Mergers and Acquisition

Merger
and Acquisition of Banking Sector
CHAPTER 1
INTRODUCTION
TO
MERGERS
AND
ACQUISITIONS
OF
BANKING SECTOR
1. INTRODUCTION TO MERGER AND ACQUISITION

OF BANKING SECTOR
MERGERS
A merger occurs when two or more companies combines and the resulting firm maintains the
identty 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
Merger through absorption
Merger through consolidation.

1
Merger
Absorption
Absorption is a combination of two or more companies into an existing company. All
companies except one loose their identify 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
ac
quired 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.
TAKEOVER
A takeover may also be defined as obtaining control over management of a company by
another company.
1.1 DISTINCTION BETWEEN MERGERS AND

ACQUISITIONS OF BANKS
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Merger
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 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
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Merger
how the purchase is communicated to and received by the target company's board of directors,
employees and shareholders.
1.2 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:
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
4
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.
Concentric Merger
Concentric merger are based on specific management functions where as the conglomerate
mergers are based on general management functions. If the activities of the segments brought
together are so related that there is carry over on specific management functions. Such as
marketing research, Marketing, financing, manufacturing and personnel.
1.3 ADVANTAGES OF MERGERS AND ACQUISITIONS
Accelerating a company's growth, particularly when its internal growth is constrained due
to paucity of resources. Internal growth requires that a company should develop its
operating facilities- manufacturing, research, marketing, etc. But, lack or inadequacy of
resources and time needed for internal development may constrain a company's pace of
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Merger
growth. Hence, a company can acquire production facilities as well as other resources from
outside through mergers and acquisitions.
Specially, for entering in new products/markets, the company may lack technical skills and
may require special marketing skills and a wide distribution network to access different seg
ments of markets. The company can acquire existing company or companies with requisite
infrastructure and skills and grow quickly.
Enhancing profitability because a combination of two or more companies may result in

more than average profitability due to cost reduction and efficient utilization of resources.
This may happen because of:-
GROWTH 0R DIVERSIFICATION: -
Companies that desire rapid growth in size or market share or diversification in the
range of their products may find that a merger can be used to fulfill the objective instead of
going through the time
consuming process of internal growth or diversification. The firm may achieve the same
objective in a short period of time by merging with an existing firm. In addition such a strategy
is often less costly than
the alternative of developing the necessary production capability and capacity. If a firm that
wants to expand operations in existing or new product area can find a suitable going concern. It
may avoid many of risks associated with a design; manufacture the sale of addition or new
products. Moreover when a firm expands or extends its product line by acquiring another firm,
it also removes a potential competitor.
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Merger
SYNERGY:
Implies a situation where the combined firm is more valuable than the sum of the
individual combining firms. It refers to benefits other than those related to economies of
scale. Operating economies are one form of synergy benefits.
But apart from operating economies, synergy may also arise from enhanced managerial
capabilities, creativity, innovativeness, R&D and market coverage capacity due to the
complementarity of resources and skills and a widened horizon of opportunities merger
may result in financial synergy and benefits for the firm in many ways:-
By eliminating financial constraints
By enhancing debt capacity. This is because a merger of two companies can bring
stability of cash flows which in turn reduces the risk of insolvency and enhances the
capacity of the new entity to service a larger amount of debt
By lowering the financial costs. This is because due to financial stability, the merged
firm is able to borrow at a lower rate of interest.
Other motives For Merger

may be motivated by other factors that should not be classified under synergism. These are the
opportunities for acquiring firm to obtain assets at bargain price and the desire of shareholders of
the acquired firm to increase the liquidity of their holdings.
1. Purchase of Assets at Bargain Prices:-
Merger
Mergers may be explained by opportunity to acquire assets, particularly land mineral rights,
plant and equipment, at lower cost than would be incurred if they were purchased or constructed at
the current market prices. If the market price of many socks have been considerably below the
replacement cost of the assets they represent, expanding firm considering construction plants,
developing mines or
buying equipments often have found that the desired assets could be obtained where by
heaper by acquiring a firm that already owned and operated that asset. Risk could be reduced
because the assets were already in place and an organization of people knew how to operate them
and market their products. Many of the mergers can be financed by cash tender offers to the
acquired firms shareholders at price substantially above the current market. Even so, the assets
can be acquired for less than their current casts of construction. The basic factor underlying this
apparently is that inflation in construction costs not fully rejected in stock prices because of high
interest rates and limited optimism by stock investors regarding future economic conditions.
2.Increased Managerial Skills or Technology:-
Occasionally a firm will have good potential that is finds it unable to develop fully because of
deficiencies in certain areas of management or an absence of needed product or production
technology. If the firm cannot hire the management or the technology it needs, it might
combine with a compatible firm that has needed managerial, personnel or technical expertise.
Of course, any merger, regardless of specific motive for it, should contribute to the
maximization of owners wealth.
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Merger
3.Acquiring new technology
To stay competitive, companies need to stay on top of technological developments and their
business applications. By buying a smaller company with unique technologies, a large company
can maintain or develop a competitive edge.
Economy of scale:This refers to the fact that the combined company can
often reduce its fixed costs by removing duplicate departments or operations, lowering the costs
of the company relative to the same revenue stream, thus increasing profit margins.
Operating economies:arise because, a combination of two or more firmsmay result in cost reduction due to
operating economies. In other words, a combined firm may avoid or reduce over-lapping
functions and consolidate its management functions such as manufacturing, marketing,
R&D and thus reduce operating costs. For example, a combined firm may eliminate du
plicate channels of distribution, or crate a centralized training center, or introduce an

