1 | P a g e

1.1 Introduction

In Indian banking sector Mergers and acquisitions has become admired trend throughout the

country. A large number of public sector bank, private sector bank and other banks are

engaged in mergers and acquisitions activities in India. The Main motive behind Mergers and

acquisitions in the banking sector is to harvest the benefit of economies of scales. Merger and

acquisition have played an important role in the transformation of industrial sector of India

since the Second World War period. During the Second World War period Economic and

political conditions give rise to effective Mergers and acquisitions (M&A). Mergers can be a

large source of growth in any economy but particularly in one that’s comparatively stagnant

and mired in deep uncertainty.

Mergers and acquisitions (M&A) are considered as a relatively fast and efficient approach to

expand into new markets and incorporate new technologies. the main motive behind used

strategy by firms to strengthen and sustain their position in the market place. Mergers and

acquisitions (M&A) have played a major role for corporate restructuring and the financial

services industry. We can find many evidences that their success is by no means assured.

Pressures on the employees of banks around the world have been manifold across, entry of

new players and products with superior technology, globalization of financial markets,

changing demographics of customer behavior, consumer pressure for wider choice and low

cost service, shareholder wealth demands, shrinking margins.

1.2 Merger and Acquisition defined

The he verbalization of business over the past decade has spawned a search for competitive

advantage that is universal in scale. Companies have followed their customers - who are

going global themselves as they respond to the pressures of obtaining scale in a rapidly

consolidate global economy. In combination with other trends, such as increased

deregulation, privatization, and corporate restructuring, verbalization has urged a never seen

before strong wave in merger and acquisition activity. Mergers and acquisitions are the hot

topic in today's business world. Mergers and acquisitions have become widely favoured or

admired by different companies having different motives. Be it the survival issue, or the

profit maximization, or the strengthening of the economy of the business mergers and

acquisitions are the most talked about topic in the competitive world.

2 | P a g e

Mergers and acquisitions (M&A) are fundamentally carried out to expand the organization,

increasing profits, save the company facing losses these mergers and acquisitions are the life

saving techniques for companies. Mergers and acquisitions represent the ultimate in change

for a business. No other event is more difficult and challenging as a merger and acquisition. It

has become a normal routine in life and people are more likely used to them. In today's global

and competitive environment mergers have become the means for long term survival. Any

merger or acquisition calls for great management survey and skills. The employee-related

issues inherent in any corporation are amplified many fold by the disruption, stress, anxiety,

and sacrifice caused by bringing two corporations together.

Mergers and acquisitions seems a name normally pronounced together but in reality two

words having two different meanings. Mergers on one hand are more on a positive side

whereas acquisitions are more of hostile nature. When we talk about a 'merger', we are

referring to the merging or getting together of two companies where one company will

continue to exist. Merger and acquisition is a financial tool that is used for enhancing long-

term profitability by expanding their operations. Mergers occur when the merging companies

have their mutual consent as different from acquisitions. The terms ‘merger’ is the

combination of two or more separate firms into a single firm. The firm that results from the

process could take any of the following identities: Acquire target or new identity Acquisition

on the other hand, takes place where a company takes over the controlling shareholding

interest of another company.

"he fusion of two or more enterprises through direct acquisition by one of the net assets of the

other or others. In a merger no new concern is created." Eric L.Kohler.

On the other hand, 'Acquisition' refers to acquiring of assets of one company by another. In

acquisitions the acquiring company will remain in the business and the acquired or the

targeted company will be integrated into the acquiring company. Acquisition is a corporate

action in which a company buys all or most of the company's ownership in order to have a

control over the targeted firm. In simple terms, an acquisition is when one company takes

over or purchases another company while a merger is a consensual situation wherein two

companies agree to continue business operations and go forward as a single new company.

"An acquisition is said to occur if one corporation buys either assets, net assets (assets -

liabilities) or stock of another corporation." Robert N.Anthony

3 | P a g e

A takeover is similar to an acquisition and also implies that the acquirer is much larger than

the acquired.

Takeovers- "A series of transactions whereby a person (individual, group of individuals or

company) acquires control over the assets of a company, either directly by becoming the

owner of those assets or indirectly by obtaining control of the management of the company."

Amalgamations- "A combination under a single head of all or a portion of assets and

liabilities of two or more business units by merger or consolidation." Eric L.Kohler

1.3 The types of Mergers and their Probable Outcomes

A) Vertical Mergers

In this type of merger, the firm purchases one of its suppliers or gets into a merger with one

of its customers. The former is a 'backward merger' and the latter may be termed as a 'forward

merger'. An acquired firm generally comes under the acquiring firm's corporate area, which is

why their most interaction remains at the corporate level in simple sense, a merger between

two companies producing different goods or services for one specific finished product is a

vertical merger.

Example: Merger between Time Warner Incorporated, a major cable operation. And the

Turner Corporation, which produces CNN, TBS, and other programming. In the merger, the

Federal Trade Commission (FTC) was alarmed by the fact that such a merger would allow

Time Warner to monopolize much of the programming on television ultimately, the FTC

voted to allow the merger but stipulated that the merger could not act in the interests of anti-

competitiveness to the point at which the public good was harmed.

B) Horizontal Mergers

A horizontal merger is when two companies competing in the same market merge or join

together. Under this type of merger, one company acquires another whose product or service

is closely related or of the same type. This type of merger can either have a very large effect

or little to no effect on the market When two extremely small companies combine, or

horizontally merge, the results of the merger are less noticeable. These smaller horizontal

mergers are very common. Horizontal mergers may negatively affect the competitive

4 | P a g e

situation in an industry. Therefore, they frequently run afoul of regulatory officials. A

horizontal merger often increases the degree of concentration in an industry.

Example: This type of merger occurs frequently as a result of larger companies attempting to

create more efficient economies of scale. The amalgamation of Daimler-Benz and Chrysler is

a popular example of a horizontal merger.

C) Conglomerate Mergers

Conglomerate Mergers involve firms engaged in unrelated types of business activity. Among

conglomerate Mergers, three types have been distinguished. Product extension Mergers

broadens the product lines of firms. These are Mergers between firms in related business

activities and may also be called concentric Mergers. A geographic market extension merger

involves two firms whose operations have been conducted in no overlapping geographic

areas. The third one referred to as pure conglomerate Mergers involves unconnected or

unrelated business activities under a single banner. Conglomerate Mergers have the potential

for improved resource allocation in financial conglomerates; managerial and concentric

conglomerates have the potential for synergy and transfer of managerial capabilities.

Example: if an auto manufacturer and a motorcycle manufacturer merge, the merger is a

concentric one. Although both industries serve the transportation needs of their customers,

the two are quite unique in their competitive structures. In concentric mergers there is a

tendency to combine some operations, especially departments focused on technology and

marketing. This will result in the sharing of expertise between the two firms, which may be

resisted by the employees of both firms. The best way to overcome this construction industry.

D) Congeneric Mergers

These mergers happen between entities engaged in the same general industry and somewhat

interrelated, but having no common customer-supplier relationship. A company uses this type

of merger in order to use same sales and distribution channels their and to reach the

customers of both businesses.

E) Cash Merger

In a typical merger, the merged entity combines the assets of the two companies and grants

the shareholders of each original company shares in the new company based on the relative

5 | P a g e

valuations of the two original companies. However, in the case of a ‘cash merger’, also

known as a ‘cash-out merger’, the shareholders of one entity receives cash in place of shares

in the merged entity. This is a common practice in cases where the shareholders of one of the

merging entities do not want to be a part of the merged entity.

F) Triangular Merger

A triangular merger is often resorted to for regulatory and tax reasons. As the name suggests,

it is a tripartite arrangement in which the target merges with a subsidiary of the acquirer.

Based on which entity is the survivor after such merger, a triangular merger may be forward

(when the target merges into the subsidiary and the subsidiary survives), or reverse (when the

subsidiary merges into the target and the target survives)

1.4 Mergers and acquisitions – World Banking Scenario

The trend towards banking consolidation, mainly cross-border mergers and acquisitions is

moving unavoidably ahead and key deals show to indicate a fundamental shift in the

evolution of mergers and acquisitions. It is the beginning of a new phase in banking

structures, both in domestic and global market. Cross-border banks deals have been evolving

over recent years and have at this time reached a take-off stage as the centre of gravity of

global finances shifts to accommodate the growing wealth of China, India and the Gulf

country along with other emerging economies across the world. Banking sector has played a

vital role in the overall economic development of this country right from the time of

nationalization.

