M&a of Banks

Mergers & Acquisitions in Banking sector
INDEX
Sr.
No.
Content
Chapter:1
Introduction
A.
B.
C.
D.
E.
Defining Merger & Acquisition

Defining Merger & Acquisition
Clarification of Concept
Govt. Initiatives
Mergers consolidation the banking industry-legal
prospective
Chapter:2
II
Need for Merger & Acquisition

1. Consolidation is inevitable and the needs for the Hour
2. Cost reduction through consolidation
3. Consolidation and core banking solution
4. Human resources management through consolidation
a) Object of M & As
b) Benefits and limitations of M & As
5. Problems in Consolidation Through M & As
Chapter:3
III
Merger Procedures
i. Merger Strategy
ii. Merger Procedure
iii. Various banks merged since 1990-2008
ssChepter:4
IV
Mergers/amalgamations in India- Legal framework

4.1 Before Liberalization
4.2 Post Liberalization period
4.3 Bank Mergers/amalgamations-Under various acts
Chepter:5
The impact of M & A to takeover holders
Pg.
No.
VI
Consolidation in Indian Banking Industry- The Current

Scenario
Chepter:6
VII
Case Study
VIII
Conclusion
IX
Bibliography
Annexure
Chapter-1
I:
INTRODUCTION
"Our Vision is to evolve into a Strong, Sound and Globally
competitive financial system, providing integrated services to
customers of all segments, leveraging on Technology and Human
Resources adopting the best accounting and ethical practices and
fulfilling
corporate
and
social
responsibilities
towards
all
stakeholders".
- Shri. S C. Gupta Chairman & Mg. Director Indian Overseas Bank
2
Liberalization and deregulation process started in 1991 - 92 has

made a sea change in the banking system. From a totally regulated
environment, we have gradually moved into a market driven
competitive system. Our move towards global benchmarks has been,
by and large, calibrated and regulator driven. The pace of changes
gained momentum in the last few years. Globalization would gain
greater speed in coming years particularly on account of expected
opening up of financial services under WTO. Four trends changed the
banking industry world over, viz.
1. Consolidation of players through Mergers & Acquisitions.
2. Globalization of operations.
3. Development of new technology.
4. Universalisation of banking.
Consolidation through Mergers and Acquisitions (M & A)
is considered one of the best ways of restructuring for effectively
facing the competitive pressures. Mergers and acquisitions are the
terms, which are hardly used in the banking industry as business deals,
but are perceived as something, which can be trusted upon, by the
ministry of Finance, Government of India. The Finance Minister, Mr. P.
Chidambaram also said that the government is in favors of
consolidation in the banking industry to achieve "World-Class" status.
The Indian Banks' Association, under the Chairmanship of Mr. V.
Leeladhar, recently constituted a Committee to examine the various
facets that could lea: consolidation between banks. The present
banking scene in India demands consolidated efforts, paving the way
for healthy competition and improved vibrancy of banks. Banking the
world over has been experiencing large-scale mergers and acquisitions,
either between banks and financial institutions or between banks and

major IT companies. All these mergers and acquisitions are driven by
motivations like efficiency gains through synergies, economies of scale
and scope of risk mitigation through diversification, cost effectiveness
etc. some times; non-economic factors like prestige, market power, or
market dominance have also influenced M&A activity.
A: DEFINING MERGER AND ACQUISITION

a): The main Idea
One plus one makes three: this equation is the special alchemy
of a merger or acquisition. The key principle behind buying a bank is
to create shareholder value over and above that of the sum of the two
companies. Two companies together are more valuable than two
separate companies at least, thats the reasoning behind
M & A.
This rational is particularly alluring to companies when times

are tough. Strong companies will act to buy other companies to create a
more competitive, cost-efficient bank. The companies will come
together hoping to gain a greater market share or achieve greater
efficiency. Because of these potential benefits, target companies will
often agree to be purchased when they know they cannot survive alone.
b): Distinction between merger and acquisition:
Although they are often uttered in the same breath and used as
though they were synonymous, the term merger and acquisition
mean slightly different things.
When a bank takes over another one and clearly becomes the
new owner, the purchase is called an acquisition. From a legal point of
view, the target bank ceases to exist and the buyer swallows the
business, and stock of the buyer continues to be traded.
In the pure sense of the term, a merger happens when two firms,
often about the same size, agree to go forward as a new single bank
rather than remain separately owned and operated. This kind of action
is more precisely referred to as a merger of equals. Both companies
stocks are surrendered, and bank stock is issued in its place. For
example, both Daimler-Benz and Chrysler ceased to exist when the
two firms merged, and a new bank, Daimler Chrysler, was created.
In practice however, actual mergers of equals dont happen very
often. Often, one bank will buy another and, as part of the deals terms,
simply allow the acquired firm to proclaim that the action is a merger
of equals, even if its technically an acquisition. Being bought out often
carries negative connotations. By using the term merger, dealmakers
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 in business is in the best interests of both
their companies. But when the deal is unfriendly that is, when the
target bank does not want to be purchased it is always regarded as an

acquisition.
So, 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 banks board
of directors, employees and shareholders.
B: TYPES MERGER & ACQUISITION

a] MERGERS:Mergers can be economically classified into four categories Viz.,
Horizontal, Vertical, Congeneric or Concentric and conglomerate.
1) Horizontal Mergers:
Horizontal Mergers normally involve the joining together of the
two or more companies which are producing essentially the same
products or rendering the same services, products, or services which
complete directly with each other (for example, sugar and artificial
sweeteners) they involve a reduction in the number of competing firms
in an industry and tend to create the greatest concern from an antimonopoly or competition point of view. They generally contribute
directly to lead the merged entities to dominant position of market
power, thereby reducing or eliminating competition.
This is way in many countries, restrictive business practices

legislation or, in other words, competition law, seeks to enforce strict
regulations on the merging or integration of competitors. A direct result
of integration or mergers of competitors into a single unit engenders
growth of monopoly power. Horizontal mergers of even small
enterprises may create conditions triggering concentration of economic
power and oligopoly.
2) Vertical mergers:
Vertical mergers involve the merger of two companies,
where one of them is an actual or potential supplier of goods or
services to the other. In other words, they involve enterprises at
different stages in the production and distribution process. An example
of this is where a motor car manufacturer and a manufacturer sheet
metal merge. Here, a supplying enterprise which mergers with a
customer enterprise can extend its control over the market by
foreclosing an actual or potential outlet for the products of its
competitors. The object of the merger may be to ensure a source of
supply or an outlet for products and the effect may improve efficiency.
3) Congeneric or Concentric merger:
In Congeneric or Concentric merger the acquirer and target
companies are related through the basic technologies, production
process or markets. The acquired company represents an extension of
product line, market participations, technologies of the acquiring

company. Concentric merger represents an outward move by the
acquiring company from its current set of business into contiguous
businesses. The acquiring company derives benefits by exploitation of
a strategic resource and from entry into a related market having higher
return than it enjoyed earlier. The potential benefit of the congeneric
merger is high because these transactions offer opportunities to
diversify around a common core of strategic resources.
4) Conglomerate mergers:
Conglomerate mergers neither constitute the bringing together of
competitors nor have a vertical connection. It involves a predominant
element of diversification of activities. This may consist of a company
deriving most of its revenue from a particular industry, acquiring
companies or entities operating in other industries for one or more of
the following reasons:
a obtain greater stability of earnings through diversification;
b employ spare resources whether of capital or management;
c obtain benefit of economies of scale; and
d provide an outlet for the ambitions of management where antimonopoly laws may make further growth in the companys own field
impracticable.
b] ACQUISITION:As we can see, an acquisition may be only slightly different

