Raj Repaired)

8/8/2019 Raj Repaired)

1/66

1

1.1 GLOBAL VIEW

In developed free economy nations, corporate mergers and amalgama-

tion are a regular feature. In Japan, USA, and European nations hundreds of

mergers and amalgamation take place every year as a regular phenomenon

of combination and reconstruction of business enterprise. Across border me r-

gers and takeover of multinational companies are the usual phenomenon in

the developed countries.

For example, Japanese groups of companies operating in USA had i n-

dulged frequently into acquisitions for the reason of halting the erosion of their

competitive advantage on the account of rise of the yen against US dollar.

There are three basic factors, which are responsible for mergers and

acquisitions in Japan viz.

i. Consolidation process for survival of undertakings, a typical example

of which has been pharmaceutical units which adopted this course of

mergers for cutting costs of production and R&D.A medium sized com-

pany needs to merge with similar sized company to save operating

costs. It was on this account Dai-lehi bank and Kangyo bank merged

and formed DKP, which is today worlds largest commercial bank.

ii. Secondly, large groups absorb the small and medium enterprises.

iii. Thirdly, to co-operate with international company which can provide

money and back up. In Japan, every active bank and securities house

has a merger and amalgamation division to explore opportunities and

work in intense competition.

In UK, merger and takeover are so common activities of the enterprises

that a City Code, containing rules of game for the players in the game of

mergers and takeovers was adopted in 1968 as a self regulatory so as to d e-

velop and follow healthy and fair practices and protect the interest of the i n-

vestors and shareholders. Prior to introduction of City Code, a person had

full freedom to acquire voting rights in a company in any proportion either

through private deal or through purchases at stock market without any restri c-

tion or regulations is freedom resulted in to unfair practices detrime ntal to the


2/66

2

interests of small investors and need was felt for a discipline in securities

dealings particularly, leading to corporate raid through takeover bid. The code

was adopted as measure of a self-discipline and form time to time it has been

amended to meet the changing requirements and difficulties in the way of r e-

gulating the takeover deals. The basic stress in the code is to safeguard the

interest of small investors and check unhealthy practices in corporate takeo v-

ers and mergers. Listed companies are normally taken over by the acquisition

of shares from shareholders.

Similarly, in USA all mergers and takeovers have to be approved by

Securities Exchange Commission to ensure fair play and non -detrimental to

the small investors.


3/66

3

1.2 INDIAN VIEW:

The Indian business environment has altered radically since 1991 with

the changes in the economic policies and introduction of new institutional m e-

chanisms. The Indian corporate world, while benefiting from decontrol and d e-

regulations, has now begun to feel the effect of these changes. Those most

affected are the promoters who are today threatened by the possibility of ho s-

tile takeovers. At the same time, financial institutions, which have a significant

stake in many companies, have started demanding better corporate gover-

nance thus while the Indian scenario continues to witness promoter -controlled

companies, corporate governance is shifting from the hands of the promoter

entrepreneur to the professional executive to the financiers.

Mergers and acquisition can bring about change in the mode of gove r-

nance of a company. Pharmaceuticals and ad agencies would be the front -

runners as well as primary targets of the M & A activity. Indian companies and

the latter multinationals. On the other hand dominate the f ormer; family busi-

nesses and single units are consolidating their positions to avoid possible

hostile takeovers.

Seen as a threat in the past, mergers, acquisition and takeovers

evoked images of sinister shadows and backdoor entries. Then, came libera-

lization, bringing with it opens door policies and foreign tie -up sweeteners, to

transform these strategies into essential restructuring tools. The first ten

weeks of 1994 have seen 29 takeover or bids i.e. one M&A move every 3

days .It is expected that the year will see more than 150 such moves.

Liberated from the stranglehold of the Foreign Exchange Regulat ion

Act. (FERA), the Monopolies and Restrictive Trade Practices (MRTP) Act, and

the Industrial Development and Regulation Act 1961, firms a re substituting

their Greenfield growth plans with takeover strategies.

The benefits of taking over a company readymade manufacturing facil i-

ties, well-entrenched brands, and captive market share, no entry delays and

established distribution networks make this strategy preferable to organic

growth. Further, this business strategy works for both companies entering


4/66

4

new areas of operation and those consolidating in their existing lines of bus i-

ness.

Secondly, the restructuring of Indian business is bringing a bout a major

reshuffling of companies and business. As the corporate mantra, of focusing

on core competencies that will help companies cope best with tomorrow,

gains ground, business houses are shedding unrelated business and consol i-

dating in a few chosen areas of operation. On the one hand, this implies that

most groups have companies to sell and on the other hand that most compa-

nies must buy up their competitors. And both of these are triggering off a chain

of reaction of M&A activity.

Thirdly, the government after decades of zealously guarding the ente r-

prises it floated, irrespective of economic rationale, is about to sell off parts of

those very enterprises, in keeping with the new economic thinking. Like wise,

the Board of Financial Reconstruction (B IFR) too becomes a facilitator of M&A

deal.

Multinational predators are not new to the Indian scene. Earlier, they

operated by acquiring foreign holdings or taking over sick units (mainly BIFR

cases). While some were able to build empires through acquisitions, others

landed themselves into problems. Besides such acquisition modes, some at-

tempts have been made to initiate another mode -leveraged buyout.

This new environment demands, more stringently than the controlled

economy did that the businesses either maintain the status quo or grow. With

grow becoming central to the new economic environment, mergers and acqu i-

sition are gaining increasing acceptance as a mode of growth, translating for

companies into scale and scope of economies and ability to tap cap ital mar-

kets.


5/66

5

2.1 MERGERS

A merger refers to a combination of two or more companies into one

company. It may involve absorption or consolidation. In the former case, one

company acquires another company. Mergers in India, called amalgamation

in legal parlance, are usually of the absorption variety. The acquiring (or

merged) company acquires the assets and liabilities of the acquired (or mer g-

ing or target) company.

2.2 Mergers can be classified into the following types:

Vertical Merger

It is the merger of firms engaged at the different stages of production.

In other words, the merging undertaking would be either a supplier or a buyer

using its product as intermediary material for production. It has following

benefits:

It gains a strong position because of imperfect market of the intermediary

products, scarcity of resources and purchased products.

It has control over product specification.

Horizontal Merger

It is a merger of two competing firms, which are at the same stage of

industrial process. The acquiring firm belongs to the same industry as the

Target Company. It has following benefits:

a) Economics of scale in production by eliminating duplication of facilities and

operations and broadening the product line, reduction in vestment in wor k-

ing capital.

b) Elimination of competition concentration in product.

c) Reduction of advertising costs and increase in market segment and exer-

cise of better control on market.

Circular merger

Companies producing distinct products seek amalgamation to share

common distribution and research facilities to obtain economies by elimination

of cost on duplication and promoting market enlargement. The acquiring co m-


6/66

6

pany obtains benefits in the form of economics of resource sharing and dive r-

sification

Conglomerate Merger

It is amalgamation of two companies engaged in unrelated industries

like DCM and Modi Industries. His basic purpose of such amalgamation re-

mains utilization of financial resources and enlarges debt capacity through re-

organizing their financial structure so as to Service the shareholders by leve-

raging and EPS, lowering average cost of capital and there raising present

worth of the outstanding shares. Merger enhancing the overall stability of the

acquirer company and creates balance in the company s total portfolio of di-

verse products and production processes.

2.3 REASONS FOR MERGER OR TAKEOVER

There is not one single reason for a merger or takeover but a multitude

of reasons, which cause merger and acquisition, and they are discussed be-

low.

1. Synergistic operating economies

It is assumed that existing undertakings are operating at a level below

optimum. But, when two undertakings combine their resources and efforts

they may with combined efforts produce better results than two separate un-dertakings because of savings in operating costs viz., combined sales officer,

staff facilities etc which lower the operating costs. Thus, the resultant econo-

mies are known as synergistic operating economies.

2. Diversification

They are motivated with the objective to diversify the activities so as to

avoid putting all the eggs in one basket and obtain advantage of joining the

resources for enhanced debt financing and better serviceability to sharehol d-

ers. But, critics say that the mergers do not benefit shareholders as they can

get better returns by having diversified portfolios by holding individual shares

of their companies.


