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Merger and Amalgamation of Banking Company

Introduction: If you don't have a functioning financial system the world economy won't be revived. All the major economies have their responsibility to assist at a pace which is required to clean up the balance sheet of the banking system and to ensure that credit flows are resumed Dr. MANMOHAN SING, the Prime Minister of India1 Yes, the aforesaid speech by the Prime is enough all for easy understanding of importance of Banking systems in the growth of economy in the context of economic liberalization. The inflection of reform process in India was to improve productivity and effectiveness of financial sector in general and the banking sector in particular. M&As, especially market driven, are aimed at stepping up size (market power) and maximizing value (revenue) by exploiting economies of scale and scope, risk diversification and strengthening capital. In the presence of excess capacity, some banks are bound to operate below efficient scale, may also have an inefficient product mix, and therefore, may be inside the efficiency frontier. In such a situation, M&As may help solve these problems more efficiently rather than outright bankruptcies because they preserve the franchise values of the merging banks. Prior to 1991, Mergers and Acquisitions were restricted under Indian law, in terms of industrial licensing and restrictive statutory provisions. M&As were not unknown, though they were few and far between. These also evoked hostile reactions in the business world. Recently, Mergers & Acquisitions (M&As) in the banking sector has been looked upon as an immediate mode for external growth. Market driven merger which are on gradual rise are outcomes of the post-reform period driven by the changes in competitive landscape of the Indian banking system which forced many of the incumbent banks to restructure themselves and boost their efficiency. The present study examines the technical efficiency of few merged banks in the post-reform period along with necessary legal frame works and case study.2 Mergers and Acquisitions: Conceptual Framework A merger occurs when two or more companies combines and the resulting firm maintains the identity of one of the firms. One or more companies may merger with an existing company or they may merge to form a new company. Usually the assets and liabilities of the smaller firms are merged into those of larger firms. Merger may take two forms-

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Merger through absorption, 2. Merger through consolidation.

Absorption: Absorption is a combination of two or more companies into an existing company. All companies except one lose their identity in a merger through absorption. Consolidation: A consolidation is a combination if two or more combines into a new company. In this form of merger all companies are legally dissolved and a new entity is created. In consolidation the acquired company transfers its assets, liabilities and share of the acquiring company for cash or exchange of assets. ACQUISITION: A fundamental characteristic of merger is that the acquiring company takes over the ownership of other companies and combines their operations with its own operations. An acquisition may be defined as an act of acquiring effective control by one company over the assets or management of another company without any combination of companies.3 TAKEOVER: A takeover may also be defined as obtaining control over management of a company by another company. DISTINCTION BETWEEN MERGERS AND ACQUISITIONS OF BANKS

Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things. When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded. In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather
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Read more at http://www.brainyquote.com/quotes/keywords/banking.html#QSDsZFtfMTSw7ELS.99 Sri Krishna International Research & Educational Consortium available at http://www.skirec.com Read more at http://www. http://business.gov.in/growing_business/mergers_acq.php

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than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place. In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it's technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal as a merger, deal makers and top managers try to make the takeover more palatable. A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly - that is, when the target company does not want to be purchased - it is always regarded as an acquisition. Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders.4 TYPES OF MERGERS Mergers are of many types. Mergers may be differentiated on the basis of activities, which are added in the process of the existing product or service lines. Mergers can be a distinguished into the following four types:1. 2. 3. 4. Horizontal Merger vertical Merger Conglomerate Merger Concentric Merger

Horizontal merger Horizontal merger is a combination of two or more corporate firms dealing in same lines of business activity. Horizontal merger is a co centric merger, which involves combination of two or more business units related to technology, production process, marketing research, development and management. Elimination or reduction in competition, putting an end to price cutting, economies of scale in production, research and development, marketing and management are the motives underlying such mergers. Vertical Merger Vertical merger is the joining of two or more firms in different stages of production or distribution that are usually separate. The vertical Mergers chief gains are identified as the lower buying cost of material. Minimization of distribution costs, assured supplies and market increasing or creating barriers to entry for potential competition or placing them at a cost disadvantage. Conglomerate Merger Conglomerate merger is the combination of two or more unrelated business units in respect of technology, production process or market and management. In other words, firms engaged in the different or unrelated activities are combined together. Diversification of risk constitutes the rational for such merger moves.5 Banking in India The first decade of 18th Century, India witnessed the General Bank of India followed by The Bank of Hindustan. In later stage, The Bank of Calcutta in June 1806 which is now considered to be the oldest Bank till in India. Popularly known as The State Bank of India . By the 1900s, the market expanded with the establishment of banks such as Punjab National Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai both of which were founded under private ownership. The Reserve Bank of India formally took on the responsibility of regulating the Indian banking sector from 1935. After India's independence in 1947, the Reserve Bank was nationalized and given broader powers.6 LIBERALISATION
4 5