integrated planning and control system
Increased revenue or market share:9
Merger
REVENUE
In business,revenue (net sales) is the income that a company receives from its normal business
activities,usually from the sale of goods and services to customers.revenue is also referred to as
sales or turnover. Some companies receive revenue from interest,royality,or otherfees.revenue may
refer to business income in general,or it may refer to the amount,in a
monetary unit,received during a period of time,as in last year,company X had revenue of $42
million.profits or net income generally imply total revenue minus total expenses in agiven period.
In accounting,revenue is often refered to as the topline due ti its position on the income
statement at the very top.this is to be contrasted with the bottom line which denotes net income.
For non-profit organization,annual revenue may be referred to as gross receipt.this revenue
includes donations from individuals and corporations,support from gobernment agencies,income
from activities related to the organizations mission,and income from fundraising activities,
membership dues, and financial securities such as stocks, bonds or investment funds.
In general usage , revenue is a calculation oe estimation of periodic income based on a particular
standard accounting practice or the rules established by a government or government agency.two
common accounting methods, cash basis accounting and accual basis accounting, do not use the
same process for measuring revenue.corporation that offer shares for sale to the public are usually
required by law to report revenue based on generally accepted accounting principles or
international financial reporting standards.
In double entry booking system, revenue accounts are general ledger accounts that are summarized
periodically under the heading revenue or revenue on an income statement. Revenue account
names repair service revenue,rent revenue earnedor sales.
This assumes that the buyer willbe absorbing a major competitor and thus increase its market
power (by capturing increased market share) to set prices.
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Merger
Cross-selling:Cross- selling is the action or practice of selling an additional product or service to an existing
customer.In practice ,businesses define cross-selling in many different ways. Elements that
might influence the definition might include the size of the business, the industry sector it
operates within and financial motivations of those required to define the term.
The objectives of cross-selling can be either to increase the the income derived from the client
or clients or to protect the relationship with the client or clients.The approach to the process of
cross-selling can be varied.
For example, a bank buying a stock broker could then sell its
banking products to the stock broker's customers, while the broker can sign up the bank's
customers for brokerage accounts. Or, a manufacturer can acquire and sell complementary
product
1.4
Procedure for evaluating the decision for mergers and

Acquisitions
The three important steps involved in the analysis of mergers and acquisitions are:-
1. Planning:-
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Merger
of acquisition will require the analysis of industry-specific and firm-specific information. The
acquiring firm should review its objective of acquisition in the context of its strengths and
weaknesses and corporate goals. It will need industry data on market growth, nature of
competition, ease of entry, capital and labour intensity, etc. This will help in indicating the
product-market strategies that are appropriate for the company. It will also help the firm
in identifying the business units that should be dropped or added. On the other hand, the
target firm will need information about quality of management, market share and size,
capital structure, profitability, production and marketing capabilities, etc.
2. Search and Screening:-
Search focuses on how and where to look for suitable candidates for acquisition. Screening
pro
cess short-lists a few candidates from many available and obtains detailed information
about each of
them.
3. Financial Evaluation:-
a merger is needed to determine the earnings and cash flows, areas of risk, the maximum price
payable to the target company and the best way to finance the merger. In a competitive market
situation, the current market value is the correct and fair value of the share of the target firm. The
target firm will not accept any offer below the current market value of its share. The target firm
may, in fact, expect the offer price to be more than the current market value of its share since it
may expect that merger benefits will accrue to the acquiring firm.
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Merger
CHAPTER 2
MERGER
AND
ACQUISTION
IN
INDIA
OF
BANKING
13
Merger
SECTOR
2. MERGERS AND ACQUISITION IN INDIA
Banking in India originated in the first decade of 18th century with The General Bank of India
coming into existence in 1786. This was followed by Bank of Hindustan. Both these banks are now
defunct. The oldest bank in existence in India is the State Bank of India being established as "The
Bank of Bengal" in Calcutta in
June 1806. A couple of decades later, foreign banks like Credit Lyonnais started their Calcutta
operations in the 1850s. At that point of time, Calcutta was the most active trading port, mainly
due to the trade of the British Empire, and due to which banking activity took roots there and
prospered. The first fully Indian owned bank was the Allahabad Bank, which was established in
1865.
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.
BEFORE LIBERALISATION
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Merger
In India the companies act 1956 and the monopolies and restrictive trade practices act, 1969 are
statutes governing mergers among companies.
In the companies act, as procedural has been laid down, in terms of which the merger can be
effectuated. Sanction of the company court is essential perquisite for the effectiveness of a scheme
of merger.
The other statue regulating mergers was the hitherto monopolies and restrictive trade practices
act. After the amendments the status 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 new industrial policy of liberalization and deregulation, aimed at
achieving economies of scale for ensuring higher productivity competitiveness.
Liberalization
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%.
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Merger
The new policy shook the Banking sector in India completely. Bankers, till this time, were used to
the 4-6-4 method (Borrow at 4%; Lend at 6%;Go home at 4) of functioning. The new wave
ushered in a
modern outlook and tech-savvy methods of working for traditional banks. All this led to the retail
boom in India. People not just demanded more from their banks but also received more.
Sarrriya Committee
In 1972 examined the restructuring of banks in greater depth and recommended that there should
be three all India banks and 5 or 6 regional banks plus a network of cooperative or rural banks in
the rural areas.
N.Vagul suggested the restructuring on the basis of location and functioning of the bank and
recommended four sets of banks in the public sector.
There should be district banks having the network of around 300 branches and Rs. 250
crores or more. Their functions similar to that of commercial banks.
National saving banks which will be located only in urban and metropolitan towns.
The third and fourth set of banks will be trade and industry banks and foreign
exchange banks and located at urban and metropolitan centers catering to designate
clientele only.
In July 1976, a commission under the chairmanship of Sh. Manubhai shah suggested the
reduction in the number of existing banks and making the smallest nationalized banks bigger
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Merger
so as to have strong regional character in states of UP, MP, Bihar, and Orissa and North east
part of the country.
James Raj Committee appointed by RBI in June 1997 recommended that
A banks size should be in the range of 1000 to 1500 branches.
SBI group should be converted into holing company with 5 zones subsidiaries and
3. Streamlining of the rural and semi urban branches.
Narasimhan Committee Report
The first report of the Narsimhan committee on the financial system had recommended a
broad pattern of the structure of the banking system as under: 3 or 4 larger banks
(including the State Bank of India) which could become international in character.
8 to 10 national banks with a network of branches throughout the country engaged in universal
banking.
Local banks whose operations would be generally confined to a specific region. Rural banks
(including RRBs) whose operations would be confined to the rural areas and whose business
would be predominantly engaged in financing of agricultural and allied activities
The Narsimhan 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.
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Merger
Narsimhan Committee (1998)
The second report of the Narsimhan committee on the banking sector reforms on the structural
issues made following recommendations.
Merger between banks and between banks and DFIs and NBFCs need to be based on synergies
and locational and business specific complimentary of the concerned institutions and must
obviously make sound commercial sense. Mergers of public sector banks should emanate from the
managements of banks with the govt. as the common shareholder playing a supportive role. Such
mergers however can be worthwhile if they lead to rationalization of workforce and branch
network otherwise the mergers of public sector banks would tie down the management with
operational issues and distract attention from the real issue. It would be
nessary to evolve policies aimed at right sizing and redeployment of the surplus staff either by the
way of retraining them and giving them appropriate alternate employment or by introducing a VRS
with appropriate incentives. This would necessitate the corporation and understanding of the
employees and towards this direction. Management should initiate discussion with the
representatives of staff and would need to convince their employees about the intrinsic soundness
of the idea, the competitive benefits that would accrue and the scope and potential foe employees
own professional advancement in a larger institution. Mergers should not be seen as a means of
bailing out weak banks. Mergers between strong banks/FIs would make for greater economic and
commercial sense and would greater than the sum of its parts and have a force multiplier effect. It
can hence be seen from the recommendations of Narsimhan Committee that mergers of the public
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Merger
sector banks were expected to emanate from the management of the banks with government as
common shareholder playing a supportive role.
CHAPTER 3
NEED OF MERGERS AND ACQUISITIONS

