Mergers and Acquisitions

Mergers And Acquisitions in the Banking Sector of India

The world is in a state of flux because of how quickly technology is developing and the forces of globalisation, which are creating intense competition among businesses. Companies are investigating various tactics to develop internally and externally. Internal growth can be achieved by streamlining processes, enhancing management, and making capital investments in the company’s current activities. Other strategies and techniques for achieving expansion include joint ventures, strategic alliances, mergers and acquisitions (M&As), and others. The companies can have an advantage over the rest of the competitors by completing any of the aforementioned tasks.

Mergers and acquisitions (“M&A”) are the obvious choices and a successful strategy to enter new markets in light of the quickly advancing technology and the rise in corporate competitiveness. Corporations frequently use this strategy in an effort to expand into new markets and escape their unviable situation.

General Meaning of Mergers and Acquisitions

A merger combines two or more corporations into one corporation, one of which continues to exist while the others cease to exist as separate corporations. All of the combined corporations’ assets and liabilities belong to the survivor. One corporation transfers all of its assets, liabilities, and stock to the transferee corporation in exchange for payment in the form of cash, equity shares in the transferee corporation, and debt obligations issued by the transferee corporation.

The purchase of a smaller corporation by a larger corporation is referred to as an acquisition, and it is also known as a takeover. It takes place between the target firm and the bidding. Acquisitions could either be hostile or friendly. An acquisition in a business combination is the purchase of a controlling stake in the share capital of another existing firm by one corporation.

Guidelines for private sector bank mergers and acquisitions

The Reserve Bank of India (“RBI”) published a master direction facilitating the merging of private-sector banks on April 21, 2016. These Guidelines apply to any proposed merger between two banking companies or between a banking company and a non-banking financial company. Additionally, public sector banks would be subject to these guidelines as necessary.

According to the Guidelines, the Banking Regulation Act of 1949’s Section 44A grants RBI the discretionary authority to approve the voluntary merger of two banking firms.

These powers do not apply to the voluntary merger of a banking company with a non-banking company, which is subject to National Company Law Tribunal approval in accordance with Sections 232 to 234 of the Companies Act of 2013.

Board of Directors approval

Bank boards are crucial to the amalgamation process since the decision to merge must be approved by a two-thirds majority of all board members, not simply those who are present and voting.

Mergers between two Banking Companies

No banking company may merge with another banking company, in accordance with Section 44A of the Banking Regulation Act of 1949, unless a scheme outlining the terms of the merger has been presented in draft form to the shareholders of each of the relevant banking companies separately and approved by a resolution passed by a majority of the shareholders of each of the aforementioned companies present in person or by proxy at a meeting of shareholders.

The draft scheme must be approved by the boards of directors of the two banking firms before the shareholders’ approval. When contemplating such approval, the following elements should be taken into account:

• The merged company’s assets, liabilities, and reserves, as well as if the planned incorporation will boost asset value;
• What form of compensation the combined banking business will give to the combined company’s shareholders;
• The two banks’ shareholding arrangements and whether, as a result of the merger and the swap ratio, any person, entity, or group’s ownership of shares in the merged bank violates RBI regulations;
• The effect on the combining banking company’s viability and capital adequacy ratio.
• Whether the proposed merger has undergone the necessary level of due diligence;
• Whether independent valuers have determined the swap ratio and whether it is fair and suitable.
• The anticipated changes to the board of directors makeup and if the new board’s membership would be in accordance with the RBI Guidelines^[1];
• If the necessary number of shareholders approve such a plan, it must be submitted to the RBI for approval, which, if given, will bind the relevant banking companies.

Mergers of NBFC and a Banking Company

• Suppose a merger of an NBFC and a banking business is being considered. In that case, the banking company should obtain RBI’s clearance after its board has approved the merger but before it is submitted to the Tribunal for approval.
• In addition to the factors mentioned above, while deciding whether to approve the plan, the board should take the following factors into account:

• Before the scheme is approved, ascertain whether any RBI/SEBI regulations have been violated or are likely to be violated by the NBFC and, if so, make sure they comply with the rules.
• Whether the NBFC complies with “Know Your Customer” standards for each of its accounts that may eventually become accounts with the banking company;
• Whether the NBFC has accessed financing from banks or other financial institutions, and if so, whether or not the loan agreements call for the NBFC to secure the consent of the relevant bank or financial institution prior to the proposed merger.

