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3. Raising Investments
The Amendment Bill proposes to amend section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 & 1980. This will enable the nationalized banks to issue bonus shares and rights issue for accessing the capital market and to raise capital required for expansion of banking business. It will also enable the nationalized banks to increase or decrease the authorized capital with the approval from central government and RBI without being limited by the ceiling of a 5 maximum of INR 3 Billion. It will also enable banking companies to issue preference shares subject to regulatory guidelines of the RBI. As it is necessary for the banking companies to raise capital for expansion and development to compete with the international players, the proposed move should help their cause.
The Amendment Bill proposes to include section 26 A in the Act to establish the "Depositor Education and Awareness Fund" ("Fund") to create awareness among the customers and to carry out such other promotional activities as specified by the RBI. For this Fund, the RBI will utilize the money in any account/deposits with a bank which has not been operated for a period of 10 years or more. However, if the depositor/account holder seeks his deposit to be returned, the bank would be liable to make the payment with necessary interest as specified by RBI from time to time. The RBI shall appoint a committee to administer the Funds, oversee the implementation of the purpose and to maintain records/account books. This is an intelligent step as it has been put forth with an intention to make use of the unutilized deposits with the banks for the welfare of the customers/promotion of depositor interest.
7. Cooperative Societies
The Amendment Bill proposes that the cooperative societies should mandatorily obtain license from 9 RBI to carry on the banking business. Further, it empowers RBI to appoint an auditor to conduct special audits at the cooperative banks for any transactions or class of transactions or for any period by extending the applicability of section 30 of the Act. The said changes sets forth a sound and healthy banking system and to protect the interest of the depositors.
8. Merger of Banks
The proposed legislation intends to exempt the mergers of banking companies from the purview of 10 the Competition Commission of India, thereby, conferring power to RBI to take the decision. The
Competition Act, 2002 has conferred authority to the said commission to regulate combinations/mergers of the banking companies which causes or likely to cause appreciable adverse effect on competition in the market within India. Since RBI is the banking regulator, empowering it with the powers of deciding on mergers and acquisition would be in the interest of the depositors and help to obtain the requested approvals swiftly in a timely manner.
9. Penalties
The Amendment Bill proposes to increase the penalty for contravening the provisions of the Act as follows - (i) For providing false information to RBI, the new penalty would be INR 10 million; (ii) or failure to provide account books or any requested information to RBI, the penalty would be INR 11 200,000 and if the default continues then an additional fine of INR 50,000 shall be imposed; (iii) If the banking company defaults in complying with any of the requirement/obligation under the Act, a penalty up to INR 10 million or twice the amount involved in such contravention whichever is more 12 shall be imposed; and (iv) If a banking company fails to furnish account books or any requested 13 information, the new penalty would be up to INR 2 million. The proposed changes would deter the defaulters.
Mergers are a legitimate means by which firms can grow and are generally as much part of the natural process of industrial evolution and restructuring as new entry, growth and exit.
Viewed in this way, there is probably no need to have a separate law on mergers. The reason that such a provision exists in most laws is to pre-empt the potential abuse of dominance where it is probable, as subsequent unbundling can be both difficult and socially costly.
Thus, the general principle, in keeping with the overall goal, is that mergers should be challenged only if they reduce or harm competition and adversely affect welfare.
The Competition Act, which received Presidential assent on January 13, 2003, established the Competition Commission of India (the CCI) as the new statutory authority to inquire into alleged contraventions of the legislation.
The Merger Control provisions contained in Sections 5 and 6 of the amended Competition Act are perhaps the most noteworthy elements of the new law, insofar as mergers were not specifically addressed under the erstwhile MRTP Act. Section 5 defines combinations and lays out the relevant thresholds for regulation. Combinations, in terms of the meaning given to them in the Act, include mergers, amalgamations, acquisitions and acquisitions of Control. Section 6 authorizes the CCI to investigate combinations above certain size thresholds, which includes mergers, amalgamations, and acquisitions of shares, assets, voting rights, or control. Section 6(1) states that combinations that cause, or are likely to cause, an appreciable adverse effect on competition are prohibited.33 Section 6(2), as amended in 2007, provides for mandatory pre-merger notification within 30 days of either approval of the proposal for a combination or execution of the agreement for an acquisition. As in the case of agreements, mergers are typically classified into horizontal and vertical mergers. In addition, mergers between enterprises operating in different markets are called conglomerate mergers. The Act makes it mandatory for the parties to notify their proposed agreement or combinations to the CCI, if the aggregate assets of the combining parties have a value in excess of Rs.1000 crores or turnover in excess of Rs. 3000 crores.
The procedure for voluntary amalgamation of two banking companies is laid down under Section 44-A of the Banking Regulation Act, 1949. After the two banking companies have passed the necessary resolution proposing the amalgamation of one bank with another bank, in their general meetings, by a majority in number representing two-thirds in value of the shareholding of each of the two banking companies, such resolution containing the scheme of amalgamation is submitted to the Reserve Bank for its sanction. If the scheme is sanctioned by the Reserve Bank, by an order in writing, it becomes binding not only on the banking companies concerned, but also on all their shareholders.
While sanctioning the scheme of amalgamation, the Reserve Bank takes into account the financial health of the two banking companies to ensure, inter alia, that after the amalgamation, the new entity will emerge as a much stronger bank.
The guidelines of the RBI specify the prudential regulations with respect to bank mergers. They do not look at the issues which the CCI looks at. As mentioned above, CCI only checks whether a combination will likely result in dominance or likely facilitate cartelisation. They will not go beyond this to check on prudential regulation, which they do not have the mandate nor competence to do. RBI on the other hand will only check whether the banks will remain sound and whether public money will remain safe after a combination. They will not go further and assess whether a dominant position will be created or whether cartelisation is likely, which is what CCI does.
A distinction should be made between prudential regulation of banks by RBI and competition regulation of the whole economy, including financial sector, by CCI. Prudential regulation is largely centred on laying and enforcing rules that limit risk-taking of banks, ensuring safety of depositors funds and stability of the financial sector. Thus regulation of M&As by the RBI would be determined by such benchmarks. Competition regulation of M&As in the banking sector on the other hand is a different matter. This is aimed at ensuring that banks compete among themselves in fighting for customers by offering the best terms, lower interest rates on loans and higher interest rates on deposits and securities. Merger regulation by CCI would be therefore intended to ensure that such activities are not motivated by the desire to collude and make excessive profits at the expense of customers or to squeeze other players out of the market through abusive practices