IN
BANKING SECTOR
3.NEED FOR MERGER AND ACQUISITION
The South East Asian crisis and the earlier economic turmoil in several developing nations
demonstrated that strong banking system is critical. Throughout the world, banking industry has been
transformed from highly protected and regulated to competitive and deregulated. Globalization coupled
with technological development has shrinked the boundaries. Trade has become transactional from
international. Due to this, there is no differencebetween domestic and foreign currency. As a result
innovations and improvement assumed greatest significance in institutional performance.
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Merger
This trend of global banking has been marked by twin phenomena of consolidation and
convergence. The trend towards consolidation has been driven by the need to attain meaningful
balance sheet size and market share in the face of intensified competition. The trend towards
convergence is driven by a move across industry to provide most of the financial services under
one roof.
Indian banking experienced wide ranging reforms in the last decade and these reforms have
contributed to a great extent in enhancing their competitiveness.
The issue of bank restructuring assumes significance from the point of view of making Indian
banking strong and sound apart its growth and development to become
suitable. International evidence also strongly indicates greater gains to banking industries after the
restructuring process. With the impending capital account convertibility, cross border movement of
financial capital would become a reality. If we cannot consolidate our size, it is rather difficult to
find reasons that could prevent Indian banks from being swallowed by the powerful foreign banks
in the long run, under the free for
all environments. The core objective of restructuring is to maintain long term profitability and
strengthen the competitive edge of banking business in the context of changes in the fundamental
market scenario. Restructuring can have both internal and external dimensions.
The pace of change in the financial market world over and in the external economic environment,
in which we work, shows no sign of slowing down. Commercial banks now have to think
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Merger
global to service the requirements of the highly sophisticated multinationals that are
increasingly dominated the industrial world.
Bank mergers would be the rule rather than exception in times to come and there is a need for
banks to check their premises before embanking on their future plans. There are synergies to be
leveraged through consolidation where factors such as size, spread, technology, human resource
and capital can be reconciled. We could hence think of a situation where we have 4-5 global
players which are really large, a handful of regional banks which will gradually set to merger and
some other players which will get to acquire special
niche to serve limited market. But it involves the sorting of various issues such as legal, regulatory,
procedural etc. This is statement of SH. V. Leeladhar, chairman, IBA on 28th aug, 2004.
History has improved beyond doubt that strong banking systems are critical for sound economic
growth. It is important to improve the comprehensiveness and quality of the banking system to
bring efficiency in the performance of the real sector in India.
Throughout the world, banking industry has been transferred from a highly protected and
regulated situation to competitive and deregulated. Globalization coupled with technological
development has shrinked
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Merger
the boundaries. Financial services and products are being provided to the customers across the
length and breadth of the globe.
Due to this, domestic and foreign currency, banking and non banking financial services are
getting closer. Correspondingly innovations and improvements assumed greater significance in
institutional performance. This trend of global banking has been marked by twin phenomena of
consolidation and convergence. The trend towards consolidation has been driven by the need to
attain meaningful balance sheet size and market share in the face of intensified competition. The
trend towards convergence is driven by a move across industry to provide most of the financial
service viz., banking, insurance, investment etc, to the customers in
one roof. Consolidation of banking industry is critical from several aspects. The factors
inducing mergers and acquisition include technological progress, excess capacity, emerging
opportunities and deregulation of geographic, functional and product restrictions. It may also
bring the performance of public sector banks to a remarkable level without variation between
banks in public sector.
The following are the important aspects for staying in the market:
Competition from global majors.
Competition from new Indian banks.
Disinter mediation and competition resulting into pressure or spread.
Qualitative change in the banking paradigm.
The competencies required from a banker would be sharper information technology

