PROJECT REPORT

On

“ROLE OF MERGER & ACQUISITION IN BANKING SECTOR FOR BETTER CORPORATE GOVERNANCE”

Submitted To ABC University City, For the Partial Fulfillment Of The Award of Degree Of

MASTER OF BUSINESS ADMINISTRATION

BATCH: 2004-2006

Under the guidance of Submitted by:Mrs. ABCS ABC

ABC INSTITUTE OF MANAGEMENT & TECHNOLOGY(Approved by AICTE, & Affiliated ABC.University, City)

Address

INDEX

SERIAL NO. PARTICULARS

1. Preface

2. Acknowledgement

3. Certificate

4. Introduction

5. Literature Review

6. Overview Of The Industry Beginning of banking in the world Beginning of banking in India Reforms in banking

7. Basic framework Objectives of the study Research methodology Source of data Limitation Scope of study

8. Conceptualization Merger & Acquisition Corporate Governance

9. Framework of Corporate Governance

10.Case Study (Global trust bank with Oriental bank of commerce)

11.Analysis

12.Conclusion

13.Appendix

14.Suggestions

15.Annexure

16.Bibliography

DECLARATION

I ABC Roll No. Class MBA, student of Institute Of Management and Technology here

by declare that the project entitled “Role of Merger & Acquisition in Banking Sector

For Better Corporate Governance”” is an original work and the same has not been

submitted to any other institute for the award of any degree. The interim report was

presented to the Supervisor on __________and the per-submission was made

on_____________. The flexible suggestions have been incorporated in consultation with

the supervisor.

Counter Signed

Signature of the Candidate

Signature of the Supervisor

Forwarded By:

Director/ Principal of the Institute

ACKNOWLEDGEMENT

In this present world of competition there is a race of existence in which those who are

having will to come forward will succeed. Project is a bridge between practical and

theoretical working , with this will I have joined the project . I really wish to express my

gratitude towards all those people who have helped me.

I really indebted to Mr. AB H.O.D. M.B.A. department ABC., City for this kind hearted

approach. His timely guidance, supervision & encouragement have helped me to get this

golden opportunity.

My project guide Mrs. ABCD lecturer of ABC., City, who provided me his expert advise,

inspiration & moral support in spite of her busy schedule & assignments, has mainly

provided my understanding of this project. I am very grateful to his kindhearted approach

& encouragement, which helped me immensely in completion of this project report.

Last , but not the least, I say only this much that all are not to be mentioned but none is

forgotten and I will like to extend my special thanks and gratitude to my parents who

always encourage me in pursuit of excellence.

(ABC)

In the wake of recent financial & corporate scandals corporate governance is the need of

hour. In spite of the growing knowledge, not much attention has been given to corporate

issues in bank.

3 C’S OF BANKING ARE

Capital

Corporate governance

Consolidation (according to Business Today)

IMPORTANCE OF CORPORATE GOVERNANCE IN BANKS

First , because banks are seen as the engines that drive the

economy towards growth in developing countries

Second, due to under developed financial markets in developing

countries, banks are the major source of finance for many firms.

Third, bank acts as a repository for the economy’s savings, apart

from providing means of payment.

Fourth, after recent privatization & disinvestments of most of the

banks & the reduce role of economic regulations, bank today are open for

freedom in terms of how they are being run.

WHY THERE IS A NEED FOR CORPORATE GOVERNANCE IN

BANKING SECTOR

There are following issues:

The NPA syndrome

Employee’s frauds

Evolution of new business models

Branch banking vs. unit banking

Complicated financial structure

Scandals have become the trend of times

False picture of financial health and misleading investors.

Non-compliance with statutory requirement, negative net worth,

negative capital adequacy & low morale.

ACCORDING TO CAPIRO & LEVINE,

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

governance.

First, with banks being more non-transparent, there arises an

agency problem. The information difference between the insiders & outsiders in

banking lead to more difficulty for equity & debt holders in monitoring the

managers, and in turns, it become easier forth managers to use the benefit of

controls, rather the focusing on maximizing the value.

Second, heavy regulations imposed on the banks stand as an

obstacle for natural corporate governance mechanism.

Director’s poor decisions and ineffective board processes are to pay the price. For

measuring the board performance4 against certain benchmarks set for “good

governance”,

ACCORDING TO SHLEIFER & VISHNY DEFINE CORPORATE

GOVERNANCE AS

“Dealing with the ways that supplier of finance to corporations to assures themselves of

getting a return on their investment”.

ACCORDING TO AGENCY THEORY, if managers operate independently, they

make financing, investment & payout decision that are determinately to shareholders.

To mitigate the conflict between managers and shareholders, the literature offers

several solutions, such as monitoring by the board of directors and the block holders,

compensation structure, and managerial equity investment.

Investors and depositors, regulators

have direct interest in the bank performance. On a more aggregate level, regulators

are concerned with the effect governance has on the performance of financial

institution because the health of the overall economy depends upon the board of

directors of the banking firm is placed in a crucial role in its governance structure.

One major area likely to be affected by

regulation is the structure of executive compensation. Stock-based compensation

motivates top management to undertake more value enhancing decision, but

regulators would also want to consider how to stock option affect risk taking.

Resolution of the financially distresses

is necessary because this usually leads to liquidation, and the incumbent is removed

from management.

Large grant to top executives have the

potential to impact banking firms capital by way of future share repurchase.

Therefore large grants of options in any given year have the potential to affect the

capital base adversely in later years.

ACC TO MC. KINSEY CONSULTANCY

THE CONTROL MODEL GOVERNANCE CHAIN

ShareholdersEnvironment

Capital market TransparencyLiquidity Accountability

FIGURE:- 1

Concentratedownership

Reliance onfamily, bankand publicfinance

Insider board

Incentivesaligned withcore share-holder

UnderDevelopednew issuedmarket

Inadequateminorityprotection

Limitedtakeover

Limiteddisclosure

CORPORATECONTEXT

INSTITUTIONALCONTEXT

BEGINNING OF BANKING IN THE WORLD

BEGINNING OF BANKING IN INDIA

REFORMS OF BANKING IN INDIA

BEGINNING OF BANKING IN THE WORLD

The word “bank is derived from the word “Bancus or Banque”, that is bench. Jews, who

were considered to be the early bankers, transacted their business on benches in the

market. Some people trace the origin of the word “bank” from the German word “Back”

meaning a joint stock fund. This seems to be better.

EARLY HISTORY OF BANKING

According to history, Babylonians had developed as banking system. The great temples

were powerful of the Greek banking institutions. In ancient Greece & Rome, the practice

of granting was widely prevalent. People used cheque & drafts to settle their accounts.

Manu, the ancient Hindu lawgiver has written exhaustive regulations governing credit.

He talks about credit installments, interest on loans and commercial papers.

During the early periods, although banking business was mostly done by private

individuals, many countries established in Barcelona in 1941. During 1407, the bank of

Genoa was established. The bank of Amsterdam was established in 1609 to meet the

needs of the merchants of the city. It accepted deposits, which could be drawn on

demand.

English banking may correctly be attributed to the London gold smiths. The received

their valuables and fund for safe custody and issued receipts. These notes, in the course

of time, became payable to bearer of demand and hence enjoyed considerable circulation.

However, in the course of time, gold smiths were ruined. This lead to the growth of

private banking and establishment of “Banking of England” in 1694

A SHORT HISTORY OF BRITISH BANKING

The origin of modern banking in Britain can be traced back across four centuries and the

history of the Royal Bank of Scotland Group’s past constituents perfectly illustrates the

story of the industry’s development.

THE BIRTH OF BRITISH BANKING

In the 1660s London dominated England’s political and economic lie and , with a

population of 450,000 was the fourth largest city in the world. The established

importance of London in raising and servicing government finance and in international

trade had led to the development of a relatively sophisticated money market. It was

consequently here that the profession of banking emerged from the trade of goldsmith

during the course of the seventeenth century.

The goldsmiths, makers and sellers of plate and jewellery, flourished after the dissolution

of the monasteries in the 1530s increased the available supplies of gold. Many goldsmiths

developed strong connections with the crown and , from the 1940s, most began to take in

valuables for safe keeping in their vaults.

THE GROWTH OF PROVINCIAL BANKING

The number of banks in London grew during the eighteenth century, but their business

was restricted and provincial banks began to flourish outside London to serve

industrialists and merchants remote from the capital.

Thomas Smith , a cloth merchant in Nottingham, began operating the earliest known

provincial bank in the 1650s , by offering banking services to his customers. Most

country’s banks however, were established from the mid-eighteenth century onward.

Before 1750 there were only a handful of bankers in the country outside London . by

1784 this number had grown to 119 and by 1810 to a massive 650. similarly in Scotland,

by 1772 there were eight banking companies operating in Scotland outside Edinburgh &

Glasgow, a number that had increased to 21 by 1810.

