Mergers & Acquisitions in Banking sector

INDEX

Sr. No.

Content

Pg. No.

Chapter:1

I

Introduction

A. Defining Merger & Acquisition

B. Defining Merger & Acquisition

C. Clarification of Concept

D. Govt. Initiatives

E. Mergers consolidation the banking industry-legal prospective

Chapter:2

II

Need for Merger & Acquisition

1. Consolidation is inevitable and the needs for the Hour

2. Cost reduction through consolidation

3. Consolidation and core banking solution

4. Human resources management through consolidation

a)Object of M & As

b)Benefits and limitations of M & As

5. Problems in Consolidation Through M & As

Chapter:3

III

Merger Procedures

i. Merger Strategy

ii. Merger Procedure

iii. Various banks merged since 1990-2008

ssChepter:4

IV

Mergers/amalgamations in India- Legal framework

4.1 Before Liberalization

4.2 Post Liberalization period

4.3 Bank Mergers/amalgamations-Under various acts

Chepter:5

V

The impact of M & A to takeover holders

VI

Consolidation in Indian Banking Industry- The Current Scenario

Chepter:6

VII

Case Study

VIII

Conclusion

IX

Bibliography

X

Annexure

Chapter-1

I: INTRODUCTION

"Our Vision is to evolve into a Strong, Sound and Globally competitive financial system, providing integrated services to customers of all segments, leveraging on Technology and Human Resources adopting the best accounting and ethical practices and fulfilling corporate and social responsibilities towards all stakeholders".

- Shri. S C. Gupta Chairman & Mg. Director Indian Overseas Bank

Liberalization and deregulation process started in 1991 - 92 has made a sea change in the banking system. From a totally regulated environment, we have gradually moved into a market driven competitive system. Our move towards global benchmarks has been, by and large, calibrated and regulator driven. The pace of changes gained momentum in the last few years. Globalization would gain greater speed in coming years particularly on account of expected opening up of financial services under WTO. Four trends changed the banking industry world over, viz.

1. Consolidation of players through Mergers & Acquisitions.

2. Globalization of operations.

3. Development of new technology.

4. Universalisation of banking.

Consolidation through Mergers and Acquisitions (M & A) is considered one of the best ways of restructuring for effectively facing the competitive pressures. Mergers and acquisitions are the terms, which are hardly used in the banking industry as business deals, but are perceived as something, which can be trusted upon, by the ministry of Finance, Government of India. The Finance Minister, Mr. P. Chidambaram also said that the government is in favors of consolidation in the banking industry to achieve "World-Class" status. The Indian Banks' Association, under the Chairmanship of Mr. V. Leeladhar, recently constituted a Committee to examine the various facets that could lea: consolidation between banks. The present banking scene in India demands consolidated efforts, paving the way for healthy competition and improved vibrancy of banks. Banking the world over has been experiencing large-scale mergers and acquisitions, either between banks and financial institutions or between banks and major IT companies. All these mergers and acquisitions are driven by motivations like efficiency gains through synergies, economies of scale and scope of risk mitigation through diversification, cost effectiveness etc. some times; non-economic factors like prestige, market power, or market dominance have also influenced M&A activity.

A: DEFINING MERGER AND ACQUISITION

a): The main Idea

One plus one makes three: this equation is the special alchemy of a merger or acquisition. The key principle behind buying a bank is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies at least, thats the reasoning behind M & A.

This rational is particularly alluring to companies when times are tough. Strong companies will act to buy other companies to create a more competitive, cost-efficient bank. The companies will come together hoping to gain a greater market share or achieve greater efficiency. Because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone.

b): Distinction between merger and acquisition:

Although they are often uttered in the same breath and used as though they were synonymous, the term merger and acquisition mean slightly different things.

When a bank takes over another one and clearly becomes the new owner, the purchase is called an acquisition. From a legal point of view, the target bank ceases to exist and the buyer swallows the business, and stock of the buyer continues to be traded.

In the pure sense of the term, a merger happens when two firms, often about the same size, agree to go forward as a new single bank rather than remain separately owned and operated. This kind of action is more precisely referred to as a merger of equals. Both companies stocks are surrendered, and bank stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new bank, Daimler Chrysler, was created.

In practice however, actual mergers of equals dont happen very often. Often, one bank will buy another and, as part of the deals terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if its technically an acquisition. Being bought out often carries negative connotations. By using the term merger, dealmakers and top managers try to make the takeover more palatable.

A purchase deal will also be called a merger when both CEOs agree that joining together in business is in the best interests of both their companies. But when the deal is unfriendly that is, when the target bank does not want to be purchased it is always regarded as an acquisition.

So, whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target banks board of directors, employees and shareholders.

B: TYPES MERGER & ACQUISITION

a] MERGERS:-

Mergers can be economically classified into four categories Viz., Horizontal, Vertical, Congeneric or Concentric and conglomerate.

1) Horizontal Mergers:

Horizontal Mergers normally involve the joining together of the two or more companies which are producing essentially the same products or rendering the same services, products, or services which complete directly with each other (for example, sugar and artificial sweeteners) they involve a reduction in the number of competing firms in an industry and tend to create the greatest concern from an anti-monopoly or competition point of view. They generally contribute directly to lead the merged entities to dominant position of market power, thereby reducing or eliminating competition.

This is way in many countries, restrictive business practices legislation or, in other words, competition law, seeks to enforce strict regulations on the merging or integration of competitors. A direct result of integration or mergers of competitors into a single unit engenders growth of monopoly power. Horizontal mergers of even small enterprises may create conditions triggering concentration of economic power and oligopoly.

2) Vertical mergers:

Vertical mergers involve the merger of two companies, where one of them is an actual or potential supplier of goods or services to the other. In other words, they involve enterprises at different stages in the production and distribution process. An example of this is where a motor car manufacturer and a manufacturer sheet metal merge. Here, a supplying enterprise which mergers with a customer enterprise can extend its control over the market by foreclosing an actual or potential outlet for the products of its competitors. The object of the merger may be to ensure a source of supply or an outlet for products and the effect may improve efficiency.

3) Congeneric or Concentric merger:

In Congeneric or Concentric merger the acquirer and target companies are related through the basic technologies, production process or markets. The acquired company represents an extension of product line, market participations, technologies of the acquiring company. Concentric merger represents an outward move by the acquiring company from its current set of business into contiguous businesses. The acquiring company derives benefits by exploitation of a strategic resource and from entry into a related market having higher return than it enjoyed earlier. The potential benefit of the congeneric merger is high because these transactions offer opportunities to diversify around a common core of strategic resources.

4) Conglomerate mergers:

Conglomerate mergers neither constitute the bringing together of competitors nor have a vertical connection. It involves a predominant element of diversification of activities. This may consist of a company deriving most of its revenue from a particular industry, acquiring companies or entities operating in other industries for one or more of the following reasons:

1. obtain greater stability of earnings through diversification;

1. employ spare resources whether of capital or management;

1. obtain benefit of economies of scale; and

1. provide an outlet for the ambitions of management where anti-monopoly laws may make further growth in the companys own field impracticable.

b] ACQUISITION:-

As we can see, an acquisition may be only slightly different from a merger. In fact, it may be different in name only. Like mergers, acquisitions are actions through which companies seek economies of scale, efficiencies, and enhanced market visibility. Unlike all mergers, all acquisitions involve one bank purchasing anotherthere is no exchanging of stock or consolidating as a new bank. Acquisitions are often congenial, with all parties feeling satisfied with the deal. Other times, acquisitions are more hostile.