Available at http://www.business.gov.in Growing a Business Introduction to Merger and Acquisition available at http://www.scribd.com/doc/27106710/Merger-andAcquisition 6 Ibid

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In India the companies act 1956 and the monopolies and restrictive trade practices act, 1969 are statutes governing mergers among companies. In the early 1990s the then Narasimha Rao government embarked on a policy of liberalisation and gave licences to a small number of private banks, which came to be known as New Generation tech-savvy banks, which included banks such as UTI Bank (the first of such new generation banks to be set up), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, kick started the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks. The next stage for the Indian banking has been setup with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%.7 BANK MERGER/AMALGAMATION UNDER VARIOUS ACTS The relevant provisions regarding merger, amalgamation and acquisition of banks under various acts are discussed in brief as under: Mergers- banking Regulation act 1949 Amalgamations of banking companies under B R Act fall under categories are voluntary amalgamation and compulsory amalgamation. Section 44A Voluntary Amalgamation of Banking Companies. Section 44A of the Banking Regulation act 1949 provides for the procedure to be followed in case of voluntary mergers of banking companies. Under these provisions a banking company may be amalgamated with another banking company by approval of shareholders of each banking company by resolution passed by majority of two third in value of shareholders of each of the said companies. The bank to obtain Reserve Banks sanction for the approval of the scheme of amalgamation. However, as per the observations of JPC the role of RBI is limited. The reserve bank generally encourages amalgamation when it is satisfied that the scheme is in the interest of depositors of the amalgamating banks. A careful reading of the provisions of section 44A on banking regulation act 1949 shows that the high court is not given the powers to grant its approval to the schemes of merger of banking companies and Reserve bank is given such powers. Further, reserve bank is empowered to determine the Market value of shares of minority shareholders who have voted against the scheme of amalgamation. Since nationalized banks are not Baking Companies and SBI is governed by a separate statue, the provisions of section 44A on voluntary amalgamation are not applicable in the case of amalgamation of two public sector banks or for the merger of a nationalized bank/SBI with a banking company or vice versa. These mergers have to be attempted in terms of the provisions in the respective statute under which they are constituted. Moreover, the section does not envisage approval of RBI for the merger of any other financial entity such as NBFC with a banking company voluntarily. Therefore a baking company can be amalgamated with another banking company only under section 44A of the BR act. But u/s 44B(1) of the BR Act No Hc shall sanction a compromise or arrangement between a banking co and its creditor or any one class of them or between such company and its members or any class of them unless being certified by the RBI in writing of being worked out as not being detrimental to depositors interest of that bank.U/s44b(2) Where an application made u/s 391 of the companies act ,1956 in respect of a banking company , the HC may direct the RBI to inquiry about the affairs of the Company and its directors and consequently RBI may submit the report to HC.U/s 38(3)(b)(i) if the RBI is in opinion of dissatisfaction as to compromise or arrangement sanctioned in respect of banking co by the Court , the RBI then has power to make an application of winding up Sector 45- Compulsory Amalgamation of banks Under section 45(4) of the banking regulation act, reserve bank may prepare a scheme of amalgamation of a banking company with other institution (the transferee bank) under sub- section (15) of section 45. Banking institution means any banking company and includes SBI and subsidiary banks or a corresponding new bank. A compulsory amalgamation is a pressed into action where the financial position of the bank has become week and urgent measures are required to be taken to safeguard the depositors interest. Section 45 of the Banking regulation Act, 1949 provides for a bank to be reconstructed or amalgamated compulsorily i.e. without the consent of its members or creditors, with any other banking institutions as defined in sub section(15) thereof. Action under there provision of this section is taken by reserve bank in consultation with the central government in the case of banks, which are weak, unsound or improperly managed. Under the provisions, RBI can apply to the central

Dr. K.A. Goyal & Vijay Joshi, Indian Banking Industry: Challenges And Opportunities