From the 1770s a more sophisticated banking infrastructure began to emerge, with the

creation of a clearing house in London for settling inter-bank payments

THE ARRIVAL OF JOINT STOCK BANKING

Lancaster Banking Company , became the first British joint stock bank in 1826 , whilst

other important constituents of the Royal Bank of Scotland were established soon after.

These included Manchester & Liverpool District banking Company in 1829, National

Provincial Bank of England in 1833 and Manchester & Sal ford bank and Ulster Banking

Company in 1836.

THE EMERGENCE OF LARGE NATIONAL BANKS

Despite the success of Scotland’s banks, London still dominated the nation’s financial

system. The volume of transactions settled through London was also increasing. In 1864

National Bank of Scotland became the first Scottish bank to open a London office.

THE EMERGENCE OF LARGE NATIONAL BANKS

Despite the success of Scotland’s banks, London still dominated the nation’s financial

system. The volume of transactions settled through London was also increasing. In 1864

National Bank of Scotland became the first Scottish bank to open a London office.

The end of the nineteenth century may have seen a slower pace of change in the banking

sector, but nonetheless the lending and share underwriting activities of banks had made

possible vigorous industrial and commercial growth in Britain and her empire. in

addition, bankers were held in high regard in their local communities as men of influence

and importance.

THE ‘BIG FIVE’

In 1900 there were around 250 private and joint stock banks in Britain and London was

undoubtedly the world’s largest and busiest banking center.

The outbreak of the First World War heralded a period of rapid change in the banking

industry. Overall the volume of banking business grew during the war and many of the

private banks responded by opening additional branches, developing businesses abroad

and embarking on a series of major amalgamations.

‘Big Five’-Westminster, National Provincial, Barclays, Lloyds and Midland. The smaller

banks, like then Royal Bank of Scotland, were little affected by these controls.

SHORT HISTORY OF BRITISH BANKING

The origin of modern banking in Britain can be traced back across four centuries and the

history of The Royal Bank of Scotland Group’s past constituents perfectly illustrates the

story of the industry’s development.

WAR AND CHANGE

During the Second World War, all the banks experienced similar problems as in 1914 to

1918, with controls over foreign exchange and lending priorities, and responsibility for

the marketing and distribution of savings certificates and defense bonds. Meanwhile, the

government signaled the softening of its hard-line opposition to bank mergers resulting in

the amalgamation, announced in 1968, of the biggest High Street banks –National

Provincial Bank and Westminster bank. Likewise, in Scotland, in 1969 the Royal Bank of

Scotland merged with National Commercial Bank of Scotland.

EXPANSION, CONSOLIDATION AND INNOVATION

In 1971, a government white paper published a scheme of monetary control, which

encouraged the banks to compete more actively with one another and with other financial

institutions. As a result many of the banks began to provide additional services and to

sharpen their public image.

During the late 1980s and early 1990s many banks developed their overseas

representation, but there was also widespread retrenchment due to the impact of both the

deep recession in the UK economy and the fierce competition bred by deregulation

HISTORICAL PERSPECTIVE OF

INDIAN BANKING

According to Indian banking history, The British East India Company established “The

Hindustan Bank” in Calcutta and Bombay in 1870, was the earliest Indian Bank banking

in India on modern lines started with the establishment of three presidency banks under

Presidency Bank’s act 1876 i.e. Bank of Calcutta, Bank of Bombay and Bank of Madras.

IMPERIAL BANK OF INDIA

The first major event in the history of banking in India took place in 1919 when the

presidency banks were amalgamated and “Imperial bank of India” was set up. Banking

companies Inspection ordinance was passed in January, 1946 and in February, 1946 the

Banking Company’s restriction of Branches Act was passed. In 1949, the Banking

companies Act was passed which was later amended to read as Banking Regulation Act.

RESERVE BANK OF INDIA

Reserve Bank of India Act was passed in 1934 & Reserve Bank of India (RBI) was

constituted as an apex bank without major government ownership. Banking Regulations

Act was passed in 1949. This regulation brought Reserve Bank of India under

government control. Under the act, RBI got wide ranging powers for supervision

&control of banks. The Act also vested licensing powers & the authority to conduct

inspections in RBI

NATIONALIZATION OF BANKS

On 19 July 1969, the Government acquiring ownership and control of 14 major banks in

the country an Ordinance. This was done to bring commercial banks in to the mainstream

of economic development with definite social obligations and objectives. Later, on 5

April 1980, six more commercial banks were nationalized.

REFORMS OF EARLY 1990’S

After submissions of recommendations of the committee headed by Chairman Shri M.

Narasimham, a comprehensive reform of the banking system was introduced in 1992-93.

the main aim of the reform measures was to ensure that the balance sheets of banks

reflected their actual financial health.

Companies or have lent money to people who needed it for business or personal

purposes. Banks now also offer a wide range of other services such as exchanging foreign

currency, advising on investments and insurance and acting as executors and trustees.

AUTOMATION IN BANKING SECTOR

In recent years there has also been considerable change in the functioning of banks. There

has been an increase in the amount of technology used by these institutions e.g. some

banks use cash dispensers and offer twenty four hours cash withdrawal facility, instant

account details and money transfer through computer network.

Because of much more competition in the banking sector, services have to be sold in

ways never done earlier.

Today, customers do all their banking transactions while sitting at home.

Banks are introducing Automatic Teller Machine (ATM) cards.

Debit and credit cards are used as well.

This promises to change the face of banking forever.

LIBERALIZATION

There is a growing need for banking facilities due to nationwide growth, international

trade and industrial liberalization which have all contributed to changes in the banking

environment.

DIVERSIFYING THE PRIORITIES OF BANKS

From the regular banking operation, termed as ‘House Keeping’, balancing of books and

reconciliation of inter-branch and intra-branch entries of simple money transaction,

commercial banks are diversifying their priorities.

New financial institutions like merchant banks, leasing companies, mutual

funds and venture capital companies have come into existence.

Commercial banks too have joined the hub of capital market activities.

There has been a transformation in the services offered by banks and this has

led to considerable change in the type of manpower recruited.

With demand of profit, in the banking industry, particularly in the

international banking sector the total concept of seniority and promotion has

been changed.

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

gone down.

Banks have set right their organizational structure for efficient services.

Computers have taken over and recruitment pattern has been favorable to

more technical manpower.

Management graduates, Chartered Accountants, Chartered Financial Analysts

are hence in greater demand in the banking sector. Presently, emphasis is on

specialization and diversification.

To cater to the needs of a growing industry for marketing its shares and debentures,

public sector banks and financial institutions have started their own Merchant

Banking divisions. Many industrial houses too have started their own Merchant

Banking, companies, acting as lead managers for public issues of shares and

debentures, e.g. Times Guarantee, Tata Finance etc.

CORPORATE AND MERCHANT BANKING:

Corporate and Merchant Banking are business related activities. Corporate Banking

incorporates corporate finance i.e. credit risk assessment and technical aspects such

as raising capital, business mergers and acquisitions as well as all banking activities

related to large organizations.

While Merchant Banking implies investment management e.g. management

of trusts, securities, mutual and pension funds, public issue management and

international funds. Merchant Banking involves offering advisory services to

corporate clients on capital structure decisions, public issue management,

underwriting, raising funds through public issue from overseas markets, project

appraisals besides mergers and acquisitions. With merger and acquisitions as well

as joint ventures and alliances being formalized by corporate for the sake of

expansion, opportunities for merchant bankers have grown.

INVESTMENT BANKING:

Investment Banking activities are associated with financial activities such as

securities underwriting, markets and arranging mergers, acquisitions and

restructuring. Investment bankers work in retail banking and corporate clients and

institutional banking. These banks hold large financial assets as they manage dealer

activities and in trading and distribution of securities. The function is advisory and

the bank support financial activities through lending to customers using securities as

collateral or for repurchase agreements where in they use their own securities.

Investment banking is fund based and not only fee based while Merchant Banking,

on the other hand, is fee based.

The world’s top six investment banking houses manage the major portion of new

issue investment-grade securities and are referred to as special bracket firms; these

are Solomon Brothers, First Boston, Goodman Sachs, Morgan Stanley, Merrill

Lynch, and Shearson Lehman Brothers. In India, some of the top investment

Bankers is DSP Merrill Lynch, PNB Capital Services, GE Caps, IFCI Financial

Services, IDBI Capital Markets, SBI Capital & JM Financial and Investment.

The role of Investment Banks is to participate in direct markets by bringing

financial claims for sale. They operate to help businesses and governments sell their

new security issues. Once the securities are sold investment bankers make

secondary markets for securities as brokers and dealers. They are largely doing

underwriting business. Investment Banking can be carried on as part of the normal

range of business activities. In India ICICI Bank can be regarded as investment

banking.

TREASURY AND FOREX FUNCTION

With the increase in forex (foreign exchange) flow in the country and reliance of

corporate on the international market in sourcing their fund requirements, the

treasury and forex functions are becoming increasingly important.