and knowledge centric.
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Merger
In order to compete with the new entrants effectively, Indian commercial banks need to posses
matching financial muscle, as a fair competition is possible only among the equals. Size has
therefore, assumed critically.
A banks size is really to be determined by the size of its balance sheet. The question before major
commercial banks,therefore, is how to acquire a competitive size. Mergers and acquisition route
provides a quick step forward in this direction offering opportunities to share synergies and reduce
the cost of product development and delivery. Different type of banks, even through they
themselves belong to the public sector, spend considerable time competing themselves without
increasing commensurate benefits to the system as a whole. As a result, the focus on banks has
shifted away from the areas of real productivity.
The present system is not ideal for simultaneously retaining separate identities as well as
preserving the very characteristics of competitiveness. Our banks are really small in terms of
business size or capital when compared with banks in the west or even China.. The lesson here is
to think of consolidation of our efficient banks to build up global scale institutions. Consolidations
would also enable us to go for global technologies benefiting the customers and efficiency of our
banks.
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Merger
If Indian banks are to be made more effective, efficiency and comparable with their counterparts
from abroad, they would need to be more capitalized, automated and technology oriented, even
while strengthening their internal operations and systems. Further in order to make them
comparable with their competitors from abroad with regard to the size of their capital and asset
base, it would be necessary to structure these banks. Merger and acquisitions are considered
useful to achieve the requisite size in the short run.
CHAPTER 4
MERGER
24
Merger
IN
INDIAN
BANKING
SECTOR
4.MERGER IN INDIAN BANKING SECTOR
Mergers and acquisitions encourage banks to gain global reach and better synergy and allow large
banks to acquire the stressed assets of weaker banks. Merger in India between weak/unviable
banks should grow faster so that the weak banks could be rehabilitated providing continuity of
employment with 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.
In the banking sector, important mergers and acquisitions in India in recent years include the
merger between IDBI (Industrial Development bank of India) and its own subsidiary IDBI
Bank. The deal was worth $ 174.6 million (Rs. 7.6 billion in Indian currency). Another important
merger was that between Centurion Bank and Bank of Punjab. Worth $82.1 million (Rs. 3.6
billion in Indian currency), this mer
25
Merger
ger led to the creation of the Centurion Bank of Punjab with 235 branches in different regions of
India, another merger was HDFC bank and Centurion bank of punjab.
Some of the past merged banks are Grind lay Bank merged standard charated Bank, Times Bank
with HDFC Bank, bank of Madura with ICICI Bank, Nedungadi Bank Ltd. With Punjab National
Bank and Global Trust Bank merged with Oriental Bank of Commerce.
The small and medium sized banks are working under threats from economic environment which
is full of problem for them, viz. inadequacies of resources, outdated technology, on systemized
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 reorganization through consolidation/merger could offer succor to re-establish
them in viable banks of optimal size with global presence.
Merger and amalgamation in Indian banking so far has been to provide the safeguard and hedging
to weak bank against their failure and too at the initiative of RBI, rather than to pay the way to
initiate the banks to come forward on their own record for merger and amalgamation purely with
a commercial view and economic consideration.
As the entire Indian banking industry is witnessing a paradigm 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.
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Merger
There is every reason to welcome the process of creating globally strong and competitive banks
and let big Indian banks create big thunders internationally in the days to come.
In order to achieve the INDIAN VISION 2020 as envisaged by Honble president of India Sh.
A.P.J.Addul Kalam much requires to be done by banking industry in this regard.
It is expected that the Indian banking and finance system will be globally competitive. For this
the market players will have to be financially strong and operationally efficient. Capital would be
key factor in the building a successful institution. The Banking and finance system will improve
competitiveness through a process of consolidation either through mergers and acquisitions or
through strategic alliances.
There is need to restructure the banking sector in India through merger and amalgamation in
order top makes them more capitalized, automated and technology oriented so as to provide
environment more competitive and customer friendly
4.1RISKS ASSOCIATED WITH MERGER

There are several risks associated with consolidation and few of them are as follows: -
When two banks merge into one then there is an inevitable increase in the size of the
organization. Big size may not always be better. The size may get too widely and go
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Merger
beyond the control of the management. The increased size may become a drug rather than
an asset.
Consolidation does not lead to instant results and there is an incubation period before the
results arrive. Mergers and acquisitions are sometimes followed by losses and tough
intervening periods before the eventual profits pour in.
Patience, forbearance and resilience are required in ample measure to make any merger a
success story. All may not be up to the plan, which explains why there are high rate of
failures in mergers.
Consolidation mainly comes due to the decision taken at the top. It is a top-heavy decision
and willingness of the rank and file of both entities may not be forthcoming. This leads to
problems of industrial relations, deprivation, depression and demotivation among the
employees. Such a
work force can never churn out good results. Therefore, personal management at the
highest order with humane touch alone can pave the way.
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Merger
The structure, systems and the procedures followed in two banks may be vastly different, for
example, a PSU bank or an old generation bank and that of a technologically superior foreign
bank. The erstwhile structures, systems and procedures may not be conducive in the new
milieu.
A thorough overhauling and systems analysis has to be done to assimilate both the
organizations. This is a time consuming process and requires lot of cautions approaches to
reduce the frictions.
There is a problem of valuation associated with all mergers. The shareholder of existing
entities has to be given new shares. Till now a foolproof valuation system for transfer and
compensation is yet to emerge.
Further, there is also a problem of brand projection. This becomes more complicated
when existing brands themselves have a good appeal. Question arises whether the earlier
brands should continue to be
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Merger
projected or should they be submerged in favour of a new comprehensive identity.

Goodwill is often towards a brand and its sub-merger is usually not taken kindly.
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Merger
31
Merger
Structure of the Organized Banking Sector in India. Number Of Banks Are In Brackets.
32
Merger
MERGER STORY SO FAR

YEAR
BANK
1969
Bank Of Bihar
1970
National Bank Of Lahore
1971
Eastern Bank Ltd.
1974
Krishnaram Baldeo Bank Ltd.
1976
Belgaum Bank Ltd.
1984-85
Lakshmi Commercial Bank
1984-85
Bank Of Cochin
1985
Miraj State Bank
1986
Hindustan Commercial Bank
1988
Traders Bank Ltd.
1989-90
United Industrial Bank
1989-90
Bank Of Tamilnad
1989-90
Bank Of Thanjavur
1989-90
Parur Central Bank
1990-91
Purbanchal Bank
1993-94
New Bank Of India
1993-94
Bank Of Karad
1995-96
Kasinath Seth Bank
1996
SCICI
1997
ITC Classic
1997
BARI Doab Bank
1998
1998
1999
1999
2000
2001
2002
2003
2004
2004
2005
2005
2008
Punjab Co-operative Bank