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government for suspension of business by a banking company and prepare a scheme of reconstitution or amalgamation in order to safeguard the interests of the depositors. Under compulsory amalgamation, reserve bank has the power to amalgamate a banking company with any other banking company, nationalized bank, SBI and subsidiary of SBI. Whereas under voluntary amalgamation, a banking company can be amalgamated with banking company can be amalgamated with another banking company only. Meaning thereby, a banking company can not be merged with a nationalized bank or any other financial entity. Companies Act Section 394 of the companies act, 1956 is the main section that deals with the reconstruction and amalgamation of the companies. Under section 44A of the banking Regulation Act, 1949 two banking companies can be amalgamated voluntarily. In case of an amalgamated of any company such as a non banking finance company with a banking company, the merger would be covered under the provisions of section 394 of the companies act and such schemes can be approved by the high courts and such cases do not require specific approval of the RBI. Under section 396 of the act, central government may amalgamate two or more companies in public interest. State Bank of India Act, 1955 Section 35 of the State Bank of India Act, 1955 confers power on SBI to enter into negotiation for acquiring business including assets and liabilities of any banking institution with the sanction of the central government and if so directed by the government in consultation with the RBI. The terms and conditions of acquisition by central board of the SBI and the concerned banking institution and the reserve bank of India is required to be submitted to the central government for its sanction. The central government is empowered to sanction any scheme of acquisition and such schemes of acquisition become effective from the date specified in order of sanction. As per sub-section (13) of section 38 of the SBI act, banking institution is defined as under banking institution includes any individual or any association of individuals (whether incorporated or not or whether a department of government or a separate institution), carrying on the business of banking. SBI may, therefore, acquire business of any other banking institution. Any individual or any association of individuals carrying on banking business. The scope provided for acquisition under the SBI act is very wide which includes any individual or any association of individuals carrying on banking business. That means the individual or body of individuals carrying on banking business. That means the individual or body of individuals carrying on banking business may also include urban cooperative banks on NBFC. However it may be observed that there is no specific mention of a corresponding new bank or a banking company in the definition of banking institution under section 38(13) of the SBI act. It is not clear whether under the provisions of section 35, SBI can acquire a corresponding new bank or a RRB or its own subsidiary for that matter. Such a power mat have to be presumed by interpreting the definition of banking institution in widest possible terms to include any person doing business of banking. It can also be argued that if State Bank of India is given a power to acquire the business of any individual doing banking business it should be permissible to acquire any corporate doing banking business subject to compliance with law which is applicable to such corporate. But in our view, it is not advisable to rely on such interpretations in the matter of acquisition of business of banking being conducted by any company or other corporate. Any such acquisition affects right to property and rights of many other stakeholders in the organization to be acquired. The powers for acquisition are therefore required to be very clearly and specifically provided by statue so that any possibility of challenge to the action of acquisition by any stakeholder are minimized and such stakeholders are aware of their rights by virtue of clear statutory provisions. Nationalised banks may be amalgamated with any other nationalized bank or with another banking institution. i.e. banking company or SBI or a subsidiary. A nationalized bank cannot be amalgamated with NBFC. Under the provisions of section 9 it is permissible for the central government to merge a corresponding new bank with a banking company or vice versa. If a corresponding new bank becomes a transferor bank and is merged with a banking company being the transferee bank, a question arises as to the applicability of the provisions of the companies act in respect to the merger. The provisions of sec. 9 do not specifically exclude the applicability of the companies act to any scheme of amalgamation of a company.

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Further section 394(4) (b) of the companies act provides that a transferee company does not include any company other than company within the meaning of companies act. But a transferor company includes anybody corporate whether the company is within the meaning of companies act or not. The effect of this provision is that provision contained in the companies act relating to amalgamation and mergers apply in cases where any corporation is to be merged with a company. Therefore if under section 9(2)(c) of Nationalization act a corresponding new bank is to merged with a banking company( transferee company), it will be necessary to comply with the provisions of the companies act. It will be necessary that shareholder of the transferee banking company the in value present and voting should approve the scheme of amalgamation. Section 44A of the Banking Regulation Act which empowers RBI to approve amalgamation of any two banking companies requires approval of shareholders of each company 2/3rd in value. But since section44A does not apply if a Banking company is to be merged with a corresponding new bank, approval of 3/4th in value of shareholders will apply to such merger in compliance with the companies act.

Acquisition of co-operative banks with Other Entities Co-operative banks are under the regulation and supervision of reserve bank of India under the provision of Banking regulation act 1949(as applicable to cooperative banks). However constitution, composition and administration of the cooperative societies are under supervision of registrar of co-operative societies of respective states (in case of Maharashtra State, cooperative societies are governed by the positions of Maharashtra co operative societies act, 1961, in case of WEST BENGAL WEST BENGAL STATE CO OPERATIVE REGISTRATION ACT) Amalgamation of cooperative banks Under section 18A of the Maharashtra State cooperative societies act 1961(MCS Act)registrar of cooperatives societies is empowered to amalgamate two or more cooperative banks in public interest or in order to secure the proper management of one or more cooperative banks. On amalgamation, a new entity comes into being. Under sector 110A of the MCS act without the sanction of requisition of reserve bank of India no scheme of amalgamation or reconstruction of banks is permitted. Therefore a cooperative bank can be amalgamated with any other entity.