7/66

7

3. Taxation advantage

Mergers take place so that they have the advantage of tax laws and company

having accumulated losses may merge with profit earning company that will

company that will shield the income from taxation. Section 72A of Income Tax

Act, 1961 provides this incentive for reverse mergers for the survival of the

sick units.

4. Growth advantage

They are motivated with a view to sustain growth or to acquire growth.

To develop new areas becomes costly and risky and difficult that to acquire a

company in a growth sector even though the acquisition is on premium rather

than investing in new assets or new establishments.

5. Production capacity utilization

To reduce the capacity of production merger is sometimes used as a

tool particularly during recessionary times as was in early 1980 in USA. The

technique is used to nationalize traditional industries.

6. Managerial motives

Managers benefit in rank status and perquisites as the enterprises

grows and expands because their salaries, perquisites and status often in-

crease with the size of the enterprises. The Acquirer may motivate managerial

support by assuring benefits of larger size of the company to the managerial

staff. The resultant large company can offer better security for salary earners.

7. Acquisition of specific assets

Surviving company may purchase only the assets of the other compa-

ny in merger. Sometimes, vertical merger are done with motive to secure

source of raw material but acquirer may purchase the specific assets of the

acquiree rather that acquiring the whole undertaking with assets and liabilities.

8. Acquisition by management or leveraged buyouts

The management personnel can have the acquisition of a company. It is

known as management buyout. The practice is common in USA over 25years

and quite in vogue in UK.


8/66

8

9. Acquire research facilities

It is not the equipment that is being bought but the creativity and the

inventiveness and rate of successful development of a particular company.

10. To gain a quotation on the stock exchange

Reverse takeover procedures may be used to enable a quoted compa-

ny to be purchased. This will enable the hither to unquote to have a measure

of efficiency reflected on the stock exchange. In this situation, it may be pos s-

ible to obtain sufficient shares to be able to develop a share to be able to d e-

velop a share option scheme for executives, which would depend upon ma r-

ket pressures. This may well be an increasing reason for acquisition in the

failure for those companies who cannot provide such schemes, which are b e-

coming increasingly popular.

11. To gain advantages for shareholders

It may be possible to obtain increased dividends and increase the price

of shares by making astute acquisitions. Again what is for the benefit of the

shareholders may not necessarily be for the benefit of the employees.

12. To acquire patents owned by the company bought

This is a strictly business transaction, defensive in character, to ensure

that competitors do not acquire know-how before the purchasing company.

2.4 ADVANTAGES OF MERGERS AND ACQUISITIONS

Mergers and acquisition are permanent form of combinations, which

vest in management complete control and provide centralized administration,

which are not available in combinations of holding company and its partly

owned subsidiary. These are in general the advantages, which accrue to the

organization besides multitude of gains already d iscussed above.

Shareholders in the selling company gain from the merger and take o-

ver as the premium offered to induce acceptance of the merger or takeover

offers much more price than the book value of shares.


9/66

9

Shareholders in the buying company gain in t he long run with the

growth of the company not only due to synergy but also due to books tra p-

ping earnings.

2.5 IMPACT OF MERGERS

Impact of mergers on general public could be viewed as aspect of be n-

efits and costs to:

I. Consumers of the product or services.

II. Workers of the companies under combination.

III. General public affected in general having not been user or consumer or

the worker in the companies under merger plan.

IV. on top level management

V. Shareholders

Consumers

The economic gains realized from mergers are passed on to the con-

sumers in the form of lower prices and better quality of the product, which d i-

rectly raise their standard of living and quality of life. The balance of benefits

in favor of consumers will depend upon the fact whether or not the mergers

increase or decrease competitive economic and productive activity which di-rectly affect the degree of welfare of the consumers through changes in price

level, quality of products, after sales service etc.

Workers community

The benefit or loss from mergers to workers community will depend

upon the level of satisfaction of their demands, mergers of companies pro-

vides in the form of employment, increased wages, environmental improve-

ments, better living conditions and amenities. The merger and ac quisition of a

company may have the effect on both the sides of increasing the welfare by

creating unemployment through retrenchment and resultant lack of purcha s-

ing power and other miseries of life. Two sides of the impact as discussed by

researches and academies are: Firstly, mergers with cash payment to share-

holders provide opportunities for them to invest this money in other compa-

nies which will generate further employment and growth to the uplift of the


10/66

10

economy in general. Secondly, any restrictions placed on such mergers will

decrease the growth and investment activity with corresponding decrease in

employment. Both workers and communities will suffer on lessening job o p-

portunities, preventing the distribution of benefits resulting from diversification

of production activity. Diversification fosters and provides opportunities for a d-

vancements in career, training in skills among other alike benefits.

General public

Mergers result into concentration of power in small number of corpo-

rate leaders, which results in the concentration of an enormous aggregation of

economic power in their hands. Economic power is to be understood in speci f-

ic limited sense as the ability to control prices and industries output as mon o-

polists affect social and political environment to tilt every thing in their favor to

maintain their power and expand their business empire. These advances r e-

sult into declaration of level of welfare and well being of the general public,

which are subjected to economic exploitation. But, in a free ec onomy a mono-

polist does not stay for a longer period as other companies enter in to the field

to reap the benefits of high prices set in by the monopolists. This enforces

competition in the market, as Consumers are free to substitute the alternative

products. Therefore, it is difficult to generalize that mergers affect the welfare

of general public adversely of favorably. Every merger of two or more compa-nies has to be viewed from difficult angles in the business practices which

protects the interest of the shareholders in the merging company and also,

serve the national purpose to act to the welfare of the employees, consumers

and does not create hindrance in administration of the government policies.

Management at the top:

Impact of mergers and acquisiti ons on top level management:

Impact of mergers and acquisitions on top level management may actually

involve a "clash of the egos". There might be variations in the cultures of the

two organizations. Under the new set up the manager may be asked to im-

plement such policies or strategies, which may not be quite approved by him.

When such a situation arises, the main focus of the organization gets diverted


11/66

11

and executives become busy either settling matters among themselves or

moving on. If however, the manager is well equipped with a degree or has

sufficient qualification, the migration to another company may not be troubl e-

some at all.

Shareholders:

Impact of mergers and acquisitions on shareholders:

We can further categorize the shareholders into two parts:

y The Shareholders of the acquiring firm

y The shareholders of the target firm.

Shareholders of the acquired firm:

The shareholders of the acquired company benefit the most. The reason be-

ing, it is seen in majority of the cases that the acquiring company usua lly pays

a little excess than it what should. Unless a man lives in a house he has r e-

cently bought, he will not be able to know its drawbacks. So that the shar e-

holders forgo their shares, the company has to offer an amount more then the

actual price, which is prevailing in the market. Buying a company at a higher

price can actually prove to be beneficial for the local economy.

Shareholders of the acquiring firm:

They are most affected. If we measure the benefits enjoyed by the sharehol d-

ers of the acquired company in degrees, the degree to which they were bene-

fited, by the same degree, these shareholders are harmed. This can be attr i-

buted to debt load, which accompanies an acquisition.

2.6 REGULATING THE MERGERS AND ACQUISITION MARKET:

Mergers, Acquisition and Takeover may be regarded as legitimate de-vices in the market for corporate control provided they are properly regulated.

The framework for their regulation should basically seek to:

Impact transparency to the process.

Protect the interest of shareholders.

Facilitate the realization of gain.


12/66

12

Provide financial support to desirable proposals.

Discussed below are the current regulatory frameworks for Mergers

and Acquisition in India and the changes expected in the near future.

The Role of SEBI-

As the economy gets set to view boom in mergers and acquisitions, the

old rules will not be able to govern it. It is in this respect that the Securities

and Exchange Board Of India (SEBI), empowered under section 11(h) of the

SEBI Act 1992, to regulate substantial acquisition shares and takeover of

companies has created a legal framework for the newly liberalized market for

mergers based on the code borrowed liberally from the Takeover Panel Code

used in the UK.

Some of the highlights of SEBI (Substantial Acquisition of Shares and

Takeovers) Regulations 1997 are:

Under the disclosure requirements any acquirer who acquires shares or

voting rights which (taken together with shares or voting rights, if any, held

by him) would entitle him to more than 5% shares or voting rights in a

company, in any manner whatsoever shall disclose the aggregate of his

shareholdings or voting rights in that company, to the company.