In an acquisition, a bank can buy another bank with cash, with stock, or a combination of the two. Another possibility, which is common in smaller deals, is for one bank to acquire all the assets of another bank. Bank X buys all of Bank Ys assets for cash, which means that Bank Y will have only cash (and debt, if they had debt before). Of course, Bank Y becomes merely a shell and will eventually liquidate or enter another area of business.

Another type of acquisition is a reverse merger, a deal that enables a private bank to get publicly-listed in a relatively short time period. A reverse merger occurs when a private bank that has strong prospects and is eager to raise financing buys a publicly-listed shell bank, usually one with no business and limited assets. The private bank reverse mergers into the public bank, and together they become an entirely new public corporation with tradable shares. Regardless of their category or structure, all mergers and acquisitions have one common goal: they are all meant to create synergy that makes the value of the combined companies greater than the sum of the two parts. The success of a merger or acquisition depends on how well this synergy is achieved.

C: CLARIFICATION OF CONCEPTS:

1) Mergers or Amalgamation:

Merger is define as combination of two or more companies into a single company where one survives and the others lose their corporate existence. According to the oxford dictionary, the expression mergers or Amalgamation means combination of two or more business concerns into one respectively the survivor acquires the assets as well as liabilities of the merged company or companies. All assets, liabilities and stock of one company stand transferred to Transferee Company or debentures or cash or mix of the two or three modes. For example; Sikkim bank benaras state bank Ltd. and global trust bank Ltd., Were amalgamated with Union bank of India, Bank of Baroda and Oriental bank of commerce respectively.

2) Consolidation:

Consolidation is known as the fusion of two existing companies into a new entity on which both the existing companies extinguish. Thus, consolidation is mixing up of the two companies to make them into new one in which both the existing companies lose their identity and cease to exist, the mix up assets of the two companies are known by new names and the shareholders of two companies become share holders of the new company.

3) Combination:

Combination refers to the mergers and consolidation as a common term used interchangeably but carrying legally distinct interpretation. All mergers acquisitions and amalgamations are business combinations.

4) Acquisition or Takeover:

Acquisition in general is acquiring the ownership in the property. In the context of business combinations, an acquisition is purchase by one company of a controlling interest in the share capital of another existing company. A takeover is acquisition and both the terms are used interchangeably.

The concentration of economic power occurs inter alia, through mergers and amalgamations. Acquisition or takeover takes place when one company acquires control of another company.

D: GOVERNMENT INITIATIVES

During the last few years the Indian Banking system has witnessed some very high profile mergers, such as the merger of ICICI Ltd. with its banking arm ICICI Bank Ltd. the merger of Global Trust Bank with Oriental Bank of Commerce and more recently the merger of IDBI with its banking arm IDBI Bank Ltd. the Union Finance Minister, P. Chidambaram gave an inkling of the governments stance on mergers in the banking sector when he stated that The Government would encourage consolidation among banks in order to make them globally competitive. The Government will not force consolidation, but if two banks want to consolidate, we would encourage them. We will encourage them if it helps banks grow in size, scale and muscle so that they can compete globally. To facilitate such mergers, a small amendment to the Income-tax Act would be made during the budget session of Parliament next year. Similarly, banks would be encouraged to go to the market to raise resources.

The above statement of the Honorable Finance Minister has to be understood in the context of the Basel II Accord which has proposed in June 1999 by the Basel committee on Banking Supervision. As per the Quantitative Impact Study published by the Basel Committee in May 2003, there would be an increase in capital requirements by 12% for bank in developing countries on implementation of the Basel II Accord. Merger among banks will be one of the ways to increase market power and thereby increase the revenue generation of banks which would in turn enable them to access the capital market to raise funds and meet the increased capital requirement.

E: MERGERS CONSOLIDATING THE BANKING INDUSTRY: A LEGAL PERSPECTIVE

The topic of consolidation of banks has occupied the front seat of banking sector reforms in the recent past. The finance minister said that the government would put in place an environment, which will be conducive for mergers and acquisitions of banks. The union finance minister announced that PSBs would be encouraged to merger. Further, he promised that the next union budget, due in February 2005, would provide tax incentives for profitable PSBs grow in scale and muscle so that they can complete effectively with world class banks. In India, banking has been divided into broad classification of public sector banks, private sector banks, foreign banks, cooperative banks, local area banks etc. banking institutions operating in India are governed by different statutory provisions depending upon their status as a body corporate established by a act of parliament or a banking company and such statutes are relevant for the purpose of consolidation of such banking institutions by acquisitions and mergers. The importance attributed to consolidation of banks, in the recent past, throws light on the need of mergers, especially in the background of collapse of a major private sector bank and daily fall of cooperative banks. A question that arises in whether mergers are alternative to cover weakness of banking industry as such.

1. Is the object is to increase the profit by enlarging ideas of new finance minister?

1. Are banks driving towards mergers to merge NPAs with strong banks?

1. Whether consolidation of banks would be a solution to wipe off the losses and increases the market muscle?

In this background, an attempt has been made in the present article to list out legal provisions providing room for consolidation of banks, legal impediments preventing the cross merger i.e. public sector banks, private banks, cooperative banks, non banking financial institutions, regional rural banks, multi state cooperative banks etc., and to suggest the amendments to overcome such legal difficulties, if any, to create an environment of unrestricted and choice oriented mergers in banking sector in India.

Chapter - 2

II: NEED FOR MERGERS AND ACQUISITION

The consolidation in the present arena being talked about is the merger of weak banks in the strong banks, neither it is to protect the interest of depositors of one bank by merging it into other bank. Instead, it is a merger of two banks, even two large banks or two strong banks to be a mega as well as strong entity, which may rank amongst the top 200 banks of the world. The idea is that a strong unit can absorb the shocks and survive in the difficult times.

Consequent upon consolidation, the new entity will not only have sound financial position but also a large branch network through out the country, overseas presence, the large clientele base, large resources and big size in terms of assets as well as business figures. Further, the sound financial position will be in terms of large capital base, increased profitability, higher capacity to tolerate the unexpected loss, better risk management, larger disclosed and undisclosed reserves, large base of real assets, better stability, higher capacity to tolerate losses, if any, thereby making higher gains etc.

The consolidation will also result in increased discretionary powers to the field functionaries at branch level for lending, investment, foreign exchange business and derivatives trading, which will on the one hand increase the profitability of the banks and on the other hand will facilitate customers and other stakeholders for quick decision. The public confidence will be increased manifold. The rating of the merged entity by international agencies will be improved which will increase the confidence of depositors and international banks and financial institutions dealing with the Indian Banks.