Due to globalization the Indian banking sector has been facing keen competition from the

foreign banks. The Reserve Bank of India (RBI), which is equally protective of the Indian

banking industry, has been already sounded a note of warning to the foreign banks who

suppose easier entry and takeover norms by 2009. The old and new private sector banks will

be prime targets after foreign banks are allowed to launch predatory forays in Indian banking

sector. The world is changing significantly and moving away from a US-centric focus. Last

October China’s bank, Industrial and Commercial Bank of China (ICBC), in a landmark $ 5.6

billion deal, acquired a 20 per cent stake in South Africa’s Standard Bank. In India a cross-

border M & A the State Bank of India (SBI) acquired majority stakes in an Indonesian bank

6 | P a g e

Indo Monex. In another case SBI has acquired Mauritius based Indian Ocean and Kenya

Based GIRO Commercial Bank both in 2005.

1.5 Mergers and Acquisitions and Corporate Performance

An attempt has been made to summarize the important research literature on the M&A front

in developed countries with respect to its impact on corporate performance.

Evaluating the performance of companies involved in Mergers and Acquisitions has become

a subject matter of a great deal of research. Many attempts were made to throw light on the

motives behind the merger and Acquisition transactions and to determine their results by

evaluating the cost benefits for both the companies and even the countries where they are

located. The various reasons for Mergers and Acquisitions and the diversity of their results

have given rise to a varied range of hypothesis, in which each part tries to explain a part of

merger and Acquisition phenomenon. This hypothesis can be compiled into three major

theories i.e. the internalization theory, technological competence theory and the transaction

cost theory.

These three theories show the variety of reasons for M&As. Khemani (1991) states that there

are varied reasons, motives as well as economic forces which can be taken together

separately in isolation which influences the companies' decisions to engage in the merger and

Acquisition activities. Over the past few years, the pressure from international competition,

the innovations in finance, growth and expansion economically increased political and

economic integration and the technological changes have contributed to the fast rate of

growing merger and Acquisition activities. The Mergers and Acquisitions can also be

motivated by commercial and economic considerations by broadening the extent of products

that are related and also the geographical market, the diversification and the risks and benefits

involved in vertical integration.

It can be well assumed that these motives have enhanced the profitability of the corporates as

the long term objective. It can be assumed that even if this is not always the possibility, the

main concern of corporate managers who make the Acquisition regardless of their motives is

increasing profits at an alarming rate. However, there are so many factors that have an effect

7 | P a g e

on this that it can become extremely difficult to make statistical measurements in isolation of

the effect of merger and Acquisitions on profits.

Free cash theory propounded by Jenson (1998) is an excellent example of immediate

objective which in the long run can lead to more profitability. This theory has made an

assumption that the managers and the shareholders of the corporates do not share the same

objective. The conflict between these objectives may intensify when the corporate are in a

profitable position enough to generate free flow cash i.e. there is no reinvestment of the

profits in the corporates. Under such conditions, the corporates may take the decisions to go

in for Acquisitions to use the liquidities.

These types of acquisitions are most often financed by issuing debentures and also by

liquidating the cash. The managers are induced to take new measures to increase the

efficiency of the operations of the corporates by the higher debt levels. Jenson says that the

reorganization and restructuring which is made by takeovers leads to long term profits.

Several studies were made to measure the success of the early Mergers in terms of

profitability and determine the reason for their success and failure. Livemore attributes

success to astute business leadership and in particular to the rapid managerial and the

technological improvements, new product developments and the entering into industries' new

subdivisions and the promotion of brand names of quality as well as the exploitation of the

research commercially. The causes for failure as given by Deving (1953) include lack of

efforts to realize the economies of scale by modernizing inherited equipments, plants as well

as the increase in overhead cost and the large size and inadequate talent to manage a large

group of plants leads to lack of flexibility.

The studies conducted on the impact of Mergers and Acquisitions can be bifurcated as per the

financial or industrial organization approach. One of the ways to measure the performance is

by monitoring the prices of shares after the deal of Mergers and Acquisitions is struck. The

financial approach that is most commonly employed examines the trends in the prices of

shares of the corporates that are involved in Mergers and Acquisitions and compares them

with a specific reference group of corporates. The performance of the corporates seemed to

have improved when the shareholders' return tend to increase after the Mergers and

Acquisitions. The results thus obtained especially in the United States and also in Canada

showed that the corporate takeovers most probably have favourable effects for shareholders

8 | P a g e

of the target companies. The merger and Acquisition announcements are positively viewed

by the stock market.

Further studies conducted evaluated the impact of Mergers and Acquisitions in respect to

profitability before and after the merger and Acquisition. These organizations' studies do not

consider share price studies instead the longer time horizons are taken into consideration.

Most of the organizations do not show improvements in the profitability which is long term

after the Acquisition. Some studies have concluded that compared to horizontal and vertical

Mergers and Acquisitions, the conglomerate Mergers and Acquisitions provide more

favourable results.

Many research studies that were conducted have investigated that the performance of

unrelated conglomerate Mergers was not as good as the merging companies which have

potential economies of scale. It is evident in terms of returns to the shareholders.

1.6 The Indian Banking Sector and Indian Banking System

The Indian banking system is that the backbone of a monetized economy. The Indian banking

sector divided into 2 phases, the pre alleviation section and also the post alleviation. Within

the pre alleviation section government of Indian nationalized fourteen banks as 19July 1965

and additional business Banks were nationalized as fifteen Gregorian calendar month 1980 in

India. within the year nineteen93 government united the new banks of Asian country and

geographic region National banks and this was the sole united between nationalized Banks

subsequently the quantity of Nationalized Banks reduces from twenty to 19.In the post

alleviation section, government had initiated the policy of alleviation and licenses were

issued to the non-public banks which might result in the expansion of Asian country banking

sector in India. the Indian industry is that the financial organization of India referred to as

Federal Reserve Bank of India .the Reserve Bank of India(RBI) is answerable for the Indian

industry since 1935, the business banks in Asian country are quarantined into Public sector

banks ,Private sector banks and Foreign banks .All these banks constitute Federal Reserve

Bank of Asian country classification of regular business banks (SCBs).Public sector, non-

public sectors and Foreign banks as they're embody within the second regular of the Reserve

Bank of Asian country Act 1934.

9 | P a g e

Merger and acquisition in banking sector are controlled or regulated by the apex money

authority of a selected country. As an example the Merger and acquisition in banking sector

of India are overseen by the Reserve Bank of India (RBI).Sometime even run batted in

additionally intervenes and tells one bank to amass another bank as a result of non

performance of that bank. In case, run batted in feels that the purchasers mustn't suffer as a

result of the non performance of the bank .this forces them to come back forward and

promote a merger or a sale.

1.7 Industry scenario of Indian Banking Industry

The growth within the Indian Banking Sector has been additional qualitative than quantitative

and it's calculable to stay identical within the returning years. And sector supported the

projections created within the "India Vision 2020" ready by the look Commission and also

the Draft tenth arrange, the report forecasts that the speed of growth within the balance-sheets

of banks is probably going to decelerate. the full assets of all regular business banks by end-

March 2010 square measure expected at Rs forty, 90,000 crores. Which will comprise

regarding 65 per cent of value at current market costs as compared to sixty seven per cent in

2002-03? Bank assets square measure expected to lift at AN annual composite rate of

thirteen.4 per cent throughout the remainder of the last decade as against the expansion rate

of 67 per cent that existed between 1994-95 and 2002-03 in India. It is anticipated that there'll

be massive additions to the capital base and reserves on the liability aspect in banking sector.

The Indian industry that is ruled by the Banking Regulation Act of India, 1949 may be

broadly speaking classified into 2 major classes, non-scheduled banks and regular banks.