No acquirer shall acquire shares or voting rights which (taken together withshares or voting rights, if any, held by him or by persons acting in concert

with him), entitle such acquirer to exercise 15% or more of the voting rights

in a company, unless such acquirer makes a public announcement to ac-

quire shares of such company in accordance with the regulation.

No acquirer who, together with persons acting in concert with him, has the

provisions of law (15% or more but less than 75%) of the shares or voting

rights in a company, shall acquire, either by himself or through or with per-

sons acting in concert with him additional shares or voting rights entitling

him to exercise more than 5% of the voting rights, in any period of 12

months, unless such acquirer makes a public announcement to acquire

shares in accordance with the regulations.

Irrespective of whether or not, there has been any acquisition of shares or

voting rights in a company no acquire control over the target company, un-


13/66

13

less such person makes a public announcement to acquire shares and

acquire shares and acquire such shares in accordance with the regula-

tions.

Before making any public announcement of offer referred to in Regulation

or Regulation 11 or Regulation 12, the acquirer shall appoint a merchant

banker in category 1 holding a certificate of registration granted by the

board, which is not associate of the acquirer or the target company.

The public offer shall be made to the shareholders of the Target Company

to acquire from them an aggregate minimum 20% of the voting capital of

the company. Provided that where the open offer is made in pursuance to

sub regulation (2) of Regulation 11, the public offer shall be such perce n-

tage of the voting capital as may be decided by the company.

Where the offer is conditional upon minimum level of acceptance from the

shareholders as provided for in clause (xvii) of regulation 16, the provi-

sions of sub-regulation (1) of this regulation shall not be applicable, if the

acquirer has deposited in the escrow account in cash a sum of 50% of the

consideration payable under the public offer

If the public offers results in the public shareholding being reduced to 10%

or less of the voting capital of the company, the acquirer shall either -

a. Within a period of 3 months from the date of closure of the public offer,

make an offer to buy out the outstanding shares remaining with the share-

holders at the same offer price, which may result in the deli sting of the Target

Company.

b. Undertake to disinvest through an offer for sale or by a fresh issue of cap i-

tal to the public, which shall open within a period of month from the date of

closure of the public offer, such number of shares so as to satisfy the listing

requirements.

Where proposals for acquisition of shares in respect of a financially

weak company is made by a state level public financial institution, the

provisions of these regulations in so far as they relate to scheme of r e-

habilitation prepared by a public financial institution, shall apply except

that in such a case the Industrial Development Bank of India, a corpo-


14/66

14

ration established under the IDBI Act 1964, shall be the agency for e n-

suring the compliance of these regulations for ensuring the compliance

of these regulations for acquisition of shares in the financially weak

company.

2.7 COMMONLY USED DEFENSIVE AND OFFENSIVE STRATEGY

Defense against Mergers and Acquisition Bid

The directors of a company hold command of its affairs. They are also

morally responsible to protect the interest of the shareholders and also saf e-

guard the existence of the company, ensuring continuity of its business activi-

ty and profitable footings and warding off unscrupulous corporate raiders. The

power of management delegated to the board must be exercised bonfires in

the interest of the company. However, often in the case of an M&A bid,

though the company and its shareholders may stand to gain, the directors,

keeping their personal interests in mind, try and thwart the bid. This is not to

say that all defensive moves are made with mollified intentions.

The common defensive strategies adopted against an M &A bid are: -

1. Management Buyout:

In this case, when there is a hostile bid for a takeover, shareholders

offer their equity and voting rights to the senior management executives or

non-management personnel with a view to pass on the management to their

own people rather than subjecting the company to unwanted acquirers.

2. Poison pills:

This strategy involves the making of a low price preference issue to the

existing shareholders and enlarges the capital base so as to make the acqui-

sition very expensive.

3. Poison Put:

Here, bonds that encourage holders to cash in at high prices are is-

sued so that the resultant cash drainage makes the target unattractive.

4. Greenmail:


15/66

15

This involves the repurchase of shares acquired by the raider at a hefty

premium and allowing the raider to make a fast buck and quit.

5. Pac-Man Defense:

This strategy involves making a counter bid for the raiders company,

forcing him to concentrate on defending himself and calli ng off the bid. A vari-

ation of this making a bid for a third company and financing this by taking debt

against that companies assets, thereby making the existing company too big

for the raider to pick-up.

6. White Knight:

Here, an appeal is made to a friendly company to buy all, or part of the

company. In this case, the buyer promises not to displace the current man-

agement after the buy-out.

7. White Square:

In this case, the owner sells-out to a company, which is not interested

in a takeover and thus, the former owner, retains control.

2.8 OFFENSIVE STRATEGIES:

Like in the case of defense strategies, a wide variety of offense strate-

gies are available with the predator. The most potent weapon in his hand is

the element of surprise. But, typical amongst them are:

1. Tender offer:

Open offer to all shareholders to buy their stakes without the consent of

the acquired company. The takeover of Consolidated Coffee Limited (CCL) by

Tata Tea Ltd. was an example of the tender offer where more than 50% of

CCLs shareholders offered to sell their holdings to Tata Tea at offered price,

which was, much more than the investment price.

2. Street Sweep:

Accumulating large amounts of stock in a company before making an

open offer Target is left with no choice but to give in.


16/66

16

3. Dawn Hug:

It is one where brokers swoop down on the stock exchanges at the

time of their opening and buying up all available shares swiftly, before the

prey reacts.

4. BearHug:

It was a practice followed in the USA, which involved sending the target

companys management a tender offer for its shareholders at an attractive

price and warning them to act in the interest of the shareholders.

5. Saturday Night Special:

In this luring away suppliers and infrastructure support, thus forcing the

Target Company to give in, softens up the resistance

6. Strategic Alliance:

Here, offering a partnership rather than a buy -out disarms the opposi-

tion from the Target Company. Afterwards, it asserts control from within and

takes over the target.

2.9 PROCEDURES FOR MERGERS: -

The procedure for merger and amalgamation is different from takeover.

Merger and amalgamation are regulated under the provisions of the Comp a-

nies Act 1956 whereas takeovers are regulated under the SEBI (Substantial

Acquisition of Shares and Takeovers) Regulations 1997.The following are the

summarized view of the procedural formalities involved in accomplishing the

merger.

I. Top management commitments toward merger and acquisition:

Top management defines the organizations goals and outlines the pol-

icy Framework to achieve these objectives. The organizations goal for bus i-

ness expansion could be accomplished, interalia through business combin a-

tions assimilating a target corporate which can remove the present deficie n-

cies in the organization and contribute in the required direction to accomplish

the goal of business expansion through enhanced commercial activity that is

supply of inputs and market for output product diversification, adding up new

products and improved technological process, providing new distribution


17/66

17

channels and market segments, making available technical personnel and

experience skill manpower, research and development with reference to

creating a new set and or acquiring a well established set up firm.

ii. Search for a merger partner:

The top management may use their own contacts with competitors in

the same line of economic activity or in other diversified field which could be

identified as better merger partners or may use the contacts of merchant

bankers, financial consultant and other agencies in locating suitable merger

partners. A number of corporate candidates may be short listed and identified

such identification should be based on the information of the merger partners

collected from the published and private sources. Such information should re-

veal the following aspects viz.

a) Organizational history of business and promotes and capital structure.

b) Organizational goals.

c) Product, market and competitors.

d) Asset profile-movable and immovable assets, land and building.

e) Manpower skilled, unskilled, technical personnels and detailed particulars

of management employees.

f) Accounting policies, financial management and control.

g) Operational data.

h) Profitability projections.

i) Creditors profile and companys credit performance and record with its

bankers in particular.

iii. Negotiating with merger partner:

Top management can negotiate at a time with several identified short -

listed companies suited to be merger partner for selling terms of merger and

pick up one of them which most favorable terms. Negotiation can be had with

target companies before making any acquisition attempt. Same drill of negot i-

ation could be followed in the cases of merger and amalgamation .The sch e-

dule for planning covers different aspects like preliminary consultations with


18/66

18

the prospective merger partner and seeking its willingness to corporate in i n-

vestigations. There are other aspects too in the activity schedule covering,

quantification plan, purpose, shape and date of merger, profitability and valu a-

tion, taxation aspects, legal aspect and development plan of the company a f-

ter merger.