Since fund management is an important determinant of success of any business,

treasury management has become a very important finance function. Knowledge of

global money markets and financial instruments such as deposit certificates,

treasury bills, forecasting, financial management and manipulation, source

evaluation and domestic and foreign currency funds has become critical for

managing the treasury profit center. Treasury and risk management ensures cost

effectiveness in planning strategies in this era of deregulation.

Forex marketing technically is an inter banking activity. The job entails two major

responsibilities assessing various markets e.g. Stock or money markets on behalf of

the bank and customer desk to advise corporate or other banks that require foreign

currency. The job entails checking on current prices, keeping abreast with policies

of the regulatory bodies, analyzing past trends for making predictions and bids for

forex trading. The task is affected by the high volatility of the markets and involves

taking risks.

BANKING –FINANCIAL SECTOR & REFORMS

FINANCIAL SECTOR REFORMS

1992-94 TO 1995-96

Bank norms liberalized And banks given the freedom to

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

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

involving expansion/ modernization of power generation capacities.

Banks allowed setting their own interest rate on post-

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

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

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

Bank freed to fix their own forex open position limit

subject to RBI approval.

Guidelines issued to banks to ensure qualitative

improvement in their customer service.

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

bifurcate the maximum permissible bank finance of Rs 200 million and above into

loan component of 40% (short term working capital loan) and cash credit component

of 60%.

COMPETITION

Decades of non-commercial orientation, direct lending, loan waivers and

increasing non-performing assets had initially made banks difficult to adjust to a

market environment having strict prudential norms. However, the emerging

results suggest that banks are beginning to adapt to the competitive environment

and facing the challenge.

DECONTROL

Many steps were taken in 1995-96 to reduce controls and remove operational

constraints in the banking system. These include interest rate decontrol,

liberalization and selective removal of Cash Reserve Ratio (CRR) stipulation,

freedom to fix foreign exchange open position limit and enhanced refinance

facilities against government and other approved securities.

THE RBI ISSUED GUIDELINES REGARDING THE

FORMATION AND FUNCTIONING OF

PRIVATE SECTOR BANKS

(IN JANUARY 1993)

I. The banks shall be governed by the provisions of the Reserve Bank of India Act,

1934 The Banking Regulation Act, and 1949 other relevant statuaries.

II. Private sector banks are required to be registered as public limited companies in

India.

III. The authority to grant a license lies with the RBI.

IV. The shares of banks are required to be listed on stock exchanges.

V. Preference will be given to those banks whose headquarters are proposed to be

located in a centre which does not have headquarters of any bank.

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

total voting rights.

VII. The new bank would not be allowed to have as its director any person who is

already a director in a banking company.

VIII. The bank will be subject to prudential norms in respect of banking operations,

accounting policies and other policies, as laid down by RBI. The bank will be required

to adhere to the following:

Minimum paid up share capital of Rs. 1 bn

Promoter’s contribution as determined by the RBI capital adequate of 8% of the risk

weighted assets Single borrower and Group borrower exposure limits in force Priority

sector lending Export Credit Loan Policy within overall policy guidelines laid down

by the RBI.

IX. The banks will be free to open branches anywhere once they satisfy the capital

adequacy and prudential accounting norms.

X. The banks would not be allowed to have investments in subsidiaries, mutual funds

and portfolio investments in other companies in excess of 20% of the banks own paid up

capital and reserves.

XI. The banks would be required to use modern infrastructural facilities in office

equipment, computer, telecommunications etc.

POLICY FOR INVESTMENT MADE IN PRIVATE BANKS

New private sector banks have not been allowed to set up in India since 1969. with a view

to increasing competition in the banking industry and in line with the recommendations of

then Narsimhan Committee, the government has now allowed the entry of such banks.

CLOSE MONITORING BY RBI

However, the freedom of the entry into the banking sector will be carefully managed by the

RBI. The RBI will grant approvals for entry of private sector banks provided such banks

offer competitive, efficient and low cost financial intermediation services, result in up

gradation of technology in the banking sector, are financially viable and do not resort to

unfair means like preemption and concentration of credit, monopolization of economic

power, cross holding with industrial groups etc.

FOREIGN INVESTMENT IN BANKING SECTOR

Under the scheme, Non Resident Indians are allowed to have primary equity in a new

banking company to the extent of 40%. In the case of a foreign banking company or a

finance company acting as a technical collaboration or a co-promoter, equity participation

is restricted to 20%.

REFORMS IN BANKING SECTOR TO CONTINUE

A new bill on banking sector reforms is to be introduced in Parliament to strengthen

creditor rights through foreclosure and enforcement of securities by banks and financial

institutions.

Union Finance Minister Yashwant Sinha today stressed in parliament that reforms in the

banking sector will be continued to enhance the efficiency and competitiveness of the

sector.

THE FOLLOWING MEASURES HAVE EITHER BEEN

TAKEN OR ARE BEING TAKEN

* Public sector banks recovered Rs 12,860 cr in 2000-

01 as compared with Rs.9,883 cr in the previous year and net NPAs as percentage of

net advances came down to 6.7% as on March 31, 2001 as compared to 7.4% in the

previous year.

* To help banks and financial institutions to make

provisions for NPAs as required by the RBI, additional fiscal relief is being offered,

details of which will be given in part B of my speech. This will enable banks to

review their lending rates.

* A new bill on banking sector reforms is proposed to

be introduced in parliament to strengthen creditor rights through foreclosure and

enforcement of securities by banks and financial institutions. This bill will also enable

securitization for money locked up in long-term loans.

* A Pilot Asset Reconstruction Company will be set

up by 30 June 2002 with the participation of public and private sector banks, financial

institutions and multilateral agencies. This company will initiate measures for taking

over non-performing assets in the banking sector and also0 develop a market for

securitized banks.

* The Deposit Insurance Credit and Guarantee

Corporation (DICGC) will be converted into the Bank Deposits Insurance

Corporation (BDIC) to make it an effective instrument for dealing with depositor’s

risks and for dealing with distressed banks .Appropriate legislative changes will be

proposed for this purpose.

* Reforms in the financial sector have posed new

challenges for the Development Finance Institutions (DFIs) like IDBI. It is proposed

to make legislative changes to corporatism IDBI within the coming year to provide it

appropriate flexibility. Meanwhile IDBI’s tier one capital is being strengthened by

conversion of existing IBRD and NIC (LTO) loans in to appropriate long-term

instruments.

* Consequent to certain amendments made in the year

2000, in the Companies Act 1956, directors incur disqualification for election in the

case of certain defaults by the company. It is proposed to exempt nominee director’s

financial institutions and banks from this provision.

* Three public sector banks had been classified as

weak banks on the basis of criteria suggested by the committee on Banking Sector

Reforms in 1997-98. two of these banks namely UCO bank United bank of India have

turned around and have started making profits. Though the Indian Bank has also

shown improvement, its capital adequacy ratio remains deficient. A provision of Rs

1300 cr is proposed for re-capitalization support to this bank, on the basis of a

commitment to government for implementing monitor able reform measures.

* In the Banking Sector, foreign banks are permitted

to operate in India as fully owned branches with specific permission of the Reserve

Bank of India. As recommended by the Committee on Banking Sector Reforms, it has

now been decided to give an option to foreign banks to either operate as branches of

their parent banks or to set up subsidiaries. Such subsidiaries will have to adhere to all

banking regulations, including priority sector lending norms, applicable to other

domestic banks. Necessary amendments will be proposed in the Banking Regulation

Act 1949 to relax the maximum ceiling of voting rights of 10% for such subsidiaries.

The cooperative credit structure, which is critical for the agriculture sector, has low

capital adequacy and high NPAs, is of urgent need of reform. A committee under the then

Deputy Governor of RBI was appointed to examine its functioning closely. The

recommendations of this committee have been discussed widely by chief ministers and in

a joint committee of cooperation ministers under the chairmanship of Vikhe Patil reform

measures such as the adoption of a Model Cooperative Act, removal of dual control

between state governments and the RBI, regular conduct of elections, larger stake of the

members, and proffessionalisation of management etc. have been recommended.

The recapitalization formula suggested is 60:40 between the central and state government

along with increases in share capital of members. States will have to consider and accept

their funding share and implement the suggested measures for reform.

Even though this is a state subject the government of India will go out of its way to help

in the process. To start the process, Sinha said he is making a token provision of Rs 100

cr and depending on the pace of reform, provision of additional funds will be considered.

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

Banking scenario has changed rapidly since 1990s. The decade of 90s has witnessed a sea

change in the way banking is done in India.

‘Anywhere banking’ and ‘Anytime banking’ have become a reality. The financial

sector now operates in a more competitive environment than before and intermediates

relatively large volume of international financial flows.