Consolidation in Banking Industry has further become important due to the following reasons:

Unhealthy Competition amongst banks;

Expansion of branches, unviable branches;

Clusters of branches of various banks at particular centers;

Regional imbalance/unequal VRS;

Improper deployment of staff;

Restrictions on transfer of clerical staff;

Inter zone transfer policy of officers up to specified scale in various banks;

Uneven promotions;

Computerization/installation of ATMs/networking/core banking solution.

1: CONSOLIDATION IS INEVITABLE AND THE NEED OF THE HOUR

The consolidation in banking industry by mergers and acquisitions is the need of the hour and cannot be avoided. A lot of companies have been taken over by the other companies to make a mega company. "Collectiveness is strength" will hold true on consolidation. After merging two-three big banks, it will be a very large sized bank, which will be seen as a market leader. It will not only improve the position and rating of the particular bank but also of the country as a whole. How many large banks India have, matters significantly. At present we have only one bank namely State Bank of India that is ranked amongst top 200 banks in the world. After the consolidation, we will be having 3-4 banks of international level or standard. It will be a good name for the country to have 4 banks in the top 200 banks of the world. This will further improve our country rating i.e. the rating for India.

The large corporate houses and Resident and Nonresident Indians and foreign nationals are now viewing the balance sheet of the banks before dealing with them. The balance sheet of consolidated banks will be a strong one showing very sound financial position of the merged entity.

2: COST REDUCTION THROUGH CONSOLIDATION

One of the super advantages of the consolidation of banks is the reduction in operating cost. This will be on account of the following factors:

1. Closing down branches which are located within a short radius of the merged entity thereby cutting expenditure and deployment of surplus staff in marketing of other fee based services or products.

1. Reduction in number of controlling offices i.e. regional or zonal offices thereby reduction in administrative expenses.

1. More utility and viability of ATMs. Increase in number of transactions at ATMs and more availability of ATMs to the customers.

1. Reduction in payment of annual maintenance charges for software as well as numerous other items such as servers, computers, machinery equipment etc. The A.M.C. of the high capacity and disaster recovery centre in case of core banking solution is in crores of rupees. Thus by merging 3 banks, such cost will be saved for 2 banks.

1. Reduction in other operative expenses to a great extent.

3: CONSOLIDATION AND CORE BANKING SOLUTIONS

The consolidation will make it convenient to introduce core banking solution at maximum number of branches due to its being cost effective.

The CEOs of the banks have been stressing on the advantages of core banking solution. One of the biggest benefits from moving to core banking is that transaction cost will be sufficiently reduced, by around 15% to begin with, but much more in due course. The core banking solution, in addition, will be able to handle large number of customers, large number of users and large number of transactions, viz. to the million transactions a day for each of the large banks. Without consolidation, the handling of large number of transactions may not be possible in future for small sized banks. Besides this, expanding the implementation of Real Time Gross Settlements, Electronic Fund transfer at more centers, maximize the use of Electronic clearing system, Electronic Banking, E-cheques, paperless handling of Inter Bank Clearing Transactions all will be conveniently possible after consolidation with the help of Core Banking Solution and Technology up gradation.

4:HUMANRESOURCESMANAGEMENTTHROUGH CONSOLIDATION

Different persons have different qualities. Some are expert in marketing, some in table work whereas some in field work. Some others are expert in making policies. Some develop specific skills, which others do not have. Maximum output or productivity can be achieved by optimizing capacity utilization as well as efficiency utilization of each individual and by putting right person on the right job.

If a person is given a job of his choice or expertise, he starts loving his job profile. Then the job no more remains for him but becomes playing a game or singing a song. Thus, there will be more opportunities for the employees and they may be offered the different job of their choice and skill. Thus, the human resources will be managed in a better way after consolidation. It will also provide more career opportunities to employees.

a: OBJECTIVES OF MERGERS

Mergers are well recognized commercial practices for growth and diversification of manufacturing, business and service activities.

The factors that motivate mergers are, to

1. diversify the areas of activities; achieve optimum size of business;

1. remove certain key factors and other bottlenecks of input supplies;

1. improve the profitability;

1. serve the customer better;

1. achieve economies of scale and size, internal and external;

1. acquire assets at lower than the market price;

1. bring separate enterprises under single control;

1. Grow without any gestation period; and nurse a sick unit and get tax advantages by acquiring a running concern.

There could be other influencing factors. But, by and large, they will be subsumed in one or the other of the above listed factors. One of the main advantages arising out of mergers is the possible resultant economies of sale.

b): BENEFITS OF MERGERS & ACQUISITIONS

The principal economic rationale or merger is that the value of combined entity is expected to be greater than the value of the sum of the independent value merging entities.

For instance, if the banks x & y merge, then the value of the combined entity i.e. v (xy) is expected to be greater than vx + vy, i.e. the sum of independent values of x & y. this is called as synergistic effect the essence & projection of a merger.

1) Increase in the growth and expansion:

Growth is the need of survival. A corporate that shows growth and dynamism is very much able to attract and retain talented executives. At the same time, it enriches the job perspectives of the working executives by posing ever increasing challenges and hence has a proportional effect on managerial efficiency.

2) Increase in profit margins:

Profits increase due to the fact that a combination of two or more banks may result into cost reduction due to operating economies. This can happen as a combined entity may avoid or at least reduce overlapping functions and facilities. At the same time economies of scale may also enhance profitability. These arise due to more intensive utilization of data processing systems, marketing of services, product innovation and so on.

3) Strategic benefit:

This can be explained owing to the fact that in a saturated market like that of India, simultaneous expansion and replacement (through merger) may help the banks to reap profits rather than creation of additional capacity through internal expansion.

4) Product Innovation:

With the merger of two banks, it may be easier for them to successfully bring about product innovations as their resources are more so complementary.

LIMITATIONS OF MERGERS & ACQUISITIONS

The probable limitations that every merger might have to face are:

1) Dysentery Effect:

It is very important that before merging the two banks should take into consideration the nature and extent of synergy which they have. Generally it is seen that if the two combining entities differ in their work cultures then the synergy might go negative and this brings about dysynergy.

2) Striving for bigness:

It is the matter of fact that size is taken to be the most important yardstick for the measurement of success. But beyond a particular size, the economies of scale turn into diseconomies of scale. Thus while evaluating a merger or acquisition proposal, the focus should be on to create or maximize the shareholders wealth rather than increasing the size.

3) Failure to integrate well:

It is said that Sometimes even a best strategy can be ruined by poor implementation. A post merger or post acquisition integration of the two banks is a must. Although this is an extremely complex task just like grinding east and west together.

These adverse features may or may not be outweighed by the positive features of mergers such as economies of scale, stability through diversification, utilization of idle funds, nursing a sick unit or better/optimal utilization of capacity.