(Iv) Stapes of merger and acquisition

(1) Examination of object clauses:

The MOA of both the companies should be examined to check the

power to amalgamate is available. Further, the object clause of the merging

company should permit it to carry on the business of the merged company. If

such clauses do not exist, necessary approvals of the share holders, board of

directors, and company law board are required.

(2) Intimation to stock exchanges:

The stock exchanges where merging and merged companies are

listed should be informed about the merger proposal. From time to time, co p-

ies of all notices, resolutions, and orders should be mailed to the concerne d

stock exchanges.

(3) Approval of the draft merger proposal by the respective boards:

The draft merger proposal should be approved by the respective BODs. The

board of each company should pass a resolution authorizing its direc-

tors/executives to pursue the matter further.

(4) Application to high courts:

Once the drafts of merger proposal is approved by the respective boards,

each company should make an application to the high court of the state where


19/66

19

its registered office is situated so that it can convene the meetings of share

holders and creditors for passing the merger proposal.

(5) Dispatch of notice to share holders and creditors:

In order to convene the meetings of share holders and creditors, anotice and an explanatory statement of the meeting, as approved by the high

court, should be dispatched by each company to its shareholders and cred i-

tors so that they get 21 days advance intimation. The notice of the meetings

should also be published in two news papers.

(6) Holding of meetings of share holders and creditors:

A meeting of share holders should be held by each company for

passing the scheme of mergers at least 75% of shareholders who vote either

in person or by proxy must approve the scheme of merger. Same applies to

creditors also.

(7) Petition to High Court for confirmation and passing of HC orders:

Once the mergers scheme is passed by the share holders and credi-

tors, the companies involved in the merger should present a petition to the HC

for confirming the scheme of merger. A notice about the same has to be pu b-lished in 2 newspapers.

(8) Filing the order with the registrar:

Certified true copies of the high court order must be filed with the registrar of

companies within the time limit specified by the court.

(9) Transfer of assets and liabilities:

After the final orders have been passed by both the HCs, all the assets and

liabilities of the merged company will have to be transferred to the merging

company.

(10) Issue of shares and debentures:


20/66

20

The merging company, after fulfilling the provisions of the law, should issue

shares and debentures of the merging company. The new shares and debe n-

tures so issued will then be listed on the stock exchange.

2.10 LEGAL ASPECTS OF MERGER AND ACQUISITION:

(I) the Companies Act, 1956

Section 390 to 395 of Companies Act, 1956 deal with arrangements, ama l-

gamations, mergers and the procedure to be followed for getting the a r-

rangement, compromise or the scheme of amalgamation approved. Though,

section 391 deals with the issue of compromise or arrangement which is di f-

ferent from the issue of amalgamation as deal with under section 394, as se c-

tion 394 too refers to the procedure under section 391 etc., all the section are

to be seen together while understanding the procedure of getting the scheme

of amalgamation approved. Again, it is true that while the procedure to be fo l-

lowed in case of amalgamation of two companies is wider than the scheme of

compromise or arrangement though there exist substantial overlapping.

The procedure to be followed while getting the scheme of amalgamation and

the important points, are as follows: -(1) Any company, creditors of the company, class of them, members or the

class of members can file an application under section 391 seeking sanction

of any scheme of compromise or arrangement. However, by its very nature it

can be understood that the scheme of amalgamation is normally presented by

the company. While filing an application either under secti on 391 or section

394, the applicant is supposed to disclose all material particulars in acco r-

dance with the provisions of the Act.

(2) Upon satisfying that the scheme is prima facie workable and fair, the Tr i-

bunal order for the meeting of the members, class of members, creditors or

the class of creditors. Rather, passing an order calling for meeting, if the r e-

quirements of holding meetings with class of shareholders or the members,

are specifically dealt with in the order calling meeting, then, there wont be any


21/66

21

subsequent litigation. The scope of conduct of meeting with such class of

members or the shareholders is wider in case of amalgamation than where a

scheme of compromise or arrangement is sought for under section 391

(3) The scheme must get approved by the majority of the stake holders viz.,the members, class of members, creditors or such class of creditors. The

scope of conduct of meeting with the members, class of members, creditors

or such class of creditors will be restrictive some what in an application seek-

ing compromise or arrangement.

(4) There should be due notice disclosing all material particulars and annexing

the copy of the scheme as the case may be while calling the meeting.

(5) In a case where amalgamation of two companies is sought fo r, before ap-

proving the scheme of amalgamation, a report is to be received form the reg i-

strar of companies that the approval of scheme will not prejudice the interests

of the shareholders.

(6) The Central Government is also required to file its report in a n application

seeking approval of compromise, arrangement or the amalgamation as the

case may be under section 394A.

(7) After complying with all the requirements, if the scheme is approved, then,

the certified copy of the order is to be filed with the con cerned authorities.

(II) The Competition Act, 2002

Following provisions of the Competition Act, 2002 deals with mergers of the

company:-

(1) Section 5 of the Competition Act, 2002 deals with Combinations which

defines combination by reference to assets and turnover

(a) Exclusively in India and

(b) In India and outside India.


22/66

22

For example, an Indian company with turnover of Rs. 3000 crores cannot a c-

quire another Indian company without prior notification and approval of the

Competition Commission. On the other hand, a foreign company with turnover

outside India of more than USD 1.5 billion (or in excess of Rs. 4500 crores)

may acquire a company in India with sales just short of Rs. 1500 crores with-

out any notification to (or approval of) the Competition Co mmission being re-

quired.

(2) Section 6 of the Competition Act, 2002 states that, no person or enterprise

shall enter into a combination which causes or is likely to cause an apprecia-

ble adverse effect on competition within the relevant market in India and such

a combination shall be void. All types of intra-group combinations, mergers,

demergers, reorganizations and other similar transactions should be specif i-cally exempted from the notification procedure and appropriate clauses

should be incorporated in sub-regulation 5(2) of the Regulations. These

transactions do not have any competitive impact on the market for assess-

ment under the Competition Act, Section 6.

(III) Foreign Exchange Management Act,1999

The foreign exchange laws relating to issuance and allotment of shares to

foreign entities are contained in The Foreign Exchange Management (Tran s-

fer or Issue of Security by a person residing out of India) Regulation, 2000 i s-

sued by RBI vide GSR no. 406(E) dated 3rd May, 2000. These regulations

provide general guidelines on issuance of shares or securities by an Indian

entity to a person residing outside India or recording in its books any transfer

of security from or to such person. RBI has issued detailed guidelines on fo r-

eign investment in India vide Foreign Direct Investment Scheme contained

in Schedule 1 of said regulation.

(IV) SEBI Takeover Code 1994

SEBI Takeover Regulations permit consolidation of shares or voting rights

beyond 15% up to 55%, provided the acquirer does not acquire more than 5%

of shares or voting rights of the target company in any financial year. [Regul a-


23/66

23

tion 11(1) of the SEBI Takeover Regulations] However, acquisition of shares

or voting rights beyond 26% would apparently attract the notification proc e-

dure under the Act. It should be clarified that notification to CCI will not be r e-

quired for consolidation of shares or voting rights permitted under the SEBI

Takeover Regulations. Similarly the acquirer who has already acquired control

of a company (say a listed company), after adhering to all requirements of

SEBI Takeover Regulations and also the Act, should be exempted from the

Act for further acquisition of shares or voting rights in the same company.

(V) The Indian Income Tax Act (ITA), 1961

Merger has not been defined under the ITA but has been covered under the

term 'amalgamation' as defined in section 2(1B) of the Act. To encourage r e-

structuring, merger and demerger has been given a special treatment in the

Income-tax Act since the beginning. The Finance Act, 1999 clarified man y is-

sues relating to Business Reorganizations thereby facilitating and making

business restructuring tax neutral. As per Finance Minister this has been done

to accelerate internal liberalization. Certain provisions applicable to me r-

gers/demergers are as under: Definition of Amalgamation/Merger Section

2(1B). Amalgamation means merger of either one or more companies with

another company or merger of two or more companies to form one company

in such a manner that:

(1) All the properties and liabilities of the transferor company/companies be-

come the properties and liabilities of Transferee Company.

(2) Shareholders holding not less than 75% of the value of shares in the tran s-

feror company (other than shares which are held by, or by a nominee for, the

transferee company or its subsidiaries) become shareholders of the transfe-

ree company.