Regular banks comprise business banks and also the co-operative banks. In terms of

possession, business banks may be additional classified into nationalized banks, the banking

company of India and its cluster banks, regional rural banks and private sector banks (the old/

new domestic and foreign). These banks have over 67,000 branches unfold across the

country.

In India the Public Sector Banks (PSBs), that square measure the bottom of the Banking

sector in India account for quite 78 per cent of the full industry assets. Sadly they are

burdened with excessive Nonperforming assets (NPAs), huge hands and lack of

contemporary technology. On the opposite hand the private Sector Banks square measure

creating tremendous progress. They are leaders in net banking, mobile banking, phone

10 | P a g e

banking, ATMs. As so much as foreign banks square measure involved they're probably to

reach the Indian industry.

In the Indian industry a number of the private Sector Banks operative square measure IDBI

Bank, ING Vyasa Bank, SBI business and International Bank Ltd, Bank of Rajasthan Ltd.

and banks from the general public Sector embrace geographic area full service bank, Vijaya

Bank, UCO Bank, Oriental Bank, Allahabad Bank among others. Some other ANZ

Grindlays Bank, ABN-AMRO Bank, yankee categorical Bank Ltd, Citibank square measure

a number of the foreign banks operative within the Indian industry.

As so much because the gift situation worries the industry in India goes through a

transformation part. The most important part of monetary reforms resulted within the

nationalization of fourteen major banks in 1969 and resulted in a very shift from category

banking to Mass banking. This successively resulted in a very important growth within the

geographical coverage of banks. Each bank had to allocate a minimum proportion of their

loan portfolio to sectors known as “priority sectors”. The producing sector additionally grew

throughout the Nineteen Seventies in protected geographic area and also the banking sector

was a vital supply. Ensuing wave of reforms saw the nationalization of vi additional business

banks in 1980. Since then the quantity of regular business banks raised four-fold and also the

number of bank branches raised eight-fold.

After the second part of monetary sector reforms and relief of the world within the early

nineties, the general public Sector Banks (PSB) s found it extraordinarily tough to contend

with the new private sector banks and also the foreign banks. The new private sector banks

initial created their look once the rules allowing them were issued in January 1993. Eight new

private sector banks square measure presently operational. These banks attributable to their

late begin have access to progressive technology, that successively helps them to avoid

wasting on hands prices and supply higher services.

During the year 2000, the State bank of India (SBI) and its seven associates accounted for a

25 % share in deposits and 28.1 % share in credit .The twenty nationalized banks accounted

for 53.2 % of the deposits and forty seven.5percent of credit throughout identical amount.

The share of foreign banks (numbering 42), regional rural banks and different regular

business banks accounted for 5.7 percent, 3.9 % and 12.2 % severally in deposits and 8.41

percent, 3.14 % and 12.85 % severally in credit throughout the year 2000.

11 | P a g e

1.8 Types of Banks

In 1935, ‘The State Bank of India Act, was passed, accordingly, ‘The Imperial Bank of India’

was nationalized and State Bank of India emerged with the objective of extension of banking

facilities on a large scale, specifically rural and semi – urban area and for various of the

public purposes. In 1969, fourteen major Indian Commercial Banks were nationalized and in

1980, six more were added on to constitute the public sector banks. Commercial Banks in

India are classified in Scheduled Bank and Non Scheduled Banks. Scheduled Banks are

including nationalized Bank, SBI and its subsidiaries, private sector banks and foreign banks.

Non Scheduled Banks are those included in the second Scheduled of the RBI Act, 1934.

1. Scheduled Banks

The second scheduled of RBI act, create a list of banks which are described as “Scheduled

Banks” In the terms of section 42 (6) of RBI act, 1934, the required amount is only Rs. 5

Lakh. The Scheduled Banks enjoy several privileges. It means that scheduled banks carries

safety and prestige value compared to non scheduled banks. It is entailed to receive refinance

facility as applicable.

2. Nationalized Banks

The nationalized banks include 14 banks nationalized on 19th July, 1969 and the 6 more

nationalized on 15th April, 1980. They are also scheduled banks, after this nationalization the

governments try to implement various welfare schemes.

3. Non- scheduled Banks

The commercial banks not included in the 2nd schedule of the RBI act are known as non

scheduled banks. They are not entitled to facilities like refinance and rediscounting of bills

etc, from RBI. They are engaged in lending money discounting and collection bills and

various agency services. They insist higher security for loans.

4. Old private Banks

These banks all registered under Companies Act, 1956. Basic difference between Co-

operative bank and Private Banks is its aim. Co-operative banks work for its member and

private banks are work for own profit.

12 | P a g e

5. New Private Banks

These banks lead the market of Indian banking business in very short period because of its

variety of services and approach to handle customer and also because of long working hours

and speed of services. This is also registered under the Company Act 1956. Between old and

new private banks there is wide difference.

6. Foreign Banks

Foreign Banks mean multi-countries bank. In case of Indian foreign banks are such banks

which open its branch office in India and their head office are outside of India. E.g. HSBC

Bank, City Bank, Standard Chartered Bank etc.

8. Co-Operative Banks

Co-operative Banks another component of the Indian bank with the enactment of the Co-

operative Credit Societies were sated owing to the increasing demand of Co-operative Credit,

a new Act of the 1994, which provide for the increasing demand of Co-operative Central

banks by a union of primary credit societies or by a union of primary credit socialites and

individuals.

1.9 Banking after Independence in India

A. First Phase: 1948 – 1969

The country inherited a banking system that was patterned on the British Banking System.

There have been joint stock companies doing banking business and that they were

concentrating mostly in major cities. Even the financing activities of these banks were

confined to the exports of Jute, Tea etc and ancient industries like textile and sugar. There

was no uniform law governing banking activity. A direct concern when the partition of the

country was concerning bank branches situated in Pakistan and steps were taken to shut a

number of them as want by that country. In 1949, as several as 55 banks either went into

liquidation or went out of banking business. Banking failed receives much attention of the

policy makers and disjointed efforts were made towards the regulation of the banking

industry.

13 | P a g e

B. Second Phase: Nationalization Era 1969 – 1990

After independence, India adopted a socialist pattern of society as its goal. This means in non

technical language a society with wealth distributed as equitably as possible without making

the country a totalitarian state. In 1955, the Imperial Bank of India was nationalized and its

undertaking was taken over by State Bank of India. Its transformation into SBI has been

effective from July 1, 1955.

There were seven subsidiaries Banks. Their Associate Bank was 1960. The State Bank group

including State Bank of Hyderabad, State Bank of Mysore, State Bank of Travancore, State

Bank of Bikaner and Jaipur, State Bank of Indore, State Bank of Patiala and State Bank of

Saurashtra.

As regards the scheduled banks, there have been complaints that Indian Commercial Banks

were leading their advances to the big and medium scale industries and massive business

homes which the sectors strict priority like agriculture, little scale industries and exports

weren't receiving their due share.

There were some effects and achievements of nationalized banks. However, there are some

problems relating to NPAs, competition, competency, overstaffing, inefficiency etc. for the

nationalized bank

D. Third Phase: 1991 – 2002 Economic Reforms

The Indian economic development takes place within the realistic world from 1991

“Liberalization, Privatization and Globalization” policy. As per “LPG” policy all restriction

on the Indian economy was entirely dissolved and also the soundest section for the Indian

banking industry adopt over here. This additionally modified the situation of the political

economy world. The budget policy and suggestion provided by Dr Man Mohan Singh and

also the Governor of Reserve Bank of India. As per the guideline the segments for

development is has various drawback then the importance of public sector cannot be

unheeded. The country is flooded with foreign banks and their ATM stations. Efforts are

being place to prove a satisfactory service to customers. Phone banking and net banking is

introduced. The complete system became additional convenient and swift. Time is given

more importance than money the financial system of India has shown a great deal of

resilience. It is protected from any crisis triggered by any external macroeconomics shock as

14 | P a g e

different East Asian Countries suffered. This can be all as a result of a versatile rate regime,

the foreign reserves are high, and the capital account isn't however totally convertible, and

banks and their customers have restricted interchange exposure.

