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Mergers And Acquisitions


We have been learning about the companies coming together to from another
company and companies taking over the existing companies to expand their business.

With recession taking toll of many Indian businesses and the feeling of insecurity
surging over our businessmen, it is not surprising when we hear about the immense
numbers of corporate restructurings taking place, especially in the last couple of years.
Several companies have been taken over and several have undergone internal
restructuring, whereas certain companies in the same field of business have found it
beneficial to merge together into one company.

In this context, it would be essential for us to understand what corporate

restructuring and mergers and acquisitions are all about.

All our daily newspapers are filled with cases of mergers, acquisitions, spin-offs,
tender offers, & other forms of corporate restructuring. Thus important issues both for
business decision and public policy formulation have been raised. No firm is regarded
safe from a takeover possibility. On the more positive side Mergers & Acquisition’s may
be critical for the healthy expansion and growth of the firm. Successful entry into new
product and geographical markets may require Mergers & Acquisition’s at some stage in
the firm's development. Successful competition in international markets may depend on
capabilities obtained in a timely and efficient fashion through Mergers & Acquisition's.
Many have argued that mergers increase value and efficiency and move resources to their

Mergers And Acquisitions

highest and best uses, thereby increasing shareholder value. .

To opt for a merger or not is a complex affair, especially in terms of the

technicalities involved. We have discussed almost all factors that the management may
have to look into
Before going for merger. Considerable amount of brainstorming would be required by the
managements to reach a conclusion. E.g. A due diligence report would clearly identify
the status of the company in respect of the financial position along with the net worth and
pending legal matters and details about various contingent liabilities. Decision has to be
taken after having discussed the pros & cons of the proposed merger & the impact of the
same on the business, administrative costs benefits, addition to shareholders' value, tax
implications including stamp duty and last but not the least also on the employees of the
Transferor or Transferee Company.


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

where one survives and the others lose their corporate existence. The survivor acquires all
the assets as well as liabilities of the merged company or companies. Generally, the
surviving company is the buyer, which retains its identity, and the extinguished company
is the seller.

Mergers And Acquisitions

Merger is also defined as amalgamation. Merger is the fusion of two or more

existing companies. All assets, liabilities and the stock of one company stand transferred
to Transferee Company in consideration of payment in the form of:

• Equity shares in the transferee company,

• Debentures in the transferee company,
• Cash, or
• A mix of the above modes.

Acquisition in general sense is acquiring the ownership in the property. In the
context of business combinations, an acquisition is the purchase by one company of a
controlling interest in the share capital of another existing company.

Methods of Acquisition:
An acquisition may be affected by
a) Agreement with the persons holding majority interest in the company management
like members of the board or major shareholders commanding majority of voting
b) Purchase of shares in open market;
c) To make takeover offer to the general body of shareholders;
d) Purchase of new shares by private treaty;
e) Acquisition of share capital through the following forms of considerations viz.
Means of cash, issuance of loan capital, or insurance of share capital.

Mergers And Acquisitions


A ‘takeover’ is acquisition and both the terms are used interchangeably.

Takeover differs from merger in approach to business combinations i.e. The process
of takeover, transaction involved in takeover, determination of share exchange or cash
price and the fulfillment of goals of combination all are different in takeovers than in
mergers. For example, process of takeover is unilateral and the offeror company decides
about the maximum price. Time taken in completion of transaction is less in takeover
than in mergers, top management of the offeree company being more co-operative.

De-merger or corporate splits or division:

De-merger or split or divisions of a company are the synonymous terms signifying

a movement in the company.

Mergers And Acquisitions

Purpose of Mergers & Acquisitions

The purpose for an offeror company for acquiring another company shall be
reflected in the corporate objectives. It has to decide the specific objectives to be
achieved through acquisition. The basic purpose of merger or business combination is to
achieve faster growth of the corporate business. Faster growth may be had through
product improvement and competitive position.

Other possible purposes for acquisition are short listed below: -

(1) Procurement of supplies:

1. To safeguard the source of supplies of raw materials or intermediary product;

2. To obtain economies of purchase in the form of discount, savings in transportation
costs, overhead costs in buying department, etc.;
3. To share the benefits of suppliers economies by standardizing the materials.

(2) Revamping production facilities:

1. To achieve economies of scale by amalgamating production facilities through more

intensive utilization of plant and resources;
2. To standardize product specifications, improvement of quality of product,

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3. Market and aiming at consumers satisfaction through strengthening after sale

4. To obtain improved production technology and know-how from the offered
5. To reduce cost, improve quality and produce competitive products to retain and
Improve market share.

(3) Market expansion and strategy:

1. To eliminate competition and protect existing market;

2. To obtain a new market outlets in possession of the offeree;
3. To obtain new product for diversification or substitution of existing products and to
enhance the product range;
4. Strengthening retain outlets and sale the goods to rationalize distribution;
5. To reduce advertising cost and improve public image of the offeree company;
6. Strategic control of patents and copyrights.