The following provisions would be applicable to merger only if the conditions

laid down in section 2(1B) relating to merger are fulfilled:


24/66

24

(1) Taxability in the hands of Transferee Company Section 47(vi) & section

47

(a) The transfer of shares by the shareholders of the transferor company in

lieu of shares of the transferee company on merger is not regarded as tran s-

fer and hence gains arising from the same are not chargeable t o tax in the

hands of the shareholders of the transferee company. [Section 47(vii)]

(b) In case of merger, cost of acquisition of shares of the transferee company,

which were acquired in pursuant to merger will be the cost incurred for acqui r-

ing the shares of the transferor company. [Section 49(2)]

(VI) Mandatory permission by the courts

Any scheme for mergers has to be sanctioned by the courts of the country.

The company act provides that the high court of the respective states where

the transferor and the transferee companies have their respective registered

offices have the necessary jurisdiction to direct the winding up or regulate the

merger of the companies registered in or outside India. The high courts can

also supervise any arrangements or modifications in the arrangements after

having sanctioned the scheme of mergers as per the section 392 of the Co m-

pany Act. Thereafter the courts would issue the necessary sanctions for the

scheme of mergers after dealing with the application for the merger if they are

convinced that the impending merger is fair and reasonable. The courts al-

so have a certain limit to their powers to exercise their jurisdiction which have

essentially evolved from their own rulings. For example, the courts will not a l-

low the merger to come through the intervention of the courts, if the same can

be effected through some other provisions of the Companies Act; further, the

courts cannot allow for the merger to proceed if there was something that the

parties themselves could not agree to; also, if the merger, if allowed, would be

in contravention of certain conditions laid down by the law, such a merger also

cannot be permitted. The courts have no special jurisdiction with regard to the

issuance of writs to entertain an appeal over a matt er that is otherwise final,

conclusive and binding as per the section 391 of the Company act.

(VII) Stamp duty


25/66

25

Stamp act varies from state to State. As per Bombay Stamp Act, conveyance

includes an order in respect of amalgamation; by which property is transferred

to or vested in any other person. As per this Act, rate of stamp duty is 10 per

cent.

(viii) Sick Industrial Companies (Special Provisions) Act (SICA) -

This Act is not applicable to a non-industrial company or small scale/

ancillary undertakings. An industrial company will be deemed to be a sick i n-

dustrial company it has been registered for not less than five years and which

has at the end of any financial year accumulated losses equal to or exceeding

its entire net worth.

Once a company becomes a sick industrial company, it will be referred

to BIFR, which may sanction, under section 18 of the above Act. The merger

of a sick industrial company undertaking with any other company or vice -

versa The sanctioned scheme must be approved through a special resolution

by the shareholders of, which is not sick. Another significant aspect of this Act

is that it provides for hearing the views of employees, particularly

2. The carry forward and set off losses and unabsorbed depreciation

shall be allowed only if;

i) The amalgamated company continues to hold at least 3/4 th (in value) of the

assets of amalgamating company for a minimum period of five years.

ii). the amalgamated company continues to carry on the business of the

amalgamating company for five years from the date of amalgamation.

iii). It fulfills all other conditions.

1. In case the conditions prescribed above are not complied with, the

amount of loss or unabsorbed depreciation adjusted by the amalgamated

company in any previous year shall be deemed as income of the previousyear in which breach takes place.

2. In case of demerger, the accumulated losses of the demerged comp a-

ny shall be allowed to be forward by the resulting company in the following

manner:


26/66

26

i). Any amount of loss or unabsorbed depreciation which is directly attributable

to the undertaking transferred under demerger, shall be deemed as loss of the

resulting company and shall be allowed to be carried forward and set off.

Loss of demerged company * Value of asset transferred under demerger

Total value of asset of demerged company

3. The Central Government may specify the conditions for ensuring the

genuine demerger.

Carry forward of losses on amalgamation or demerger of a company

[section 79(a)]-With the effect from 1-4-2000, the clause (a) of section79 shall

not be applicable if there is change in shareholding of a Indian company (as

which isan subsidiar7y of a foreign company) as a result of amalgamation or

demerger of foreign company subject to the condition that 51% of sharehold-

ers amalgamating or demerged company continue to be the shareholders of

amalgamating or resulting company.

Depreciation-

For tax purposes, the depreciation chargeable by the amalgamated

company shall be based on the written down value of the assets before amal-

gamation.

Amortization of capital Expenses-

The amalgamated company can amortize the expenditure on scientific

research, acquisition of patent rights or copyrights, preliminary expenses and

capital expenditure on the promotion of family planning.

Capital Gains Tax-

No capital gains tax is applicable to the amalgamating company or its

shareholders if they get shares in the amalgamating company.

2.11 POST MERGER CONSIDERATION-

The crucial period of success or failure is the first three months. During

this period the merger manager should have established the integration plans


27/66

27

of the two companies and decided the power structure, also the personnel

manager will have to come to conclusion on these matters which he has re-

searched in the pre-merger and immediate merger period. These will need to

be implemented effectively and communicated rapidly to show the acquired

business where it stands on personnel policy and general terms and condi-

tions of employment.

In the second three months, the new management must put into effect

the decisions that been taken in the first three. Surplus managers must be r e-

tired and peripheral activities and surplus assets sold off if necessary.

During the third stage, which wills probably las5 12 months, the basic

shape of the company is dealt with. This covers rationalization of market pr o-

cedures, production facilities, sales force, product development and total o r-

ganization.

Fredrick sear by summarizes some important tasks that must be car-

ried out in post merger situations

I. Effecting the merger by:

Completing legal arrangements.

Designating agents of the new company for suppliers and vendors.

Changing corporate signs and logos.

Preparing necessary public relations releases.

Negotiating with trade unions.

II Maintain momentum immediately after the merger by:

Clarifying reporting relationships.

Ensuring the continuity of credit facilities and insurance

Making financial authorizations.

III. Bringing the new organization into the corporate structure by:

Installing a reporting system for new company.


28/66

28

Consolidated financial reporting, press relations and shareholding co m-

munications.

Reviewing compensation and personnel policies of the acquired company.

Consolidating the tax return preparation.

Reviewing the accounting practices and policies.

Developing a new audit program and eliminating activities not appropriate

to the new company.

1V.Realizing short term profit improvement potential by:

Consolidating the headquarters staff.

Closing down unnecessary facilities.

Eliminating redundant executive positions and unproductive personnel.

Centralizing volume functions, e.g. Purchasing, insurance, and computer i-

zation.

Cutting down unnecessary frills, e.g. Cars, club membership etc.

Consolidating banking relationships.

V. Realizing long term profit improvement potential by

Integrating operations.

Transferring technologies and methods.

So, looking at the three stages of post merger activity, it is clear that pe r-

sonnel manager is vitally involved. He will be concerned with putting into

effect all items, which he will have determined, strategically in the pre -merger

stage. He will be able to get into the business and find out the facts about all

those matters of personnel policy about which he had to make some assum p-

tions.


29/66

29

RESEARCH DESIGN & METHODOLOGY

3.1 STATEMENT OF THE PROBLEM

Of late, there appears to be an increasing tendency among new pr i-vate sector banks to combine their businesses apparently for synergic advan-

tage. This might in due course lead to a problem of Oligopoly over banking

products available for the users

3.2 OBJECTIVES OF THE STUDY

The objectives of this project are two folds.

To get in depth knowledge about mergers and acquisit ion .

To find out whether the banks are benefited with mergers and acquis i-

tion.

To understand the procedure involved in the mergers and acquisition

process of banks.

To know the legal constraints involved in mergers and acquisition of

banking sector.

To know the performance of the bank before and after the mergers and

acquisition process

3.3 SCOPE OF THE STUDY

A growing firm in order to expand its business or in order to establish a

strong brand position or to acquire a financially strong position in th e market

place or to expand its customer base takes the decision to merge with another

company. This phenomenon is very common in the corporate world in this cen-

tury and hence there is a necessary for every finance student to study and

analyze the process and the performance of the company before and after its

merger. The study of the topic also helps one to gain sufficient knowledge on

the legal aspects of merger, procedure, the company has to undergo in its

process of merger with the company and this knowledge helps the finance stu-


30/66

30

dent to get a good base knowledge which helps him/her to take good strategic

financial decision in his work environment.