1.10 Banking Sector Reforms in India

Banking Sector reforms were initiated to upgrade the operating standard health and financial

soundness of the banks. The Government of India setup the Narasimham Committee in 1991,

to examine all aspects relating to structure, organization and functioning of the Indian

banking system the recommendations of the committee aimed at creating at competitive and

efficient banking system.

Another committee which is Khan Committee was instituted by RBI in December, 1997 to

examine the harmonization of the role and operations of development financial institutions

and banks. It submitted its report in 1998. The major recommendations were a gradual more

towards universal banking, exploring the possibility of gain full merger as between banks,

banks and financial institutions.

Then the Verma Committee was established this committee recommended the need for

greater use of IT even in the weak public sector banks, restructuring of weak banks but not

merging them with strong banks, VRS for at least 25% of the staff. The Banking Sector

reforms aimed at improving the policy frame work, financial health and institutional

infrastructure, there two phase of the banking reforms. Narasimham Committee provided the

blue print for the initial reforms in banking sector following the balance of payment crisis in

1991.

Phase I: Narasimham Committee (1991)

- Deregulation of the interest rate structure.

- Progressive reduction in pre-emptive reserves.

- Liberalization of the branch expansion policy.

- Introduction of prudential norms.

- Decline the emphasis laid on directed credit and phasing out the confessional rate of interest

to priority sector.

15 | P a g e

- Deregulation of the entry norms for private sector banks and foreign banks.

- Permitting public and private sector banks to access the capital market.

- Setting up to asset reconstruction fund.

- Constituting the special debt recovery tribunals.

- Freedom to appoint chief executive and officers of the banks.

- Changes in the institutions of the board.

- Bringing NBFC, under the ambit of regulatory framework.

16 | P a g e

Phase Ii: Narasimham Committee Ii (April 1998)

(I) Capital Adequacy:

- Minimum capital to risk asset ratio be increased from the existing 8 percent to 10 percent by

2002.

- 100 percent of fixed income portfolio marked to market by 2001.

- 5 percent market risk weight for fixed income securities and open foreign exchange position

limits.

- Commercial risk weight (100%) to government guaranteed.

(Ii) Asset Quality

- Banks should aim to reduce gross NPAs to 3% and net NPA to zero percent by 2002.

- Directed credit obligations to be decline from 40 percent to 10 percent.

- Government guaranteed irregular accounts to be classified as NPAs and provide for.

- 90 day overdue norms to be applied for cash based income recognition.

(III) Systems and Methods

- Banks to start recruitment from market.

- Overstaffing to be dealt with by redeployment and right sizing via VRS.

- Public sector banks to be given flexibility in remuneration structure.

- Introduce a new technology.

(IV) Industry Structure

Only two categories of financial sector players to emerge. Banks and non Bank finance

companies.

- Mergers to be driven by market and business considerations.

- Feeble banks should be converted into narrow banks.

17 | P a g e

- Entry of new private sector banks and foreign banks to continue.

- Banks to be given greater functional autonomy & minimum government Shareholding 33

percent for State Bank of India, 51 percent for other Public Sector Banks.

(V) Regulation and Supervision

- Board for financial regulation and supervision to be constituted with statutory Powers.

- Greater emphasis on public disclosure as opposed to disclosure to regulators.

- Banking regulation and supervision to be progressively de linked from monetary policy

(VI) Legal Amendments

- Broad range of legal reforms to facilitate recovery of problem loans.

- Introduction of laws governing electronic fund transfer.

Many of the important recommendations of Narasimham Committee II have been accepted

and are under implementation the second generation banking reforms concentrate on

strengthening the foundation of the banking system by structure technological up graduation

and human resource development.

1.11 Historical Perspective of Mergers and Acquisition in Indian Sector in India

From 1903 to 1905

History reveals that most of the mergers which took place in the first phase were considered

unsuccessful as they were not efficient enough to attain the required standards, Then in 1903

the financial system of the world was shattered, followed by a stock market collapse in 1904,

Even this phase experienced a rather bad experience, It was then that the apex judiciary body

issued directions on the anti-competitive mergers. It stated that these mergers could be de-

merged by implementing the Sherman Act.

From 1916 to 1940

The mergers and acquisitions process was triggered by the financial boom which came soon

after the World War I. The expansions further helped in the various developments in the

fields of science and technology. It also saw the emergence of infrastructure firms which

18 | P a g e

provided services for required growth in railroads and transportation by automobiles, The

government strategies laid in 1920s made the corporate ambiance supportive enough for

firms to work in harmony; Financial institutions like government and private banks also

played a significant part in aiding the mergers and acquisitions process. These were also

horizontal mergers. But like before this phase also ended with a huge decline in the stock

market which was further followed by great depression,

From 1965 to 1970

These mergers were characterized by increasing stock and interest rates. During this phase

the bidding companies were small in size and fiscal strength than the target companies. These

kinds of mergers were sponsored mainly by equities and eliminating the roles of the banks. In

1968, the Attorney General decided to break the multinationals which resulted in the end of

merging activities but was shattered decision because of the inefficient performance of the

multinationals, but the mergers which became successful and made a mark came up in 1970s.

From 1981 to 1989

This phase experienced acquisitions of companies which were much bigger in size as

compared to the firms in previous phases. Oil and gas, pharmaceuticals, banking etc came up

which were nationally or internationally merged. This phase came to an end with the

introduction of anti acquisition laws, restructuring of fiscal organizations and the Gulf War.

From 1992 till 2000

This period was stimulated by globalization, upsurge in stock market boom and deregulation

policies. Major mergers were seen taking place between telecoms and banking giants out of

which most were sponsored by equities. Now there was also experienced a change in the

attitude of the industrialists and they started thinking it as a more profitable thing.

From 2001 till now

Volume of mergers and acquisitions in India in 2007 are grew two fold from 2006 and four

times compared to 2005. In 2007, the first two months alone accounted for merger and

acquisition deals worth $40 billion in India. Promising economic trends, investments by

corporate and revised government policies motivated the participation of many

conglomerates to contribute in the acquisition trend_ This has led to a participation of

19 | P a g e

different sector to enter into a merger or acquisition deal. Sector wise, large volumes of

mergers and mergers and acquisitions in India have occurred in finance. telecoms. FMCG,

construction materials, automotive and metals

In the telecoms sector, an increase of stakes by Sing Tel from 26,96 % to 32.8 % in Bharti

Telecoms was worth $252 million (Rs. 10.9 billion in Indian currency). In the Foods a

controlling stake of Shaw VVallace and Company was acquired by United Breweries Group

owned by Vijay Mallya. In the banking sector, important mergers and acquisitions in India in

recent years include the merger between IDBI and its own subsidiary IDBI Bank. Then it was

acquisition of centurion bank of Punjab by HDFC bank in 2008 and ICICI bank acquired

Bank of Rajasthan in 2010.

Considerably influenced by the merger and acquisition trends and they are further interested

in Indian markets. The process of mergers and acquisitions has gained substantial importance

in today's corporate world. This process is extensively used for restructuring the business

organizations. In India, the concept of mergers and acquisitions was initiated by the

government bodies. All over the world, in developing as well as developed countries.

Number of mergers and acquisitions are recorded every year. The recent trends suggest that

most of the mergers and acquisitions actually led to the decrease in number of public

undertakings and increase in number of private enterprises. This happened as many public

organizations all over the world, were either merged into or acquired by big private

institutions. The reason of this particular Merger and Acquisition Trend was the emergence

and rapid growth of Private Equity Funds.

Moreover, the regulatory environment of the publicly owned companies and the urge to attain

growth of short term earnings were also behind the specific trend of Mergers and

acquisitions. Mergers and acquisitions resulting into privatization of the public undertakings

took place not only in Europe, but also in North America, China and even in country like

Brazil. In Europe this type of Mergers and acquisitions took place significantly, as the market

for public-to-private investment was quite strong in Europe. India is arguably the world's

most promising emerging market, on its current growth scenario; India is expected to become

the world's third largest economy by 2050.