5:PROBLEMSINCONSOLIDATIONTHROUGHMERGER AND ACQUISITION:

1. Different technology in different banks; unacceptably low standards of job performance some of the rural centers;

1. An underutilized and de-motivated workforce:

1. Limited flexibility;

1. Attitudinal problems towards work a: management;

1. The absence of a sense of teamwork and a shared responsibility for getting work done;

1. More of an individual than a company perspective on work;

1. Lack of clarity in job responsibilities;

1. Breakdowns in personal relationships;

1. Employees developing their own ways of worn which express their personal comfort zones;

1. Problems in controlling large number of brand and the manpower.

Chapter- 3

The word 'MERGER' may be taken as an, abbreviation which means:

M

MIXING

E

ENTITIES

R

RESOURCES FOR

G

GROWTH

E

ENRICHMENT AND

R

RENOVATION

The factors favoring growth, enrichment and renovation should be taken into due consideration before stepping into the process of M & As so that the abbreviation truly comes out to be fruitful.

III. MERGER STRATEGY

REMAINING SMALL MIGHT BE BEAUTIFUL BUT BECOMING BIG WOULD MAKE YOU POWERFUL IS THE UNDERLYING PRINCIPLE BEHIND THE MERGER AND ACQUISITION BUSINESS STRATEGY.

Various aspects of the M & A deal such as valuation, legal compliance; accounting and negotiation are highly specialized areas. The advisors are often investment and merchant bankers who are well versed with the M&A market players and have experience and knowledge. Advisors take fees for performing various tasks:

1. Target identification

1. Determination of appropriate price

1. Structuring the finance

1. Assisting in negotiation

1. Advising on post-merger integration

The fees charged by the intermediary are often negotiable. The Lehman formula (also known as 5-4-3-2-1) formula is most popular. If the target is being sought, the seeker should carefully state the objectives.

For example, the objective(s) may be one or more of:- Increasing market share in domestic market,- Eliminating a competitor,- Entering fast growing markets abroad,- Better control of critical input material and components etc.

ii: MERGER PROCEDURE

I. Accounting

When mergers and acquisitions take place, the combined entity's financial statements have to reflect the effect of combination. According to the Accounting Standard 14 (AS 14) issued by the Institute of Chartered Accountants of India, an amalgamation can be in the nature of pooling of interests, referred to as "amalgamation in the nature of merger', or acquisition. The conditions to be fulfilled for an amalgamation to be treated as an "amalgamation in the merger " are as follows:

1) All assets and liabilities of the "Transferor Company" before amalgamation should become assets and liabilities of the "Transferee Company".

2) Shareholders holding not less than 90% of shares (in value terms) of the "Transferor Company" should become the shareholders of the "Transferee Company".

3) The consideration payable to the shareholders of the "Transferor Company" should be in the form of shares of the "Transferee Company" only; cash can however, be paid in respect of fractional shares.

4) Business of the "Transferor Company" is intended to be carried on by the "Transferee Company."

5) The "Transferee Company" incorporates, in its balance sheet, the book values of assets and liabilities of the "Transferor Company" without any adjustment except to the extent needed to ensure uniformity of accounting policies. An amalgamation which does not satisfy all the conditions stated above will be regarded as an "Acquisition".

The accounting treatment of an amalgamation in the books of the "Transferee Company" is dependent on the nature of amalgamation. For a merger, the 'pooling of interest' method is to be used and for an Acquisition the 'purchase' method is to be used. Under 'the pooling of interest' method, the balance sheet of the combined entity is arrived at by a line by line addition of the corresponding items in the balance sheets of the combining entities. Hence, there is no asset write-up or write-down or even goodwill. Under the 'purchase' method, however, the "acquiring company" treats the "acquired company" as an acquisition investment and, hence, reports its tangible assets at fair market value. So, there is often an asset write-up. Further, if the consideration exceeds the fair market value of tangible assets, the difference is reflected as goodwill, which has to be amortized over a period of five years. Since there is often an asset write-up as well as some goodwill, the reported profit under the purchase method is lower because of higher depreciation as well as amortization of goodwill.

II. Legal/ Statutary approvals

The process of mergers or amalgamations is governed by sections 391 to 394 of the Companies Act, 1956 and requires the following approvals:

a: Shareholder approval

The shareholders of the amalgamating and the amalgamated companies are directed to hold meetings by the respective High Courts to consider the scheme of amalgamation. The scheme is required to be approved by 75% of the shareholders, present and voting, and in terms of the voting power of the shares held (in value terms).

Further, Section 395 of the Companies act stipulates that the shareholding of dissenting shareholders can be purchased, provided 90% of the shareholders, in value terms, agree to the scheme of amalgamation. In terms of section 81(IA) of the Companies Act, the shareholders of the "amalgamated company" also are required to pass a special resolution for issue of shares to the shareholders of the "amalgamating company".

b: Creditors/Financial Institutions/Banks approval

Approvals from these are required for the scheme of amalgamation in terms of the agreement signed with them.

c: High Court approvals

Approvals of the High courts of the States in which registered offices of the amalgamating and the amalgamated companies are situated are required.

d: Reserve Bank of India approval

In terms of section 19 of FERA, 1973 Reserve Bank of India permission is required when the amalgamated company issues shares to the nonresident shareholders of the amalgamating company or any cash option is exercised.

e: SEBI's Takeover Code for substantial acquisitions of shares in Listed companies

In India take-over are controlled. On 4th November 1994, SEBI announced a take-over code for the regulation of substantial acquisition of shares, aimed at ensuring better transparency and minimizing the occurrence of clandestine deals. In accordance with the regulations prescribed in the code, on any acquisition in a company which makes acquirers aggregate shareholding exceed 15%, the acquirer is required to make a public offer. The take-over code covers three types of takeovers-negotiated takeovers, open market takeovers and bail-out takeovers.

III. Valuation

There are several approaches to valuation. The important ones are the discounted cash flow approach, the comparable company approach, and the adjusted book value approach. Traditionally, the comparable company approach and the adjusted book value approach were used more commonly. In the last few years, however, the discounted cash flow approach has received greater attention, emphasis, and acceptance. This is mainly because of its conceptual superiority and its strong endorsement by leading consultancy organizations.

iii: NUMBER OF BANK MERGED

SINCE 1990 2008

SR.

NAME OF BANK MERDED

WITH WHOM MERGED

DATE OF MERGER

1

PURBANCHAL BANK LTD.

CENTRAL BANK OF INDIA

29-8-1990

2

NEW BANK OF INDIA

PUNJAB NATIONAL BANK

04-09-1993

3

BANK OF KARAD LTD.

BANK OF INDIA

1993 - 1994

4

KASHINATH SETH BANK

STATE BANK OF INDIA

1995 - 1996

5

PUNJAB CO OP BANK LTD

ORIENTAL BANK OF COMMERCE

1996 - 1997

6

BARI DOAB BANK

ORIENTAL BANK OF COMMERCE

1996 - 1997

7

BAREILLY CORP. BANK LTD.

BANK OF BARODA

03-06-1999

8

SIKKIM BANK LTD

UNION BANK OF INDIA

22-12-1999

9

TIMES BANK LTD

HDFC BANK LTD.

26-02-2000

10

BENARAS STATE BANK LTD.