Since market shares accompany merger and acquisitions, brand power

and synergies, companies are finding this the easiest and perhaps the quickest

way to expand. However, the mergers and acquisitions activity has its advan-

tageous and disadvantageous. Moreover the elements missing in todays ma r-

ket are the takeover artistes with investable funds to finance their acquisition.

This study intends to analyze the pros and cons of corporate mergers as stra t-

egy growth.

3.4 RESEARCH METHODOLOGY

Research methodology is a way to systematically solve the

research problem .it may be understood as a science of studying how re-

search is done scientifically .In it we study the various steps that are genera l-

ly adopted by a researcher in studding his research problem along with the

logic behind them

3 .5 RESEARCH DESIGN

A Research design is the arrangement of conditions for collec-

tion and analysis of data in a manner that aims to combine relevance to the

research purpose with economy in procedure .It constitute the blue print for

the collection ,measurement and analysis of data.

In this study research design used is analytical research design. In analytical

research the researcher has to use facts or information already available, and

analyze these to make a critical evaluation of the material.


31/66

31

3.6 DATA COLLECTION METHODS

Secondary data is used for the study. Secondary data in-

cludes financial statements of bank journals, magazines, websites etc.

3.7 STASTISTICAL TOOLS

Statistical tool used in this method is ratio method.

3.8 LIMITATIONS OF STUDY

The study was subject to the following limitations/drawbacks:

Due to only secondary data, the study was able to draw only limited con-

clusion about the impact of the mergers and acquisition.

The study was conducted for a short period of time and it act as a major

limitation.

The data analysis and interpretation of merger are based on secondary

information only. These results were not discussed with the management

of the companies to assess their views on the subject.

The study was exclusively limited to only two banks..


32/66

32

4 COMPANY PROFILE

4.1 ICICI BANK

1955:

The Industrial Credit and Investment Corporation of India Limited (ICICI) i n-corporated at the initiative of the World Bank, the Government of India and

representatives of Indian industry, with the objective of creating a develop-

ment financial institution for providing medium-term and long-term project fi-

nancing to Indian businesses. Mr.A.Ramaswami Mudaliar elected as the f irst

Chairman of ICICI Limited. ICICI emerges as the major source of foreign cur-

rency loans to Indian industry. Besides funding from the World Bank and other

multi-lateral agencies, ICICI was also among the first Indian companies to

raise funds from international markets.

The Industrial Credit and Investment Corporation of India Limited was

incorporated on 5th January as a Public Limited Company under the Indian

Companies Act, 1913, and subsequently renamed ICICI Limited with effect

from September 11, 1998.

Industrial Credit & Investment Corporation of India (ICICI) is one of the

premier development finance institutions assisting the country's industrial

growth. The Government of India and the World Bank took an active inte r-est in the formation and development of ICICI. Also in 1996 SCICI was

merged with ICICI due to overlap of business and clientele.

ICICI has changed its lending focus from traditional manufacturing sectors

to knowledge-based industries and the service sector. It is the only finan-

cial Service Company, which has positioned itself as a full service unive r-

sal bank. Corporate financial services includes project finance, infrastru c-

ture finance, working capital finance, structured finance, equity research

and advisory services. Among retail financial service it has banking servic-es, IT related services, demat services, home loans, car loans, mutual

funds and retail bonds.

ICICI has also started the `Export Breakthrough Service' in collaboration

with Developing Countries Trade Agency (DeCTA), a British Government

funded agency.


33/66

33

ICICI has entered into interest rate and currency swaps for some portion of

its long-term borrowings in order to hedge exposure to interest rate and

currency exchange rate movements.

The Bank set up the ICICI Asset Management Company Limited to oper-

ate the schemes of the `ICICI Premier', launched in November

The Bank formed a joint venture in July 1993-Inapex Auto Products

Exports Limited-with consortium of 30 major auto-product companies to sell

auto

companies abroad.

The Bank has set up an in-house Training Institute at Pune which was in-

augurated on October 13, to take care of the long-term training needs of

the employees of all the companies in the ICICI group, at various levels.

The Bank entered the custodial business as sub-custodian for the GDR

issues by Indian companies.

The Advisory Service Division has proposed the setting up of a joint ven-

ture for the infrastructure sector in West Bengal.

1996 - The Bank diversified its activities into different forms of asset fi-

nancing such as leasing, asset credit and deferred credit as well as

finance for non-project activities, which are typically, short term in nature.

The Bank has introduced a performance-linked incentive scheme for moti-

vating employees at all levels to produce their best for the Corporation.

ICICI has received approval from the Union finance ministry to set up a

Global Medium-Term Note (GMTN) program aggregating u to $500 mil-

lions.

ICICI has set up India's first dedicated software fund.

ICICI has entered into a strategic alliance with two Kerala-based private

sector banks-Federal Bank Ltd. (FBL) and South Indian Bank Ltd. (SIBL) -

to share business interests and strategies.

ICICI bank offered two new products - the Quantum Optima, a flexible

fixed deposit scheme and the second, christened Infinity, an Internet ban k-

ing service.

1998 - ICICI is building a multi -channel distribution network to provide

ready access to its customers.


34/66

34

ICICI Banking Corporation has recently launched a call-linked short-term

deposit scheme, Quantum Corporate, which comes with a minimum sub-

scription amount of Rs.1crore and thereafter in multiples of Rs.25 lakhs.

The Industrial Credit and Investment Corporation of India, which would

shortly change its name to ÌCICI LTD., has made provisions and write-

offs to the tune of Rs.263.89, crore against assets vested upon merger of

ITC Classic Finance.

ITC Classic has been amalgamated with ICICI on 21st April.

ICICI has set up a separate `Mergers and Acquisitions' department aimed

at restructuring its asset portfolio and providing a sharper focus to the r e-

covery of Non Performing Assets (NPAs).

1999 - ICICI has set up a special purpose vehicle (SPV) for securitisation

of receivables in the oil and gas sector.

ICICI LTD has introduced a new Èasy Installment Bond' in its sixth trench

of ÌCICI Safety Bonds', which is opening for subscriptions on January 21.

Hyundai Motor India Ltd. (HMIL) has tied up with ICICI for private label

consumer financing of the Santro.

ICICI Ltd. is setting up a network of 312 investor service centers in 300 c i-

ties across the country over the next two years.

ICICI Ltd. and Punjab National Bank (PNB) have reached an ìn - principle'

agreement for an equal charge on the cash flows of Jin dal Vijaynagar

Steel Ltd. (JVSL).

ICICI, the country's second largest financial institution, has proposed a

yearly commission not exceeding one per cent of net profit to its non -

wholetime directors.

The Company has issued 87,50,000 Preference Shares aggregating Rs

8.75 crore against Preference Shares held by the shareholders of the

erstwhile Anagram Finance Ltd., and redeemed Preference Shares aggr e-

gating Rs 250 crore of the same company. Further, the Company has also

redeemed 9.25% Preference Shares of Rs50 crore at par on 23rd July.

12.5% fully convertible Debentures have been converted into 3,45,31,200

No. Of Equity Shares of Rs 10/- at a premium of Rs 5 per Share on July

18, thereby enhancing the Equity Share Capital as on June 30th, by Rs

34,53,12,000


35/66

35

ICICI became the first Indian Company to get listed on the NYSE in

Sep.'99. The company is making constant efforts to take first mover advan-

tage the technology-related businesses. It is developing a large wireless pla t-

form to offer complete range of financial services to its customer. The services

offered are banking, broking, and financial information, booking tickets and

paying bills.

The Far Eastern Economic Review in its survey of Asian Companies

adjudged ICICI as the fourth among the top 10 leading companies in India.

Similarly, Hewitt - the HR consulting firm adjudged ICICI as the fourth best

company to work for in India, in a survey done for the Business Today mag a-

zine. ICICI also bagged the award for the best-presented accounts given by

the Institute of Chartered Accountants of India. ICICI has won this award for

the second consecutive year in the category of 'Banks and FIs'. Finally, ICICI

also received the "Rio Tinto Award for long term commitment" from the Secr e-

tary General of the Commonwealth in London recently. The award has been

instituted by "Worldaware," an UK based charity organization, and is given to a

Commonwealth based company which has demonstrated consistent commit-

ment over a number of years to involvement in development.