from a merger. In fact, it may be different in name only. Like mergers,
acquisitions are actions through which companies seek economies of

scale, efficiencies, and enhanced market visibility. Unlike all mergers,
all acquisitions involve one bank purchasing anotherthere is no
exchanging of stock or consolidating as a new bank. Acquisitions are
often congenial, with all parties feeling satisfied with the deal. Other
times, acquisitions are more hostile.
In an acquisition, a bank can buy another bank with cash, with
stock, or a combination of the two. Another possibility, which is
common in smaller deals, is for one bank to acquire all the assets of
another bank. Bank X buys all of Bank Ys assets for cash, which
means that Bank Y will have only cash (and debt, if they had debt
before). Of course, Bank Y becomes merely a shell and will eventually
liquidate or enter another area of business.
Another type of acquisition is a reverse merger, a deal that
enables a private bank to get publicly-listed in a relatively short time
period. A reverse merger occurs when a private bank that has strong
prospects and is eager to raise financing buys a publicly-listed shell
bank, usually one with no business and limited assets. The private bank
reverse mergers into the public bank, and together they become an
entirely new public corporation with tradable shares. Regardless of
their category or structure, all mergers and acquisitions have one
common goal: they are all meant to create synergy that makes the
value of the combined companies greater than the sum of the two parts.
The success of a merger or acquisition depends on how well this
synergy is achieved.
C: CLARIFICATION OF CONCEPTS:
1) Mergers or Amalgamation:
Merger is define as combination of two or more companies into
a single company where one survives and the others lose their
corporate existence. According to the oxford dictionary, the expression
mergers or Amalgamation means combination of two or more
business concerns into one respectively the survivor acquires the
assets as well as liabilities of the merged company or companies. All
assets, liabilities and stock of one company stand transferred to
Transferee Company or debentures or cash or mix of the two or three
modes. For example; Sikkim bank benaras state bank Ltd. and global
trust bank Ltd., Were amalgamated with Union bank of India, Bank of
Baroda and Oriental bank of commerce respectively.
2) Consolidation:
Consolidation is known as the fusion of two existing companies
into a new entity on which both the existing companies extinguish.
Thus, consolidation is mixing up of the two companies to make them
into new one in which both the existing companies lose their identity
and cease to exist, the mix up assets of the two companies are known
by new names and the shareholders of two companies become share
holders of the new company.
3) Combination:
Combination refers to the mergers and consolidation as a
common term used interchangeably but carrying legally distinct
10
interpretation. All mergers acquisitions and amalgamations are

business combinations.
4) Acquisition or Takeover:
Acquisition in general is acquiring the ownership in the
property. In the context of business combinations, an acquisition is
purchase by one company of a controlling interest in the share capital
of another existing company. A takeover is acquisition and both the
terms are used interchangeably.
The concentration of economic power occurs inter alia, through
mergers and amalgamations. Acquisition or takeover takes place when
one company acquires control of another company.
D: GOVERNMENT INITIATIVES
During the last few years the Indian Banking system has
witnessed some very high profile mergers, such as the merger of ICICI
Ltd. with its banking arm ICICI Bank Ltd. the merger of Global Trust
Bank with Oriental Bank of Commerce and more recently the merger
of IDBI with its banking arm IDBI Bank Ltd. the Union Finance
Minister, P. Chidambaram gave an inkling of the governments stance
on mergers in the banking sector when he stated that The Government
would encourage consolidation among banks in order to make them
globally competitive. The Government will not force consolidation, but
if two banks want to consolidate, we would encourage them. We will
encourage them if it helps banks grow in size, scale and muscle so that
they can compete globally. To facilitate such mergers, a small
amendment to the Income-tax Act would be made during the budget
11
session of Parliament next year. Similarly, banks would be encouraged

to go to the market to raise resources.
The above statement of the Honorable Finance Minister has to
be understood in the context of the Basel II Accord which has proposed
in June 1999 by the Basel committee on Banking Supervision. As per
the Quantitative Impact Study published by the Basel Committee in
May 2003, there would be an increase in capital requirements by 12%
for bank in developing countries on implementation of the Basel II
Accord. Merger among banks will be one of the ways to increase
market power and thereby increase the revenue generation of banks
which would in turn enable them to access the capital market to raise
funds and meet the increased capital requirement.
E: MERGERS CONSOLIDATING THE BANKING INDUSTRY:
A LEGAL PERSPECTIVE
The topic of consolidation of banks has occupied the front seat
of banking sector reforms in the recent past. The finance minister said
that the government would put in place an environment, which will be
conducive for mergers and acquisitions of banks. The union finance
minister announced that PSBs would be encouraged to merger. Further,
he promised that the next union budget, due in February 2005, would
provide tax incentives for profitable PSBs grow in scale and muscle
so that they can complete effectively with world class banks. In
India, banking has been divided into broad classification of public
sector banks, private sector banks, foreign banks, cooperative banks,
local area banks etc. banking institutions operating in India are
12
governed by different statutory provisions depending upon their status

as a body corporate established by a act of parliament or a banking
company and such statutes are relevant for the purpose of
consolidation of such banking institutions by acquisitions and mergers.
The importance attributed to consolidation of banks, in the recent past,
throws light on the need of mergers, especially in the background of
collapse of a major private sector bank and daily fall of cooperative
banks. A question that arises in whether mergers are alternative to
cover weakness of banking industry as such.
Is the object is to increase the profit by enlarging ideas of new
finance minister?
Are banks driving towards mergers to merge NPAs with strong
banks?
Whether consolidation of banks would be a solution to wipe off
the losses and increases the market muscle?
In this background, an attempt has been made in the present article to
list out legal provisions providing room for consolidation of banks,
legal impediments preventing the cross merger i.e. public sector banks,
private banks, cooperative banks, non banking financial institutions,
regional rural banks, multi state cooperative banks etc., and to suggest
the amendments to overcome such legal difficulties, if any, to create an
environment of unrestricted and choice oriented mergers in banking
sector in India.
Chapter - 2
13
II: NEED FOR MERGERS AND ACQUISITION

The consolidation in the present arena being talked about is the
merger of weak banks in the strong banks, neither it is to protect the
interest of depositors of one bank by merging it into other bank.
Instead, it is a merger of two banks, even two large banks or two strong
banks to be a mega as well as strong entity, which may rank amongst
the top 200 banks of the world. The idea is that a strong unit can
absorb the shocks and survive in the difficult times.
Consequent upon consolidation, the new entity will not only
have sound financial position but also a large branch network through
out the country, overseas presence, the large clientele base, large
resources and big size in terms of assets as well as business figures.
Further, the sound financial position will be in terms of large capital
base, increased profitability, higher capacity to tolerate the unexpected
loss, better risk management, larger disclosed and undisclosed
reserves, large base of real assets, better stability, higher capacity to
tolerate losses, if any, thereby making higher gains etc.
The consolidation will also result in increased discretionary
14
powers to the field functionaries at branch level for lending,

investment, foreign exchange business and derivatives trading, which
will on the one hand increase the profitability of the banks and on the
other hand will facilitate customers and other stakeholders for quick
decision. The public confidence will be increased manifold. The rating
of the merged entity by international agencies will be improved which
will increase the confidence of depositors and international banks and
financial institutions dealing with the Indian Banks.
Consolidation in Banking Industry has further become important
due to the following reasons:
Unhealthy Competition amongst banks;
Expansion of branches, unviable branches;
Clusters of branches of various banks at particular centers;
Regional imbalance/unequal VRS;
Improper deployment of staff;
Restrictions on transfer of clerical staff;
Inter zone transfer policy of officers up to specified scale in
various banks;
Uneven promotions;
Computerization/installation of ATMs/networking/core banking