BANK OF BARODA

20-07-2002

11

NEDUNGADI BANK LTD

PUNJAB NATIONAL BANK

01-02-2003

12

BANK OF MADURA

ICICI BANK

MAR. 2001

13

GLOBAL TRUST BANK LTD

ORIENTAL BANK OF COMMERCE

24-07-2004

14

CENTURION BANK

BANK OF PUNJAB

29-06-2005

15

HDFC BANK

CENTURION BANK

28-01-2008

THEWEAKNESSESOFSMALLERBANKSAREBEING EXPOSEDLEADINGTOMULTIPLEFAILURES

Chapter 4

IV: MERGERS / AMALGAMATIONS IN INDIA - LEGAL FRAMEWORK

4.1: Before Liberalization

In India, the companies act, 1956 and the monopolies and Restrictive trade practices act 1969(before the 1991 amendments) are the statues governing mergers among companies.

In the companies act, a procedure has been laid down, in terms of which a merger can effectuated. Sanction of the company court (high court) is an essential prerequisite for the effectiveness of and for effectuating a scheme merger.

The other statue regulating mergers was the hitherto monopolies and restrictive trade practices act, 1969 (MRTP Act) .after the 1991 amendments, the statue does not regulate mergers.

The regulatory provisions in the MRTP Act were removed through the 1991 amendments, with a view to giving effect to the industrial policy of liberalization and deregulating, aimed at achieving economies of scale for ensuring higher productivity, competitiveness and advantages in the international market.

4.2: Mergers-Post Liberalization Period

a: Narasimham committee report (1991)

The first report of the narasimham committee (November 1991) on the financial system had recommended a broad pattern of the structure of the banking system as under:

1. 3 or 4 large banks (including the state bank of India) which could become international in character.

1. 8 to 10 national banks with a network of branches throughout the country engaged in universal banking;

1. local banks whose operations would be generally confined to a specific region; and

1. Rural banks (including RRBs) whose operations would be confined to the rural areas and whose business would be predominantly engaged in financing of agriculture and allied activities.

The narasimham committee was of the view that the move towards this revised system should be market driven and based on profitability considerations and brought about through a process of mergers and acquisitions.

4.3: BANK MERGERS / AMALGAMATIONS UNDER VARIOUS ACTS

The relevant provisions regarding merger, amalgamations and acquisition of banks under various acts are discussed in brief as under:

A: MERGERS/AMALGAMATION-_BANKING REGULATION ACT, 1949

Amalgamation of banking companies under B.R. act falls under two categories i.e. voluntary amalgamation and compulsory amalgamation.

a: Section 44A voluntary amalgamation of banking companies:

Section 44A of the banking regulation act, 1949 provides for the procedure to be followed in case of voluntary mergers/amalgamations of banking companies. Under these provisions a banking company by approval of shareholders of each banking company by resolution passed by majority of two-third in value of the shareholders of each of the said companies. The banks have to obtain reserve banks sanction for the approval of the scheme of amalgamation. However, asa per the observations of JPC the role of RBI is limited. The reserve bank generally encourages amalgamation when it satisfied that the scheme is in the interest of depositors of the amalgamating banks. Further RBI is also empowered to determine the market value of shares of the minority shareholders who have voted against the scheme of amalgamation.

Since nationalized banks are not banking companies and SBI is governed by a separate statute, the provisions of section 44A on voluntary amalgamation are not applicable in the case of amalgamation of two public sector banks or for the merger of a nationalised bank/SBI with a banking company or vice versa. Moreover, the section does not envisage approval of RBI for the merger of any other financial entity such as a NBFC with a banking company voluntarily.

Therefore, a banking company can be amalgamated with another banking company under section 44A of the BR act.

b: Section 45- compulsory amalgamation of banks :

Under section 45(4) of the banking regulation act, reserve bank may prepare a scheme of amalgamation of a banking company with other banking institution (the transferee bank). Under sub-section (15) of section 45 banking institution means any banking company and includes state bank of India or a subsidiary bank or a corresponding new bank. A compulsory amalgamation is pressed into action where the financial position of the bank has become weak and urgent measures are required to be taken to safeguard the depositors interest. Section 45 of the banking regulation act, 1949 provides for a bank to be reconstructed or amalgamated compulsorily, i.e. without the consent of its institutions as defined in sub-section (15) thereof. Action under the provisions of this section is taken by the reserve bank in consultation with the central government in the case of banks, which are weak, unsound or improperly managed. Under the provisions, RBI can apply to the central government for suspension of business by a banking company and prepare a scheme of reconstitution or amalgamation in order to safeguard the interests of its depositors. Under compulsory amalgamation, reserve bank has the power to amalgamate a banking company with any other banking company, nationalized bank, SBI and subsidiary of SBI. Whereas under voluntary amalgamation, a banking company can be amalgamated with another banking company only. Meaning thereby, a banking company cannot be merged with a nationalized bank or any other financial entity.

B: STATE BANK OF INDIA ACT, 1955

Section 35 of the state bank of India act, 1955 confers power on state bank of India to enter into negotiation for acquiring business including assets and liabilities of any banking institution with the sanction of the central government and if so directed by the government in consultation with the reserve bank of India. The terms and conditions of acquisition as approved by the central board of the state bank for its sanction. The central government is empowered to sanction any scheme of acquisition and such scheme of acquisition becomes effective from the date specified in the order of sanction.

As per sub section (13) of section 38 of the SBI act banking institution is defined as under:

Banking institution includes any individual or any association of individuals (whether incorporated or not or whether a department of government or any separate institution), carrying on the business of banking. SBI may, therefore, acquire business of any other banking institution i.e. any individual or any association of individuals carrying on banking business. The scope provided for acquisition under the SBI act is very wide which includes any individual or any association of individuals carrying on banking business. That means the individual or body of individuals carrying on banking business may also include urban cooperative banks NBFCs. However, it may be observed that there is no specific mention of a corresponding new bank or a banking company in the definition of banking institution under section 38(13) of SBI act.

C: ACQUISITION BY SUBSIDIARY BANK

Under section 38 of the state bank of India (subsidiary banks) act, 1959, subsidiary bank may acquire the business, including the assets and liabilities of any other banking institution. banking institution is defined under sub-section (14) of section 38 of the act includes any individual or any association of individuals (whether incorporated or not, or whether a department of government or a separate institution), carrying on the business of banking.

Therefore, subsidiary bank may acquire business of

1. any individual doing banking business, and

1. Association of individuals doing banking business.

It may be noted that no provision for amalgamation has been provided under the act. It is the acquisition of the banking business of the individual or association of individuals. The definition of banking institution provided under the SBI act.

D:AMALGAMATIONOFNATIONALISEDBANKSWITH OTHER ENTITIES

Section 9 of the banking companies (acquisition) act, 1970 provides that the central government after consultation with RBI may make a scheme providing for

1. the reconstitution of any corresponding new bank into two or more corporations,

1. The amalgamation of any corresponding new bank with any other corresponding new bank or with another banking institution.

1. The transfer of the whole or any part of the undertaking of a corresponding new bank or banking institution, or

1. The transfer of the whole or any part of the undertaking of any other banking institution to a corresponding new bank.

E:AMALGAMATIONOFCO-OPERATIONBANKSWITH OTHER ENTITIES

Co-operative banks are under the regulation and supervision of reserve bank of India under the provisions of banking regulation act, 1949. However, constitution composition and administration of the co-operative societies are under the supervision of registrar of co-operative societies of respective states (in case of Maharashtra state, co-operative societies are governed by the provisions of Maharashtra co-operative societies act, 1961).

