Mergers and Acquisitions: Banking Sector
“It is well enough that people of the Nation do not understand our BANKING & MONETARY SYSTEM.
For if they did, I believe there would be a REVOLUTION before morning.”
– HENRY FORD
In India, the banking system has undoubtedly earned numerous outstanding achievements, in a comparatively short time, for the World’s largest and the most diverse democracy. The reform process of the banking sector or industry is part and parcel of the government strategic agenda aimed at repositioning and integrating the Indian banking sector into the global financial system. There have been several reforms in the Indian banking sector, as well as quite a few successful mergers and acquisitions, which have helped it, grow manifold. Mergers and acquisitions are most widely used strategy by firms to strengthen and maintain their position in the marketplace. M&A‟s are considered as a relatively fast and efficient way to expand into new markets and incorporate new technologies. For instance, in 1993, Punjab National Bank acquired New Bank of India. The only other nationalized bank merged with another except for State Bank of India with its associate banks was the merger of Bharatiya Mahila Bank with State Bank of India in 2017. In August, 2019 the Government merged 27 public sector banks and reduced to 12. The second largest PNB Amalgamated with- Oriental Bank of Commerce, United Bank of India and Bank of India.
Merger is defined as “a combination of two or more companies in which the assets and liabilities of the selling firm(s) are absorbed by the buying firm. Although the buying firm may be a considerably different organization after the merger, it retains its original identity.”
On the other hand, “an acquisition is when one company purchases most or all of another company’s shares to gain control of that company. Purchasing more than 50% of a target firm’s stock and other assets allows the acquirer to make decisions about the newly acquired assets without the approval of the company’s shareholders.”
MERGERS AND BANKING AND REGULATION ACT, 1949
Section 44A of the Banking Regulation Act of 1949, which states that no banking companies shall amalgamate unless a scheme of such amalgamation is required to be approved by a two-third majority of shareholders of each amalgamating company. Subsequently it is send to RBI for its sanction. But at present either in person or proxy at the respective general meeting so convened for the consideration of the scheme. Also, section 2A introduced by the Banking Laws (Amendment) Act, 2011 provides for the non-applicability of the provisions of the Competition Act to any banking company
MERGERS AND COMPANIES LAW, 2013
Under Companies Act 2013, Chapter XV, states that any merger proposed between a bank and company (not engaged in banking business) would, at first instance, require the approval of the High Court and then subsequently by the RBI in order to put the scheme into effect, as mandated only under the erstwhile Companies Act of 1956.
MERGER AND COMPETITION ACT, 2002
The Competition Act 2002 (Competition Act) is the principal legislation that regulates Combinations (mergers and acquisitions) in India. Sections 5 and 6 of the Act, deal with the regulation of mergers and acquisitions. The main objective behind introducing the Competition Act of 2002 was to eliminate practices having appreciable adverse effect on competition (AAEC), promote and sustain competition, protect customer’s interests and ensure freedom of trade carried on by other participants in the market, to prohibit anti-competitive agreements and abuse of dominate position, provide for regulation of combinations i.e., mergers, amalgamations, acquisitions, etc. and to enjoin competition advocacy. Any combination which is likely to cause any AAEC is void. Any bank pursuant to any loan or investment agreement enjoys exemption from the rigors of combination provision; however, the disclosure of such combination is required to make before the CCI within 7 days.
In 2017, the Government has exempted mergers of nationalized banks from seeking fair trade watchdog CCIs approval. The aim was paving way for fast-tracking consolidation in PSU banking space. This exemption will be applicable for ten years and comes at a time when several experts and even policymakers have been talking about the need for consolidation in the banking sector, especially among the state-run banks.
Why there is a need for Merger?
In 2018-19, according to Reserve Bank of India, frauds reported by Public Sector Banks (PSBs), during the period from April 1, 2019 to September 30, 2019 is 5,743 involving a total amount of 95,760.49 crores. PSBs have a disproportionate share of 85%, significantly exceeding their relative business share. Prima facie, an initial investigation in these cases has revealed involvement of not only midlevel employees, but also of the senior most management and also due to political interference and the ‘pro-corporate’ approach of decision makers. The banking system is plagued with high levels of NPAs then it is a cause of worry, because it reflects financial distress of borrower clients such as Vijay Malaya, Nirav Modi, Dewan Housing etc, and inefficiencies in transmission mechanisms.
In 2018, according to reports, India became the 10th largest economies in the world, with the highest bad loan ratio after Italy. This is because Government-controlled lenders are estimated to be holding approximately 90 percent of such non-performing assets. The losses incurred by the four PSBs including Bank of Baroda, IDBI Bank Ltd, Oriental Bank of Commerce and Central Bank of India were Rs. 21,646.38 crore in the year ended March 31, 2018, after which the government planned their merger. These catastrophic situations resulted in Centre’s forced Bank mergers.
Merits of Mergers
The main agenda for such a merger & acquisition is consolidation of banks, to control the rise in bad loans or non-performing assets, to robust financial health, upgradation of technology and ensure better scale efficiency. It also helps in gaining a large number of new customers instantly. Not only does an acquisition give your bank more capital to work with when it comes to lending and investments, but it also provides a broader geographic footprint in which to operate.
Demerits of Mergers
The tax paid by general public, are being used to rescue the ailing private banks by capitalizing these banks. Other difficulties such as execution risk in bringing the two new banking entities on the same platform, HR/IT synchronization, streamlining of processes, situations of mismatch in compliance consistency and risk culture negatively affecting the profitability of the business and loss of local identity of small banks during a merger.
The banking industry (PSB) has been undergoing major Mergers and Acquisitions in the recent years for achievement of consolidation of banks. It would also help institution scale up quickly and gain a large number of new customers instantly. Not only does an acquisition give your bank more capital to work with when it comes to lending and investments, but it also provides a broader geographic footprint in which to operate. But mergers may become an alarming issue for Indian economy if it goes over the edge. Although, the consolidation has led to an unprecedented increase in bank concentration at the market level and may affect the competition within the Banking sector. The sudden escalate in NPAs and bad-loans of country has hampered its position all over the world. The Government should strongly scrutinize the on going Anti Competitive Combinations and abuse of dominance in banking sector. At present it is necessary for the government to incorporate necessary merger provisions concerning PSBs as well as private banking companies.
Drafted by Sakshi Verma, Associate at Vidhiśāstras -Advocates & Solicitors.