ECONOMIC OUTLOOK AND BANKING SECTOR’S PERFORMANCE

During the last couple of years, global growth has been above the forecast in almost

every region stimulated by strong monetary and fiscal measures. Inflation rate has been

under control, barring some hiccup for a short period.

HIGH CAPITAL INFLOWS: AN OPPORTUNITY AS WELL AS A

CHALLENGE

Liquidity position in the financial sector has been quite comfortable in the recent times.

TECHNOLOGY IS THE KEY

Technology has thrown new challenges in the banking sector and new issues have started

cropping up which is going to pose certain problems in the near future. The new entrants

in the banking are with computer background. Foreign banks and the new private sector

banks have embraced technology right from the inception of their operations

GLOBALISATION OF FINANCIAL SERVICES

The surge in globalization of finance has also gained momentum with the technological

advancements which have effectively overcome the national borders in the financial

services business.

INDIAN BANKS AT THE GLOBAL STAGE: A REALITY CHECK

As per Indian Banks' Association report ‘Banking Industry Vision 2010’, there would be

greater presence of international players in Indian financial system and some of the

Indian banks would become global players in the coming years.

WHAT IS BEING DONE TO PREPARE INDIAN BANKS TO MEET GLOBAL

CHALLENGE?

Indian banking sector has already implemented internationally followed prudential

accounting norms for classification of assets, income recognition and loan loss

provisioning.

SUPPORTING REGULATORY FRAMEWORK

RBI has suitably changed the country’s regulatory framework from time to time to

support Indian financial institutions to withstand the competitive pressures placed on

them by increasing globalization.

CONSOLIDATION AND MOVE TOWARDS UNIVERSAL BANKING

We are slowly but surely moving from a regime of “large number of small banks” to

“small number of large banks.”

GOVERNMENT AND RBI REGULATIONS

All commercial banks face stiff restrictions on the use of both their assets and

liabilities.40% of loans must be directed to “Priority Sectors” and the high liquidity ratio

and cash reserve requirements severely limit the availability of deposits for lending. The

RBI requires that domestic Indian banks make 40% of their loans at concessional rates to

priority sectors selected by the government. These sectors consist largely of agriculture,

exporters, and small businesses. Since July 1993, foreign banks have been required to

make 32% of their loans to these priority sectors. Within the target of 32%, two sub-

targets for loans to the small-scale sector (minimum of 10%) and exports (minimum of

12%) have been fixed.

Foreign banks, however, are not required to open branches in rural areas, or to make

loans to the agricultural sector.

(SOURCE: GOVERNMENT OF INDIA ECONOMIC SURVEY)

NEED TO PONDER

Debates on India’s slowdown focus on the manufacturing sector which is dangerously

misleading: one of the biggest areas of worry about India’s banking sector. Stories about

the real health of Indian banks get less publicized because banks are still overwhelmingly

owned, controlled and directed by the government, i.e. the ministry of finance(MOF).

Banks have no effective mouthpiece either

GREY FUTURE

One more reason being the opacity of the RBI. This doesn’t mean a forecast of doom for

the Indian banking sector the kind that has washed out South East Asia. And also not

because Indian banks are healthy. We still have no clue about the real non-performing

assets of financial institutions and banks. Many banks are now listed. That puts additional

responsibility of sharing information. It is now clear that it was the financial sector that

caused the sensational meltdown of some Asian nations. India is not Thailand, Indonesia

and Korea. Borrowed investment in property in India is low and property prices have

already fallen, letting out steam gently. Our micro-meltdown has already been happening.

CONCLUSION

Still, there are several other worries about the banking sector, mainly confusion over

ownership and control. Sometimes soon India will be forced to apply the norms of

developed countries and many banks (including some of the biggest) will show very poor

return ratios and dozens of banks will be bankrupt. When that happens the two popular

reasons to defend bad banks will disappear. These are:

* To save face in the remote hope of that fortunes will ‘revive’

* Some banks are too big to be allowed to fail faring social upheaval.

FINANCIAL SECTOR REFORMS

THROUGH CONSOLIDATION

There has been a tectonic change in some component of the financial sector in the last

decade or so. The capital markets have seen phenomenal changes in technology,

regulations, instruments and institutions. The banking sector also has witnessed important

changes in terms of regulations and instruments. From the period of segmentation in the

1960s and 1970s, capital markets and banking sector entered the period of consolidation

in the period of 1990s

INTEGRATING THE MARKET WILL FACILITATES

Reduction in the interest cost and hence benefits the ultimate consumer

Enhancing the credit delivery mechanisms

Introduction of the rating processes at retail level

Creating level playing field when global players enter retail

Reversing the inverse relationship between the size of borrowing and the cost of

borrowing.

OBJECTIVE OF THE STUDY

RESEARCH METHODOLOGY

SOURCE OF THE DATA

SCOPE OF STUDY

LIMITATION OF STUDY

OBJECTIVE OF THE STUDY

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

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

Governance.

Encouraging factors for the said merger.

Analyze parameters for evaluation of both the companies.

To find it out the basis of merger and acquisition.

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

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

To study the measures taken by the government to increase Merger & Acquisition

in Banking Sector.

RESEARCH METHODOLOGY

Research Methodology refers to the methods the researcher use in performing research

operations. The research methods which are going to be used are:

1) Explorative research

2) Case study (comparative analysis)

i. Whole case is divided into parts.

ii. Organizations position before merger & acquisition traced.

iii. Organizations position after merger & acquisition traced.

iv. Comparison of both.

v. Comparative evaluation of results is given.

In the explorative research, our objective is going to:

i. Expand understanding of the dilemma or problem.

ii. Gather background information on topic to refine the research

problem.

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

Measurement questions.

Explorative phase begin with the literature search-a review of books as well as articles in

journals or professional literature that relates to our dilemma. A literature search requires

that use of library online catalog and one or more bibliographic databases or indexes. For

some topics it may be useful to consult a handbook or specialized encyclopedia first to

establish a list of key terms, people or events that have influenced our topic and also to

determine what the major publications are and who the foremost authors are. Other

reference materials should be incorporated into research strategy as needed.

SOURCE OF DATA

The various types of secondary data carry out the study.

Magazines

Business Today

Business World

India Today

Newspapers

Economic times

Business standard

Web sites

www.yahoo.com

www.google.com

www.SEBI.org

www.RBI.org

SCOPE OF THE STUDY

As in the era of consolidation in the banking sector this study will surely be

very helpful to various concerned individuals.

Study will be useful for the

management students.

Researchers and scholars can carry

on the further study.

No study is really complete in itself

similarly this study is open for

the students who are interested in further study.

LIMITATIONS OF THE STUDY

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

Lack of comprehensiveness due to time constraints.

All the data available in Secondary form.

Only quantitative aspects of corporate governance are taken into

consideration due to time consideration.

There is a subjective judgment in analysis.

MERGER & ACQUISITION

The phase merger &acquisition (M & A ) refer to the aspect of business strategy

& management dealing with the merging and/ or acquiring of different

companies.

Usually these occur in a friendly setting where officers I each company involved

come together to go through due diligence process to ensure a successful merge

between all the parties involved.

On other occasions, acquisition can happen through hostile takeover via absorbing

the majority of outstanding shares in the open stock market.

FINANCING M & A

Various methods of financing M&A deals exist :

A Stock swap involves

issuing stock to exchange for the shares of the other company.

A Cash deal involves

buying a target company with cash.

In some cases, a

company may acquire another company by issuing junk bonds to raise

funds.

DIFFICULTIES IN M&A

For achieving a greater extent of corporate governance, merger & acquisition is

one of the ways. But it’s not so easy; various types of problems are faced by the

organization in this type of procedure. There difficulties are:

1. SECRECY

Secrecy is maintained from bankers, suppliers, employees, customers &

others so that the negative reactions can be minimized.

2. SLOW, EXPENSIVE & DIFFICULT

A transaction generally requires six to nine months & many steps to meet

all the legal procedure.

3. HARD TO FIND BUYER

Its very difficult to find a potential buyer fir the multimillion dollar

corporations, so that adequate consideration can be measured.

4. NEGOTIATION & POTENTIAL OF THE COMPANY

More difficulty arises at the time of the negotiation & the measurement

of the net worth of the business.

5. EXPENSIVE SERVICES

Professional middleman (intermediaries, business brokers & investment

bankers) charge a high rate as their fees.

6. INEFFICIENCY

Middlemen operate inefficiently because of the slow & limiting nature of

having too much rely upon telephonic communication.

WHY DOES ORGANIZATIONS GOES FOR

MERGER & ACQUISITION

SYNERGY

Synergy is the magic force that allows for enhanced cost efficiencies of the

new business. Synergy takes form of revenue enhancement & cost saving.

STAFF REDUCTION

Merger tends to mean job losses from accounting, marketing & other

departments.

ECONOMIES OF SCALE

A bigger company places a bigger order of various items & can save more

cost & in better negotiation position.

