Banking is necessary, banks are not.”
-Bill Gates
Introduction
Mergers and Acquisitions as a strategy renders stability and enhance marketplace. Banks did not remain un hindered by this strategy.
Late 18th century brought beginning of mergers and acquisitions in banking which came in waves changing the structure of banking sectors. These brought amendment of information technology and assimilation of international capital market.[1]
Banking mergers are horizontal mergers.
Horizontal Mergers are as the name suggests- horizontal plane mergers. These are between peers, companies selling similar products or services in the same market and, ideally direct competitors of each other. Not a competition favouring tool. The main objectives of horizontal merger are to benefit from economies of scale, reduce competition, and achieve monopoly status and control of the market.
Merger and Acquisition: A line of difference
Mergers and acquisitions, almost used as synonyms but they differ.
| Merger | Acquisition |
| – fusion of two or more organizations whereby the identity of one or more is lost resulting in a single company; – consolidation of two entities into one entity which can be merged together either by way of merger by absorption or by formation of new company; – board of directors of two companies approve the combination and seek shareholders’ approval. Eg., Merger between IDBI and IDBI Bank | – one entity takes ownership of another entities stock, equity interest or assets; – purchase by one company of controlling interest in the share capital of another existing company; – after the takeover, there is a change in the management of another company but separate legal entities or identity could be retained; – only a change in control of another company. |
Mergers and Acquisitions of Public Sector Banks in Recent Times
A complex process, with effort and time involved, in mergers of Banks. The objective is normally single pointed- Economic Improvements.
Since Economic Improvement has been on the agenda of GoI, it has devoted significant efforts in this and consolidated ten public sector banks into four banks:
| Year | Transferor Company | Transferee Company / Post Merger |
| 2020 | Oriental Bank of Commerce United Bank of India | Punjab National Bank |
| 2020 | Syndicate Bank | Canara Bank |
| 2020 | Allahabad Bank | Indian Bank |
| 2020 | Andhra Bank Corporation Bank | Union Bank of India |
These have been done with the intent of
- creating a huge capital base to aid the acquirer banks to provide a large amount of loan
- enhanced services pertaining to delivery;
- offering expanded customer choice beyond loans and deposits to mutual funds and insurance;
- better control at the ministry level;
- technological upgradation.
The recapitalization that came from the Government would be deducted.
On flip side, local identity of the small banks would not be prominent. Few large inter-linked banks can expose the broader economy to enhanced financial risks. Employment and HR related issues.
What does the Banking Regulation Act, 1949 affect?
Banking Regulation Act, 1949 (BRA) dictates procedures, conduct and affairs of banking company. And the Companies Act, 2013 (ICA) deals with registration and management of companies.
The provisions of the BRA are in addition to, and not, in derogation of the ICA or any law for the time being in force. Thus, company carrying on banking business as per Section 5(b) of the BRA, has to comply with both BRA and ICA.
In case of a conflict between the two, the BRA prevails for application to the banking companies. The BRA even overrides the MoA and AoA and provisions contained in the MoA and AoA, if repugnant to the provisions of BRA are considered void.
Section 5A of BRA stipulates that if a resolution for restructuring of banking company is passed in General Body Meeting or by its Board of Directors or any agreement executed by the company, it will only come into effect if it is consistent with the provisions of the BRA.
Sections 44A, 44B and 45, Under Part III of the BRA contain the procedure of amalgamation of banking companies. As per Section 44A, unless a scheme of amalgamation has been approved with, 2/3rd of shareholders of each amalgamating company, banking companies cannot amalgamate.
With this approval, it has to be submitted to the RBI for it’s sanction.
Also, in public interest the Central Government exempt amalgamation of Nationalized Bank from the provision of Section 5 (the value at which the combination amalgamation is conducted) and Section 6 (the regulation of Combination) of the Competition Act, 2002 for a period of 10 years vide circular dated August 30, 2017.
Conclusion: Key Highlights
Mergers and acquisition in the banking sectors depends on-
the bank’s ability to assess the relatedness of assets that both the banks are possessing.
A negative impact normally arises on the outcomes of mergers and acquisition if the employee issues is not blended well. RBI intervenes to introduce stability for merging weak banks with strong banks.[2]
It is challenging to assess direct impact of mergers and acquisitions of Banks based on some factors such as increasing competition, globalization and changes in technology. Stress on transaction infrastructure such as branch networks and IT performance, high cost distribution, overcapacity that is generally brought by traditions of protection will improve the outcome. Slow-growing markets that rarely outpace the overall rate of economic growth and usually lag it due to encroaching financial disintermediation, exacerbating the overcapacity problem need to be addressed.
Mergers and acquisitions in the banking sector would probably be limited, if key managers were not personally interested in the performance, size and prestige of their institution. The personal interests would presumably increase the motivation of key managers directly involved in mergers and acquisitions which will accelerate the pace and improve the chances of a successful merger and acquisition.
The gains of Banking acquisition and merger is intangible in nature. As the primary objective of these remain to maximise shareholder value. Increase in Shareholder Value require, acquiring bank to have market power, introduce efficiency and risk diversification.
In Part 2 we examine, how has India faired on this count.
The Special Editions are only for beter understanding of various subject matters and is only for information purposes. Nothing contained herein is, purports to be, or is intended as legal advice and you should seek legal advice before you act on any information or view expressed herein. Endeavoured to accurately reflect the subject matter of this alert, without any representation or warranty, express or implied, in any manner whatsoever in connection with the contents of this. This isn’t an attempt to solicit business in any manner.
[1] https://www.ijsdr.org/papers/IJSDR1711002.pdf
[2] Ramanujam, S., “Mergers et al: Issues, Implications and Case Law in Corporate Restructuring”, LexisNexis: Butterworths Wadhwa, Nagpur, 3rd Edn. (2012), p.306