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

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Amalgamation of Financial Institution with other entities Public financial institution is defined under section 4A of the companies act 1956. Section 4A of the said act specify the public financial institution. Is governed by the provisions of respective acts of the institution Acquisition of non-Banking financial Companies (NBFCs) with other entities NBFCs are basically companies registered under companies act 1956. Therefore, provisions of companies act in respect of amalgamation of companies are applicable to NBFCs. Voluntary Acquisition Section 394 of the companies act 1956 provides for voluntary amalgamation of a company with any two or more companies with the permission of tribunal. Voluntary amalgamation under section 44A of banking regulation act is available for merger of two banking companies. In the case of an amalgamation of any other company such as a non banking finance company with a banking company, the merger would be covered under the provisions of section 394 of the companies act such cases do not require specific approval of the RBI.

Compulsory Acquisition Under section 396 of the companies act 1956, central government in public interest can amalgamate 2 or more companies. Therefore, NBFCs can be amalgamated with NBFCs only. FINANCIAL IMPLICATIONS OF BANKING M&A These indicators include measures of financial performance: asset and liability composition capital structure liquidity risk exposure profitability financial innovation and efficiency

As dependent variable, we measure change of performance as the difference between the merged banks two-year average return on equity ( ROE) after the acquisition and the weighted average of the ROE of the merging banks two years before the acquisition. Sr.No 1 Definition Performance Change (ROE) Formula Return on equity (After merger)

Liquidity (LIQ)

Liquid Asset/Total Deposit

Cost-income ratio (COST/INC)

Total cost/Total revenue

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Capital to asset ratio (CA/TA)

Total capital/Total asset

Loans to total assets ratio (LOAN/TA))

Net Loans/Total asset

Credit Risk (BADL/INT_INC)

Loan loss provision/Net interest revenues

Diversity Earning (OOR/TA)

Other operational revenues/Total assets

Off balance sheet (OBS/TA)

Off balance sheet item/Total asset

Loans to deposit ratio (LOANS/DEP)

Customer loan to Customer deposit

As dependent variable, we measure change of performance as the difference between the merged banks two-year average return on equity (ROE) after the acquisition and the weighted average of the ROE of the merging banks two years before the acquisition.8 PROCEDURE FOR BANK MERGER

The procedure for merger either voluntary or otherwise is outlined in the respective state statutes/ the Banking regulation Act. The Registrars, being the authorities vested with the responsibility of administering the Acts, will be ensuring that the due process prescribed in the Statutes has been complied with before they seek the approval of the RBI. They would also be ensuring compliance with the statutory procedures for notifying the amalgamation after obtaining the sanction of the RBI.

Before deciding on the merger, the authorized officials of the acquiring bank details of both the banks and the area terms and conditions.

and the merging bank sit together and discuss the

procedural modalities and financial terms. After the conclusion of the discussions, a scheme is prepared incorporating therein the all the

Once the scheme is finalized, it is tabled in the meeting of Board of directors of respective banks. The board discusses the scheme thread bare and accords its approval if the proposal is found to be financially viable and beneficial in long run.

Available at www.scribd.com/doc/6916858/Mergers-and-Acquisitions

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After the Board approval of the merger proposal, an extra ordinary general meeting of the shareholders of the respective banks is convened to discuss the proposal and seek their approval.

After the board approval of the merger proposal, a registered valuer is appointed to valuate both the banks. The valuer valuates the banks on the basis of its share capital, market capital, assets and liabilities, its reach and anticipated growth and sends its report to the respective banks.

Once the valuation is accepted by the respective banks , they send the proposal along with all relevant documents such as Board
approval, shareholders approval, valuation report etc to Reserve Bank of India and other regulatory bodies such Security & exchange board of India (SEBI) for their approval.

After obtaining approvals from all the concerned institutions, authorized officials of both the banks sit together and discuss and finalize
share allocation proportion by the acquiring bank to the shareholders of the merging bank (SWAP ratio) After completion of the above procedures , a merger and acquisition agreement is signed by the bank

GUIDELINES ON MERGERS & ACQUISITIONS OF BANKS

With a view to facilitating consolidation and emergence of strong entities and providing an avenue for non disruptive exit of weak/unviable entities in the banking sector, it has been decided to frame guidelines to encourage merger/amalgamation in the sector.

Although the Banking Regulation Act, 1949 (AACS) does not empower Reserve Bank to formulate a scheme with regard to merger and amalgamation of banks, the State Governments have incorporated in their respective Acts a provision for obtaining prior sanction in writing, of RBI for an order, inter alia, for sanctioning a scheme of amalgamation or reconstruction.

The request for merger can emanate from banks registered under the same State Act or from banks registered under the Multi State Cooperative Societies Act (Central Act) for takeover of a bank/s registered under State Act. While the State Acts specifically provide for merger of co-operative societies

registered under them, the position with regard to take over of a co-operative bank registered under the State Act by a co-operative bank registered under the CENTRAL

Although there are no specific provisions in the State Acts or the Central Act for the merger of a co-operative society under the State Acts with that under the Central Act, it is felt that, if all concerned including administrators of the concerned Acts are agreeable to order merger/ amalgamation, RBI may consider proposals on merits leaving the question of compliance with relevant statutes to the administrators of the Acts. In other words, Reserve Bank will confine its examination only to financial aspects and to the interests of depositors as well as the stability of the financial system while considering such proposals. INFORMATION & DOCUMENTS TO BE FURNISHED BY THE ACQUIRER OF BANKS 9 1. Draft scheme of amalgamation as approved by the Board of Directors of the acquirer bank.