solution.
15
1: CONSOLIDATION IS INEVITABLE AND THE NEED OF

THE HOUR
The consolidation in banking industry by mergers and
acquisitions is the need of the hour and cannot be avoided. A lot of
companies have been taken over by the other companies to make a
mega company. "Collectiveness is strength" will hold true on
consolidation. After merging two-three big banks, it will be a very
large sized bank, which will be seen as a market leader. It will not only
improve the position and rating of the particular bank but also of the
country as a whole. How many large banks India have, matters
significantly. At present we have only one bank namely State Bank of
India that is ranked amongst top 200 banks in the world. After the
consolidation, we will be having 3-4 banks of international level or
standard. It will be a good name for the country to have 4 banks in the
top 200 banks of the world. This will further improve our country
rating i.e. the rating for India.
The large corporate houses and Resident and Nonresident
Indians and foreign nationals are now viewing the balance sheet of the
banks before dealing with them. The balance sheet of consolidated
banks will be a strong one showing very sound financial position of the
merged entity.
16
2: COST REDUCTION THROUGH CONSOLIDATION

One of the super advantages of the consolidation of banks is the
reduction in operating cost. This will be on account of the following
factors:
Closing down branches which are located within a short radius of the
merged entity thereby cutting expenditure and deployment of surplus
staff in marketing of other fee based services or products.
Reduction in number of controlling offices i.e. regional or zonal offices
thereby reduction in administrative expenses.
More utility and viability of ATMs. Increase in number of transactions

at ATMs and more availability of ATMs to the customers.
Reduction in payment of annual maintenance charges for software as

well as numerous other items such as servers, computers, machinery
equipment etc. The A.M.C. of the high capacity and disaster recovery
centre in case of core banking solution is in crores of rupees. Thus by
merging 3 banks, such cost will be saved for 2 banks.
Reduction in other operative expenses to a great extent.
3: CONSOLIDATION AND CORE BANKING SOLUTIONS
The consolidation will make it convenient to introduce core
banking solution at maximum number of branches due to its being cost
effective.
The CEOs of the banks have been stressing on the advantages of core
banking solution. One of the biggest benefits from moving to core
17
banking is that transaction cost will be sufficiently reduced, by around

15% to begin with, but much more in due course. The core banking
solution, in addition, will be able to handle large number of customers,
large number of users and large number of transactions, viz. to the
million transactions a day for each of the large banks. Without
consolidation, the handling of large number of transactions may not be
possible in future for small sized banks. Besides this, expanding the
implementation of Real Time Gross Settlements, Electronic Fund
transfer at more centers, maximize the use of Electronic clearing
system, Electronic Banking, E-cheques, paperless handling of Inter
Bank Clearing Transactions all will be conveniently possible after
consolidation with the help of Core Banking Solution and Technology
up gradation.
4: HUMAN RESOURCES MANAGEMENT THROUGH
CONSOLIDATION
Different persons have different qualities. Some are expert in
marketing, some in table work whereas some in field work. Some
others are expert in making policies. Some develop specific skills,
which others do not have. Maximum output or productivity can be
achieved by optimizing capacity utilization as well as efficiency
utilization of each individual and by putting right person on the right
job.
If a person is given a job of his choice or expertise, he starts loving his
job profile. Then the job no more remains for him but becomes playing
a game or singing a song. Thus, there will be more opportunities for
the employees and they may be offered the different job of their choice
18
and skill. Thus, the human resources will be managed in a better way
after consolidation. It will also provide more career opportunities to
employees.
a: OBJECTIVES OF MERGERS
Mergers are well recognized commercial practices for growth
and diversification of manufacturing, business and service activities.
The factors that motivate mergers are, to
a
diversify
the areas
of
activities;
achieve
optimum
size
of
business;
b
remove certain key factors and other bottlenecks of input

supplies;
improve the profitability;
serve the customer better;
achieve economies of scale and size, internal and external;
acquire assets at lower than the market price;
bring separate enterprises under single control;
Grow without any gestation period; and nurse a sick unit and
get tax advantages by acquiring a running concern.
There could be other influencing factors. But, by and
large, they will be subsumed in one or the other of the above listed
factors. One of the main advantages arising out of mergers is the
possible resultant economies of sale.
19
b): BENEFITS OF MERGERS & ACQUISITIONS

The principal economic rationale or merger is that the value of
combined entity is expected to be greater than the value of the sum of
the independent value merging entities.
For instance, if the banks x & y merge, then the value of the
combined entity i.e. v (xy) is expected to be greater than vx + vy, i.e.
the sum of independent values of x & y. this is called as synergistic
effect the essence & projection of a merger.
1) Increase in the growth and expansion:
Growth is the need of survival. A corporate that shows growth
and dynamism is very much able to attract and retain talented
executives. At the same time, it enriches the job perspectives of the
working executives by posing ever increasing challenges and hence has
a proportional effect on managerial efficiency.
2) Increase in profit margins:
Profits increase due to the fact that a combination of two or more
banks may result into cost reduction due to operating economies. This
can happen as a combined entity may avoid or at least reduce
overlapping functions and facilities. At the same time economies of
scale may also enhance profitability. These arise due to more intensive
utilization of data processing systems, marketing of services, product
innovation and so on.
20
3) Strategic benefit:
This can be explained owing to the fact that in a saturated
market like that of India, simultaneous expansion and replacement
(through merger) may help the banks to reap profits rather than
creation of additional capacity through internal expansion.
4) Product Innovation:
With the merger of two banks, it may be easier for them to
successfully bring about product innovations as their resources are
more so complementary.
LIMITATIONS OF MERGERS & ACQUISITIONS
The probable limitations that every merger might have to face are:
1) Dysentery Effect:
It is very important that before merging the two banks should
take into consideration the nature and extent of synergy which they
have. Generally it is seen that if the two combining entities differ in
their work cultures then the synergy might go negative and this brings
about dysynergy.
2) Striving for bigness:
It is the matter of fact that size is taken to be the most important
yardstick for the measurement of success. But beyond a particular size,
the economies of scale turn into diseconomies of scale. Thus while
evaluating a merger or acquisition proposal, the focus should be on to
21
create or maximize the shareholders wealth rather than increasing the

size.
3) Failure to integrate well:
It is said that Sometimes even a best strategy can be ruined
by poor implementation. A post merger or post acquisition
integration of the two banks is a must. Although this is an extremely
complex task just like grinding east and west together.
These adverse features may or may not be outweighed by the
positive features of mergers such as economies of scale, stability
through diversification, utilization of idle funds, nursing a sick unit
or better/optimal utilization of capacity.
22
5: PROBLEMS IN CONSOLIDATION THROUGH MERGER

AND ACQUISITION:
Different
technology
in
different
banks;
unacceptably
low
standards of job performance some of the rural centers;