Required documents and information 

The following are a few of the documents or pieces of information that must be presented along with the application for the scheme of amalgamation:

• Proposed merger plan approved by the shareholders of the banking companies:
• Certificates that have been signed by all of the representatives in attendance at the shareholder’s meeting;
• Certificates from the concerned executives of the banking businesses detailing the names of shareholders who notified the banking company in writing of their opposition to the amalgamation plan at or before the meeting, along with the number of shares owned by each shareholder;
• Information about the proposed CEO of the banking institution after amalgamation;
• Annual reports for each of the banking companies for three financial years prior to the date of the proposed amalgamation;
• Any other explanation, information or documents as required by the RBI during the process of application.

Why merger and acquisition?

The following are the reasons for mergers in banks:

Merging weaker banks – In order to stabilise weak banks and diversify risk management, the goal of merging weaker banks with stronger banks has received support. The weaker banks can keep their presence and avoid going out of business entirely by partnering with a more powerful one.

Larger customer base – Getting a larger customer base by increasing market share and rural reach. Banks must develop infrastructure, restrict competition, ease bank congestion, and take advantage of underutilised resources if they are to compete with international banks in the global era.

Talent & Skill – When two banks combine or are acquired by one another, their employees and expertise are also combined, expanding the big talent pool and giving the merged company an edge over its rivals.

Scale economies and financial liquidity – A merger ensures immediate access to cash resources, boosts liquidity and aids in the sale of extra and obsolete assets. Pooling the resources of the many banks and using them effectively and efficiently helps. The banks will be better positioned following the merger to finance large projects that they previously wouldn’t be able to execute on their own, making the funding process for those projects quick and easy.

Technological progress – With the development of the internet, banks may now provide services through the use of a touch screen, enabling them to take advantage of the most recent innovations. Through the merger, banks collaborate to provide better services and leverage cutting-edge technologies.

Impact of the Mergers

The merger, which resulted in the consolidation of 27 public sector banks into 12, had as its primary goal the establishment of next-generation banks and the eventual realisation of a trillion-dollar economy. The banking sector will surely benefit from this merger, which will also impact the banks’ productivity, employees, and clients.

The government’s bank consolidation plan aims to grow the size of the banks so they can compete with domestic and foreign financial institutions. SBI now holds a 22% market share among all banks as a result of the mergers, while PNB, the second-largest public-sector bank, holds an approximate 8% market share.

The country’s second-largest nationalised bank in terms of income and branch network will be created through the merger of Punjab National Bank, United Bank of India, and Oriental Bank of Commerce. The consequent synergy will produce a next-generation bank that is competitive on a global basis.

Benefits of Merging Banks

Some of the benefits of merging banks are:

• A merger boosts the capital base. Additionally, it offers the bank access to a more extensive money supply, enabling it to decide how much money to lend out. This would lessen the need for recapitalisation, which the government would otherwise have had to fund.
• Acquisitions assist banks in strengthening their balance sheets since the combined assets and liabilities of all the banks into consideration. The Non-Performing Assets (NPA) of smaller PSU banks in India would eventually be eliminated with its assistance.
• By uniting the customers of the merging banks, mergers help broaden the bank’s customer base. Larger banks are exposed to smaller PSBs’ regional concentration.
• Bank operations and efficiency can be scaled up more successfully through mergers and acquisitions. They eliminate the need to develop such skills from the ground up by filling in technological and financial gaps. Additionally, branch-level costs would be optimised.
• Mergers expand the offerings of the anchor bank, allowing consumers access to more financial products in addition to the ones they already have.
• The network of the merging bank is widened and lengthened as a result of mergers and acquisitions, which unify the branches of all the involved banks.
• Larger banks produced through mergers are better able to compete on a global scale.

Conclusion

In India, the banking industry is developing and increasing. Major mergers and acquisitions have been taking place in the banking sector over the past several years, resulting in the emergence of a number of international companies. An acquisition or merger helps a bank expand its geographic reach, enabling it to service a larger customer base and giving it more capital to work when making loans and investments. If they are carried out correctly and effectively, mergers and acquisitions benefit the banking industry. For that, it is necessary to make Indian banks compatible, self-sufficient, and productive on a global scale.

Read our Article: How do Mergers and Acquisitions affect Shareholders?