20 | P a g e

1.12 Banking sector Profile

Banking sector has always been regarded as an important and necessary financial sector in

the economy of India. Without a sound and effective banking system in India it cannot have a

healthy economy the banking system of India has not only become hassle free but it is also

able to meet new challenges posed by the technology and any other external and internal

factors. The basic origin of banking is very old during the pre-Independence days. Earlier

there were a group of rich dominating people called The Famindars and The Sahukars. These

were regarded as some of the upper. Lass people who had a strong financial background and

used to lend money to the poor farmers at their own preferable rate of interest. Therefore we

can say that the banking sector in India is a very old sector which has supported the Indian

economy from olden days,

The banking sector has provided a strong backbone for the Indian economy The International

banking scenario has shown major turmoil in the past few years in terms of mergers and

acquisitions. Deregulation has been the main driver, through three major routes - dismantling

of interest rate controls, Iremoval of barriers between banks and other financial

intermediaries, and lowering of entry barriers, It has lead to dis-intermediation, investors

demanding higher returns, price competition, reduced margins, falling spreads and

competition across geographies forcing banks to look for new ways to boost revenues.

Consolidation has been a significant strategic tool for this and has become a rationalization,

worldwide phenomenon. driven by apparent advantages of scale-economies. geographical

diversification, and lower costs through branch and staff r cross-border expansion and market

share concentration The new Basel II norms have also led banks to consider M&As. In India

the banks are being segregated in different groups. Each group has their own benefits and

limitations in operating in India. Each has their own dedicated target market. Few of them

only work in rural sector while others in both rural as well

as urban. Many even are only catering in cities. Some are of Indian origin and some are

foreign players. They differ in their relation with the customers, their mode of operation, etc,..

The RBI has shown certain interest to involve more of foreign banks than the existing one

recently. This step has paved a way for few more foreign banks to start business in India.

21 | P a g e

Currently banking in India is generally fairly mature in terms of supply, product range and

reach-even though reach in rural India still remains a challenge for the private sector and

foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered

to have dean, strong and transparent alance sheets relative to other banks in comparable

economies in its region. The Reserve Bank of India is an autonomous body, with minimal

pressure from the government, The stated policy of the Bank on the Indian Rupee is to

manage volatility but without any fixed exchange rate-and this has mostly been true. With the

growth in the Indian economy expected to be strong for quite some time-especially in its

services sector-the demand for banking services, especially retail banking, mortgages and

investment services are expected to be strong. One may also expect M&As, takeovers, and

asset sales. With years, banks are also adding services to their customers

The Indian banking industry is passing through a phase of customers market The customers

have more choices in choosing their banks. A competition has been established within the

banks operating in India. With stiff competition and advancement of technology, the services

being provided by the banks has become more easy and convenient. The past days are

witness to an hour wait before withdrawing cash from accounts or a cheque from north of the

country being cleared in one month in the south. A healthy banking system is essential for

any economy striving to achieve good growth and yet remain stable in an increasingly global

business environment.

The Indian banking system, with one of the largest banking networks in the world, has

witnessed a series of reforms over the past few years like the .dereg u I ation of interest rates,

dilution of the government stake in public sector banks (PSBs), and the increased

participation of private sector banks, The growth of the retail financial services sector has

been a key development on the market front. Indian banks (both public and private) have not

only been keen to tap the domestic market but also to compete in the global market place.

New foreign banks have been equally keen to gain a foothold in the Indian market. The

banking system in India is significantly different from that of other Asian nations because of

the country's unique geographic, social and economic characteristics. India has a large

population and size. A diverse culture and extreme disparities in income, which are marked

among its regions. There are high levels of illiteracy among a large percentage of its

population but, at the same time, the country has a large reservoir of managerial and

technologically advanced talents.

22 | P a g e

The Indian financial system comprises the following institutions] 1 Commercial banks a.

Public sector b. Private sector c. Foreign banks d. Cooperative institutions (I) Urban

cooperative banks (ii) State cooperative banks (iii) Central cooperative banks 7 Financial

institutions a. All-India financial institutions (AIRs) b. State financial corporation's (SFCs) c.

State industrial development corporations (SIDCs) 3, Non banking financial companies

(NBFCs) 4. Capital market intermediaries

1nThe Indian Banks are governed by a supreme authority Reserve Bank of india, RBI. The

central bank of the country is the Reserve Bank of India (RBI). Was established in April 1935

with a share capital of Rs. 5 crore on the basis f the recommendations of the Hilton Young

Commission. The share capital ' as divided into shares of Rs. 100 each fully paid which was

entirely owned y private shareholders in the beginning. The Government held shares of

Itiominal value of Rs. 2, 20,000.

Reserve Bank of India was nationalized in the year 1949. The general Lperintendence and

direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor

and four Deputy Governors, one Government official from the Ministry of Finance, ten

nominated Directors by the Government to give representation to important elements in the

economic life of the country, and four nominated Directors by the Central Government to

represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New

Delhi. Local Boards consist of five members each Central government appointed for a term

of four years to represent territorial and canonic interests and the interests of co-operative and

indigenous banks he Reserve Bank of India Act. 1934 was commenced on April 1, 1935 the

ct, 1934 (II of 1934) provides the statutory basis of the functioning of the bank.

The Bank was constituted for the need of following: To regulate the issue of banknotes to

maintain reserves with a view to securing monetary stability and to operate the credit and

currency system of the country to its

1.13 Mergers and acquisitions (Global scenario)

Business Combinations are a critical part of the fabric of doing business in a free market

economy and are deeply ingrained in the business strategy the world over. Such combinations

include mergers, acquisitions and other forms of corporate restructuring undertaken both

within a country and across international boundaries. The intensity of M&A activity, in US in

23 | P a g e

1990s was unlike any other year in US history. Following a drop in both the number of

transactions and the total dollar volume during the 1990 recession, M&A activity rebounded

sharply in 1992. Deals during the nineties were prompted more by strategic considerations

and used less debt as compared to 1980s. The financial environment which was quite

favorable in terms of vibrant stock markets and relatively low interest rates facilitated the

resurgence of M&A activity in US. According to the data furnished by Thomson Financials,

the global M&A activity jumped by 30% in the year 2006 to hit an all time record of $3.7

trillion surpassing the year 2000 high of $3.4 trillion. The USA which accounted for over

40% global M&A activity was the most targeted country for acquisitions. The UK was the

most targeted European country for acquisitions, accounting for cross border and domestic

transactions valued at $339 billion.

In the meantime according to the data released by Dealogic, a deal tracking firm, Europe had

overtaken the United States of America (USA) as the most targeted region, accounting for

$1.34 trillion or about 40% of the total deal value compared with the USA share of 36%, or

$1.22 trillion. This increase in M&A activity in Europe was caused by demographics and

economic changes which were the major factors driving M&A activity as an integral part of

the overall corporate restructuring activity in Europe according to experts. The cash surplus

held by private equity firms (PEs) and public companies, the interest rates which touched

their historic lows and the willingness of banks to provide financing were found to be the key

factors for the global surge in M&A activity in 2006. The year 2007 was again a record year

for global M&A volumes which were estimated at a record figure of around $4.4 billion

according to Thomson Financials and $ 4.7 billion according to Dealogic. Volumes in Europe

were higher than in the US for the first time in five years and only the second time ever:

$1.78 trillion vs. $1.57 trillion according to Thomson Financial. This has been partially

attributed to the lag in Europe being affected by the credit markets.

1.14 Growth of Mergers and acquisitions

Mergers and acquisitions (M&A) have been a popular strategy of business expansion

worldwide. Literature on the subject accounts for growth of M&A by way of several waves

that are caused by some favourable business climate and end on account of economic or

regulatory reasons. Lipton, M (2006) reports such merger waves for US that has seen

multiple waves of mergers over a long period in its corporate history.

24 | P a g e

The first period — 1893-1904 was the time for horizontal mergers and created the principal

steel, telephone, oil, mining, railroad, and other giants of the basic manufacturing and

transportation industries in the US. The Panics of 1904 and 1907, anti-trust laws, and then the

First World War are pointed to as the causes of the end of the first wave. The second wave

from 1919 to 1929 significantly increased vertical integrations in US but ended with the

Great Depression and the 1929 Crash. The third wave of 1955 to 1969 gave birth to

conglomerates with companies diversifying into new industries and areas. The wave ended

with the crash of conglomerate stocks in

1969-70. while the fourth wave, 1980-89 was the period of takeovers and hostile bids that

ended with collapse of junk bond market, the fifth wave 1993-2000 was the era of mega deals

for US. During this time, companies of unprecedented size and global sweep were created on

th assumption that size matters. This period also, however, ended with slowdown in

important sectors such as telecommunication and media and technology and bursting of IT

bubble.