An underutilized and de-motivated workforce:
Limited flexibility;
Attitudinal problems towards work a: management;
The absence of a sense of teamwork and a shared responsibility

for getting work done;
More of an individual than a company perspective on work;
Lack of clarity in job responsibilities;
Breakdowns in personal relationships;
Employees developing their own ways of worn which express
their personal comfort zones;
Problems
in
controlling
large
number
manpower.
23
of
brand
and
the
Chapter- 3
The word 'MERGER' may be taken as an, abbreviation which means:
M
E
MIXING
ENTITIES
RESOURCES
G
E
FOR
GROWTH
ENRICHMEN
T AND
RENOVATION
The factors favoring growth, enrichment and renovation should

be taken into due consideration before stepping into the process of M
& As so that the abbreviation truly comes out to be fruitful.
III. MERGER STRATEGY
REMAINING SMALL MIGHT BE BEAUTIFUL
BUT BECOMING BIG WOULD MAKE YOU POWERFUL
IS THE UNDERLYING PRINCIPLE BEHIND THE
MERGER AND ACQUISITION BUSINESS STRATEGY.
Various aspects of the M & A deal such as valuation, legal
compliance; accounting and negotiation are highly specialized areas.
The advisors are often investment and merchant bankers who are well
versed with the M&A market players and have experience and
knowledge. Advisors take fees for performing various tasks:
24
Target identification
Determination of appropriate price
Structuring the finance
Assisting in negotiation
Advising on post-merger integration
The fees charged by the intermediary are often negotiable. The
Lehman formula (also known as 5-4-3-2-1) formula is most popular. If
the target is being sought, the seeker should carefully state the
objectives.
For example, the objective(s) may be one or more of:
- Increasing market share in domestic market,
- Eliminating a competitor,
- Entering fast growing markets abroad,
- Better control of critical input material and components etc.
25
ii: MERGER PROCEDURE
I. Accounting
When mergers and acquisitions take place, the combined entity's
financial statements have to reflect the effect of combination.
According to the Accounting Standard 14 (AS 14) issued by the
Institute of Chartered Accountants of India, an amalgamation can be in
the nature of pooling of interests, referred to as "amalgamation in the
nature of merger', or acquisition. The conditions to be fulfilled for an
amalgamation to be treated as an "amalgamation in the merger " are as
follows:
1) All assets and liabilities of the "Transferor Company" before
amalgamation should become assets and liabilities of the "Transferee
Company".
2) Shareholders holding not less than 90% of shares (in value terms) of
the "Transferor Company" should become the shareholders of the
"Transferee Company".
3) The consideration payable to the shareholders of the "Transferor
Company" should be in the form of shares of the "Transferee
Company" only; cash can however, be paid in respect of fractional
shares.
4) Business of the "Transferor Company" is intended to be carried on by
the "Transferee Company."
5) The "Transferee Company" incorporates, in its balance sheet, the

book values of assets and liabilities of the "Transferor Company"
26
without any adjustment except to the extent needed to ensure

uniformity of accounting policies. An amalgamation which does
not satisfy all the conditions stated above will be regarded as an
"Acquisition".
The accounting treatment of an amalgamation in the books of the

"Transferee Company" is dependent on the nature of amalgamation.
For a merger, the 'pooling of interest' method is to be used and for an
Acquisition the 'purchase' method is to be used. Under 'the pooling of
interest' method, the balance sheet of the combined entity is arrived at
by a line by line addition of the corresponding items in the balance
sheets of the combining entities. Hence, there is no asset write-up or
write-down or even goodwill. Under the 'purchase' method, however,
the "acquiring company" treats the "acquired company" as an
acquisition investment and, hence, reports its tangible assets at fair
market value. So, there is often an asset write-up. Further, if the
consideration exceeds the fair market value of tangible assets, the
difference is reflected as goodwill, which has to be amortized over a
period of five years. Since there is often an asset write-up as well as
some goodwill, the reported profit under the purchase method is lower
because of higher depreciation as well as amortization of goodwill.
II. Legal/ Statutary approvals
27
The process of mergers or amalgamations is governed by

sections 391 to 394 of the Companies Act, 1956 and requires the
following approvals:
a: Shareholder approval
The
shareholders
of
the
amalgamating
and
the
amalgamated companies are directed to hold meetings by the

respective High Courts to consider the scheme of amalgamation. The
scheme is required to be approved by 75% of the shareholders, present
and voting, and in terms of the voting power of the shares held (in
value terms).
Further, Section 395 of the Companies act stipulates that the
shareholding of dissenting shareholders can be purchased, provided
90% of the shareholders, in value terms, agree to the scheme of
amalgamation. In terms of section 81(IA) of the Companies Act, the
shareholders of the "amalgamated company" also are required to pass a
special resolution for issue of shares to the shareholders of the
"amalgamating company".
b: Creditors/Financial Institutions/Banks approval
Approvals from these are required for the scheme of
amalgamation in terms of the agreement signed with them.
c: High Court approvals
28
Approvals of the High courts of the States in which

registered offices of the amalgamating and the amalgamated
companies are situated are required.
d: Reserve Bank of India approval
In terms of section 19 of FERA, 1973 Reserve Bank of
India permission is required when the amalgamated company issues
shares to the nonresident shareholders of the amalgamating company
or any cash option is exercised.
e: SEBI's Takeover Code for substantial acquisitions of shares in
Listed companies
In India take-over are controlled. On 4th November 1994,
SEBI announced a take-over code for the regulation of substantial
acquisition of shares, aimed at ensuring better transparency and
minimizing the occurrence of clandestine deals. In accordance with the
regulations prescribed in the code, on any acquisition in a company
which makes acquirers aggregate shareholding exceed 15%, the
acquirer is required to make a public offer. The take-over code covers
three types of takeovers-negotiated takeovers, open market takeovers
and bail-out takeovers.
III. Valuation
29
There are several approaches to valuation. The important

ones are the discounted cash flow approach, the comparable company
approach, and the adjusted book value approach. Traditionally, the
comparable company approach and the adjusted book value approach
were used more commonly. In the last few years, however, the
discounted cash flow approach has received greater attention,
emphasis, and acceptance. This is mainly because of its conceptual
superiority and its strong endorsement by leading consultancy
organizations.
iii: NUMBER OF BANK MERGED

30
SINCE 1990 2008

SR.
NAME
OF
MERDED
BANK
WITH
WHOM
MERGED
DATE
OF
MERGER
PURBANCHAL
LTD.
BANK
CENTRAL
OF INDIA
29-8-1990
NEW BANK OF INDIA
PUNJAB
NATIONAL BANK
04-09-1993
BANK OF KARAD LTD.
BANK OF INDIA
1993 - 1994
KASHINATH SETH BANK
STATE BANK OF
INDIA
1995 - 1996
PUNJAB CO OP BANK
LTD
ORIENTAL BANK
OF COMMERCE
1996 - 1997
BARI DOAB BANK
ORIENTAL BANK
OF COMMERCE
1996 - 1997
BAREILLY CORP. BANK

LTD.
BANK
BARODA
OF
03-06-1999
SIKKIM BANK LTD
UNION BANK OF
INDIA
22-12-1999
TIMES BANK LTD
HDFC BANK LTD.
26-02-2000
10
BENARAS STATE BANK

LTD.
BANK
BARODA
20-07-2002
11
NEDUNGADI BANK LTD
PUNJAB
NATIONAL BANK
01-02-2003
12
BANK OF MADURA
ICICI BANK
MAR. 2001
13
GLOBAL TRUST BANK

LTD
ORIENTAL BANK
OF COMMERCE
24-07-2004
14
CENTURION BANK
BANK OF PUNJAB
29-06-2005
15
HDFC BANK
CENTURION
BANK
28-01-2008
31
BANK
OF
THE WEAKNESSES OF SMALLER BANKS ARE BEING