Anagram Fianance
Bareilly Corporation Bank
Sikkim Bank ltd.
Times bank
Bank of Madura
Benaras state bank
Nedungadi Bank
South Gujarat Local Area Bank
Global Trust Bank
Bank of Punjab
IDBI bank
HDFC bank
33
MERGED WITH
State Bank Of India
State Bank Of India
Chartered Bank
State Bank Of India
Union Bank Of India
Canara Bank
State Bank Of India
Union Bank Of India
Punjab National Bank
Bank Of Baroda
Allahabad Bank
Indian Overseas Bank
Indian Bank
Bank Of India
Central Bank Of India
Punjab National Bank
Bank Of India
State Bank Of India
ICICI
ICICI
Oriental Bank of Comerce
Oriental
Bank
of
Commerce
ICICI
Bank of Baroda
Union Bank
HDFC Bank
ICICI
Bank of Baroda
Punjab national Bank
Bank of Baroda
Oriental
Bank
Commerce
Centurion bank
IDBI
Centurion bank of punjab
of
Merger
CHAPTER 5
CHALLENGES
AND
OPPORTUNITIES
IN
THE
INDIAN
BANKING SECTOR
5.Challenges and opportunities in Indian banking sector
In a few years from now there would be greater presence of international players in Indian
financial system and some of the Indian banks would become global players in the coming years.
Also competition is not only on foreign turf but also in the domestic field. The new mantra for
Indian banks is to go global in search of
34
Merger
new markets, customers and profits. But to do so the Indian banking industry will have to meet
certain challenges. Some of them are
FOREIGN BANKS
India is experiencing greater presence of foreign banks over time. As a result number of
issues will arise like how will smaller national banks compete in India with them, and will
they themselves need to generate a larger international presence? Second, overlaps and
potential conflicts between home country regulators of foreign banks and host country
regulators: how will these be addressed and resolved in the years to come? It has been seen
in recent years that even relatively strong regulatory action taken by regulators against
such global banks has had negligible market or reputational impact on them in terms of
their stock price or similar metrics. Thus, there is loss of regulatory effectiveness as a
result of the presence of such financial conglomerates. Hence there is inevitable tension
between the benefits that such global conglomerates bring and some regulatory and market
structure and competition issues that may arise.
GREATER CAPITAL MARKET OPENNESS
An important feature of the Indian financial reform process has been the calibrated
opening of the capital account along with current account convertibility. It has to be seen
that the volatility of capital inflows does not result in unacceptable disruption in exchange
rate determination with inevitable real sector consequences, and in domestic monetary
conditions. The vulnerability of financial intermediaries can be addressed through
35
Merger
prudential regulations and their supervision; risk management of non-financial entities.

This will require market development,
Enhancement of regulatory capacity in these areas, as well as human resource development in

both financial intermediaries and non-financial ent entities.
IV. TECHNOLOGY IS THE KEY
IT is central to banking. Foreign banks and the new private sector banks have embraced
technology right from their inception and continue to do so even now. Although public
sector banks have crossed the 70%level of computerization, the direction is to achieve
100%. Networking in banks has also been receiving focused attention in recent times. Most
recently the trend observed
in the banking industry is the sharing of ATMs by banks. This
is one area where perhaps India needs to do significant catching up. It is wise for Indian
banks to exploit this globally state-of-art expertise, domestically available, to their fullest
advantage.
V. CONSOLIDATION
We are slowly but surely moving from a regime of "large number of small banks" to "small
number of large banks." The new era is one of consolidation around identified core
competencies i.e., mergers and acquisitions. Successful merger of HDFC Bank and Times
Bank; Stanchart and ANZ Grindlays; Centurion Bank and Bank of Punjab have
demonstrated this trend. Old private sector banks, many of which are not able to cushion
36
Merger
their NPAs, expand their business and induct technology due to limited capital base should
be thinking seriously about mergers and acquisitions.
VI. PUBLIC SECTOR BANKS
It is the public sector banks that have the large and widespread reach, and hence have the
potential for contributing effectively to achieve financial inclusion. But it is also they who
face the most difficult challenges in human resource development. They will have to invest
very heavily in skill enhancement at all levels: at the top level for new strategic goal setting;
at the middle level for implementing these
goals; and at the cutting edge lower levels for delivering the new service modes. Given the
current age composition of employees in these banks, they will also face new recruitment
challenges in the face of adverse compensation structures in comparison with the freer
private sector.
VII. Basel II
As of 2006, RBI has made it mandatory for Scheduled banks to follow Basel II norms.
Basel II is extremely data intensive and requires good quality data for better results. Data
versioning conflicts and data integrity problems have just one resolution, namely banks
need to streamline their27operations and adopt enterprise wide IT architectures. Banks need to
look towards ensuring a risk culture, which penetrates throughout the organization.
VIII. COST MANAGEMENT

37
Merger
Cost containment is a key to sustainability of bank profits as well as their long-term

viability. In India, however, in 2003, operating costs as proportion of total assets of
scheduled commercial
banks stood at 2.24%, which is quite high as compared to in other economies. The tasks
ahead are thus clear and within reach.
IX.
RECOVERY MANAGEMENT
This is a key to the stability of the banking sector. Indian banks have done a remarkable job
in containment of non-performing loans (NPL) considering the overhang issues and overall
difficult environment. Recovery management is also linked to the banks interest margins.
Cost and recovery man
agement supported by enabling legal framework hold the key to future health and
competitiveness of the Indian banks. Improving recovery management in India is an area
requiring expeditious and effective actions in legal, institutional and judicial processes.
REACH AND INNOVATION
Higher sustained growth is contributing to enhanced demand for financial savings

opportunities. In rural areas in particular, there also appears to be increasing diversification
of productive oppor
38
Merger
tunities. Also industrial expansion has accelerated; merchandise trade growth is high; and
there are vast demands for infrastructure investment, from the public sector, private sector
and through public private partnerships. Thus, the banking system has to extend itself and
innovate. Banks will have to innovate and look for new delivery mechanisms and provide
better access to the currently under-
served. Innovative channels for credit delivery for serving new rural credit needs will have to
be found. The budding expansion of non-agriculture service enterprises in rural areas will
have to be fi
nanced. Greater efforts will need to be made on information technology for record keeping,
service delivery, and reduction in transactions costs, risk assessment and risk management.
Banks will have to invest in new skills through new recruitment and through intensive
training of existing personnel.
XI. RISK MANAGEMENT
Banking in modern economies is all about risk management. The successful negotiation and
implementation of Basel II Accord is likely to lead to an even sharper focus on the risk
measurement and risk management at the institutional level. Sound risk management practices
would be an important pillar
39
Merger
for staying ahead of the competition. Banks can, on their part, formulate early warning
indicators suited to their own requirements, business profile and risk appetite in order to better
monitor and manage risks.
XII. GOVERNANCE
The quality of corporate governance in the banks becomes critical as competition intensifies,
banks strive to retain their client base, and regulators move out of controls and micro-regulation.
The objective should be to continuously strive for excellence. Improvement in policy-framework,
regulatory regime,
market perceptions, and indeed, popular sentiments relating to governance in banks need to be
on the top of the agenda
to serve our societys needs and realities while being in harmony with the global perspective.
5.1FUTURE SCENARIO
40
Merger
The future outlook of the Indian banking industry is that a lot of action is set to be seen with
respect to M & As, with consolidation as a key to competitiveness being the driving force. Both
the private sector banks and public sector banks in India are seeking to acquire foreign banks. As
an example, the State Bank of India, the largest bank of the country has major overseas
acquisition plans in its bid to make itself one of the top three
Banks in Asia by 2008, and among the top 20 globally over next few years. Some of the PSU
banks are even planning to merge with their peers to consolidate their capacities. In the coming
years we would also see strong cooperative banks merging with each other and weak cooperative
banks merging with stronger ones.
While there would be many benefits of consolidation like size and thereby economies of scale,
greater geographical penetration, enhanced market image and brand name, increased bargaining
power, and other synergies; there are also likely to be risks involved in consolidation like problems
associated with size, human relations problems, dissimilarity in structure, systems and the
procedures of the two organizations, problem of valuation etc which would need to be tackled
before such activity can give enhanced
value to the industry.
41
Merger
CHAPTER 6
REGULATION
REGARDING
MERGERS
AND
ACQUISITION
OF
BANK
6.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.
42
Merger
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 Markey 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.
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
43
Merger
(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 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
44
Merger
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 bankinginstitution 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 th at 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.
45
Merger
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. Further
46
Merger
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)
Amalgamation of cooperative banks
47
Merger
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 en
tity 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.
6.1ACQUISITION
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
48
Merger
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.
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 specific the public financial institution. Is governed by the provisions of respective
acts of the institution
49
Merger
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.
CHAPTER 7
50
Merger
MERGER
OF
HDFC BANK AND CENTURIAN
BANK OF PUNJAB
A CASE STUDY
7.MERGERS OF HDFC BANK AND CENTURIAN BANK