Similarly, Europe also has witnessed a wave of takeovers since middle 1950s and

subsequently in 1980s. In recent times, such merger wave phenomenon is observed in

emerging markets with Asian economies experiencing a large growth in M&A transactions.

Deals by companies in emerging markets now account for 30% of global M&A activity.'

Mergers and acquisitions deals worldwide reached an all time high in 2006, with a total value

of $3.7 trillion, surpassing the 2000 high of $3.4 trillion [Dobbs, Goedhart and Suonio

(2006)]. The analysis of authors indicate that US was the most targeted country for

acquisition representing over 40% of global M&A activity, while UK was the most targeted

European country for acquisition with $339 bn of cross-border and domestic transactions.

During the year 2010, the global M&A activity increased 33% over 2009. 2 Fig.1.1 clearly

depicts the growing interest of corporate firms around the world in mergers and acquisitions.

It can be observed that the number of M&As have announced during the period 1988 to 2006,

have increased from 2,856 in 1988 to 23,708 in the year 2006 with maximum number of

deals announced reported at 40,141 in the year 2000.

Nearly half (44%) of privately held businesses in the BRIC (Brazil, Russia, India and China)

economies are planning to grow by acquisition in 2011.

25 | P a g e

1.15 Global Financial Crisis and global M&A point of view for the future

The global financial crisis has pushed many countries around the globe into deep recession

and has dramatically affected their business plans and outlook the world over. The global

economy plunged into recession in the latter half of the year 2008. This deepened in the early

months of 2009, as global trade contracted sharply, investment was slashed and consumer

demand faded. This nine month period coincided with the steepest decline in global economy

in the post war era. This period witnessed a combination of severe banking crises in many

mature economies like US, the credit squeeze, massive house price corrections and dramatic

collapse in fixed investments. While the recession may be easing, as a sequel to the massive

fiscal stimulus measures taken by the governments of the countries concerned and world

bodies, the recovery is going to be slow and patchy.

Mike Hughes, global leader-mergers and acquisitions for Grant Thornton International while

attributing the large scale reduction in transaction volumes to the tight lending policies

exuded optimism that these turbulent times could also provide attractive opportunities to cash

rich/well capitalized businesses to register substantial improvement in their growth by

acquiring ailing but fundamentally sound rivals. The next 12 months are likely to be a buyer’s

market offering opportunities to make strategic acquisitions at attractive valuations” (Mergers

and acquisitions release, 2009-Thornton). M&A activities gained traction globally in the

fourth quarter of 2009,witnessing a rise in value by 46% to $739.6 billion which was $150

billion higher than any other quarter in 2009(Business Standard,20th March,2010). This has

clearly thrown a hint at a resurgence of M&A activity in the Year 2010 according to

Dealogic.

1.16 M&A in the Indian context after economic reforms

The Indian economy has experienced a major structural transformation following the

introduction of economic reforms by the Government of India in 1991. The forces of

Liberalization, Privatization and Globalization unleashed by these reforms have brought

about a sea change in the traditional Indian business mindset. Indian business leaders started

thinking in terms of inorganic growth both within and beyond the borders of the country. In

this backdrop, M&A presented a viable alternative for the businesses aspiring to grow

quickly and gain the benefits of sustainable competitive advantage by realizing the benefits of

scale and scope economies, fast changing technologies for effectively facing rapidly

26 | P a g e

intensifying domestic and international competition. Many corporate embarked upon several

corporate restructuring activities like M&As, Joint Ventures, Spin-offs and Divestitures. The

major industry sectors influenced by the forces of consolidation in India, though varied from

time to time, were mostly in the realm of infrastructure sectors like cement, power and steel,

drugs, telecommunications, media & entertainment and banking. A major change evident

after 2002 in the corporate restructuring activity in India is that of Indian companies making

forays into developed foreign markets through acquisitions and joint ventures (JVs). During

this period India also became an attractive destination for foreign direct investment (FDI) as

the inbound acquisitions also gained considerable momentum. Merger and Acquisition

activity in India comes under the purview of the various provisions of the Companies Act,

Securities Exchange Board of India (SEBI) and Competition Commission Act of India, 2002.

In the year 2009, M&A and PE investments in India almost halved both in volume and value

terms due to the economic slowdown precipitated by the global financial crisis. According to

Grant Thornton’s Deal Tracker report, the total value of M&A and PE deals announced in

2009 stood at $21.20 billion as against $41.54 billion in 2008. PE and qualified institutional

placement in the same year was at $11.17 billion ($10.59 billion). The M&A and PE

investments in 2007 were of the order of $70.14 billion. There were 488 deals in the year

2009 against over 766 in 2008.Domestic M&A volumes dipped to 142 from 172 in 2008.

Outbound M&A was down at 64(196) while inbound M&A to 61(75% to $ 3.11 billion from

$12.55 billion in 2008, the Russian 86). Coming to the value of deals, the value of inbound

deals dipped by about Government’s acquisition of a strategic stake in Sistema Shyam

Telecom for $676 million was the largest inbound deal in 2009 while Daichi’s acquisition of

Ranbaxy Technologies for $4.5 billion was the largest inbound deal in 2008. The value of

outbound deals declined to $1.12 billion ($13.19 billion) in 2009. However, the top two

outbound deals in 2008-Tata-Jaguar Land Rover and ONGC-Imperial accounted for almost

40% of the outbound deals. Top deals occurred in the oil and gas sector followed by telecom,

pharmaceuticals, healthcare and biotech while in the year 2008 the top deals were spread

across various sectors. It may also be noted that in 2008, cash-rich Indian companies like

Infosys Technologies made new acquisitions both in India and abroad following a steep drop

in the valuations of target companies.

According to global M&A(Mergers and acquisitions) intelligence service, Merger market, the

overall improvement in economic and business environment of India has resulted in an

27 | P a g e

impressive (166.5%) jump in the M&A deals (both inbound and outbound being nearly equal

in volume terms at around $25 billion) in the year 2010 as against 2009.Telecom sector got

the lion’s share with 16 transactions amounting to $19.6 billion while Bharti's acquisition of

Zain Africa for $10.7 billion contributed significantly to the M&A pie in the year 2010.

1.17 Motives for Mergers and acquisitions

The modern trend has been towards related mergers and acquisitions. Infrastructure-related

industries dominated Mergers and acquisitions in 2008 (accounting for over 45% of the deals

in value terms). According to Bundeep Singh Rangar, Chairman, Indus View Advisors Ltd,

Europe’s fastest-growing Indian Mergers and acquisitions firm advising multinational

companies on business opportunities emanating from India’s rapidly growing economy, the

dominance of this sector in Mergers and acquisitions symbolizes the growing need for world

class facilities, adoption of globally acceptable best practices, experienced global

management expertise & technology applications to accelerate growth in the Indian economy.

Grant Thornton (2006) conducted a survey of Indian corporate managers across various

sectors. Their findings revealed that Mergers and acquisitions continued to be a significant

form of business strategy for Indian corporate.

The recent trend has been towards related mergers and acquisitions. The move towards

divesture of non-core business too has lent support to mergers and acquisitions. In India

Industries operating in the sector of telecommunication, broadcasting, utilities and

pharmaceuticals have witnessed consolidation leading heavy mergers and acquisitions. at this

time the strategic forces aim at getting a bigger size of the market, enhancing product mix

through R&D, to achieve economies of scale and synergy, strengthening ownership control

and guarding against Acquisitions. Through adopting these strategic considerations

companies expected to focus on their core competencies through core consolidation and stay

economical.