F: AMALGAMATION OF CO-OPERATIVE BANKS

Under section 18A of the Maharashtra state co-operative societies act, 1961, (MCS act) registrar of co-operative societies is empowered to amalgamated two or more co-operative banks in public interest or in order to secure the proper management of one or more co-operative banks. On amalgamation, a new entity comes into being. Under section 110A of the MCS act without the sanction of requisition of reserve name of India no scheme of amalgamation or reconstruction of the bank is permitted. Therefore, a co-operative bank only. It cannot be amalgamated with any other entity.

G:AMALGAMATIONOFMULTI-STATECO-OPERATIVE BANKS WITH OTHER ENTITIES

a): Voluntary Amalgamation

Section 17 of the multi-state co-operative societies act, 2002 provides for voluntary amalgamation by the members of two or more multi-state co-operative societies, and forming a new multi-state co-operative society. It also provides for transfer of its assets and liabilities in whole or in part to any other multi-state co-operative society or any co-operative society, being a society registered under the state legislation. Voluntary amalgamation of multi-state co-operative societies will come into force when all the members and creditors give their accent. The resolution has to be approved by the central registrar.

b): Compulsory amalgamation

Under section 18 of the multi-state co-operative societies act, 2002 central registrar with the previous approval of the reserve bank, in writing during the period of the moratorium made under section 45(2) of BR act (AACS) may prepare a scheme for amalgamation of the co-operative banks with any other co-operative bank therefore, amalgamation of multi-state co-operative bank with other multi-state co-operative bank and with co-operative bank is permissible.

Chapter-5

V:THEIMPACTOFMERGERSANDACQUISITIONSON TAKEOVERHOLDERS:

1) Increasing shareholder value is generally held to be the paramount objective of most M & As today. However, experience from most M & As in the mid-1980s is not very encouraging in this regard. At that time, many newly merged banks and insurance companies found their cost structures increased, resulting in duplication of structures and costs rather than predicted savings. The much slower growth levels in the 1990s and the high premiums usually paid to shareholders of target companies, mean that the restructuring needed to achieve satisfactory cost savings from mergers

It is found that between 19.47% of are acquisitions were disinvested within 10 years of acquisition. Over the years, academic studies have consistently shown that only 15% of mergers are successful and over 60% have negative result. The merger of ICICI bank and Bank of Madura also proved the same result. The share price of Bank of Madura at Bombay Stock Exchange and National Stock Exchange shot up suddenly after the announcement of Swap Ratio and the ICICI Bank's share price slipped down.

2) Human resource is another sensitive issue on the road to consolidation. The UNI Europe survey estimates that 130,000 jobs have been lost in the last 10 years as a result of mergers and take overs alone. In India about 11 percent of the over 800,000 strong bank employees opted for the first-ever voluntary retirement scheme in the state run banking industry.

Mergers often lead to higher workloads being placed remaining staff, with companies requiring greater flexibility, in terms of working hour's motility and skills excellent and highly motivated employees of the merged entity may feel frustrated and may resign or they may not give their best to the organization which they expected to. It is very relevant especially for the service industry like banking. Mergers have also brought about a change in the nature and quality of employment in the banking sector.

"Consolidation is the name of the game in the oil and telecom sectors and I am glad that the banking sector is also looking at this (Consolidation) as a strategy," said the Finance Minister Mr. P. Chidambaram in the Annual General Meeting of Indian Banks' Association. These signals are enough for state-owned banks to unleash their acquisitive ambitions. But any progress in consolidation would hinge on the government's ability to push through enabling legislation. In India, the merger of nationalized banks would require an amendment of banking regulations Act and the bank companies (Acquisition and Transfer of undertaking) Act.

4) "The Government is open to allowing acquisition of shares up to 10 percentage a year by foreign banks in domestic private bank and taking controlling stake in three-four years" said by Finance Minister Mr. P. Chidambaram in the inauguration of Dena Bank Corporate Center. The private sector banks are not willing to accept this because most of the old private sector, banks are community based and a section of shareholders could stall the whole process.

VI:CONSOLIDATION IN INDIAN BANKING INDUSTRY THE CURRENT SCENARIO

It appears to be an open season for the M & As in the stogy world of public sector banks. With the merger of crisis ridden global trust bank with the Delhi based oriental bank of commerce, a new chapter has begun in the history of banking sector. According to the reports published in the ET, about a half dozen public sector banks are fishing for acquisition targets in the region where they are recessive.

The probable reason behind the shooting up of the phenomenon called consolidation is that from the next year the guidelines for the capital requirements will get more stringent with the Basel II coming into force. Also it is projected that by 2006, the Indian economy will be open to service sector as well and then the Indian banks will have to prove their global competence. At present, out of the so many banks in India, only one i.e. the Stale Bank of India, figures in the largest 200 banks of the world. It seems India is really a big country with small things. If we compare ourselves with a small country like Taiwan, we will be taken aback to know that most of its banks are bigger than the biggest bank of India. Acc. To the Finance Minister. Mr. P. Chidambaram, the banks are very much willing to consolidate both inter and intra regionally in India. And this is the first time in the three and a half decades of bank nationalization that the banks are looking at acquisition of another healthy bank. The chairperson BOB, Mr. P.S Shenoy, is of the view that their bank is looking forward for opportunities in the north, east and south. At the same time, Vijaya Bank is very much keen to lake its northward leap. The Chennai based Indian Bank has already begun the process of identifying two new targets. But at the same time, we cannot avert the truth that no bank is willing to obliterate its own banks name.

Chapter-6

VII. CASE STUDY

: CENTURION BANK AND BANK OF PUNJAB MERGER.

The Centurion Bank of Punjab (formerly Centurion Bank) is an Indian private sector bank providing both retail and corporate banking services.

a): History:

The company was incorporated on 30th June,1994 and the certificate of Commencement of Business on July 20th. It is promoted as a joint venture between 20th Century Finance Corporation Ltd, and its associates and Keppel Group of Singapore. It has got a network of ten branches. The main equity of the Bank was provided by the promoters, 20th Century Finance Corporation Ltd. & its associates and Keppel bank of singapore (now keppel tatlee bank ltd.) through Kephinance Investment (Mauritius) Pvt. Ltd.

The Bank has introduced, for the first time in the country, the concept of `anywhere banking' which enables to operate the account from any other branch of the bank.

2005 - Boards of Directors of Centurion Bank and Bank of Punjab Ltd on June 29, 2005 approves merger of two banks. The combined bank will be called Centurion Bank of Punjab.

b: PROFILE:

Centurion Bank of Punjab is a new generation private sector bank offering a wide spectrum of retail, SME and corporate banking products and services. It has been among the earliest banks to offer a technology-enabled customer interface that provides easy access and superior customer service.