EXPOSED LEADING TO MULTIPLE FAILURES
Nedungadi Bank
32
Chapter 4
IV: MERGERS / AMALGAMATIONS IN INDIA - LEGAL

FRAMEWORK
4.1: Before Liberalization
In India, the companies act, 1956 and the monopolies and
Restrictive trade practices act 1969(before the 1991 amendments) are
the statues governing mergers among companies.
In the companies act, a procedure has been laid down, in
terms of which a merger can effectuated. Sanction of the company
33
court (high court) is an essential prerequisite for the effectiveness of

and for effectuating a scheme merger.
The other statue regulating mergers was the hitherto
monopolies and restrictive trade practices act, 1969 (MRTP Act) .after
the 1991 amendments, the statue does not regulate mergers.
The regulatory provisions in the MRTP Act were removed through the
1991 amendments, with a view to giving effect to the industrial policy
of liberalization and deregulating, aimed at achieving economies of
scale for ensuring higher productivity, competitiveness and advantages
in the international market.
4.2: Mergers-Post Liberalization Period
a: Narasimham committee report (1991)
The first report of the narasimham committee
(November 1991) on the financial system had recommended a broad
pattern of the structure of the banking system as under:
a 3 or 4 large banks (including the state bank of India) which could
become international in character.
b
8 to 10 national banks with a network of branches throughout the

country engaged in universal banking;
c local banks whose operations would be generally confined to a specific

region; and
d
Rural banks (including RRBs) whose operations would be confined to

the rural areas and whose business would be predominantly engaged in
financing of agriculture and allied activities.
34
The narasimham committee was of the view that the move

towards this revised system should be market driven and based on
profitability considerations and brought about through a process of
mergers and acquisitions.
4.3: BANK MERGERS / AMALGAMATIONS UNDER
VARIOUS
ACTS
The relevant provisions regarding merger, amalgamations and

acquisition of banks under various acts are discussed in brief as under:
A: MERGERS/AMALGAMATION-_BANKING REGULATION
ACT, 1949
Amalgamation of banking companies under B.R.
act falls under two categories i.e. voluntary amalgamation and
compulsory amalgamation.
a: 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/amalgamations of banking companies. Under these provisions
a banking company by approval of shareholders of each banking
company by resolution passed by majority of two-third in value of the
shareholders of each of the said companies. The banks have to obtain
reserve banks sanction for the approval of the scheme of
amalgamation. However, asa per the observations of JPC the role of
RBI is limited. The reserve bank generally encourages amalgamation
when it satisfied that the scheme is in the interest of depositors of the
35
amalgamating banks. Further RBI is also empowered to determine the

market value of shares of the minority shareholders who have voted
against the scheme of amalgamation.
Since nationalized banks are not banking companies and
SBI is governed by a separate statute, 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 nationalised bank/SBI
with a banking company or vice versa. Moreover, the section does
not envisage approval of RBI for the merger of any other financial
entity such as a NBFC with a banking company voluntarily.
Therefore, a banking company can be amalgamated with
another banking company under section 44A of the BR act.
b: Section 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 banking institution (the transferee bank). Under sub-section (15)
of section 45 banking institution means any banking company
and includes state bank of India or a subsidiary bank or a
corresponding new bank. A compulsory amalgamation is pressed into
action where the financial position of the bank has become weak 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 institutions as defined in sub-section (15) thereof. Action
under the provisions of this section is taken by the reserve bank in
36
consultation with the central government in the case of banks, which

are weak, unsound or improperly managed. Under the provisions, RBI
can apply to the central government for suspension of business by a
banking company and prepare a scheme of reconstitution or
amalgamation in order to safeguard the interests of its 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
another banking company only. Meaning thereby, a banking company
cannot be merged with a nationalized bank or any other financial
entity.
B: STATE BANK OF INDIA ACT, 1955
Section 35 of the state bank of India act, 1955 confers power on
state bank of India 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 reserve bank of India. The terms
and conditions of acquisition as approved by the central board of the
state bank for its sanction. The central government is empowered to
sanction any scheme of acquisition and such scheme of acquisition
becomes effective from the date specified in the order of sanction.
As per sub section (13) of section 38 of the SBI act banking
institution is defined as under:
37
Banking institution includes any individual or any association

of individuals (whether incorporated or not or whether a department of
government or any separate institution), carrying on the business of
banking. SBI may, therefore, acquire business of any other banking
institution i.e. 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 may also include
urban cooperative banks NBFCs. 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 SBI act.
C: ACQUISITION BY SUBSIDIARY BANK
Under section 38 of the state bank of India (subsidiary banks)
act, 1959, subsidiary bank may acquire the business, including the
assets and liabilities of any other banking institution. banking
institution is defined under sub-section (14) of section 38 of the act
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.
Therefore, subsidiary bank may acquire business of
a any individual doing banking business, and
b Association of individuals doing banking business.
38
It may be noted that no provision for amalgamation has

been provided under the act. It is the acquisition of the banking
business of the individual or association of individuals. The definition
of banking institution provided under the SBI act.
D: AMALGAMATION OF NATIONALISED BANKS WITH
OTHER ENTITIES
Section 9 of the banking companies (acquisition) act, 1970
provides that the central government after consultation with RBI may
make a scheme providing for
a
the reconstitution of any corresponding new bank into two or more

corporations,
The amalgamation of any corresponding new bank with any other

corresponding new bank or with another banking institution.
The transfer of the whole or any part of the undertaking of a

corresponding new bank or banking institution, or
The transfer of the whole or any part of the undertaking of any other
banking institution to a corresponding new bank.
E: AMALGAMATION OF CO-OPERATION BANKS WITH
OTHER ENTITIES
Co-operative banks are under the regulation and supervision of
reserve bank of India under the provisions of banking regulation act,
1949. However, constitution composition and administration of the cooperative societies are under the supervision of registrar of cooperative societies of respective states (in case of Maharashtra state,
39
co-operative societies are governed by the provisions of Maharashtra

co-operative societies act, 1961).
F: AMALGAMATION OF CO-OPERATIVE BANKS

Under section 18A of the Maharashtra state co-operative
societies act, 1961, (MCS act) registrar of co-operative societies is
empowered to amalgamated two or more co-operative 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 section 110A of the MCS act without the sanction of requisition
of reserve name of India no scheme of amalgamation or reconstruction
of the bank is permitted. Therefore, a co-operative bank only. It cannot
be amalgamated with any other entity.
G: AMALGAMATION OF MULTI-STATE CO-OPERATIVE
BANKS WITH OTHER ENTITIES
a): Voluntary Amalgamation
Section 17 of the multi-state co-operative societies act, 2002
provides for voluntary amalgamation by the members of two or more
multi-state co-operative 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 co-operative
40
society or any co-operative society, being a society registered under the

state legislation. Voluntary amalgamation of multi-state co-operative
societies will come into force when all the members and creditors give
their accent. The resolution has to be approved by the central registrar.
b): Compulsory amalgamation

Under section 18 of the multi-state co-operative societies act,
2002 central registrar with the previous approval of the reserve bank,
in writing during the period of the moratorium made under section
45(2) of BR act (AACS) may prepare a scheme for amalgamation of
the co-operative banks with any other co-operative bank therefore,
amalgamation of multi-state co-operative bank with other multi-state
co-operative bank and with co-operative bank is permissible.
41
The new guidelines could alter the entire structure

and shareholding patterns of several private sector
banks. . . . This would force ICICI Bank, for example,
to reduce its 20.44% stake in Federal Bank and 11.8%
stake in South Indian Bank.
Chapter-5
42
V: THE IMPACT OF MERGERS AND ACQUISITIONS ON

TAKEOVERHOLDERS:
1) Increasing shareholder value is generally held to be the paramount
objective of most M & As today. However, experience from most M &
As in the mid-1980s is not very encouraging in this regard. At that
time, many newly merged banks and insurance companies found their
cost structures increased, resulting in duplication of structures and
costs rather than predicted savings. The much slower growth levels in
the 1990s and the high premiums usually paid to shareholders of target
companies, mean that the restructuring needed to achieve satisfactory
cost savings from mergers
It is found that between 19.47% of are acquisitions were
disinvested within 10 years of acquisition. Over the years, academic
studies have consistently shown that only 15% of mergers are
successful and over 60% have negative result. The merger of ICICI
bank and Bank of Madura also proved the same result. The share price
of Bank of Madura at Bombay Stock Exchange and National Stock
Exchange shot up suddenly after the announcement of Swap Ratio and
43
the ICICI Bank's share price slipped down.