Available at http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=2247&Mode=0

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2. Copies of the reports of the valuers appointed for the determination of realizable value of assets (net of amount payable to creditors having precedence over depositors) of the acquired bank. 3. Information which is considered relevant for the consideration of the scheme of merger including in particular:A. Annual reports of each of the Banks for each of the three completed financial years immediately preceding the proposed date for merger. B. Financial results, if any, published by each of the Banks for any period subsequent to the financial statements prepared for the financial year immediately preceding the proposed date of merger. C. Pro-forma combined balance sheet of the acquiring bank as it will appear consequent on the merger. D. Computation based on such pro-forma balance sheet of the following: Tier I Capital Tier II Capital Risk-weighted Assets Gross and Net npas Ratio of Tier I Capital to Risk-weighted Assets Ratio of Tier II Capital to Risk-weighted Assets Ratio of Total Capital to Risk-weighted Assets Tier I Capital to Total Assets Gross and Net npas to Advances Cash Reserve Ratio Statutory Liquidity Ratio

4. Information certified by the values as is considered relevant to understand the net realizable value of assets of the acquired bank including in particular:A. The method of valuation used by the values B. The information and documents on which the values have relied and the extent of the verification, if any, made by the values to test the accuracy of such information C. If the values have relied upon projected information, the names and designations of the persons who have provided such information and the extent of verification, if any, made by the values in relation to such information D. Details of the projected information on which the values have relied E. Detailed computation of the realizable value of assets of the acquired bank CASE STUDIES

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Case study I

Agrees to amalgamate Bank of Rajasthan:

ICICI Bank has entered into an agreement with certain shareholders of Bank of Rajasthan (BoR) to amalgamate BoR, with a tentative share exchange ratio of 1:4.72 (25 shares of ICICI Bank for 118 shares of BoR). The final exchange ratio will be based on due diligence and independent valuation reports. Assuming a share swap ratio of 1:4.72, the deal values BoR at Rs30.4b and will lead to ~3% equity dilution for ICICI Bank.

Branch addition, stronger North India network are key positives:

The key positives for ICICI Bank will be a 23% increase in the number of branches and a stronger network in North India. Over 60% of BoRs 463 branches are in the state of Rajasthan and ~70% are in North India. BoRs biggest competitors in the state of Rajasthan are SBIs subsidiary, State Bank of Bikaner and Jaipur (~750 branches), Bank of Baroda (~350 branches) and Punjab National Bank (~310 branches).

Deal at a significant premium; Improvement in deposit franchisee will be key

value driver: The implied valuation of BoR at 4.8x trailing book value appears expensive, as the book needs to be adjusted for the re-assessment of BoRs NPAs by ICICI Bank. The key near-term challenges for ICICI Bank will be assessment of BoRs asset quality, rationalization and re-positioning of BoRs branches, and possible regulatory issues. We will review our target price for ICICI Bank post the merger details. Maintain Buy. Valuing BoR at Rs66m/branch While BoRs asset base is just 5% of ICICI Banks, its 463 branches will result in a ~23% increase in ICICI Banks existing network of 2,000 branches. A share swap ratio of 1:4.72 (25 shares of ICICI Bank for 118 shares of BoR) implies a valuation of Rs66m per branch and 0.2x the deposit base for BoR. It is noteworthy that ICICI Bank has opened 580 new branches (1.3x BoRs branch network) since March 2009 at a cost of Rs8m-10m per branch. However, it takes almost two years for a new branch to break even. STATE BANK OF INDORE On August 26, 2010, State Bank of Indore was officially merged with State Bank of India.

State Bank of Indore was formerly named as Bank of Indore Ltd. It was established under a special charter of His Highness Maharaja Tukojirao Holker-III, the then ruler of Malwa region.

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It became a subsidiary of State Bank of India on 1 January 1960, under the State Bank of India Subsidiary Banks Act, 1959.

In the following year (1962), State Bank of Indore took over the business of The Bank of Dewas Ltd.

In 1965, State Bank of Indore took over The Dewas Senior Bank Ltd. as well.

State Bank of Indore was upgraded to class 'A' category bank in 1971.

The business turnover of the Bank crossed Rs.47000 Crore at the end of December 2008.

It has emerged as the premier bank of Madhya Pradesh due to its steady progress.

The SBI with the sanction of Govt. of India entered into negotiations with State Bank of Indore for the acquisition on Oct 8, 2009.