OF PUNJAB
HDFC BANK
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 liberalisation of the Indian Banking Industry in 1994. The bank
was incorporated in August 1994 in the name of 'HDFC Bank Limited', with its registered office
in Mumbai, India. HDFC Bank commenced operations as a Scheduled Commercial Bank in
January 1995. The following year, it started its operations
as a Scheduled Commercial Bank. Today, the bank boasts of as many as 1412 branches and over
3275 ATMs across India.
51
Merger
Amalgamations
In 2002, HDFC Bank witnessed its merger with Times Bank Limited (a private sector bank
promoted by Bennett, Coleman & Co. / Times Group). With this, HDFC and Times became the
first two private banks in the New Generation Private Sector Banks to have gone through a merger
About Centurion Bank of Punjab
Centurion bank of Punjab is a new generation private 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 241 branches and 389
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 well
managed and growing retail assets business, including leadership positions in two wheeler loans
and commercial vehicles loans and a strong capital base. The shares of the bank are listed on the
major stock exchanges in India and also on the Luxembourg Stock exchange
MERGER POSITION
52
Merger
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.
HDFC Bank and Centurion Bank of Punjab have agreed to the biggest merger in Indian
banking history, valued at about $2.4 billion. It is likely the beginning of a wave of M&A
deals in the financial services industry, as India prepares to ease restrictions on bank
ownership in 2009.
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 had taken 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.
53
Merger
Rana Talwar, chairman of Centurion Bank of Punjab, says, I believe that the merger with HDFC
Bank will create a world-class bank in quality and scale and will set the stage to compete with
banks both locally as well as on a global level.
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 had meet 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.
7.1HIGHLIGHTS OF THE MERGER- HDFC AND
CENTURION BANK OF PUNJAB
HDFC bank is merged with Centurion Bank of punjab
New entity is named as HDFC bank itself.
The merger will strengthen HDFC Bank's distribution network in the northern and the
southern regions.
54
Merger
HDFC Bank Board on 25th February 2008 approved the acquisition of Centurion
Bank of Punjab (CBoP) for Rs 9,510 crore
CHAPTER 8
MERGER OF
IDBI
AND
IDBI BANK
A CASE STUDY
8.Merger of IDBI and
IDBI BANK
The Industrial Development Bank of India Limited commonly known by its acronym IDBI is
one of India's leading public sector banks and 4th largest Bank in overall ratings. RBI categorized
IDBI as "other public sector bank".It was established in 1964 by an Act of Parliament to provide
credit and other facilities for the development of the fledgling Indian industry. It is currently the
tenth largest development bank in the world in terms of reach with 975 ATMs, 568 branches and
55
Merger
352 centers.[1] Some of the institutions built by IDBI are The National Stock Exchange of India
(NSE), The National Securities Depository Services Ltd. (NSDL) and the Stock Holding
Corporation of India (SHCIL) IDBI BANK , as a private bank after government policy for new
generation private banks.
IDBI
The Industrial Development Bank of India (IDBI) was established on July 1, 1964 under an Act of
Parliament as a wholly owned subsidiary of the Reserve Bank of India. In 16 February 1976, the
ownership of IDBI was transferred to the Government of India and it was made the principal
financial institution for coordinating the activities of institutions engaged in financing, promoting
and developing industry in the country. Although Government shareholding in the Bank came
down below 100% following IDBIs public issue in July 1995, the former continues to be the
major shareholder (current shareholding: 52.3%). During the four decades of its existence, IDBI
has been instrumental not only in establishing a well-developed, diversified and efficient industrial
and institutional structure but also adding a qualitative dimension to the process of industrial
development in the country
Merger position
On April 2, 2005, the merger of IDBI Bank Ltd. (IDBI Bank), the banking subsidiary of Industrial
Development Bank of India (IDBI) with its parent company (IDBI held 57% stake in IDBI Bank)
was announced. However, the merger was to be effective retrospectively from October 1, 2004.
56
Merger
The swap ratio was established at 1:1.42 , that is, IDBI issued 100 equity shares for every 142
equity shares held by the shareholders in IDBI Bank. The merged entity was to be called IDBI
Ltd...
IDBI, one of India's leading Development Financial Institutions (DFI), .merged with IDBI bank, its
banking subsidiary, in a move aimed at consolidating businesses across the value chain and
realizing economies of scale.
M Damodaran is IDBI chairman he confirm that the merger would benefit both IDBI and IDBI
Bank. The rationale of the merger is extremely compelling because the bank needs capital to
grow and gets to use a name that has great brand value. They can start operations as a full-fledged
bank without incurring expenditure on setting up branches, inducting technology, or bringing in
new people, Damodaran said.
A new entity, IDBI Ltd, will become the holding company with two strategic business units
IDBI, which will function as a development finance company, and IDBI Bank, which will be the
retail arm. IDBI Home Finance, which was acquired from the Tatas, would also be merged into
IDBI.
57
Merger
CHAPTER 9
MERGER
OF
BANK OF PUNJAB
AND
CENTURION BANK
A CASE STUDY
9.MERGERS OF CENTURIAN BANK AND BANK OF PUNJAB