2) Human resource is another sensitive issue on the road to
consolidation. The UNI Europe survey estimates that 130,000 jobs
have been lost in the last 10 years as a result of mergers and take overs
alone. In India about 11 percent of the over 800,000 strong bank
employees opted for the first-ever voluntary retirement scheme in the
state run banking industry.
Mergers often lead to higher workloads being placed
remaining staff, with companies requiring greater flexibility, in terms
of working hour's motility and skills excellent and highly motivated
employees of the merged entity may feel frustrated and may resign or
they may not give their best to the organization which they expected to.
It is very relevant especially for the service industry like banking.
Mergers have also brought about a change in the nature and quality of
employment in the banking sector.
"Consolidation is the name of the game in the oil and telecom sectors
and I am glad that the banking sector is also looking at this
(Consolidation) as a strategy," said the Finance Minister Mr. P.
Chidambaram in the Annual General Meeting of Indian Banks'
Association. These signals are enough for state-owned banks to
unleash their acquisitive ambitions. But any progress in consolidation
would hinge on the government's ability to push through enabling
legislation. In India, the merger of nationalized banks would require an
amendment of banking regulations Act and the bank companies
(Acquisition and Transfer of undertaking) Act.
44
4) "The Government is open to allowing acquisition of shares up to

10 percentage a year by foreign banks in domestic private bank and
taking controlling stake in three-four years" said by Finance Minister
Mr. P. Chidambaram in the inauguration of Dena Bank Corporate
Center. The private sector banks are not willing to accept this because
most of the old private sector, banks are community based and a
section of shareholders could stall the whole process.
VI: CONSOLIDATION IN INDIAN BANKING INDUSTRY

THE CURRENT SCENARIO
45
It appears to be an open season for the M & As in the

stogy world of public sector banks. With the merger of crisis ridden
global trust bank with the Delhi based oriental bank of commerce, a
new chapter has begun in the history of banking sector. According to
the reports published in the ET, about a half dozen public sector banks
are fishing for acquisition targets in the region where they are
recessive.
The probable reason behind the shooting up of the
phenomenon called consolidation is that from the next year the
guidelines for the capital requirements will get more stringent with the
Basel II coming into force. Also it is projected that by 2006, the Indian
economy will be open to service sector as well and then the Indian
banks will have to prove their global competence. At present, out of the
so many banks in India, only one i.e. the Stale Bank of India, figures in
the largest 200 banks of the world. It seems India is really a big
country with small things. If we compare ourselves with a small
country like Taiwan, we will be taken aback to know that most of its
banks are bigger than the biggest bank of India. Acc. To the Finance
Minister. Mr. P. Chidambaram, the banks are very much willing to
consolidate both inter and intra regionally in India. And this is the first
time in the three and a half decades of bank nationalization that the
banks are looking at acquisition of another healthy bank. The
chairperson BOB, Mr. P.S Shenoy, is of the view that their bank is
looking forward for opportunities in the north, east and south. At the
same time, Vijaya Bank is very much keen to lake its northward leap.
The Chennai based Indian Bank has already begun the process of
identifying two new targets. But at the same time, we cannot avert the
truth that no bank is willing to obliterate its own banks name.
46
Chapter-6
47
VII. CASE STUDY

: CENTURION BANK AND BANK OF PUNJAB MERGER.
The Centurion Bank of Punjab (formerly Centurion Bank) is an

Indian private sector bank providing both retail and corporate banking
services.
a): History:
The company was incorporated on 30th June,1994 and the
certificate of Commencement of Business on July 20th. It is promoted
as a joint venture between 20th Century Finance Corporation Ltd, and
its associates and Keppel Group of Singapore. It has got a network of
ten branches. The main equity of the Bank was provided by the
promoters, 20th Century Finance Corporation Ltd. & its associates and
Keppel bank of singapore (now keppel tatlee bank ltd.) through
Kephinance Investment (Mauritius) Pvt. Ltd.
The Bank has introduced, for the first time in the country, the
48
concept of `anywhere banking' which enables to operate the account

from any other branch of the bank.
2005 - Boards of Directors of Centurion Bank and Bank
of Punjab Ltd on June 29, 2005 approves merger of two banks. The
combined bank will be called Centurion Bank of Punjab.
b: PROFILE:
Centurion Bank of Punjab is a new generation private sector
bank offering a wide spectrum of retail, SME and corporate banking
products and services. It has been among the earliest banks to offer a
technology-enabled customer interface that provides easy access and
superior customer service.
Centurion Bank of Punjab has a nationwide reach through
its network of 249 branches and 402 ATMs. The bank aims to serve all
the banking and financial needs of its customers through multiple
delivery channels, each of which is supported by state-of-the-art
technology architecture.
Centurion Bank of Punjab was formed by the merger of
Centurion Bank and Bank of Punjab, both of which had strong retail
franchises in their respective markets. Centurion Bank had a wellmanaged and growing retail assets business, including leadership
positions in two-wheeler loans and commercial vehicle loans, and a
strong capital base. Bank of Punjab brings with it a strong retail
deposit customer base in North India in addition to a sizable SME and
agricultural portfolio. The shares of the bank are listed on the major
stock exchanges in India and also on the Luxembourg Stock Exchange.
49
Among Centurion Bank of Punjab's greatest strengths is

the fact that it is a professionally managed bank with a globally
experienced and capable management team. The day-to-day operations
of the bank are looked after by Mr. Shailendra Bhandari, Managing
Director & CEO, assisted by a senior management team, under the
overall supervision and control of the Board of Directors. Mr. Rana
Talwar is the Chairman of the Board. Some of our major shareholders
viz. Sabre Capital, Bank Muscat and Keppel Corporation, Singapore
are represented on the Board.
The following is the pro-forma combined figures as of March 2005:
Branches and ext. Counters
235
ATMs
382
Number of Customers
2.2 million
Net Worth (Rs. Crores)
696
Total Assets
9,395
Deposits (Rs. Crores)
7,837
Operating Profit (Rs. Crores)
43
50
C: FINANCIAL HIGHLIGHTS
These figures are of standalone Centurion Bank Ltd. prior to the merger with Bank
of Punjab Ltd.
* - Merged Figures
Financial Highlights As on 31st March of each Year (Rs. in lacs)
2001
2002
2003
2004
2005
Share Capital
Net Worth
Total Assets
Deposits
Advances
Gross Income
Gross
Profit
15247
21726
587971
425743
202840
64539
15247
5542
402585
353499
162597
55294
15247
2016
322981
283471
131372
45122
5675
6156
341748
302879
155641
39677
10132
46856
449029
353038
219395
41055
(Before
12061
7528
7044
4827
5289
702
(16184)
(2536)
(10514)
2511
9.61
4.16
1.95
4.41
21.42
49
57
60
61
75
821
965
945
1112
1374
Depreciation)
Net Profit / (Net
Loss)
Dividend (%)
Capital Adequacy
Ratio (%)
No. Of Branches
No.
Of
Employees
Thus, we see that after the merger the situation seems to much
better than prior merger. As we see in this particular balance sheet,
we can see all the figures rising tremendously. There is a
considerable increase in the net profit. The numbers of branches
51
have also increased which helps in networking smoothly. Thus as a

conclusion the merger between banks would help them to become
a major power.
Lord Krishna Bank merges with Centurion Bank of