ACQUIRING NEW TECHNOLOGY

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

development. By buying a smaller company with unique technology, a

larger company can develop a competitive edge.

IMPROVED MARKET REACH & INDUSTRY

VISIBILITY

A merge may extend two companies marketing & distribution

opportunities. Capital can raise easily in a bigger company than a smaller

company.

MERGER

A merger in business or economy refers to the combination of two companies into one

larger company. Such actions are commonly voluntary and often involves stock swap. In

many instances a merger resemble a takeover but results in a new company name. (often

combining the names of the original companies and in new branding)

CLASSIFICATION OF MERGERS

Horizontal merger take place where two-merging companies both produce similar

product in the same industry.

Vertical merger occur when two firms, each working at different stages in the

production of the same goods, combine.

Market-extension occurs when two companies that sell the same products in

different markets merge.

HORIZONTAL MERGER

VERTICAL MERGER

CONGLOMERATE MERGER

MARKET -EXTENSION

PURCHASE MERGER

PRODUCT- EXTENSION

CONSOLIDATION MERGERS

Product-extension occurs when two companies that sell the different but related

products in the same market merge.

Conglomerate merger take place when the two firms operate in different industry &

have no common area. There are two types of merger:

Purchase mergers occurs when one company purchase other company. The purchase

is made either by cash or through the issue of some kind of debt instrument, and the sale

is taxable.

Consolidation mergers occur when a brand new company is formed and both

companies are bought & combined under the new entity. Tax terms are the same as those

of a purchase merger.

FAMOUS MERGERS

Bank of America/ Fleet Boston

Global Trust Bank/ Oriental Bank of Commerce

Nedungadi Bank/ Punjab National Bank

Bank of Madura/ ICICI Bank

ACQUISITIONS

When a company takes over another one and clearly becomes the new owner, the

purchase is called as an acquisition

From a legal point of view, the target company ceases to exist and the buyer “swallows”

the business, and stock of the buyer continues to be traded.

WAYS OF ACQUISITION

C

I. Consideration- A company can buy another company with cash, with stock, or a

combination of two.

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

III. Reverse Merger-In this type of acquisition, a deal that enables a private company to

get publicly listed in a relatively short time period.

SCHEME OF MERGER & ACQUISITION

Whenever two or more companies agree to merge with each other, they have to prepare a

scheme of amalgamation. The main content of model scheme:

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

Their authorized, issued and subscribed/ paid up capital.

Change of name, object clause and accounting year.

CONSIDERATION BY ASSETS REVERSE MERGER

Protection of employment

Dividend position and prospectus

Management , board of directors, their number and participation of Transferee

company’s director on the board.

Application u/s 391 and 394 of the companies act, 1956,to obtain high court’s

approval.

Expenses of amalgamation.

Conditions of the schemes to become effective and operstive , effective date of

amalgamation.

The basis of merger and acquisition in the scheme should be the reports of the valuers of

asset of both the merger partner companies.

CORPORATE GOVERNANCE

Corporate governance is about promoting corporate fairness, transparency and

accountability.

ACCORDING TO WELFENSON, PRESIDENT OF THE WORLD BANK

QUOTED BY FINANCIAL TIMES

“Corporate governance deals with the way in which supplies of finance to corporations

assure themselves of getting a return on their investment.”

Corporate governance is a system by which business corporations are directed and

controlled.

CORPORATE GOVERNANCE IN BANKING SECTOR

In the wake of recent corporate scandals, corporate governance practices have received

heightened attention. Shareholder, creditors, regulators and academic are examining the

decision-making process in corporations and other organizations, and are posing changes

in governance structure to enhance accountability and efficiency.

Therefore in order to evaluate reforms of the governance structure of banking firms, it is

important to understand the current government practices.

BAD CORPORATE GOVERNANCE

PRACTICE IN THE FOAM OF

Fraudulent and false accounting (in case of GTB)

Complicated financial systems

To create a false picture of financial health and misleading investors.

Hide its real financial position (in case of GTB)

Scandals have become the trend of times (Ketan Parekh scam in GTB)

Inflated profits and high debts

Complicated financial structure (Enron, worldcom)

Masking true financial position (in case of GTB)

Very high NPA

The morale of the work force was very low

The continuous losses had totally eroded into net worth

The bank: losses, week governance, non compliance with statutory requirement,

negative net worth, negative capital adequacy and low morale

HRD was tremendously neglected.

ISSUED RAISED FROM BAD CORPORATE GOVERNANCE

Bankruptcy

It’s dealt a strong blow to those analysts who smugly claimed for something

It brought the role of auditors sharply into focus

It exposed the peculiarities of the Indian Banking Environment.

FOR BETTER CORPORATE GOVERNANCE THE

FOLLOWING INFORMATION AND REPORT

SHOULD PLACE BEFORE THE BOARD

Annual operating plans and budgets, together with updated long term plans

Capital budgets, manpower and overhead budgets

Quarterly results for the company as a whole and its operating division or business

segment

Internal audit report, including cases of theft and dishonesty of a material nature.

Show cause, demand and prosecution notices received from revenue authorities that

is considered to be materially important(material nature of any exposure that exceeds 1 %

of the company’s net worth).

Reports to fatal and serious accidents, dangerous occurrences, any any affluent and

pollution problem.

Default in payment of interest or non-payment of the principal on any public deposit,

and / or any secured creditor or financial institutions.

Any issue which involves possible public or product liability claims of a substantial

nature, including any judgment or order which may have either passed structure on the

conduct of the company, or taken an adverse view regarding another enterprise that can

have negative implications for the company.

Detail of any joint venture or collaboration agreement.

Transactions that involve substantial payment for achieving goodwill, improving

brand equity, and for acquiring intellectual property.

Recruitment and remuneration of senior officers just below the board level, including

appointment and removal of the chief financial officer and the company secretary.

Labor problems and their proposed solutions.

Quarterly details of foreign exchange exposure and the steps taken by management to

limit the risks of adverse exchange rate movement.

ACCORDING TO BUSINESS TODAY, NOVEMBER 1999

BOARD STRUCTURE AND PROCESSES FOR GOOD GOVERNANCE

STRUCTURE PROCESSES

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

Develop guidelines for the use of committees to ensures the basic task fulfilled and complex topics are explored in sufficient depth

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

Rotate directors through the various committees to ensure the mix of views

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

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

Ensure the majority of outside directors so that tough questions are asked

Choose a lead director to prevent insiders from dominating the agenda

Require directors to redesign upon retirement, or upon changes in employment and responsibilities

Ensure unrestricted access for board to management so that information is not filtered

Limit the number of other board of directors on which directors can serve

Establish additional models of information flow to ensure sufficient information

Impose term limits to introduce fresh and potentially critical viewpoints while avoiding groupthinks

Establish an orientation program so that new directors can contribute quickly

Establish a set of qualification for directors, and use them to screen new candidate

Develop effective recruitment and evaluation process for the board

Impose a retirement age to maintain a mix of skill, energy, enthusiasm and commitment

Ensure that the management reports regularly to the board of succession planning

SOURCES: BUSINESS TODAY, NOVEMBER 7, 1999

FIGURE-2

FRAMEWORK OF CORPORATE GOVERNANCE

On the basis of the above recommendations of the various institutions and prediction, the

following framework is prepared.

HOW MERGER AND ACQUISITION LEADS TO

CORPORATE GOVERNANCE

Merger and acquisition leads to total change in every aspect of the new organization and

these changes leads to more transparency by the following ways:

HOW MERGER AND ACQUISITION LEADS TO

CORPORATE GOVERNANCE

All relevant decisions should place before the shareholders in the meetings

STRUCTURE OF BOARD OF DIRECTORS

PROPER REPORTING AND INFORMATION

RECRUITMENT PROCESS

PROPER MEETING

PROCEDURE OF LENDING

Less number of directors to reduce coalitions

New scope and sources for the various type of information is developed

Recruitment should base upon the skills and qualifications of the candidate

All relevant decisions should place before the shareholders in the meetings

Requirement of lending should be complete, so that claim can be made

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

Proper information about daily working of the firm

Qualification should be decide for the directors

Attendances should be compulsory for the directors

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

FIGURE-3

HOW THESE PROCEDURE LEADS TO

CORPORATE GOVERNANCE

All these amendments leads to corporate governance in the banking sector by the

following ways:

FIGURE-4

STRUCTURE OF BOARD OF DIRECTORS

PROPER REPORTING AND INFORMATION

RECRUITMENT PROCESS

PROPER MEETING

PROCEDURE OF LENDING

By raising more queries about remuneration, dividends, non-performing asset etc.

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

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

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

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

CORPORATE GOVERNANCE CAN BE

SEEN IN THE FORM OF

A large number of criteria can be used for measuring the corporate governance in the

banking firm.