The Board of Directors of State Bank of Indore On October 31, 2009, approved the Scheme of Acquisition of State Bank of Indore
(SBIN) by SBI, under Section 35 of the SBI Act, 1955. SBI has already announced a share swap ratio of 34:100 for the merger. That means, SBI would give its 34 shares for every 100 shares of State Bank of Indore held by minority shareholders.

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For this purpose, SBI would issue up to over 1.16 lakh shares of face value Rs 10 each to minority shareholders of State Bank of Indore. After the merger, the issued capital of SBI would increase from Rs 634.96 crore up to a maximum of Rs 635.08 crore. Both the banks separately and independently appointed M/s Haribhakti & company (qualified chartered accountants and M/s Axis Bank ltd. (Category 1 merchant bankers) as the independent valuers. M/s Kotak Mahindra capital company ltd.(Category 1 merchant bankers) was appointed by both the banks independently to provide a fairness opinion to valuation of the independent valuers. After the merger, SBI will be left with five associate banks, State Bank of Bikaner and Jaipur, State Bank of Travancore, State Bank of Patiala, State Bank of Mysore and State Bank of Hyderabad. Among these, the State Banks of Bikaner and Jaipur, Mysore and Travancore are listed companies.

PURPOSE OF THE MERGER

The merger would avoid competition between the two entities and lead to easier access to funds at competitive rates, compared to what State Bank of Indore would have managed for its growing balance sheet.

Acquisition of State Bank of Indore by SBI would allow economies of scale in terms of footprint, manpower and other resources.

State Bank of Indore has a large number of branches outside Madhya Pradesh and Chhattisgarh and all of them would be controlled conveniently from SBI's local head offices in various states leading to substantial cost savings.

Case study 3

The merger that was announced on, 2006 between Deutsche Bank and Dresdner Bank, Germanys largest and the third largest bank respectively was considered as Germanys response to increasingly tough competition markets. The merger was to create the most powerful banking group in the world with the balance sheet total of nearly 2.5 trillion marks and a stock market value around 150 billion marks. This would put the merged bank for ahead of the second largest banking group, U.S. based citigroup, with a balance sheet total amounting to 1.2 trillion marks and also in front of the planned Japanese book mergers of Sumitomo and Sukura Bank with 1.7 trillion marks as the balance sheet total.The new

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banking group intended to spin off its retail banking which was not making much profit in both the banks and costly, extensive network of bank branches associated with it. The merged bank was to retain the name Deutsche Bank but adopted the Dresdner Banks green corporate color in its logo. The future core business lines of the new merged Bank included investment Banking, asset management, where the new banking group was hoped to outside the traditionally dominant Swiss Bank, Security and loan banking and finally financially corporate clients ranging from major industrial corporation to the mid-scale companies. With this kind of merger, the new bank would have reached the no.1 position of the US and create new dimensions of aggressiveness in the international mergers. But barely 2 months after announcing their agreement to form the largest bank in the world, had negotiations for a merger between Deutsche and Dresdner Bank failed on April 5, 2000.The main issue of the failure was Dresdner Banks investment arm, Kleinwort Benson, which the executive committee of the bank did not want to relinquish under any circumstances.In the preliminary negotiations it had been agreed that Kleinwort Benson would be integrated into the merged bank. But from the outset these considerations encountered resistance from the asset management division, which was Deutsche Banks investment arm.Deutsche Banks asset management had only integrated with Londons investment group Morgan Grenfell and the American Bankers trust. This division alone contributed over 60% of Deutsche Banks profit. The top people at the asset management were not ready to undertake a new process of integration with Kleinwort Benson. So there was only one option left with the Dresdner Bank i.e. To sell Kleinwort Benson completely. However Walter, the chairman of the Dresdner Bank was not prepared for this. This led to the withdrawal of the Dresdner Bank from the merger negotiations. Case study 4

Private Banks are taking to the consolidation route in a big way. Bank of Punjab (BoP) and Centurion Bank (CB) have been merged to form Centurion Bank of Punjab (CBP). RBI has approved merger of Centurion Bank and Bank of Punjab effective from October 1, 2005. The merger is at a swap ratio 9:4 and the combined bank is will be called Centurion Bank of Punjab. The merger of the banks will have a presence of 240 branches and extension counters, 386 ATMs, about 2.2 million customers. As on March 2005, the net worth of the combined entity is Rs 696 crore and the capital adequacy ratio is 16.1 per cent. In the private sector, nearly 30 banks are operating. The top five control nearly 65% of the assets. Most of these private sector banks are profitable and have adequate capital and have the technology edge. Due to intensifying competition, access to low-cost deposits is critical for growth. Therefore, size and geographical reach becomes the key for smaller banks. The choice before smaller private banks is to merge and form bigger and viable entities or merge into a big private sector bank. The proposed merger of Bank of Punjab and Centurion Bank is sure to encourage other private sector banks to go for the M&A road for consolidation. Highlights of the merger-Centurion Bank and Bank of Punjab Bank of Punjab will be merged into Centurion Bank.New entity will be named 'Centurion Bank of Punjab'.Centurion Bank's chairman Rana Talwar will take over as the chairman of the merged entity.Centurion Bank's MD Shailendra Bhandari will be the MD of the merged entity. KPMG India Pvt Ltd and NM Raiji & Co are the independent valuers and Ambit Corporate Finance was the sole investment banker to the transaction.Swap ratio has been fixed at 4: 9, that is, for every four shares of Rs 10 of Bank of Punjab, its shareholders would receive nine shares of Rs 1 of Centurion Bank.There has been no cash transaction in the course of the merger; it has been settled through the swap of shares. There will no downsizing via the voluntary retirement scheme.