Punjab
The boards of Centurion Bank of Punjab and Lord Krishna Bank
have approved the merger between the two banks. The share swap ratio
has been fixed at 5:7. That is for every five share of Lord Krishna
Bank, its shareholders will receive seven shares of Centurion Bank of
Punjab.
Rana Talwar will be the chairman and Shailendra Bhandari, the chief
managing director and chief executive officer of the merged entity. As
part of the integration of both banks, it is envisaged that there will be
no retrenchment of staff of either bank and there will no closure of any
rural branches. Moreover, the scheme of amalgamation provides one
time increment to all employees of Lord Krishna Bank.
The board of directors of Centurion Bank of Punjab also approved a
proposal to raise additional capital through a preferential issue of fresh
equity. Up to 75 million fully paid up equity shares at a price of Rs
24.54 per equity share for a consideration of up to 1,840.5 million to
India Advantage Fund V.
Also, 95 million fully paid up equity shares at a price not exceeding Rs
25 per equity share for a consideration of up to Rs 2375 million to
Bank Muscat (S.A.O.G).
The proposal is subject to all the requisite statutory, regulatory and
52
shareholders approval including the approval of RBI.

Ambit Corporate Finance and DSP Merrill Lynch are the advisors to
Centurion Bank of Punjab and Lord Krishna Bank respectively.
HDFC BANK
53
H.D.F.C was set up on 17th October, 1977 by I.C.I.C.I. out of the

consideration that a specialized institution was needed to channel
household savings as well as funds from the capital market into the
housing sector. H.D.F.C. has emerged as the largest mortgage finance
institution in the country. The main objective of H.D.F.C. is to develop
significant expertise in retail mortgage loans to different market
segments and to have a large corporate client base for its housing
related credit facilities.
HDFC Bank was incorporated in August 1994 in the name of 'HDFC
Bank Limited', with its registered office in Mumbai, India. The Bank
commenced operations as a Scheduled Commercial Bank in January
1995. The Housing Development Finance Corporation Limited
(HDFC) was amongst the first to receive an 'in principle' approval from
the Reserve Bank of India (RBI) to set up a bank in the private sector,
as part of the RBI's liberalization of the Indian Banking Industry in
1994.
HDFC Bank has won many awards for its excellent service.
Major among them are "Best Bank in India" by Hong Kong-based
Finance Asia magazine in 2005 and "Company of the Year" Award for
Corporate Excellence 2004-05.
HDFC Bank Acquires Centurion Bank of Punjab In All

Stock Deal
HDFC Bank Ltd., Indias third-biggest by market capitalization, has
agreed to buy another smaller private bank Centurion Bank of Punjab
54
Ltd, in an all stock deal. This is Indias biggest banking deal yet. The
boards of both banks will meet on Monday (February 25) to decide the
share-swap ratio.
The two Boards have resolved to pursue the merger subject to
satisfactory due diligence, a fair share-swap ratio and all the requisite
statutory, regulatory and corporate approvals, a joint statement said.
Ernst & Young and Dalal & Shah have been appointed to determine the
share swap ratio.
Centurion Bank, controlled by Rana Talwars Sabre Capital, has a
market capitalization of Rs 10,600 core ($2.6 billion). What the deal
means is that HDFC Bank will become even stronger bank as it will
gain 2.5 million customers, mainly in Kerala and Punjab. The merged
company will have 1,148 branches (Centurion had 394 branches and
HDFC Bank 754 branches), which is more than ICICI Banks 955.
HDFC Bank said in a statement to the stock exchange. Interestingly,
both HDFC Bank and Centurion Bank have grown through M&A in
some way. HDFC Bank bought Times Bank from the media group
Bennett Coleman & Co in 2000. Centurion has bought Bank of Punjab
and Lord Krishna Bank. HDFC Bank and Centurion Bank of
Punjab to merge 24 Feb, 2008,
55
Network: More than 468 branches over 212 cities across the country.
Paid-up capital: Rs. 282 crore
Equity: Holds24.2%
Listing: HDFC India has been listed on the Stock Exchange, Mumbai
and the National Stock Exchange. The bank's American Depository
Shares are listed on the New York Stock Exchange (NYSE) under the
symbol "HDB".
HDFC Bank and Centurion Bank of Punjab (Centurion) on
Friday confirmed that they are considering a merger proposal. The
boards of directors of both the banks are meeting separately on
Saturday to consider in principle a possible merger, the banks
informed stock exchanges.
The boards will appoint independent valuers for deciding on the
share swap ratio, said an official familiar with the development. The
announcement on share swap ratio is likely to be made on Monday.
Officials of both banks, however, declined to comment on details of the
development citing legal implications.
After the merger, the combined entity would have a formidable
network of over 1,100 branches with a pan-India presence. This would
overtake ICICI Bank in terms of branch network (955). However, in
terms of balance sheet size, ICICI Bank maintains its lead by a large
margin. As on December 31, 2007, the balance sheet size of Centurion
Bank of Punjab stands at Rs 25,403 crore and of HDFC Bank at Rs
1.31 lakh crore. ICICI Banks balance sheet stands at a much larger
figure of Rs 3.76 lakh crore.
56
Centurion has 394 branches and 452 ATMs with employee

strength of around 7,500. HDFC Bank has a branch network of 754
and is understood to have over 200 more licenses in hand. HDFC Bank
has 1,906 ATMs in 327 locations.
While the capital adequacy of Centurion stands at 11.5 per cent, HDFC
Bank is at a more comfortable level of 13.8 per cent as on December
31, 2007.
The share price of Centurion on Friday closed at Rs 56.4, which
is 1.14 per cent down from the previous days close. The scrip opened
at Rs 58 and touched an intra-day high of Rs 61.9 and a low of Rs
53.45. The total traded quantity for the day was 2.49 crore shares.
HDFC Bank closed 4.40 per cent lower at Rs 1474.95 with a trading
volume of 52,394 shares.
Banking sources said both banks have agreed to merge as it fits
into their growth prospects. For around 25 shares of Re 1 of CBoP, an
investor will get one share of Rs 10 of HDFC Bank. In last two days,
share price of CBoP moved from Rs 49.85 on Wednesday to Rs 56.40
on Friday. However, it seems, investors of HDFC Bank did not like the
development. The share price of HDFC Bank on Thursday moved up
from Rs 1,534.50 to Rs 1,543. But on Friday, it fell sharply to Rs
1,475. Prior to this, in August 2007.
A senior banker said according to terms and conditions, Rana
Talwar, the present chairman of CBOP, will be the chairman, and
present MD of HDFC Bank Aditya Puri will be MD of the merged
bank. At present, CMD of HDFC Ltd Deepak Parekh is the chairman
of HDFC Bank.
57
At present HDFC Ltd owns 23.28% of equity capital in HDFC