ICICI Group offers a wide range of banking products and financial services to

corporate and retail customers through a variety of delivery channels and

through its specialised group companies, subsidiaries and affiliates in the

areas of personal banking, investment banking, life and general insurance,

venture capital and asset management. With a strong customer focus, the

ICICI Group Companies have maintained and enhanced their leadership pos i-

tion in their respective sectors.

ICICI Bank is India's second-largest bank with total assets of Rs. 3,793.01 bi l-

lion (US$ 75 billion) at March 31, 2009 and profit after tax Rs. 37.58 billion for

the year ended March 31, 2009. The Bank has a network of 1,451 branches

and about 4,721 ATMs in India and presence in 18 countries.

ICICI Prudential Life Insurance Company is a 74:26 joint venture with Pruden-


36/66

36

tial plc (UK). It is the largest private sector life insurance company offering a

comprehensive suite of life, health and pensions products. It is also the pi o-

neer in launching innovative health care products like Diabetes Care Active

and health Saver.The company operates on a multi -channel platform and has

a distribution strength of over 2,76,000 financial advisors operating from more

than 2000 branches spread across 1800 locations across the country. In add i-

tion to the agency force, it also has tie -ups with various banks, corporate

agents and brokers. In fiscal 2009, ICIC I Prudential attained a market share of

10.9% based on retail weighted premium and garnered a total premium of Rs

153.56 billion registering a growth of 13% and held assets of Rs. 327.88 bi l-

lion as on March 31, 2009.

ICICI Lombard General Insurance Company, a joint venture with the Cana-

da based Fairfax Financial Holdings, is the largest private sector general i n-

surance company. It has a comprehensive product portfolio catering to all

corporate and retail insurance needs and is present in over 300 locations

across the country. ICICI Lombard General Insurance has achieved a market

share of 27.2% among private sector general insurance companies and an

overall market share of 11.2% during fiscal 2009. The gross return premium

grew by 2.2% from Rs. 33.45 billion in fiscal 2008 to 34.20 billion in fiscal

2009.

ICICI Securities Ltd is the largest equity house in the country providing end -

to-end solutions (including web-based services) through the largest non-

banking distribution channel so as to fulfill all the diverse needs of retail and

corporate customers. ICICI Securities (I-Sec) has a dominant position in its

core segments of its operations - Corporate Finance including Equity Capital

Markets Advisory Services, Institutional Equities, Retail and Financial Product

Distribution.

ICICI Securities Primary Dealership Limited is the largest Primary Dealer in

Government Securities. It is an acknowledged leader in the Indian fixed i n-

come and money markets, with a strong franchise across the spectrum of in-

terest rate products and services - institutional sales and trading, resource


37/66

37

mobilisation, portfolio management services and research. One of the first

entities to be granted Primary Dealership license by RBI, I-Sec PD has made

pioneering contributions since inception to debt market development in India.

I-Sec PD is also credited with pioneering debt market research in India. I-Sec

PD has been recognised as the 'Best Domestic Bond House in India' by

Asiamoney every year from 2002 to 2007 and selected as 'Best Bond House'

by Financeasia.com for the years - 2001, 2004 to 2007 and 2009."

ICICI Prudential Asset Management is the third largest mutual fund with av-

erage asset under management of Rs. 514.33 billion and a market share of

10.43% as on March 31, 2009. The Company manages a comprehensive

range of mutual fund schemes and portfolio management services to meet the

varying investment needs of its investors through162 branches and 185CAMS official point of transaction acceptance spread across the country.

ICICI Venture is one of the largest and most successful private equity firms in

India with funds under management in excess of USD 2 billion. ICICI Venture,

over the years has built an enviable portfolio of companies across sectors i n-

cluding Life Sciences, Information Technology, Media, Manufacturing, Retail,

Financial Services, and Real Estate thereby building sustainable value. It has

several firsts to its credit in the Indian Private Equity industry. Amongst them

are Indias first leveraged buyout (Infomedia), the first real e state investment

(Cyber Gateway), the first mezzanine financing for a acquisition (Arch Pha r-

malabs), the first royalty-based structured deal in Pharma Research & De-

velopment (Dr Reddys Laboratories - JV) and the first fund level secondary

transaction (Coller Capital)

Products & Services

Personal Banking

y Deposits

y Loans

y Cards

y Investments

y Insurance


38/66

38

y Demat Services

y Wealth Management

NRI Banking

y Money Transfer

y Bank Accounts

y Investments

y Property Solutions

y Insurance

y Loans

Business Banking

y Corporate Net Banking

y Cash Management

y Trade Services

y FXOnline

y SME Services

y Online Taxes

y Custodial Services

4.2 BANK OF RAJASTHAN

he Bank Of Rajasthan Ltd. was established at Udaipur, the city of lakes in Ra-

jasthan on the auspicious day of Akshya Tritiya on May 8, 1943. The credit

for the birth of the Bank goes to, the then finance minister of the erst -while

Mewar Government, late Shri Rai Bahadur P.C. Chatterji, who persuaded The

Mansingka brothers of Bhilwara for establishing a joint stock bank with its re g-

istered Office at Udaipur.

The Bank was established with an initial capital of Rs.10.00 lacs. Late Seth

Shri Govind Ram Seksaria, an eminent Industrialist of the country, was the

founder Chairman. The first Broad of Directors comprised such men of emi-

nence as Shri Rai Bahadur Seth Rameshwarlal Ji Duduwala, Seth Shri Sub h-

hag Mal Ji Lodha besides the Mansighka brothers, Seth Shri Pusa Lalji Ma n-


39/66

39

sighka and Seth Shri Damodar Lal ji Mansighka. The other members of the

board were Major Rajadhiraj Amar Singhji of Banera and the then Accountant

General of Mewar, Rai Bahadur lala Sukhdayalji. In line with the contempo-

rary practice of naming the bank after the location or princely state, the su g-

gested names for the bank were Bank of Mewar State or Bank of Udaipur.

The promoters, being very clear in their vision, expressed the view that the

word 'Rajasthan' will be more advantageous in future for expanding activities

in other princely states since under the new constitution grouping of the then

local princely states was expected under one umbrella. As now is history, the

individual princely states were merged under the final name for the state - Ra-

jasthan. The naming of the bank, The Bank of Rajasthan Ltd., glaringly re-

flected the foresight of the promoters.

4.3 ICICI BANK MERGE WITH BANK OF RAJASTHAN

Globalization has come as a boon for merger and acquisitions in India.

The main sectors that have contributed significantly to the mergers and acqu i-

sitions activity are services, pharmaceuticals, automobiles, electronics and

power. Services are getting more prominence what with their i ncreasing con-

tribution to GDP.

Privatization, liberalization of foreign investment norms and gl o-

bally consolidation activity are some of the reasons that have seen the Mer-

gers and Acquisitions companies thrive even in a bad business environment.

The need for consolidation by local companies to become globally competitive

is another reason for this trend.

The lure of gaining exceptional advantage may make the prospect of a

merger seem very attractive to companies but there are many glitches to be-

ware of. The merger even it is done for seemingly value adding purpose maythreaten the companys objectives of maximizing value of the firm to the

shareholders. There are several reasons for the failure of the mergers:

Firstly, very few firms have ability to successfully manage the diverse

businesses the temptation to stray into unrelated areas that appear exotic and


40/66

40

very promising is often strong. However, in reality, such forays are often very

risky.

Secondly, there is a strong tendency of the part of managers to build

big empires, which may lead to unwise acquisitions.

Thirdly, failure to fully investigate the business of the transferor comp a-

nies may lead the transferee company to overlook vital aspects like hidden

problems, contingent liabilities, window dressed balancesheets, exaggerated

worth of intangible assets like copy rights, patents, etc.

Finally, failure to integrate well due to poor implementation ca n ruin a

perfectly good merger proposal.