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Financials of the merged entity- Centurion Bank of Punjab The cost of deposit of Bop were lower than Centurion, while Centurion had a net interest margin of around 5.8%,. The net interest margin of the merged entity will be at 4.8%. The combined entity will have net non performing assets (NPAs) of about 3.6 per cent as per Performa March 2005 data. Centurion banks net NPAs as on 31 March 2005 stood at 2.49 per cent while for Bank of Punjab the figure stood at 4.6 per cent. The combined entity will have adequate capital adequacy of 16.1 per cent to provide for its growth plans. Centurion banks capital adequacy on a standalone basis stood at 23.1 per cent while for Bank of Punjab the figure stood at 9.21per cent. The Performa net worth of combined entity as at March 2005 stood at Rs 696 crore with Centurion's net worth at Rs 511 crore and Bank of Punjab's net worth at Rs 181 crore, and the combine entity (Centurion Bank of Punjab) will have total asset 9,395 crore, deposit 7,837crore and operating profit 43 crore.The merged entity will have a paid up share capital of Rs 130 cr and a net worth of Rs 696 cr. The merged entity will have 235 Branches & extension counters, 382 ATMs and 2.2 million customers . Gains from the merger Combined entity the Punjab-centurion bank would be the among the top 10 private sector banks in the country. Merged entity would benefit from the fact that centurion bank had recently written of its bad loans against equity. Branch network of the two banks will complement each other. The combined entity will have a nationwide reach. Centurion Bank is strong in South India, Maharashtra and Goa whereas Bank of Punjab is strong in Punjab, Haryana and Delhi. While Centurion Bank has 82 per cent of its business coming from retail, Bank of Punjab is strong in the Small and Medium Enterprises (SMEs) segment and agricultural sector. The book value of the bank would also go up to around Rs 300 crore. The higher book value should help the combine entity to mobilize funds at lower rate. The combined bank will be full-service commercial bank with a strong presence in the Retail, SME and Agricultural segments.

Case study 5

HDFC Bank, Centurion swap ratio fixed at 1:29 HDFC Bank Board on 25th February 2008 approved the acquisition of Centurion Bank of Punjab (CBoP) for Rs 9,510 crore in one of the largest merger in the financial sector in India. CBoP shareholders will get one share of HDFC Bank for every 29 shares held by them. This will be HDFC Banks second acquisition after Times Bank. HDFC Bank will jump to the 7th position among commercial banks from 10th after the merger. However, the merged entity would become second largest private sector bank. The merger will strengthen HDFC Bank's distribution network in the northern and the southern regions. CBoP has close to 170 branches in the north and around 140 branches in the south. CBoP has a concentrated presence in the in the Indian states of Punjab and Kerala. The combined entity will have a network of 1148 branches. HDFC will also acquire a strong SME (small and medium enterprises) portfolio from CBoP. There is not much of overlapping of HDFC Bank and CBoP customers. The entire process of the merger would take about four months for completion. The merged entity will be known as HDFC Bank. Rana Talwar's Sabre Capital would hold less than 1 per cent stake in the merged entity from 3.48 in CBoP, while Bank Muscat's holding will decline to less than 4 per cent from over 14 per cent in CBoP. HDFC shareholding falls to will fall from 23.28 per cent to around 19 per cent in the merged entity. Mr Rana Talwar, Chairman of Centurion Bank, has been offered a seat on the Board as non-executive director and Mr Shailendra Bhandari, Managing Director, Centurion Bank, has been invited to join as the Executive Director on the board post merger. According to HDFC Bank Managing Director and Chief Executive Officer Aditya Puri, Integration will be smooth as there is no overlap. In an interview, he mentioned that at 40% growth rate there will be no lay-offs. The integration of the second rung officials should be smooth as there is hardly any overlap. The boards of the two banks will meet again on February 28 to consider the draft scheme of amalgamation, which will be subject to regulatory approvals. HDFC Bank will consider making a preferential offer to its parent Housing Development Finance Corp Ltd (HDFC). The move would allow HDFC to maintain the same level of shareholding in the bank. LATEST NEWS ABOUT MERGERS AND ACQUISITION IN BANKING SECTOR

