f or n eg ot ia ti ng t he a gr ee me nt o f

purchase and sale.

One o f the impor tan t ac t iv i t i e s in the nego t i a t ion

phase i s to develop a f inancing p lan . This ac t iv i ty i s a

k ey i np ut i n d et er mi ni ng t he p ur ch as in g p ri ce , a s i t

he lps in iden t i fy ing a p rac t i ca l l imi t o f the amount o f

the purchase pr ice the buyer can of fer the se l ler .

Integrat ion Plan:

M ak in g t he c om bi ne d f ir m p er fo rm i n l in e w it h t he

expec ta t ions i s a d i f f i cu l t t a sk . For the r esu l t to be in l ine

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w it h e xp ec ta ti on s, p ro pe r p la nn in g i s n ed de d b ef or e t he

agreement o f purchase and sa le i s s igned . Wi thou t adequa te

p l an n in g , i n tegr a ti o n i s u n li k el y t o p ro v id e t h e syne r gi e s

an t i c ipa ted by , a t the cos t inc luded in , and wi th in the t ime

provided in the acquisi t ion plan.

CLOSING:

Clos ing i s the f inal l ega l p rocedure where the bank ing

c omp any c ha ng es ha nds . I t c on si sts of a ll n ec es sar y

sh ar eho l de r , r egu l at o ry an d t h ir d p a rt y co nsent s . A l l t h e

necessary legal approvals are a t ta ined a t th is s tage .

P ro pe r c ar e m us t b e e xe rc is ed t o e ns ur e t ha t a ll t he

necessary f i l ings requi red by law have been made.

INTEGRATION:

T hi s i s t he m os t i mp or ta nt i nt eg ra ti on p ha se i n t he

acquis i t ion process .

EVALUATION:

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The post -c losing evaluat ion i s done to determine i f the

acquis i t ion i s meet ing expecta t ions , to determine, cor rect ive

ac t i o n s i f n eces sa r y , t o i d en t i f y wh a t was d o n e an d wh a t

sh o u l d b e d o n e t o av o i d m ak i n g t h e sam e m i s t ak es i n t h e

future acquis i t ions .

S u ccess o f t h e m er g e r can b e m easu r ed b y ev a l u a t i n g t h e

ac tua l pe r fo rmance o f the f i rm a f t e r the merger aga ins t the

per formance ant ic ipated in the acquis i t ion p lan . Only a fewa cq ui ri ng f ir ms c lo se ly m on it or t he p er fo rm an ce o f t he

acquis i t ion according to the p lan . Many f i rms commonly

o ve rl oo k t hi s p ha se a nd f ai l o ut t he e ff ec ti ve ne ss o f t he

acquis i t ion process . The lessons can somet imes be

embrassing , but help not to commit the same mistakes in the

future acquis i t ions .

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The merger p rocess wi l l no doub t change in the near fu tu re ,

a s d yn am ic t ec hn ol og ie s a ll ow f or t he d ev el op me nt o f a

more s t r eaml ined marke tp lace which manages to p ro tec t the

p ri va cy o f i nt er es te d c om pa ni es w hi le l in ki ng u p i de al

candidates for a merger .

NEED FOR A MERGER REVIEW PROCESS

Banks p lay a v i ta l ro le in the payment and se t t lement system

o f an econ o my . P o or l y co nce iv ed o r b adl y ex ecu ted b ank

m er ge rs w hi ch l ea d t o s ub se qu en t f ai lu re o f t he m er ge r

en t i t y can p r e sen t r i sk s t o t h e en t i r e e co n o m y a s a s t ab l e

b an ki ng s ys te m i s a p re re qu is it e f or a h ea lt hy e co no my .

Therefo re whi le cons ider ing any p roposa l fo r the merger o f

b an ks , i t w il l b e n ec es sa ry t o e va lu at e t he i mp ac t o f t he

m er ge r o n t he s af et y a nd t he s ou nd ne ss o f t he b an ki ng

sys tem. In o rder to mi t iga te the r i sk o f a f a i lu re o f a l a rge

m er ge r b an ki ng o rg an iz at io n t he re i s a d ef in it e n ee d t o

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d ev e l o p a m er g e r r ev i ew p r o cess an d a l so t o i d en t i f y t h e

author i ty that wi l l be responsib le for conduct ing the merger

review process .

S in ce R BI i n i ts c ap ac it y o f t he p ri ma ry r eg ul at or a nd

s up er vi so r o f t he b an ki ng s ys te m h as i nf or ma ti on o n t he

present funct ioning of a l l the banks in India , the RBI i s best

s ui te d t o u nd er ta ke t he m er ge r r ev ie w p ro ce ss . W hi le

u n de r tak in g t h e m erg e r r evi ew p r ocess , RBI w i ll n eed t oexamine the proposal for merger f rom a prudent ial

pe r spec t ive to gauge the impac t on s t ab i l i ty and f inanc ia l

w el l b ei ng o f t he m er ge r a pp li ca nt s a nd o n t he f in an ci al

sys t em . I n ad d i t i o n t o t h e a s se s sm en t o f t h e i m p ac t o f t h e

proposed merger on the compet i t iveness and s tabi l i ty of the

f inancial system, RBI wi l l al so need to examine the

i m pl i ca t io n s o n r egi o na l d eve l op m en t , i m pac t o n so ci e ty ,

e tc . a s a r esu lt o f the merger s ince banks in Ind ia a l so have

to fu l f i l l var ious socia l obl igat ions .

T he assessment wi l l involve a review of the merger

appl icants implementa t ion and in tegra t ion p lans , as wel l as

examina t ion o f the i r comple teness and r easonab leness and

an y ch a l l en g es t h a t m i g h t b e p o sed . Th e RBI w i l l n eed t o

e xa mi ne th e re as on abl en es s of f ina nci al pr oj ec ti on s,

including business p lans and earnings assumpt ions as wel l as

t h e e f fec t o f t h e p r o p osed m er g er o n t h e m er g ed en ti t y s

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capi ta l posi t ion . F inal ly , RBI wi l l have to consider potent ia l

changes to r i sk prof i les and the capaci ty of merger

app l ican t s r i sk management sys tems , pa r t icu lar ly the ex tent

t o wh i ch t h e l ev e l o f r i sk wo u l d ch an g e a s a r e su l t o f t h e

proposed merger and the merger ent i tys abi l i ty to measure ,

moni tor and manage those r i sks .

CORPORATISATION A KEY TO MERGER

OF PUBLIC SECTOR BANKS

THE Indian Banks Associat ion i s of the view that

` co r p o r a t i s a t i o n ' o f p u b l i c s ec t o r b an k s m ay b e t h e k ey t o

faci l i ta t ing the merger between PSU banks in the fu ture .

S inc e p ubl ic s ec to r b an ks ar e g ove rne d b y t he `B ank

Na ti o na l iza ti o n Ac t' an d t h e ` Ban k in g Regu l at i on Ac t, ' i t

w oul d be n ece ss ar y to c orp ora ti se t hem a nd g et t he m

reg i s t e red under the `Companies Act , ' accord ing to an IBA

source . Al te rna t ive ly , any amalgamat ion p lan be tween two

pub l ic sec tor banks would r equi re Par li amenta ry approva l

and th is might lead to long delays , he sa id .

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In the case of pr ivate sector banks, amalgamat ions have been

r e la t iv e ly ea si e r a s t h ey a r e g o ve r ned b y t h e ` Com p an i es

Ac t . ' He r e t h e d ec i s i o n t o m er g e i s t ak en b y sh a r eh o l d e r s

w it h t h

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