3TG

MORE SATISFIED EMPLOYEES

IMPROVEMENT IN THE NET PROFIT

REDUCTION IN NON PERFORMING ASSET

MORE LOANS AND ADVANCES

CORPORATE GOVERNANCE

INCREASE IN DEPOSITS AND CUSTOMERS/ INCREASE IN CREDIBILITY

SOUND FINANCIAL POSITION

MEETING SOCIAL NEEDS EFFECTIVELY FULFILLING

STATUTORY REQUIREMENT

FIGURE-5

GOVERNMENT FRAMEWORK FOR MERGER AND

ACQUISITION IN BANKING SECTOR

Government is providing various types of incentives and as a whole framework for the

merger and acquisition in the banking sector, for the purpose of increasing the rate of

growth in the economy because financial sector shows the real position of a country.

Approval for the consolidation of banks is given after the full fledge consideration of

the various stakeholders. That is :

Shareholders

Employees

General Public Etc.

Providing tax benefits to the bank, which acquires the weak bank.

Regulatory practices-supervision and regulation on a legal entity basis to align the

reporting requirements and inspection systems with.

Framework regarding risk management and internal controls.

The restructuring and consolidation that are under way in international banking

systems have been motivated by a number of developments in the past decade or so,

among which four stand out:

The deregulation of international and domestic financial markets.

Improvements in communications and computational technology.

Significant asset-quality-driven problems in many banking systems, and

A growing recognition of the costs and distortions associated with official support for

banking institutions.

These mutually reinforcing developments have both provided the impetus for banking

restructuring. Changes in the supervisory and regulatory framework have been an

important source of pressure for industry consolidation and restructuring . such changes

include the

Liberalization of domestic

Cross-border banking activities

Easing of segmentation barriers within national financial systems.

PRE-MERGER

-

PART-1 COUNT DOWN TO COLLAPSE OF GLOBAL TRUST

PART-II RBI’s SCHEME OF AMALGAMATION OF GTB WITH OBC

PART-III GTB PLACED UNDER MORATORIUM- NOTIFICATION OF RBI

PART-IVCLARIFICATIONS ISSUED BY RESERVE BANK OF INDIA

PART-V WHY DID THE RBI WAIT THIS LONG

PART-VIDOUBTS OF STAKEHOLDERS

PART-VIIGLOBAL TRUST BANK IS NOW ORIENTAL BANK OF COMMERCE

PART-VIIITHE MERGED BALANCE SHEET

PART-IX COST OF MERGING GLOBAL TRUST BANK

PART-I

COUNTDOWN TO COLLAPSE OF GLOBAL TRUST BANK

This was a crisis in the making for the last three years.

KETAN PAREKH SECURITIES SCAM OF 2001

The genesis of the GTB collapses lies in now ousted promoter Ramesh Gelli’s

involvement in the Ketan Parekh securities scam of 2001, when he gave huge unsecured

loans to the stock broker and group companies of Zee Telefilms.

March 31, 2002

GTB’s audited balance sheet for march 31,2002, showed net worth of Rs.400.4 cr. & a

profit of Rs. 40 cr. However, RBI’s inspection revealed that net worth is negative.

LARGE VARIANCE IN GTB’S FINANCIAL POSITION AS

REPORTED BY AUDITORS

In view of very large variance in the assessment of GTB’s financial position as reported

by auditors and by RBI’s inspectors, an independent chartered accountant was appointed

to reconcile the position.

UNDESIRABLE ACTIVITIES

GTB was placed under directions relating to certain types of advances, certain premature

withdrawl of deposits, declaration of dividend and its capital market exposure. RBI also

started monitoring GTB on monthly basis.

LOSSES IN ANNUAL ACCOUNTS

For statutory audit, RBI permitted GTB, time up to September 30, 2003 to publish the

annual accounts.

STOCK PERFORMANCE

The two possible scenarios discussed above are calling off the merger and revision in the

swap ratio. Both the cases seem to be positive for the stock of UTBK, which has already

been hammered by over 40% since the merger announcement. All the negatives seem to

be more or less factored in the current price levels. We are still positive on the

fundamentals of UTI bank and expect the bank to achieve our projected growth rates.

However, given the uncertainty over the ongoing developments, any fresh exposure to the

stock shall be avoided. If the concerned issues relating to the merger are not solved soon,

the stock could also turn out to be an underperformer.

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

Source: Indiainfoline

ON MARCH 31, 2005,

ITEMS BALANCES (CR.)

Deposits 7342

Advances 3528

Gross NPA 1032

Provision (against bad loan)

298

RBI ISSUED PRESS RELEASE, WHICH SAID:

“Even though the financial statements show an overall loss, the bank has made an

operating profit for the year 2002-03. The RBI welcomes the decision taken by the GTB

and its board to clean up the balance sheet”.

RBI’s INSPECTION

But RBI’s inspection showed that bank’s net worth has further eroded and capital

adequacy ratio (CAR) was negative.

Thereafter, government on the 24th July placed GTB under moratorium for three months

on application from RBI.

Therefore sudden decision of RBI and government of India to place GTB under

moratorium caught more than 8.5 lakh customers of the bank unaware and shocked.

The moratorium is aimed at freezing the assets and liabilities of the bank in order to

protect the bank’s health from further deterioration.

PART-II

RESERVE BANK OF INDIA’S SCHEME OF AMALGAMATION OF

GLOBAL TRUST BANK WITH ORIENTAL

BANK OF COMMERCE

Global Trust Bank Ltd., (GTB) was placed under of Moratorium on July 24, 2004.

The option available with Reserve Bank was to compulsory merger under section 45

of the Banking Regulation Act, 1949.

The government of India has sanctioned the scheme for amalgamation of the

global trust bank ltd. With the oriental bank of commerce. The amalgamation

came into force on August 14, 2004.

Before the wide interest of the different parties had considered i.e.

Oriental bank of Commerce (OBC) interest was examined by the RBI

keeping in view its financial parameters.

Its retail network and its synergies

Strategic advantages

Considered the interests of the millions of depositors of GTB

Evaluated the bank;s strengths and weaknesses, the RBI prepared draft

scheme of amalgamation of GTB with OBC.

PART-III

GLOBALTRUST BANK PLACED UNDER MORATORIUM-NOTIFICATION OF RESERVE BANK OF INDIA

On an application by the Reserve Bank of India, the Central Government has today

issued an Order of Moratorium in respect of the Global Trust Bank Ltd. The Order of

Moratorium has been passed by the Central Government in public interest, in the interest

of depositors and the banking system.

PROVISIONS FOLLOWED DURING THE PERIOD OF MERGER:-

The moratorium will be effective from the close of business on Saturday, July 24,2004 up

to and inclusive of October 23, 2004 or an earlier date.

During the period, the Reserve Bank of India will consider the various options,

including amalgamation of the Global Trust Bank Ltd.

Finalize the plans in public interest and with a view to ensuring that the public

deposits are protected.

During the period of moratorium, the bank will be permitted to make only those

payments that have been specified in the Order of Moratorium and the

depositors of the Global Bank Ltd.

Depositors were permitted to withdraw up to Rs.10000 (Rs.ten thousand only)

from their savings bank account or current account or any other deposit account

through any other of the branches of the bank.

For the present, withdrawals through ATMs of the bank/ATMs shared with

other banks will not be permitted so as to give effect to the monetory ceiling

prescribed in the moratorium, but the customers can make withdrawals upto the

limit specified at any of the bank’s branches.

Any requirement of cash at the branches of the bank for making permitted

payments will be ensured in full by the Reserve Bank of India since cash

balances are maintained with it by the Global Trust Bank Ltd.

WHAT IS IN STORE FOR CUSTOMERS?

The decision of the government to impose a moratorium on Global Trust Bank is not

Liquidation of the bank. In a moratorium, government imposes a freeze on the bank’s

liabilities so that bank is not able to grant any loan or advances, incur any liability, make

any investment or disburse any amount. In the present case, the government has allowed

the depositors of GTB to withdraw only up to Rs. 10000.

RBI has clarified that during the period of moratorium it will consider various

options to protect depositors and their money, including amalgamation of

GTB with another bank.

RBI has appointed three directors on the board of GTB. It has also given an

assurance that any requirement of cash at the branches of the bank for making

permitted payments will be met in full by the RBI, since cash balances are

maintained with it by the GTB.

PART-IV

CLARIFICATIONS ISSUED BY RESERVE BANK OF INDIA:-

RBI reiterates that the objective of the moratorium is to protect the interests and safety

of funds of all depositors. Necessary actions are being initiated to ensure the return of

normalcy.

All the branches of Global Trust Bank Ltd. will continue to remain open as per

their normal working hours to help their customers and enable them to make the

permitted withdrawals.

RBI stands by its assurance to meet any requirement of cash at the branches of the

bank for making permitted payments under the Order of moratorium.

It is also clarified that the D-mat accounts and Safe Deposit Lockers of customers

will be allowed to be operated as usual.

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

Mumbai and Hyderabad.