Centurion Bank of Punjab has a nationwide reach through its network of 249 branches and 402 ATMs. The bank aims to serve all the banking and financial needs of its customers through multiple delivery channels, each of which is supported by state-of-the-art technologyarchitecture. Centurion Bank of Punjab was formed by the merger of Centurion Bank and Bank of Punjab, both of which had strong retail franchises in their respective markets. Centurion Bank had a well-managed and growing retail assets business, including leadership positions in two-wheeler loans and commercial vehicle loans, and a strong capital base. Bank of Punjab brings with it a strong retail deposit customer base in North India in addition to a sizable SME and agricultural portfolio. The shares of the bank are listed on the major stock exchanges in India and also on the Luxembourg Stock Exchange.

Among Centurion Bank of Punjab's greatest strengths is the fact that it is a professionally managed bank with a globally experienced and capable management team. The day-to-day operations of the bank are looked after by Mr. Shailendra Bhandari, Managing Director & CEO, assisted by a senior management team, under the overall supervision and control of the Board of Directors. Mr. Rana Talwar is the Chairman of the Board. Some of our major shareholders viz. Sabre Capital, Bank Muscat and Keppel Corporation, Singapore are represented on the Board.

The following is the pro-forma combined figures as of March 2005:

Branches and ext. Counters

235

ATMs

382

Number of Customers

2.2 million

Net Worth (Rs. Crores)

696

Total Assets

9,395

Deposits (Rs. Crores)

7,837

Operating Profit (Rs. Crores)

43

C: FINANCIAL HIGHLIGHTS

These figures are of standalone Centurion Bank Ltd. prior to the merger with Bank of Punjab Ltd.

* - Merged Figures

Financial HighlightsAs on 31st March of each Year (Rs. in lacs)

2001

2002

2003

2004

2005

2006 *

Share Capital

15247

15247

15247

5675

10132

14083

Net Worth

21726

5542

2016

6156

46856

91776

Total Assets

587971

402585

322981

341748

449029

1133019

Deposits

425743

353499

283471

302879

353038

939964

Advances

202840

162597

131372

155641

219395

653344

Gross Income

64539

55294

45122

39677

41055

105206

Gross Profit(Before Depreciation)

12061

7528

7044

4827

5289

19945

Net Profit / (Net Loss)

702

(16184)

(2536)

(10514)

2511

8780

Dividend (%)

-

-

-

-

-

Capital Adequacy Ratio (%)

9.61

4.16

1.95

4.41

21.42

12.52

No. Of Branches

49

57

60

61

75

241

No. Of Employees

821

965

945

1112

1374

4471

Thus, we see that after the merger the situation seems to much better than prior merger. As we see in this particular balance sheet, we can see all the figures rising tremendously. There is a considerable increase in the net profit. The numbers of branches have also increased which helps in networking smoothly. Thus as a conclusion the merger between banks would help them to become a major power.

Lord Krishna Bank merges with Centurion Bank of Punjab

The boards of Centurion Bank of Punjab and Lord Krishna Bank have approved the merger between the two banks. The share swap ratio has been fixed at 5:7. That is for every five share of Lord Krishna Bank, its shareholders will receive seven shares of Centurion Bank of Punjab.

Rana Talwar will be the chairman and Shailendra Bhandari, the chief managing director and chief executive officer of the merged entity. As part of the integration of both banks, it is envisaged that there will be no retrenchment of staff of either bank and there will no closure of any rural branches. Moreover, the scheme of amalgamation provides one time increment to all employees of Lord Krishna Bank.

The board of directors of Centurion Bank of Punjab also approved a proposal to raise additional capital through a preferential issue of fresh equity. Up to 75 million fully paid up equity shares at a price of Rs 24.54 per equity share for a consideration of up to 1,840.5 million to India Advantage Fund V.

Also, 95 million fully paid up equity shares at a price not exceeding Rs 25 per equity share for a consideration of up to Rs 2375 million to Bank Muscat (S.A.O.G).

The proposal is subject to all the requisite statutory, regulatory and shareholdersapprovalincludingtheapprovalofRBI. Ambit Corporate Finance and DSP Merrill Lynch are the advisors to Centurion Bank of Punjab and Lord Krishna Bank respectively.

HDFC BANK

H.D.F.C was set up on 17th October, 1977 by I.C.I.C.I. out of the consideration that a specialized institution was needed to channel household savings as well as funds from the capital market into the housing sector. H.D.F.C. has emerged as the largest mortgage finance institution in the country. The main objective of H.D.F.C. is to develop significant expertise in retail mortgage loans to different market segments and to have a large corporate client base for its housing related credit facilities.

HDFC Bank was incorporated in August 1994 in the name of 'HDFC Bank Limited', with its registered office in Mumbai, India. The Bank commenced operations as a Scheduled Commercial Bank in January 1995. The Housing Development Finance Corporation Limited (HDFC) was amongst the first to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the private sector, as part of the RBI's liberalization of the Indian Banking Industry in 1994.

HDFC Bank has won many awards for its excellent service. Major among them are "Best Bank in India" by Hong Kong-based Finance Asia magazine in 2005 and "Company of the Year" Award for Corporate Excellence 2004-05.

HDFCBankAcquiresCenturionBankofPunjabInAll Stock Deal

HDFC Bank Ltd., Indias third-biggest by market capitalization, has agreed to buy another smaller private bank Centurion Bank of Punjab Ltd, in an all stock deal. This is Indias biggest banking deal yet. The boards of both banks will meet on Monday (February 25) to decide the share-swapratio.The two Boards have resolved to pursue the merger subject to satisfactory due diligence, a fair share-swap ratio and all the requisite statutory, regulatory and corporate approvals, a joint statement said. Ernst & Young and Dalal & Shah have been appointed to determine the shareswapratio.Centurion Bank, controlled by Rana Talwars Sabre Capital, has a market capitalization of Rs 10,600 core ($2.6 billion). What the deal means is that HDFC Bank will become even stronger bank as it will gain 2.5 million customers, mainly in Kerala and Punjab. The merged company will have 1,148 branches (Centurion had 394 branches and HDFC Bank 754 branches), which is more than ICICI Banks 955.

HDFC Bank said in a statement to the stock exchange. Interestingly, both HDFC Bank and Centurion Bank have grown through M&A in some way. HDFC Bank bought Times Bank from the media group Bennett Coleman & Co in 2000. Centurion has bought Bank of Punjab and Lord Krishna Bank. HDFC Bank and Centurion Bank of Punjabtomerge24Feb,2008,

Network:More than 468 branches over 212 cities across the country.

Paid-up capital: Rs. 282 crore

Equity:Holds24.2%Listing: HDFC India has been listed on the Stock Exchange, Mumbai and the National Stock Exchange. The bank's American Depository Shares are listed on the New York Stock Exchange (NYSE) under the symbol "HDB".

HDFC Bank and Centurion Bank of Punjab (Centurion) on Friday confirmed that they are considering a merger proposal. The boards of directors of both the banks are meeting separately on Saturday to consider in principle a possible merger, the banks informed stock exchanges.

The boards will appoint independent valuers for deciding on the share swap ratio, said an official familiar with the development. The announcement on share swap ratio is likely to be made on Monday. Officials of both banks, however, declined to comment on details of the development citing legal implications.