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Banking sector reforms in India are in the progress. Both Finance Ministry of India and Reserve Bank of India (RBI) are actively suggesting many far reaching reforms for banking and financial industry of India. One of such reforms pertains to regulating mergers and acquisitions (M&A) pertaining to banking sector. Till now the Competition Commission of India (CCI) has a say in the M&A pertaining to banking companies. However, with the recent proposed amendments in the Banking Regulations Act, 1949, only RBI would have power to regulate M&A pertaining to banking sector. In fact, the proposed amendments have already been approved by Cabinet of India.

The FormerFinance Minister & The Presesnt President of India ,Mr.Pranab Mukherjee has also recently said that RBI would have the final say on bank M&A. He told that banking mergers and acquisitions will not come under the purview of the Competition Act or the Companies Act. Indian mergers and acquisitions in 2011 may surpass this years record $71 billion of deals, led by oil and gas, metals and mining companies, according to M&A bankers including Topsy Mathew of Standard Chartered. Billionaire Sunil Mittals $10.7 billion acquisition of mobile-phone operators in Africa led an almost four-fold increase in takeovers this year as deals surpassed 2007s $69 billion, according to data compiled by Bloomberg. Companies in Asia-Pacific including India and China are expected to be the most acquisitive buyers in 2011 as attractive valuations and domestic competition drive deals globally, according to Bloombergs M&A Global Outlook survey. Overseas firms may target Indian pharmaceutical and consumer firms, and local enterprises will seek natural resources, said Bank of America, ranked No. 3. Outbound deals would continue to be highly active given that international companies valuations are still relatively depressed, and Indian companies have access to debt and equity capital, Saurabh Agrawal, the 41-year-old head of India investment banking at Charlotte, North Carolina-based Bank of America, wrote in an e-mailed response to questions. Inbound and local deals will also take place. Cross-border deals rose to a record $59.2 billion in India this year, after Mittals New Delhi-Bharti Airtel in March agreed to buy the African assets of Zain for $10.7 billion. Outbound M&A accounted for 74% of that volume. The acquisition spree in India, China and Brazil contrasts with a slowdown in global deals. Mergers worldwide are down 46% from 2007s record. In the US, the worlds largest market, volumes are 51% lower, and levels in Europe are down by 59%. Large Indian corporate are going through a growth phase: they think there is a lot of opportunity, they think they have access to capital, 35-year-old Mathew, managing director for M&A for India, said in an interview. The London-based bank climbed 13 places to No. 2 among Indian takeover advisers this year, its highest ranking. They are capitalizing on the positive sentiment to undertake long-term strategic transactions, he said. The mergers and acquisitions of banks will now come under the purview of the Banking Regulation Act. This means M&A in banking sector would no more require the approval of the Competition Commission of India.

CONCLUSION One of the most common reasons for mergers and acquisitions is the belief that "synergies" exist, allowing the two companies to work more efficiently together than either would separately. Such synergies may result from the firms' combined ability to exploit economies of scale, eliminate duplicated functions, share managerial expertise, and raise larger amounts of capital. Another reason for banks to move towards merger is that they are motivated by a desire for greater market power. The 'human factor' is a major cause of difficulty in making the integration between two companies work successfully. If the transition is carried out without sensitivity towards the employees who may suffer as a result of it, and without awareness of the vast differences that may exist between corporate cultures, the result is a stressed, unhappy and uncooperative workforce and consequently a drop in productivity Decision to carry out a merger or acquisition should consider not only the legal and financial implications, but also the human consequences - the effect of the deal upon the two companies' managers and employee Almost 60 -70% mergers and acquisitions and the reason for the failure is cultural differences, flawed intentions, and sometimes decisions are taken without properly analysis the future of the merger. Merger of BoR an old private sector bank with India's 2nd largest private sector bank will definitely help both of this parties as ICICI Bank can extend it activities as it total number branches will go up by 25% and BoR will also get new direction as it already witness the share price of BoR in BSE is almost doubled after the announcement of the merger

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BIBLOGRAPHY
Books: K.R.SAMPATH, Law and Procedures on Corporate Restructure Leading to MERGERS/AMAGAMATIONS,TAKEOVERS, JOINT VENTURES LLPS AND CORPORATE RESTRUCTURE ,7th edition,Snow whitePublication,Mumbai, 2011 S.RAMANUJAM; Mergers at al; Wadha Nagpur;2nd Edition,2006 Web www.google.com

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www.investopedia.com www.business.mapsofindia.com www.bloomberg.com www.legalserviceindia.com www.slideboom.com www.papercamp.com www.moneycontrol.com www.scribd.com