RBI’s INSPECTION

But RBI”s inspection showed that bank’s net worth has further eroded and capital

adequacy ratio ( CAR ) was negative.

Thereafter, government on the 24th July placed GTB under moratorium for three months

on application from RBI.

Therefore sudden decision of RBI and Government of India to place GTB under

Moratorium caught more than 8.5 lakh customers of the bank unaware and shocked.

The moratorium is aimed at freezing the assets and liabilities of the bank in order to

protect the bank’s health from further deterioration.

PART-V

WHY DID THE RBI WAIT THIS LONG

GTB’s, and Gelli’s links to Ketan Parekh were apparent way back in 2001. in late 2002,

RBI inspections had already discovered serious problems in the way the bank accounted

for non-performing loans made to Ketan Parekh. In fact, the RBI wrote a letter of

complaint to the Institute of Chartered Accountants of India about Lovelock & Lewes,

GTB’s auditors for 2001-02. For 2002-03, GTB’s new auditors, Price water house

Coopers, heavily qualified the balance sheet. (PWC and Lovelock & Lewes have a

strategic tie-up and are practically the same.)

By end-2003 or early 2004, an RBI inspection team had discovered the facts that were to

be trotted out six months later to justify the OBC-GTB merger –negative net worth and

capital adequacy ratio, and vastly understated volume of bad loans. This is despite

GTB managing to make some recoveries of its bad loans (around Rs 150 crore).

The RBI clearly dilly-dallied. It new about the serious problems in GTB for the last 2-3

years as pointed out in its inspection report. It also had nominees on the board. The

central bank would have like to justify itself by saying that after it came to know the facts

in January 2004 , it gave the promoters time to find a white knight before moving in.

however, the real reason may lie with the ballot box. It was one of the financial sector’s

worst kept secrets that Gelli was thick with to the Andhra Pradesh chief minister

Chandrababu Naidu. Right from the Ketan Parekh days of 2001 and through the Joint

Parliamentary Committee inquires in to the scam, Naidu had backed him to the hilt. With

such a powerful backer, there was little the RBI could do, even if it had wanted to. Once

Naidu went out of power in May, it was clear that the RBI felt far more comfortable in

taking Gelli on.

PART-VI

DOUBTS OF STAKEHOLDERS

Did the auditors of Global Trust Bank, Price water house Coopers (PwC), fail to blow

the whistle?

No, PwC submitted a heavily qualified report on 30 September 2003

The audit report points out that “accounts are prepared on a going concern basis even

though the net worth of the bank has been substantially eroded after considering the

loss for the year on account substantial provision against non-performing assets, taking

into account management’s assessment of growth of business, infusion of capital.

These accounts do not include adjustments aforesaid in case the management’s

business plans do not materialize…”

But why did PwC give a qualified report instead of giving a disclaimer?

In case the principle of going concern does not hold or it is not possible to arrive at an

opinion, the auditor is supposed to give a disclaimer and not express his opinion. In

GTB’s case there were many ifs and buts. For example,

Accounts were prepared on going concern basis even though the net worth

had been substantially eroded

Advances worth Rs 311.61 crore were considered good though the loans were

not fully secured;

No provision was made for assets valued at Rs 181.75 crore as the bank can

hold the property for seven years;

Accounting method is consistent except in case of the additional provision

through statutory reserve permitted by the RBI; and

The accounts give a fair view subject to points (relating to Rs 311.61 crore

and Rs 181.75 crore). The impact of which is indeterminate.

WHY DOES IT APPEAR THAT ICAI HAS NOT BEEN PROACTIVE?

PwC had submitted its eligibility for reappointment for 2003-04. it was not reappointed by

GTB, but neither did the latter complain to the Institute of Chartered Accountant of India.

The new auditor Bhasker Rao & Company took up the audit.

The results for the quarter ended December 2003 continued to be prepared on a going

concern basis, though net worth was negative. ICAI sees it sufficient to act on the basis of

complaints as ithas now shot off letters to the firms after RBI pointed out the deficiencies

of the bank’s auditors PwC and Lovelock & Lewes.

Such crisis raises serious questions on the transparency in the private sector banks

and the credibility of their financial statements.

PART-VII

GLOBAL TRUST BANK IS NOW ORIENTAL

BANK OF COMMERCE

The Government of India has sanctioned the scheme for amalgamation of the Global Trust

Bank Ltd. With the Oriental Bank of Commerce. The amalgamation will come in to force

on August 14, 2004. All the branches of Global Trust Bank Ltd with function as branches

of Oriental Bank of Commerce with effect from this date.

Customers/Depositors of GTB

Customers, including depositors of the Global Trust bank Ltd. Will be able to operate their

accounts as customers of Oriental Bank of Commerce with effect from August 14, 2004.

Oriental Bank of Commerce is making necessary arrangements to ensure that service, as

usual, is provided to the customers of the Global Trust bank Ltd.

PRO-DATA PAYMENT .IF ANY SURPLUS REMAINS

If any surplus remains after meeting all the liabilities out of the realization of the assets of

the Global Trust bank Ltd., the shareholders may receive pro-data payment.

INCOME TAX EXEMPTIONS

As part of the merger proposal, the OBC would get income tax exemptions in transferring

the assets of GTB in its book during the merger process, while all the bad debts of the

merged entity would be adjusted against the cash balances and reserves of the Hyderabad-

based bank.

PART-VIII

THE MERGED BALANCE SHEET:-

Post write-offs, OBC’s books will be stronger.

OBC GTB Total OBC GTB Total

c

COST OF MERGING GLOBAL TRUST BANK

HOW MUCH WILL GTB COST OBC?

(Rs crore)

Possible write off* ( Net NPA- Recoverable) 632 (approx.)

(-) Tax benefit on write off 226

Cost after write off 406

(-) Tax benefit on write off

of accumulated losses** 95

Net cost 311

OBC’s tax provision for 03-04 459

Possible tax benefit as above

Capital 192.54 121.36 192.54 Cash/Bank 2524.22 804.84 3329.06

Reserve/surpluses 1916.10 -118.91 1919.25 Investments 14780.54 2645.29 17425.83

Deposits 29809.10 6920.92 36730.02 Advances & 15677.24 3276.11 18953.35

Loans

Borrowings 1166.02 302.06 1468.08 Deferred tax 5.00 93.36 98.36

Assets

Deferred tax N.A. 38.62 38.62 Receivables 833.18 465.68 1299.56 Liabilities

Current 914.42 168.20 1082.62 Net Fixed 145.29 300.80 446.09

Liabilities Assets

Provisions N.A. 153.83 153.83 Intangible/ 32.71 N.A. 32.71 DRE not Written off

Total 33998.1 7586.08 41584.96 Total 33998.18 7586.08 41584.96 8

PART-IX

COST OF MERGING GLOBAL TRUST BANK

FIGURE:- 9

POSITION AFTER THE MERGER

ACCORDING TO BUSINESS TODAY JANUARY 2006

Experts and analyst had an opinion that OBC was a 58,000 cr company, one of the

country’s most successful public sector banks, had been sold a lemon , but this argument

cut no ice

OBC is confident of turning around the GTB within one year. According to OBC

chairman B.D. Narang, Gtb “suited it” because of synergies. While weaknesses of GTB

has been bad assets, strength of OBC is recovery.

BENEFITS OF OBC

Since the GTB is a south-based bank, it would give OBC the much-needed edge in the

southern part of the country.

Both the banks have a common core banking solution ‘Finale’, which will help in the

consolidation.

GTB’s 275 ATm’s multiplied its strength of 72 by a factor of almost five folds &

make it the 3rd largest ATM operator in PSU banks.

103 branches are added to exixting 1013 branches

Larger customer base

After accounting for the tax gains the merger of GTB, the total losses come to Rs.

704.6 cr.

POST MERGER BALANCE SHEET

FIGURE:- 10

ANALYSIS

GLOBAL TRUST BANK/ ORIENTAL BANK OF COMMERCE

REASONS BEHIND THE MERGER

ketan Parekh Scam

Huge NPA

Negative Net Worth

Inappropriate Audit

INCREASE IN NETWORK

BRANCHES ATM

REASONS BEHIND THE MERGER

0

500

1000

1500

2000

2500

3000

3500

BRANCHES ATM

POST-MERGERPRE-MERGER

COMPARISON OF BALANCE SHEET

LIABILITY SIDE

LIABILITY SIDE COMPARISON

0100002000030000400005000060000700008000090000

CA

PIT

AL

DE

PO

SIT

S

CU

RR

EN

TL

IAB

ILIT

Y/

PR

OV

ISIO

N

PRE-MERGER

PRE-MERGER

CAPITAL RESERVE/

SURPLUS

DEPOSITS BORROWING CURRENT

LIABILITY/

PROVISION

PRE-

MERGER

192 1919 36730 1468 1270

POST-

MERGER

192 2480 42590 1400 1700

%

CHANGE

NIL +29% +16% -5% +39%

FIGURE:- 12

ASSET SIDE

ASSET SIDE COMPARISON

05000

1000015000200002500030000350004000045000

CA

SH

/ B

AN

K

AD

VA

NC

E/

LO

AN

RE

CE

IVA

BL

ES

INT

AN

GIB

LE

AS

SE

T

PRE-MERGER

PRE-MERGER

CASH/ INVES

TMEN

ADVAN

-CE/

DEFE-

RRED

RECEI-

VABLE

NET

FIXED

INTAN-

GIBLE

BANK TS LOAN TAX

LIAB.