58
Merger
BANK OF PUNJAB
It was incorporated on may27, 1994 under the companies act, 1956.
The registered office of the bank was situated at SCO 46-47, sector 9-D, Madhya Marg,
Chandigarh- 160017.
It is banking company under the provisions of regulation act, 1949
The objects of bank are banking business as set out in its memorandum
and Articles of association.
The bank is a new private sector bank in operating for more than 10 years, with a
national network of 136 branches( including extension counters) having a significant
presence in the most of the major banking sectors of the country. The transferor bank
offers a host of banking products catering to various classes of customers ranging from
small and medium enterprises to large cooperates.
The bank is listed on the stock exchange, Mumbai, the national stock exchange of
India limited and the Ludhiana stock exchange.
59
Merger
CENTURION BANK
It was incorporated on june30, 1994 under the companies act, 1956.
The registered office of the Bank was situated at Durga Niwas, Mahatma Gandhi
Road, Panaji, 403001, Goa.
It is a banking company under the provisions of banking regulation act, 1949.
The objectives of transferee bank are banking business as set out in its
memorandum and articles of association.
The bank is a profitable and well capitalized new private sector bank having a national
presence of over 99 branches( including extension counter)
It has a significant presence in the retail segment offering a range of products across
various categories.
The bank is listed on the stock exchange, Mumbai and the National stock exchange of
India limited, Mangalore stock exchange of India limited, Mangalore stock exchange and
its global depository receipts are listed on the
Luxembourg stock exchange.
60
Merger
The amalgamation of the Transferor bank (BOP) with the transferee bank (centurion) is effected
subject to the terms and conditions embodied in the scheme of merger pursuant to section 44A of
banking
regulation act, 1949( hereinafter the act). In terms of section 44A of the said act, a resolution is
required to be passed by a majority in number and two-third in the value of the members of the
Transferor and the Transferee Bank, present rather in person or by proxy at the respective
meetings. As both the companies are banking companies, the amalgamation is regulated by the
provisions of the act and would require the sanction of the reserve bank of India under the said
act. The provisions of section 391-394 of the companies act, 1956 relating to amalgamation are
not applicable to the amalgamation of the transferor bank with the transferee bank and therefore
the scheme is not be required to be sanctioned by a high court under the provisions of the
companies act, 1956.
About Centurion Bank of Punjab
Centurion bank of Punjab is a new generation private 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 241 branches and 389
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.
61
Merger
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 well
managed and growing retail assets business, including leadership positions in two wheeler loans
and commercial
vehicles 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 agriculture portfolio.
The shares of the bank are listed on the major stock exchanges in India and also on the
Luxembourg Stock exchange. Among centurion bank of Punjabs 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 by Mr. Shilnder 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
are saber capital, Bank Muscat and Keppel Corporation, Singapore are represented on the Board.
The book value of the bank would also go up to around Rs 300 crores. 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.
Share holding pattern of Centurion Bank of Punjab

62
Merger
After the merger shareholding of Bank of Punjab (BOP) promotes will shrink to 5%. The family
of Darshanjit Singh which promoted Bop currently holds 15.62% while associates hold another
11.40% the promoter stake will now fall down to around 5% ad for associate that would be 7-8%.
The major shareholder of the centurion bank, bank of Muscats stake will fall to 20.5% from
25.91%, Keppels stake will be at 9% from current level of 11.33% and Rana Talwars capital
will have a stake of 4.4% as against 5.61%.
The promoters of BoP and major stakeholders of centurion bank will have a combine stake of
around 42% in the merged entity- centurion bank of Punjab.
The costs 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 adequate capital of 16.1% to provide for its growth plans.
Centurion banks capital adequacy on a standalone basis stood at 23.1% while Bank of Punjab
figure stood at 9.21%.
The performance net worth of combined entity as at march 2005 stood at Rs. 696 crores with
centurions net worth at Rs. 511 crore and Bank of Punjabs net worth at Rs. 181 crore, and
combine entity( centurion Bank of Punjab) will have total asset 9395 crore, deposit 7837 crore
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.
63
Merger
The merged entity will have 235 Branches and extension counters, 382 ATMs and 2.2 million
customers.
MERGER POSITION
Private Banks is taking to the consolidation route in a big way. Bank of Punjab (BOP) and
Centurion Banks (CB) have been merged to form Centurion Bank of Punjab (CBP). Private Banks
is taking to the consolidation route in a big way. Bank of Punjab (BOP) and Centurion Banks (CB)
have been merged to form Centurion Bank of Punjab (CBP).
elements of both, he added. Centurion Bank has a presence in south and west and Bank of
Punjab has a strong presence in the north. The merger will give us scale geographical reach
and entry into new products segments said the official.
Bank of Punjab is strong in small and medium enterprises (ME) business in the north, with good
retail assets and an agriculture portfolio as well as deposit franchisee Centurion Bank has a
capital, ability to generate retail assets, risk management systems and good treasury division.
Market players except the swap ratio 2:1, said sources. For very two stocks of Centurion bank, a
shareholder will
64
Merger
RBI approved merger of Centurion Bank and Bank of Punjab effective from October 1, 2005. The
merger is at swap ratio 9:4 and the combined bank is 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% 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.
The merger of Centurion bank and Bank of Punjab, both of which had strong retail franchises in their
respective markets, formed centurion bank of Punjab. Centurion bank had a well managed and growing
retail assets business, including leadership positions in 2 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 sizeable 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. Bank of Punjab has net
non- performing assets of around Rs 110.45 crore as on March 2004, which will be carried to
Centurion Banks books after merger. Both the brands are strong in their respective geographers and
business hence the merged entity willhave the elements of both, he added. Centurion Bank has a
65
Merger
presence in south and west and Bank of Punjab has a strong presence in the north. The merger
will give us scale geographical reach and entry into new products segments said the official.
Bank of Punjab is strong in small and medium enterprises (ME) business in the north, with good
retail assets and an agriculture portfolio as well as deposit franchisee Centurion Bank has a capital,
ability to generate retail assets, risk management systems and good treasury division. Market
players except the swap ratio 2:1, said sources. For very two stocks of Centurion bank, a
shareholder will get one stock of Bank of Punjab. The merged entity will have a asset base of
Rs.10, 000 crore, said a senior bank
official. The depository base of entity will be around Rs. 7165.67 crore and advances will be
around Rs. 3909.87 crore. The organization structure for the combined bank is in place and the
grades and incentives across the organization have largely been realigned. Centurion bank of
Punjab said in a statement. The operations of the bank have been integrated across the entire
network.
A decision has been taken on a common system for the banks and a phased migration has been
planned to ensure minimum disruption of customer service and operation across the bank
Centurion Bank of Punjab Said.
9.1HIGHLIGHTS OF THE MERGER- CENTURION BANK
AND BANK OF PUNJAB