After the merger, the combined entity would have a formidable network of over 1,100 branches with a pan-India presence. This would overtake ICICI Bank in terms of branch network (955). However, in terms of balance sheet size, ICICI Bank maintains its lead by a large margin. As on December 31, 2007, the balance sheet size of Centurion Bank of Punjab stands at Rs 25,403 crore and of HDFC Bank at Rs 1.31 lakh crore. ICICI Banks balance sheet stands at a much larger figure of Rs 3.76 lakh crore.

Centurion has 394 branches and 452 ATMs with employee strength of around 7,500. HDFC Bank has a branch network of 754 and is understood to have over 200 more licenses in hand. HDFC Bank has 1,906 ATMs in 327 locations.

While the capital adequacy of Centurion stands at 11.5 per cent, HDFC Bank is at a more comfortable level of 13.8 per cent as on December 31, 2007.

The share price of Centurion on Friday closed at Rs 56.4, which is 1.14 per cent down from the previous days close. The scrip opened at Rs 58 and touched an intra-day high of Rs 61.9 and a low of Rs 53.45. The total traded quantity for the day was 2.49 crore shares. HDFC Bank closed 4.40 per cent lower at Rs 1474.95 with a trading volume of 52,394 shares.

Banking sources said both banks have agreed to merge as it fits into their growth prospects. For around 25 shares of Re 1 of CBoP, an investor will get one share of Rs 10 of HDFC Bank. In last two days, share price of CBoP moved from Rs 49.85 on Wednesday to Rs 56.40 on Friday. However, it seems, investors of HDFC Bank did not like the development. The share price of HDFC Bank on Thursday moved up from Rs 1,534.50 to Rs 1,543. But on Friday, it fell sharply to Rs 1,475.Priortothis,inAugust2007.

A senior banker said according to terms and conditions, Rana Talwar, the present chairman of CBOP, will be the chairman, and present MD of HDFC Bank Aditya Puri will be MD of the merged bank. At present, CMD of HDFC Ltd Deepak Parekh is the chairman of HDFC Bank.

At present HDFC Ltd owns 23.28% of equity capital in HDFC Bank After the merger, its holding in the combined entity will come down to 19.20%. Rana Talwar, who owns 2.45% in CBOP through Saber Capital, will be reduced to a marginal shareholder in the combined company. However, Bank of Muscat, which owns 14.02% in CBOP will get around 2.45%share Total branches of the combined entity will be around 1,100 in over 400 cities and towns. A senior bank official said the merger will help HDFC Bank to penetrate rural areas. Lord Krishna Bank merger gave CBOP an access to rural network. The total deposits of the new merged entity will be around Rs 1.35 lakh crore. As on March 2007, HDFC Bank had deposits of Rs 99,400 crore and that of CBoP was Rs 14,863 crore.

The combined entity would have a nation-wide network of 1,148 branches, the largest among private sector banks, a strong deposit base of around Rs. 120,000 crore and net advances of around Rs. 85,000 crore.

The balance-sheet size of the combined entity would be over Rs. 150,000 crore. The draft scheme of amalgamation, the due diligence report and any other matter as required will be considered by the board of HDFC Bank in its meeting scheduled for February 28.

VIII. CONCLUSION

To sum up, Mergers and Acquisitions will encourage banks to gain global reach and better synergy, and allow large banks to acquire the stressed assets of weaker banks.

Mergers in India between weak/un viable banks should grow faster, so that the weak/unviable banks could be rehabilitated providing continuity of employment to the working force, utilization of the assets blocked up in the weak/unviable banks and adding constructively to the prosperity of the nation through increased flow of funds.

The merger cult in India has yet to catch fire with merchant bankers and financial consultants acquiring skills in grinding the banks to absorb weak/unviable banks and put them again on successful operations.

The small and medium sized banks are working under threats from economic environment which is full of problems for them, viz., inadequacies of resources, outdated technology, non systematised management pattern, faltering marketing efforts and weak financial structure. Their existence remains under challenge in the absence of keeping pace with growing automation and techniques obsolescence and lack of product innovations. These banks remain, at times, under threat from large banks. Their re organisation through consolidation/ merger could offer succor to re-establish them in viable banks of optimal size, with global presence. To remove sickness from the banking industry, consolidation/merger is one of the best availablealternative which requires attention from all comers. It is rightly said, 'united we stand - divided we fall'.

In a way, corporate mergers, takeovers, amalgamations and demergers are bound to change drastically and rapidly the economy in size and quality performance through reorganised corporate undertakings, combined resources and united efforts of experienced executives and skilled workforce.

As the entire Indian banking industry is witnessing a paradigm shift in systems, processes, strategies, it would warrant creation of new competencies and capabilities on an on-going basis for which an environment of continuous learning would have to be created so as to enhance knowledge and skills. There is every reason to welcome the process of creating globally strong and competitive banks and let the big Indian banks create big thunders internationally in the days to come.

In order to achieve the INDIA VISION 2020 as envisaged by Hon'ble President of India, Shri. APJ Abdul Kalam requires to be done by the banking industry, in this regard.

Only then Indian Banking Industry will be able to stand right forth the global banking competition hurricane.

KEY MESSAGE

M&A in the Indian banking sector is an opportunity and an imperative

M&A has to be based on a business rationale and effective execution there is not enough track record of that in the Indian banking sector

India may have to follow a managed transition model to ensure a stronger banking sector.

SUGGESTIONS / SOLUTIONS

1. The banks having similar technology can be merged. Alternatively, the technology can be developed to convert the data of the bank having different technology. There will not be much problem on this account.

1. The large number of branches and the manpower can be controlled through the upgraded technology. With the Core Banking Solution, the more number of units will not matter. Further, the manpower can be managed by using technology.

1. The consolidation will take care of region-wise presence of banks, thereby addressing the problem of maintaining balance of branches throughout the country.

1. The productivity of the merged entity will improve and most of the other problems will be solved automatically.

1. Imparting training to the employees / officers. The training will help improving knowledge and developing skil1s amongst the employees. Their attitude can be changed through training. They can be prepared for change and work in a new environment. They will accept the change for their betterment, better remuneration, better facilities, well-furnished and decorated branches and better working conditions.

SURVEY FORM

1.What do you mean by the term Merger & Acquisition?

___________________________________________________________________________________________________________________________________________________________________________

2. Are you aware of any M&A of any recent M & A?

__________________________________________________________________________________________________________________

3. Are you aware of any M & A of any bank?

__________________________________________________________________________________________________________________

4.Do you think M & A are beneficial for our country?

___________________________________________________________________________________________________________________________________________________________________________

Name: ________________________________

Age: ______

Occupation: ____________________________

Signature: ________________

Sign of Project Guide

Question: 1

Question: 2

Question: 3

Question: 4

IX. BIBLOGRAPHY

The project has been done with the help of the following materials:-

NEWS PAPER

ECONOMIC TIMES

THE TIMES OF INDIA

BUSINESS STANDARD

WEB SITES

www. google.com

www. hdfc.com

www. yahoo.com

www.wikipedia.com

REFERANCE BOOKS

Financial Services & Market - Vipul Prakashan

Himalaya Prakashan

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