1.18 M&As in the Indian Banking Sector

During the last two decades, the Indian banking sector has undergone a metamorphic change

following the economic reform process initiated by the Government of India. The forces of

globalization, deregulation and liberalization unleashed by the economic reforms, set in

motion in 1991, have transformed the face of the Indian financial services sector landscape ,

28 | P a g e

including that of the Indian banking sector in a big way. There has been a paradigm shift

from a regulated to a deregulated environment. Earlier, the banking industry was largely a

nationalized industry (since 1969). The larger developments in the economies across the

globe, the economic crisis in 1991 & more recently the sub-prime crisis and the changing

outlook of the policy makers in India have forced the pace of change of the Indian banking

industry. The economic liberalization and deregulation measures intiated in the 1990s have

opened up the doors to foreign competition and made the markets more efficient and

competitive. Continuous innovation and keeping pace with technological change have

become a must for survival of the firms in the financial services industry including the

banking sector. The developments in the Indian banking sector have witnessed quite a few

mergers and acquisitions (M&A).

The banking sector in India has made remarkable progress since the economic reforms in

1991.The entire financial sector - the banking sector in particular is of fundamental

importance to a developing economy. The Narasimham Committee report in August 1991

highlighted the need for financial sector reforms and fostering competitive spirit in the Indian

banking sector. The report also suggested a roadmap to achieve this objective. The central

theme of the reforms was straight forward: providing the much needed platform to the Indian

banks to operate from a vantage point on the basis of operational flexibility and functional

autonomy, thereby improving efficiency, productivity and profitability. The Government did

not accept all the recommendations due to political compulsions and the practical difficulties

in implementation.

In 1997, a second committee was set up (under M. Narasimham) to specifically suggest

further measures for banking sector reforms. The second Narasimham committee, in its report

submitted in April, 1998 had suggested, inter alia mergers among strong banks, both in the

public and private sectors. Since the onset of reforms in 1990, according to the RBI report, 22

bank amalgamations, have taken place in India (up to 2007). While, the amalgamations of

Indian banks were mostly driven by weak financials as reflected in the continuously

deteriorating balance sheets of the merging entities prior to the year 1999, in the post-1999

period there have been mergers between healthy banks prompted by business and commercial

considerations. The mergers of the largest commercial bank of India, SBI with State Bank of

Saurashtra and State Bank of Indore (in progress) are the latest among such mergers. A table

29 | P a g e

depicting the size and net profits of major public sector banks of India as at the end of March,

2009 is furnished below.

1.19 M&A in Banking Industry

Banking system is the bloodline of any economy and banks are trustees of public money. The

depositors therefore, have more stakes in the welfare of banks than the share holders. Failure

of a bank has more systemic implications than say, the failure of a manufacturing company.

Laws governing regulation and supervision of banks in all countries therefore focus on

protecting the interests of depositors. Naturally, fillip to bank consolidation in many countries

came through regulatory and governmental actions in public interest. Large scale public

funding has also taken place in a number of countries to prevent failure of banks/banking

system.

United States witnessed large scale bank failures in the eighties (Savings and Loan

Institutions) and the Government came to the rescue of banking system through liberal FDIC

(Federal Deposit Insurance Corporation) support. An estimated USD 100 Billion was sent on

the rescue. In the process the Government encouraged mergers among banks by giving

incentives to the banks taking over assets and liabilities of failed banks. Subsequent M & A

activity in the USA in nineties and in recent years have been motivated by market forces.

Nearer home, we have the Asian experience in bank consolidation post 1997 economic

meltdown. The crisis brought out the vulnerability of a weak banking system to economic

shocks. Here again, the governments had come up with funding support and actively

encouraged consolidation among banks. Let us look at some of the initiatives taken in this

region for strengthening the banking system.

Indonesia witnessed large scale infusion of public funds into the banking system through a

specialized restructuring agency. Regulatory forbearance was also present in good measure to

facilitate bank recovery. As against Basel Capital adequacy norm of 8%, banks were allowed

to operate with 4% as an interim measure. Only banks which had Capital adequacy ratio

reduced to below - 25% were marked for immediate closure. Consolidation among banks was

actively encouraged and FDI was allowed up to 99%. Net result was that the number of banks

in Indonesia which stood at 239 in 1996 came down to 138 by 2003. Consolidation was most

visible among private banks with the number of such banks coming down from 164 to 76

30 | P a g e

during the period. Post restructuring, the banks are now healthier and their branch network

and coverage has increased significantly in recent years.

In Malaysia Bank Negara, the Central Bank implemented a well crafted financial master plan

aimed at strengthening the domestic banks, create a level playing field for foreign banks and

open banking sector to global competition. The regulator used suasion to create 10 anchor

banks through the consolidation of 22 banks and 39 finance companies. FDI capped at 30% is

expected to be increased in the second phase of reforms scheduled to commence from 2007.

In Singapore, there are 3 main banking groups and they have given boost to consolidation

process not only within the country, but also in South Korea and Malyasia

Thailand has implemented a Financial Sector Master Plan aimed at removing obstructions to

M & A and also allows FDI flow to strengthen the banking system.

Japan is a country which has witnessed a virtual collapse of the banking system along with

economic stagnation which lasted over 15 years. Japan had some of the leading names in

global banking arena. The economic slowdown saw the NPA levels going up over the roofs

and the banks virtually looking for government‘s support. Needless to say, the low interest

rate regime (near zero rates) would have eased their sufferings somewhat. However, the

banking system has recovered in recent years helped by liberal financial assistance from the

government and an environment of extremely loose monetary policy. Consolidation process

which was kicked off as restructuring strategy has resulted in emergence of three large banks

viz. Mitsubishi UFJ, Mizuho and Sumitomo Mitusui.

Today NPA levels have come down to an acceptable level of 2% from a peak level of 8.4%

in the year 2002. Capital adequacy ratios have improved above the Basel Benchmark of 8%.

Banks have started showing profits and there is a pick-up in their credit portfolio. Japanese

banks may still have a long way to go as their ratings continue to be low and they are heavily

dependant on interest income with heavy reliance on low margin corporate loans.

Another interesting development taking place in Japan is the government move to privatize

the postal agency, which doubles as a financial institution that holds the world‘s largest pool

of household savings. The Housing Loan Corporation managing the advances of the postal

agency had, at one time, nearly 50% of all mortgage loans in Japan. As part of privatization

this Corporation is being wound up with the assets getting transferred to the banking system.

31 | P a g e

The privatisation of the postal agency would see the emergence of a new bank (named as

Yacho Bank) which could probably be one of the largest banking entities in the world.

1.20 M&A in Indian Banking

Mergers and acquisitions are not an unknown happening in Indian Banking. In fact, the

predecessor of State Bank of India, the Imperial Bank of India was born out of consolidation

of three Presidency Banks way back in 1920. In fact there were several cases of bank failures,

mergers and acquisitions which were reported in pre-independence period dating back to

even early 19th Century. Proper regulation and control of banks and intervention by the

regulator in the event of a crisis came into being with the passing of Banking Regulation Act

in 1949.

However, forced merger and amalgamation as a tool to provide relief to ailing banks besides

protecting public and depositor confidence in banking system came into being only in 1960

when Section 45 inserted in BR Act. Panic created by the Nath Bank in the fifties and Laxmi

bank and Palai Central bank in 1960 had prompted this legislative move. The first half of the

sixties saw 45 forced mergers under section 45. In the post nationalization period also a

number of mergers and acquisitions took place, most of them under Section 45. Interestingly

almost all of them were amalgamations of failed private banks with one of the Public sector

banks.

In the recent times, we have seen some M&A as voluntary efforts of banks. Merger of Times

Bank with HDFC Bank was the first of such consolidations after financial sector reforms

ushered in 1991. Merger of Bank of Madura with ICICI Bank, reverse merger of ICICI with

ICICI bank, coming together of Centurion Bank and Bank of Punjab to form Centurion Bank

of Punjab and the recent decision of Lord Krishna Bank to merge with Federal Bank are

voluntary efforts by banks to consolidate and grow.

Consolidation fever has not been confined to the Scheduled Commercial Banks. We have

seen consolidation process gaining strength in other sectors as well. We had 196 RRBs since

1989. The last year and a half has seen their numbers dwindle to 103 with merger of RRBs

sponsored by commercial banks within the same state. This move is expected to bring most

of the RRBs into profit making entities capable of playing their role in the way they were

expected to do when the RRB Act was passed in 1996.