Bank After the merger, its holding in the combined entity will come
down to 19.20%. Rana Talwar, who owns 2.45% in CBOP through
Saber Capital, will be reduced to a marginal shareholder in the
combined company. However, Bank of Muscat, which owns 14.02% in
CBOP will get around 2.45%share Total branches of the combined
entity will be around 1,100 in over 400 cities and towns. A senior bank
official said the merger will help HDFC Bank to penetrate rural areas.
Lord Krishna Bank merger gave CBOP an access to rural network. The
total deposits of the new merged entity will be around Rs 1.35 lakh
crore. As on March 2007, HDFC Bank had deposits of Rs 99,400 crore
and that of CBoP was Rs 14,863 crore.
The combined entity would have a nation-wide network of 1,148
branches, the largest among private sector banks, a strong deposit base
of around Rs. 120,000 crore and net advances of around Rs. 85,000
crore.
The balance-sheet size of the combined entity would be over Rs.
150,000 crore. The draft scheme of amalgamation, the due diligence
report and any other matter as required will be considered by the board
of HDFC Bank in its meeting scheduled for February 28.
VIII. CONCLUSION
To sum up, Mergers and Acquisitions will encourage
banks to gain global reach and better synergy, and allow large banks to
acquire the stressed assets of weaker banks.
Mergers in India between weak/un viable banks should
58
grow faster, so that the weak/unviable banks could be rehabilitated

providing continuity of employment to the working force, utilization
of the assets blocked up in the weak/unviable banks and adding
constructively to the prosperity of the nation through increased flow of
funds.
The merger cult in India has yet to catch fire with merchant
bankers and financial consultants acquiring skills in grinding the banks
to absorb weak/unviable banks and put them again on successful
operations.
The small and medium sized banks are working under threats
from economic environment which is full of problems for them, viz.,
inadequacies of resources, outdated technology, non systematised
management pattern, faltering marketing efforts and weak financial
structure. Their existence remains under challenge in the absence of
keeping pace with growing automation and techniques obsolescence
and lack of product innovations. These banks remain, at times, under
threat from large banks. Their re organisation through consolidation/
merger could offer succor to re-establish them in viable banks of
optimal size, with global presence. To remove sickness from the
banking
industry,
consolidation/merger
is
one
of
the
best
available alternative which requires attention from all comers. It is

rightly said, 'united we stand - divided we fall'.
In a way, corporate mergers, takeovers, amalgamations
and demergers are bound to change drastically and rapidly the
economy in size and quality performance through reorganised
corporate undertakings, combined resources and united efforts of
experienced executives and skilled workforce.
As the entire Indian banking industry is witnessing a paradigm
59
shift in systems, processes, strategies, it would warrant creation of new

competencies and capabilities on an on-going basis for which an
environment of continuous learning would have to be created so as to
enhance knowledge and skills. There is every reason to welcome the
process of creating globally strong and competitive banks and let the
big Indian banks create big thunders internationally in the days to
come.
In order to achieve the INDIA VISION 2020 as envisaged
by Hon'ble President of India, Shri. APJ Abdul Kalam requires to be
done by the banking industry, in this regard.
Only then Indian Banking Industry will be able to stand right
forth the global banking competition hurricane.
KEY MESSAGE
M&A in the Indian banking sector is an opportunity

and an imperative
M&A has to be based on a business rationale and

effective execution there is not enough track record of that in the
Indian banking sector
India may have to follow a managed transition model

to ensure a stronger banking sector.
SUGGESTIONS / SOLUTIONS
The banks having similar technology can be merged. Alternatively, the
technology can be developed to convert the data of the bank having
different technology. There will not be much problem on this account.
The large number of branches and the manpower can be controlled

through the upgraded technology. With the Core Banking Solution, the
60
more number of units will not matter. Further, the manpower can be
managed by using technology.
The consolidation will take care of region-wise presence of banks,

thereby addressing the problem of maintaining balance of branches
throughout the country.
The productivity of the merged entity will improve and most of the
other problems will be solved automatically.
Imparting training to the employees / officers. The training will help

improving knowledge and developing skil1s amongst the employees.
Their attitude can be changed through training. They can be prepared
for change and work in a new environment. They will accept the
change for their betterment, better remuneration, better facilities, wellfurnished and decorated branches and better working conditions.
SURVEY FORM
1. What do you mean by the term Merger & Acquisition?
_________________________________________________________
_________________________________________________________
_________________________________________________________
2. Are you aware of any M&A of any recent M & A?
_________________________________________________________
_________________________________________________________
61
3. Are you aware of any M & A of any bank?

_________________________________________________________
_________________________________________________________
4. Do you think M & A are beneficial for our country?
_________________________________________________________
_________________________________________________________
_________________________________________________________
Name: ________________________________
Age: ______
Occupation: ____________________________
Signature: ________________
Sign of Project Guide
Question: 1
62
Question: 2
Question: 3
63
Question: 4
IX. BIBLOGRAPHY
The project has been done with the help of the following materials:-
NEWS PAPER
64
ECONOMIC TIMES
THE TIMES OF INDIA
BUSINESS STANDARD
WEB SITES
www. google.com
www. hdfc.com
www. yahoo.com
www.wikipedia.com
REFERANCE BOOKS
Financial Services & Market - Vipul Prakashan

Himalaya Prakashan
65

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Mergers & Acquisitions in Banking sector

Defining Merger & Acquisition

Need for Merger & Acquisition

Mergers/amalgamations in India- Legal framework

The impact of M & A to takeover holders

Mergers & Acquisitions in Banking sector

Consolidation in Indian Banking Industry- The Current

Mergers & Acquisitions in Banking sector

Liberalization and deregulation process started in 1991 - 92 has

Mergers & Acquisitions in Banking sector

either between banks and financial institutions or between banks and

A: DEFINING MERGER AND ACQUISITION

This rational is particularly alluring to companies when times

Mergers & Acquisitions in Banking sector

Mergers & Acquisitions in Banking sector

target bank does not want to be purchased it is always regarded as an

B: TYPES MERGER & ACQUISITION

Mergers & Acquisitions in Banking sector

This is way in many countries, restrictive business practices

Mergers & Acquisitions in Banking sector

product line, market participations, technologies of the acquiring

b] ACQUISITION:As we can see, an acquisition may be only slightly different

Mergers & Acquisitions in Banking sector

acquisitions are actions through which companies seek economies of

Mergers & Acquisitions in Banking sector

Mergers & Acquisitions in Banking sector

interpretation. All mergers acquisitions and amalgamations are

Mergers & Acquisitions in Banking sector

session of Parliament next year. Similarly, banks would be encouraged

Mergers & Acquisitions in Banking sector

governed by different statutory provisions depending upon their status

Mergers & Acquisitions in Banking sector

II: NEED FOR MERGERS AND ACQUISITION

Mergers & Acquisitions in Banking sector

powers to the field functionaries at branch level for lending,

Unhealthy Competition amongst banks;

Expansion of branches, unviable branches;

Clusters of branches of various banks at particular centers;

Regional imbalance/unequal VRS;

Improper deployment of staff;

Restrictions on transfer of clerical staff;

Inter zone transfer policy of officers up to specified scale in

Computerization/installation of ATMs/networking/core banking

Mergers & Acquisitions in Banking sector

1: CONSOLIDATION IS INEVITABLE AND THE NEED OF

Mergers & Acquisitions in Banking sector

2: COST REDUCTION THROUGH CONSOLIDATION

More utility and viability of ATMs. Increase in number of transactions

Reduction in payment of annual maintenance charges for software as

Mergers & Acquisitions in Banking sector

banking is that transaction cost will be sufficiently reduced, by around

Mergers & Acquisitions in Banking sector

remove certain key factors and other bottlenecks of input

improve the profitability;

serve the customer better;

achieve economies of scale and size, internal and external;

acquire assets at lower than the market price;

bring separate enterprises under single control;

Mergers & Acquisitions in Banking sector

b): BENEFITS OF MERGERS & ACQUISITIONS

Mergers & Acquisitions in Banking sector

Mergers & Acquisitions in Banking sector

create or maximize the shareholders wealth rather than increasing the