66
Merger
Bank of Punjab is merged into Centurion Bank.
New entity is named as Centurion Bank of Punjab.
Centurion Banks chairman Rana Talwar has taken over as the chairman of the merged
entity.
Centurion banks MD Shailendra Bhandari is the MD of the merged entity.
KPMG India pvt ltd and NM Raiji & Co are the independent values 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 9 shares 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 is no downsizing via the voluntary retirement scheme.
In the opinion of the Board of Directors of Bank of Punjab the following are amongst others, the
benefits that are expected to accrue to the members from the proposed scheme:
67
Merger
(a) Financial Capability:
The amalgamation is expected to enable the merge Entity to have a stronger financial and
business profile, which could be synergized to both for resources and mobilization and asset
generation.
(b) Branch Network:
As a result of the amalgamation, the branch network of the merged entity would increase to 235
branches, providing increased geographic coverage, particular in the southern India and
giving it a larger national foot print as well as convenience to its customers.
(c) Retail Customer Base:
The amalgamation would enable the merged entity to increase its retail customer base. This
larger customer base will provide the merged entity enhanced opportunities for offering
banking and financial services and products and facilitate cross selling of products and
services.
(d) Use of Technology:
Post amalgamation, the merged entity would be able to provide through its branches, ATMs,
phone and the internet banking and financial services and products to a larger customer base,
with expected savings in costs and operating expenses
68
Merger
(e) Larger Size:

the larger asset base of the merged entity will put the merged entity amongst the bigger players
in the private sector banking space.
(f) International Listing:
The members will become shareholders of an internationally listed entity which has the
advantage of greater access to raising capital.
CONCLUSION:
Growth is always essential for the existence of a business concern. A business is bound to die if it
does not try to expand its active$$ties. The expansion of a business may be in the form of
enlargement of its activities or acquisition of ownership. Internal expansion results gradual
increase in the activities of the concern. External expansion refers to business combination
where two or more concerns combine and expand their business activities.
Looking at the global trend of consolidation and convergence , it is need of the hour to restructure
the banking structure in India through mergers and acquisition in order to make them more
capitalized, automated and technology oriented so as to provide environment more competitive
69
Merger
and customer friendly .Few more impediment for paving the way towards mergers and
acquisition on commercial consideration and mutual arrangement, such as government
shareholding of public sector banks, legal provisions related to banking and industrial matter
should immediately be resolved if at all the place of merger and acquisition has to be accelerated
in Indian banking sector .
Bibliography
Books
Finance and profits:- N.J.Yasaswy
Financial management and policy:-James Horne
Financial management:-P.K Jain
Financial management:- , Ravi.M.Kishore
Financial management:-Subir Kumar Banarjee

Merger and acquisition :- C.H.Rajeshwar
70
Merger
Paper
Economics times
Web
www.google.com
www.deccanherald.com
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Mergers and Acquisition

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Merger

and Acquisition of Banking Sector

1. INTRODUCTION TO MERGER AND ACQUISITION

Merger through absorption

Merger through consolidation.

1.1 DISTINCTION BETWEEN MERGERS AND

Whether a purchase is considered a merger or an acquisition really depends on whether the

1.2 TYPES OF MERGERS

1.3 ADVANTAGES OF MERGERS AND ACQUISITIONS

outside through mergers and acquisitions.

Enhancing profitability because a combination of two or more companies may result in

By eliminating financial constraints

Other motives For Merger

1. Purchase of Assets at Bargain Prices:-

2.Increased Managerial Skills or Technology:-

3.Acquiring new technology

plicate channels of distribution, or crate a centralized training center, or introduce an

Increased revenue or market share:9

Procedure for evaluating the decision for mergers and

2. Search and Screening:-

2. MERGERS AND ACQUISITION IN INDIA

James Raj Committee appointed by RBI in June 1997 recommended that

A banks size should be in the range of 1000 to 1500 branches.

3. Streamlining of the rural and semi urban branches.

Narasimhan Committee Report

Narsimhan Committee (1998)

NEED OF MERGERS AND ACQUISITIONS

3.NEED FOR MERGER AND ACQUISITION

innovations and improvement assumed greatest significance in institutional performance.

Competition from global majors.

Competition from new Indian banks.

Disinter mediation and competition resulting into pressure or spread.

Qualitative change in the banking paradigm.

The competencies required from a banker would be sharper information technology

4.MERGER IN INDIAN BANKING SECTOR

4.1RISKS ASSOCIATED WITH MERGER

projected or should they be submerged in favour of a new comprehensive identity.

MERGER STORY SO FAR

Punjab Co-operative Bank

5.Challenges and opportunities in Indian banking sector

GREATER CAPITAL MARKET OPENNESS

prudential regulations and their supervision; risk management of non-financial entities.

Enhancement of regulatory capacity in these areas, as well as human resource development in

IV. TECHNOLOGY IS THE KEY

in the banking industry is the sharing of ATMs by banks. This

VI. PUBLIC SECTOR BANKS

VIII. COST MANAGEMENT

Cost containment is a key to sustainability of bank profits as well as their long-term

REACH AND INNOVATION

Higher sustained growth is contributing to enhanced demand for financial savings

XI. RISK MANAGEMENT

Sector 45- Compulsory Amalgamation of banks

State Bank of India Act, 1955

Acquisition of co-operative banks with Other Entities

OF MULTISTATE COOPERATIVE BANKS WITH

Amalgamation of Regional Rural Banks with other Entities

Amalgamation of Financial Institution with other entities

Acquisition of non-Banking financial Companies (NBFCs) with other

7.MERGERS OF HDFC BANK AND CENTURIAN BANK

About Centurion Bank of Punjab

7.1HIGHLIGHTS OF THE MERGER- HDFC AND

CENTURION BANK OF PUNJAB

HDFC bank is merged with Centurion Bank of punjab