The Tayal family-owned Bank of Rajasthan (BoR) will merge with ICICI by Ju-

ly-end, though the vertical merger said an associate of the promoters, conf i-

dent of completing on schedule, a process hog -tied by legal disputes and em-

ployee unrest. The BoR board that met on Thursday sent the merger proposal

to RBI for approval. The application (for merger) is now with RBI. Both the

shareholders and board have approved the merger process. There are some

employees issues, which will be soon resolved by RBI, he said. On May 23,

the boards of both private-sector lenders approved ICICI Bank acquiring its

smaller rival in a share-swap deal. Under the pact, BoR shareholders will get

one ICICI Bank share for every 4.72 shares. But questions were almost im-

mediately raised on the merger, mainly because market regulator Sebi

pointed queries earlier, regarding the BoR shareholding pattern. The Tayals

have said their BoR stake is 28%. But Sebi said the stake is actually around

55%. Also, earlier this month, more than 4,300 employees of BoR began a

two-day all-India strike to protest against the merger. The marriage between

the two banks was also marred by a legal dispute when on Monday, the BoR

management received a notice from a Kolkata civil court, restraining it from

holding an extraordinary general meeting (EGM). The stay was lifted after an

order of the Kolkata High Court moved by ICICI Bank. BOR managing dire c-

tor and CEO G Padmanabhan, and two RBI-nominated directors had decided

against attending the EGM, though other shareholders went ahead and r e-


41/66

41

portedly voted in favor of the merger. Despite these troubles, the Tayal asso-

ciate was certain of the mergers success. In the last ten years, the bank has

grown from strength to strength. Bank of Rajasthan is an ideal platform for

ICICI to post a more robust and distributed growth, he said.

4.4 BOR- ICICI Bank Merger- RAJ Bank Pays the Cost of Poor Gover-

nance

Its official now. The two banks The Bank of Rajasthan Ltd and ICICI Bank

Ltd, the two private sector banks, one old generat ion and the other new gen-

eration bank are set to marry soon. While the board of both banks have a p-

proved the in principle merger, it may take couple of months to get sharehol d-

ers approvals (meetings planned for 21 st June) regulatory clearances and

other procedural hurdles cleared.

The Bank of Rajasthan is a Rajasthan based private bank in operation since

1943, promoted by Manisngka Brothers of Bhiliwara (Rajasthan). However,

promoters later changed hands to Bangurs and then Tayals who are now said

to be responsible for the circumstances leading to present merger. Today

bank has a nation vide presence with over 460 branches (110 ATMs) with

prominence in the state of Rajasthan. The bank is credited with loyal custo m-

ers, its own brand equity and even its logo comprises of a victory tower, a ris-ing sun and a coin with stronghold in Rajasthan. It also pioneered mobile

banking way back in 1960. The bank has a sponsored rural bank , Mewar

Anchlic Gramin Bank since 1983 and is also a SEBI registered merchant

banker, banker to issue and a depository participant with a capital base of

Rs 160 crore and total business of over Rs 25000 crores (deposits and ad-

vances).

On the other hand, ICICI Bank is the largest private sector bank and secondlargest bank in India. It has a assets base of Rs 3634 billion and a branch

network of over 2000 branches, 5219 ATMs and presence in 18 countries.

Unlike Bank of Rajasthan which is only listed in India, ICICI Banks ADRs are

also listed at New York Stock Exchange. The bank has significant profit re-


42/66

42

ported in March 2010 at Rs 40.25 billion where as Rajasthan Bank reported

loss in December 2009. Its March 2010 results are awaited.

There have been certain problems of mis-management and governance at the

Bank of Rajasthan which led to the circumstances resulting in the proposedmerger. The merger also suggests that all is not well in the bank. Earlier in

January this year, the banking regulator brought in a new managing director

and CEO from State Bank group to take over and clear the mess. Today with

five RBI nominated director (which is a rare case), the management of bank is

virtually at RBIs oversight. The promoter group (Tayals) faces investigations

and enquiries, both from Reserve Bank and Capital Market Regulator, SEBI.

Infact, SEBI has already issued a restrain order against the Tayals from dea l-

ing in securities market.

Though there were so called independent directors on the Board of the Bank

of Rajasthan, it is understood that there were several instances where it was

observed that either they did not acted in the larger interest of the organiza-

tion or their independence it self was at stake. Had they played a role ex-

pected of them, RBI would not have sent a fleet of new directors to oversee

the board functioning. As a cumulati ve effect, the financials and business had

been adversely affected which is also reflected in the results. The growth is

negative, bank is into losses and assets are impaired. Not only this, it also

dents the trust of all stakeholders, particularly the depositors, customers and

borrowers.

In order to salvage the bank from further sinking and to save guard the inte r-

ests of all concerned including employees, perhaps, merger seems to be a

wise idea. The option of ICICI Bank or any other bank is not the issue h ere. If

Bank of Rajasthan was to survive, the merger became inevitable and this has

been done timely at an appropriable moment.

ICICI Bank has entered into an agreement with certain shareholders ( prom o-

ter group ) for the proposed amalgamation at a share exchange ratio of 25

shares of ICICI Bank for 118 shares of Rajasthan Bank ( a ratio of 1:4.72).

This merger is going to be on a going concern basis and existing sharehold-


43/66

43

ers of both banks would gain handsomely. It one looks at BORs share prices,

they have been going up and up and in last three trading sessions, the prices

have shot up by over 60 % to Rs 166.70 (as on 24.5.2010) where as price of

ICICI Bank stood at Rs 832 on 24 the May 2010. Post merger, the value of

ICICI Bank shares will also go up as the business grows and the advantages

of merger start accruing.

The Merger Matrix

Factor BOR ICICI

Edge

Business Operations

Management

Stronghold in north India

All India

Conservative, traditional

banking

Pan India presence with

stronghold in western

parts

18 countries

Visionary, hunger for

growth

Business strategy Struggling to survive Aggressive, innovative

and expanding

Branches 463 2209

ATMs 110 5219

Financial Results Loss in December 2009 Continuous profits

Listing BSE, NSE BSE, NSE, NYSE

Share price (24.5.2010) Rs 166.70 Rs 832

One year high Rs 166.70 (24.5.2010) Rs. 1009 (6.4.2010)

Share exchange ratio 118 (4.72) 25 (1)

Value base on 24.5.2010 Rs. 19670 Rs. 20800

Merger benefit Bank survives, future

growth potential , benefi-

cial to all stakeholders

Business expansion in

north India, long term

shareholders value

Cut off date To the announced To be announced


44/66

44

So far as share exchange (swap ratio) is concerned, the present shareholders

of BOR tend to gain in money terms considering the present price or even the

price on the date of announcement in the board meetings of two banks. The

share price of BOR has been jumping by 20 percent since then and even then

at present prices, it gives a monetary gain.

For shareholders, it is believed that the merged entity would provide value to

shareholders in medium to long run. For ICICI bank, the benefits will start a c-

cruing immediately as there is going to be no cash outflow (only share ex-

change will take place) and benefits from operational performance will be i m-

mediate adding to top line as well as bottom-line. Since BOR now also oper-

ates on modern technology, some capital expenditure on information techno l-

ogy may be required to align it with that of ICICI. The customers of BOR maynow enjoy would class personal banking experience, but of course, at a cost.

While personal touch of BOR may be missing, one can then feel professio n-

al touch in banking relationships. ICICI lays emphasis on personal b anking

relationships where as customer loyalty has been a USP of Bank of Rajas-

than. Those loyalties will have to be tested now. Those customers who are

averse to dealing with private banks may shift to other public sector banks,

and in this back drop, bank like state bank of Bikaner and Jaipur may have an

edge, given its size and presence in the state of Rajasthan. The fixed deposits

may also witness some shift. Undoubtedly, customers will have rich choice of

innovative as well as customized products and corporate customers shall im-

mensely gain out of such products adding to their efficient cash manage-

ment. BOR has considerable business of state government corporations and

bodies (eg, roadways, JDA, University, RIICO etc). While ICICI would benefit

out of this, a question may arise in these corporations to continue banking re-

lations with a new generation private bank or switch over to any other public

sector bank.

The most sensitive part of this merger would be handling of human relations.

The employees of BOR will resist such a merger for obvious reasons as it

makes them in secure, fragile and brings in fear of relocation, branch clo-

sure and rationalization besides discrimination in treatment, positions, pac k-


45/66

45

ages etc. The most challenging task before BOR employees would be to

adjust to new target oriented professional work culture where performance is

rewarded and every team member has to contribute in tangible terms to or-

ganizational growth. Those who are able to change would survive and also

rediscover their talent and those who wont would find such merger really diff i-

cult to cope with. The writing is on the wall and this change (merger) seems to

be inevitable. The softer part of the merger is not yet out but it would be desi r-

able for ICICI Bank to value the BORs brand a

Documents

Raj Repaired)