32 | P a g e

Well, the big question is ―When will we see M&A activity among Public Sector Banks?‖

Public Sector Banks form nearly 75% of Indian Banking and we need to see consolidation in

this sector for the Indian Banking sector to stand up and be counted in the Global Banking

map.

1.21 History of Merger and acquisition in India

Mergers and acquisitions in Indian banking sector have initiated through the

recommendations of Narasimham committee II. The committee recommended that merger

between strong banks/ financial institutions would make for greater economic and

commercial sense and would be a case where the whole is greater than the sum of its parts

and have a “force multiplier effect”. (Narasimham committee II, chapter, para 5.13 -5.15).

Table 1 provides a list of banks that have been merged in India since post-liberalization in the

country. Mergers and acquisitions in Indian banking sector have initiated through the

recommendations of Narasimham committee II. The committee recommended that merger

between strong banks/ financial institutions would make for greater economic and

commercial sense and would be a case where the whole is greater than the sum of its parts

and have a “force multiplier effect”. (Narasimham committee II, chapter, para 5.13 -5.15).

Banks merged in India since Liberalization

Schedule of M & A deals of Indian Banks- Post Reform Period

Merger

Year

Acquirer Bank Target Bank Motive of merger Type of Merger

1993 Punjab National Bank

New Bank of Bank

Restructuring of Weak Bank Forced Merger

1993 Bank of India Bank of Kerala Ltd. Restructuring of weak bank Forced Merger

1995 State Bank of India Kashinath Seth

Bank Restructuring of Weak Bank Forced Merger

33 | P a g e

1997 Oriented Bank of

Commerce

Punjab Co-operative

Bank Ltd Restructuring of Weak Bank Forced Merger

1997 Oriented Bank of

commerce Bari Doab Bank Ltd Restructuring of Weak Bank Forced Merger

1999 Union Bank of India Sikkim Bank Ltd Restructuring of Weak Bank Forced Merger

2000 HDFC Bank Ltd Times Bank To achieve scale and scope

economies

Voluntary

Merger

2001 ICICI Bank Bank of Madura To achieve scale and scope

economies

Voluntary

Merger

2002 ICICI Bank ICICI Limited To achieve the objective of

universal banking

Voluntary

Merger

2002 Bank of Baroda Benaras State Bank Restructuring of Weak Bank Forced Merger

2003 Punjab National Bank Nedungadi Bank Ltd Restructuring of Weak Bank Forced Merger

2004 Bank of Baroda South Gujarat Local

Area Bank Restructuring of Weak Bank Forced Merger

2004 Oriented Bank of

Commerce Global Trust Bank Restructuring of Weak Bank Forced Merger

2005 Centurion Bank Bank of Punjab To achieve scale and scope

economics

Voluntary

Merger

2006 Federal Bank Ganesh Bank of

Kurandwad Restructuring of Weak Bank Forced Merger

2006 IDBI Bank United western Restructuring of Weak Bank Forced Merger

34 | P a g e

Bank

2006 Centurion Bank of

Punjab Lord Krishna Bank Expansion of size

Voluntary

Merger

2007 ICICI Bank Sangali Bank Expansion of size Voluntary

Merger

2007 Indian Overseas Bank Bharat Overseas

Bank Restructuring of Weak Bank

Compulsory

Merger

2008 HDFC Bank Centurion Bank of

Punjab

Expansion of size and benefits

of scope economics

Voluntary

Merger

2010 ICICI Bank Ltd Bank of Rajasthan Expansion of size Voluntary

Merger

Source: Compiled from report on trend and progress of banking in India, RBI, Various

issues.

1.22 Structural Contents of the Thesis

This thesis is divided into 7 chapters.

Chapter One:

Conceptual Introduction of Merger and Acquisition:

Merger is defined as combination of two or more companies into a single company where

one survives and the other lose their corporate existence. Mainly four types of merger and

acquisitions are there and two accounting methods for merger and acquisition are used. More

over in this chapter difference between merger and acquisition, difference between

acquisition and takeover, Merger and Acquisition Process, Significance of merger and

acquisition, Requirement of merger and acquisition, Motives behind merger and acquisition,

Benefits of merger and acquisition, Limitations of merger, Impact of merger and acquisition,

35 | P a g e

Financial accounting for merger and acquisition, Merger and acquisition strategies, Merger

and acquisition laws, Merger and acquisition in India, Merger and acquisition in world have

been included and discussed by the researcher.

Chapter Two:

The second chapter of this research work contains elaborate review of literature related to

different constructs used in this study.

This is aimed at enhancing the present level of understanding in the area of mergers and

acquisitions in the national and international scenario, gain insights into the success/failure of

mergers and to identify problem for the purpose of this research study. The brief summary of

the chapter is presented.

Chapter Three:

Research Methodology:-

The title of the present study is Impact of Mergers and acquisitions in Private Sector Bank’s

“A Study from Financial Perspective” the present study is mainly intended to examine the

financial performance of merged Banks five years before merger and five years after merger.

This study is mainly based on secondary data published by the selected banks in its annual

reports and accounts. The main objective of the present research is to find out the impacts of

merger and acquisitions on the financial performance of the selected banks.

Various statistical techniques like average, index number, the standard deviation have been

used and student ‘T’ test has been applied to test the validity of two hypothesis namely (1)

Null Hypothesis and (2) Alternate Hypothesis. And finally the limitations of the present

research have been presented.

Chapter Four:

In this chapter the brief history of the selected 10 banks, list of board of directors, products

and operations process, organization structure of the selected banks, distribution network and

its operations and services, products & services of each bank, list of associates and subsidiary

banks, major achievements of the selected banks, corporate governance report and social

responsibility, strength and weaknesses and future plans of the selected banks have been

discussed.

36 | P a g e

Chapter Five:

This chapter is about Data Analysis and Interpretation of Data.

In this chapter analysis of profitability, liquidity and leverage position of selected units under

study have been explained. Here meaning of profitability, liquidity and leverage, various

measurement of profitability, liquidity and leverage and framework of analysis of

profitability has been discussed. For analysis and interpretation of data the return on gross

capital employed ratio, return on net capital employed ratio, return on long-term funds ratio,

Earning per share ratio, gross profit ratio, net profit ratio and operating profit ratio for the

profitability analysis and current ratio, quick ratio, long-term debt to equity ratio, total debt to

equity ratio, fixed assets turnover ratio and working capital turnover ratio for the liquidity and

leverage analysis have been calculated by the researcher. Here various ratios of profitability,

liquidity and leverage have been tested with the help of student paired ‘t’ test.

37 | P a g e

Chapter Six:

This chapter is about Results and Discussions of Data.

Ratio analysis is one of the most important techniques to measure the profitability and

liquidity. It measures efficiency of asset management and efficiency of expense control. The

Results and Discussions of this study have been narrated as under: the return on gross capital

employed ratio, return on net capital employed ratio, return on long-term funds ratio, Earning

per share ratio, gross profit ratio, net profit ratio and operating profit ratio for the profitability

analysis and current ratio, quick ratio, long-term debt to equity ratio, total debt to equity ratio,

fixed assets turnover ratio and working capital turnover ratio for the liquidity and leverage

analysis have been considered by the researcher.

Chapter Seven:

This chapter is about conclusions and recommendations of the research study which is

followed by discussion about limitations of the study and also few words about scope of

further research.

1.26 Conclusion

This chapter deals with the concepts related to Mergers and acquisitions (M&As), Takeover,

Amalgamations, Consolidations along with the motives of mergers at length. It also throws light

on the global and Indian merger and acquisitions scenario. The global Scenario provides an

insight in to the projections relating to merger and amalgamations worldwide (Europe, Asia

pacific, South East Asia, North America, and South America). Keeping in mind the various

facets, it is concluded that the complexity of our legal system needs to be reduced but protecting

the rights of the domestic producer and customers should be accorded the highest priority. Having

discussed the global and Indian scenario of mergers and acquisitions (M&As), the next chapter to

study of deals mergers and amalgamations in the Indian Private sector Bank since economic

liberalization.