S ASSET ASSET

PRE-

MERGER

3329 17426 18953 99 1300 446 32

POST-

MERGER

4400 19300 22957 24 1220 445 16

%

CHANGE

+32% +11% +21% -76% -6% -0.3% -50%

BENEFITS DERIVED FROM MERGER AND ACQUISITION

After studying various cases of mergers in the banking sector a large number of benefits

can be seen which are as follows:

*Better corporate governance.

( Global Trust Bank / Oriental Bank Of Commerce)

*Increase in the network / branches.

( Bank Of madura / ICICI)

*Increase in customer base.

( Bank Of America / Fleet Boston)

*Reduction in NPA.

( Nedungadi Bank / Punjab National Bank)

*Compliance with statutory requirement.

(Global Trust Bank / Oriental Bank Of Commerce)

*Fulfilling more responsibility towards society.

(Bank Of madura / ICICI)

*Improve in financial position.

(Global Trust Bank / Oriental Bank Of Commerce)

CONCLUSION

After merger of the Global Trust Bank and Oriental Bank of Commerce following

changes has been take place:

Change in management

New ways of providing services to customers. (e-payment-railway tickets )

Change in debt recovery policy.

After analyzing the whole case of merger of the Global Trust Bank with Oriental

Bank of Commerce following conclusions can be drawned.

The quantitative factors thatare taken as the criteria for measuring the corporate

governance after the consolidations can be achieved in a better manner, like:

Net profits

Increase in deposits / credibility

Increase in customer base / network

More loans and advances

Fulfilling statutory requirement

Sound financial position

Reduction in Non Performing Assets

(ANNOUNCED AS A 0% NPA BANK-

ORIENTAL BANK OF COMMERCE

ACC. TO BUSINESS STANDARD)

ALL OF THESE

SHOWN

IMPROVEMENT

AFTER MERGER

DUE TO BETTER

PRACTICE OF

CORPORATE

GOVERNANCE

SHOWN A GREAT

DECLINE IN NPA

THERE IS ANOTHER EXAMPLE

TO SUPPORT THE STUDY

BANK OF AMERICA BUYS FLEETBOSTON

FleetBoston's headquarters  (AP)

(CBS/AP) Bank of America Corp. announced an agreement Monday to buy FleetBoston

Financial Corp., a deal initially valued at $47 billion that would swallow up the last of the

big Boston banks that made the city a financial center from the earliest days of the

Republic. The agreement, if approved by shareholders and regulators, would create the

nation's second-biggest banking company. Bank of America, currently No. 3, would have

about 33 million customers and 2.5 million business clients in 35 countries.

The deal would also bring Bank of America into New England and eliminate the Fleet

name. “The combined bank will have about 5,200 branches; Bank of America already has

more branches than any other U.S. bank. No. 2 Wells Fargo has about 3,000.

"It's going to be one of the dominant banks in the U.S. banking industry over the next 25

years," said Gerard Cassidy, an industry analyst with RBC Capital Markets.

"It's going to have branches in cities that it didn't have them before, primarily places in

the Northeast — New York, Boston, along the northeast coast and New England," said

CBS MarketWatch editor Greg Morcroft.

Bank of America, based in Charlotte, N.C., will pay $45 a share for Fleet, or about $13

more than FleetBoston's closing price on Friday. In trading Monday on the New York

Stock Exchange, FleetBoston shares climbed to $39.20, while Bank of America shares

fell to $73.57, down $8.29, or 10 percent. That reduced the value of the offer to $42.9

billion. Lewis will be chief executive of the merged company, to be headquartered in

Charlotte. Gifford will be chairman of the board. The deal, already approved by both

boards of directors, is expected to be completed in the first half of 2004. Bank of America

said it expects the merger to save $1.1 billion.

Analyst John McCune of SNL Financial Corp. said the deal could also signal a new

round of bank mergers with large regional banks joining forces with big financial

services as the only way to compete.

TOP 10 BANKS

(ACC.TO BUSINESS TODAY JANUARY 2006)

I. HDFC BANK

II. CITI BANK

III. ABN AMRO BANK

IV. STATE BANK OF PATIALA

V. ORIENTAL BANK OF COMMERCE

VI. CORPORATION BANK

VII. HONGKONG & SHANGAI BANKING CORP.

VIII. KOTAK MAHINDRA BANK

IX. STANDARD CHARTERED BANK

X. JAMMU & KASHMIR BANK

SIMILAR EXAMPLES OF MORATORIUMS

ON WEAK BANKS

Following is the list of similar moratoriums on weak banks, which finally resulted in their

mergers with major public sector banks:

1) Nedungadi bank in 2002, which was later, merged with Punjab National Bank.

2) Banaras State Bank in UP in 2000. To protect the interest of depositors, the bank

was merged with bank of baroda (BOB).

3) In 1993, the government had imposed a moratorium on the depositors of new

Bank of India. The bank was later merged with PNB.

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

India.

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

merged with Canara Bank.

6) Early 1990s , Karur Central Bank in Kerala was merged with Bank of India.

7) Hindustan Commercial Bank faced the moratorium in 1988 and was merged with

PNB.

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

Bank.

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

with State Bank of India.

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

SUGGESTIONS

EXISTING GOVERNANCE AND SCOPE FOR IMPROVEMENT

CORPORATE

GOVERNANCE

MECHANISM

In developing country like

India

Scope for policy

intervention

LARGE BLOCK

HOLDERS

Likely to be the most

important governance

mechanism

Strengthen rules &

protecting minority

investors interest

MARKET FOR

CORPORATE

CONTROL

Important when ownership

is strongly concentrated;

can still take place through

debt contracts

Remove some managerial

defenses; disclosure of

ownership and control

EXECUTIVE

COMPENSATION

Less important when

controlling owner can hire

and fire and has private

benefits

Disclosure of compensation

schemes, conflicts of

interest rules

PROXY FIGHTS Effective when ownership

is strongly concentrated

Technology improvement

for communicating with

and among shareholders;

disclosure of ownership and

control

BOARD ACTIVITY Influential when controlling

owner can hire and fire

board members

Introduce element of

independence of directors;

training of directors;

disclosure of voting;

cumulative voting possibly

SHAREHOLDER

ACTIVISM

Potentially important,

particularly in large firms

with dispersed

shareholders.

Encourage interaction

among shareholders.

Strengthen minority

rotection. Enhance

governance of institutional

investors.

Potentially important,

EMPLOYEE

MONITORING

particularly in smaller

companies with high skilled

human capital where threat

of leaving is high

Disclosure of information

to employees ; possibly

require board

representation; assure

flexible labor markets.

LITIGATION Depends critically on

quality of general

enforcement environment ,

but can sometimes work.

Facilitate communication

among shareholders;

encourage class-action suits

with safeguards against

excessive litigation

MEDIA AND SOCIAL

CONTROL

Potentially important, but

depends on competition

among and independence of

media.

Encourage competition in

and diverse control of

media; active public

campaign can empower

public.

REPUTATION AND

SELF ENFORCEMENT

BILATERAL PRIVATE

ENFORCEMENT

MECHANISM

Important when general

enforcement is weak, but

stronger when environment

is stronger

Important, as they are more

specific, but do not benefit

outsiders and can have

downsides.

Depends on growth

opportunity and scope for

rent seeking. Encourage

competition in factor

markets.

Requiring functioning civil/

commercial courts

ARBITRATION,

AUDITORS, AND

OTHER

MULTILATERAL

AGREEMENT

Potentially important, often

the origin of public law ;

but the enforcement

problem often remains ;

audits sometimes abused;

watch conflicts of interest

Facilitate the formation of

private third party

mechanism (sometimes

avoid forming public

alternatives); deal with

conflicts of interests; ensure

competition.

COMPETITION Determines scope for

potential mistreatment of

factors of production,

including financing.

Open up all factor markets

to competition , including

from abroad.

ANNEXURE

S. NO. TOPIC

I. Control Model of Governance chain- Mc.

II. Table of board structure and processes of good governance

III. Table of how merger & acquisition leads to corporate governance

IV. Table of how these procedure leads to corporate governance

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

VI. Pre-merger Scenario

VII. Merged balance Sheet

VIII. Cost of Merging Global Trust Bank

IX. Post Merger balance Sheet

X. Reasons behind Merger

XI. Comparison of Balance Sheet

Liability Side

Asset Side