(4) Financial strength:

1. To improve liquidity and have direct access to cash resource;
2. To dispose of surplus and outdated assets for cash out of combined enterprise;
3. To enhance gearing capacity, borrow on better strength and the greater assets
4. To avail tax benefits;
5. To improve EPS (Earning Per Share).

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(5) General gains:

1. To improve its own image and attract superior managerial talents to manage its
2. To offer better satisfaction to consumers or users of the product.

(6) Own developmental plans:

The purpose of acquisition is backed by the offeror company’s own developmental

A company thinks in terms of acquiring the other company only when it has
arrived at its own development plan to expand its operation having examined its own
internal strength where it might not have any problem of taxation, accounting, valuation,
etc. But might feel resource constraints with limitations of funds and lack of skill
managerial personnel’s. It has to aim at suitable combination where it could have
opportunities to supplement its funds by issuance of securities, secure additional financial
facilities, eliminate competition and strengthen its market position.

(7) Strategic purpose:

The Acquirer Company view the merger to achieve strategic objectives through
alternative type of combinations which may be horizontal, vertical, product expansion,
market extensional or other specified unrelated objectives depending upon the corporate

Mergers And Acquisitions

strategies. Thus, various types of combinations distinct with each other in nature are
adopted to pursue this objective like vertical or horizontal combination.

(8) Corporate friendliness:

Although it is rare but it is true that business houses exhibit degrees of cooperative
spirit despite competitiveness in providing rescues to each other from hostile takeovers
and cultivate situations of collaborations sharing goodwill of each other to achieve
performance heights through business combinations. The combining corporate aim at
circular combinations by pursuing this objective.

(9) Desired level of integration:

Mergers and acquisition are pursued to obtain the desired level of integration
between the two combining business houses. Such integration could be operational or
financial. This gives birth to conglomerate combinations. The purpose and the
requirements of the offeror company go a long way in selecting a suitable partner for
merger or acquisition in business combinations.

Mergers And Acquisitions

Types of Mergers
Merger or acquisition depends upon the purpose of the offeror company it wants to
achieve. Based on the offerors’ objectives profile, combinations could be vertical,
horizontal, circular and conglomeratic as precisely described below with reference to the
purpose in view of the offeror company.

(A) Vertical combination:

A company would like to takeover another company or seek its merger with that
company to expand espousing backward integration to assimilate the resources of supply
and forward integration towards market outlets. The acquiring company through merger
of another unit attempts on reduction of inventories of raw material and finished goods,
implements its production plans as per the objectives and economizes on working capital
investments. In other words, in vertical combinations, the merging undertaking would be
either a supplier or a buyer using its product as intermediary material for final production.

The following main benefits accrue from the vertical combination to the acquirer
company i.e.

1. It gains a strong position because of imperfect market of the intermediary products,

scarcity of resources and purchased products;

2. Has control over products specifications.

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(B) Horizontal combination:

It is a merger of two competing firms which are at the same stage of industrial
process. The acquiring firm belongs to the same industry as the target company. The mail
purpose of such mergers is to obtain economies of scale in production by eliminating
duplication of facilities and the operations and broadening the product line, reduction in
investment in working capital, elimination in competition concentration in product,
reduction in advertising costs, increase in market segments and exercise better control on

(C) Circular combination:

Companies producing distinct products seek amalgamation to share common

distribution and research facilities to obtain economies by elimination of cost on
duplication and promoting market enlargement. The acquiring company obtains benefits
in the form of economies of resource sharing and diversification.

(D) Conglomerate combination:

It is amalgamation of two companies engaged in unrelated industries like DCM

and Modi Industries. The basic purpose of such amalgamations remains utilization of
financial resources and enlarges debt capacity through re-organizing their financial
structure so as to service the shareholders by increased leveraging and EPS, lowering
average cost of capital and thereby raising present worth of the outstanding shares.

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Merger enhances the overall stability of the acquirer company and creates balance in the
company’s total portfolio of diverse products and production processes.

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[4]Advantages of Mergers

Mergers and takeovers are permanent form of combinations which vest in

management complete control and provide centralized administration which are not
available in combinations of holding company and its partly owned subsidiary.
Shareholders in the selling company gain from the merger and takeovers as the premium
offered to induce acceptance of the merger or takeover offers much more price than the
book value of shares. Shareholders in the buying company gain in the long run with the
growth of the company not only due to synergy but also due to “boots trapping earnings”.

Mergers and acquisitions are caused with the support of shareholders, manager’s
ad promoters of the combing companies. The factors, which motivate the shareholders
and managers to lend support to these combinations and the resultant consequences they
have to bear, are briefly noted below based on the research work by various scholars

(1) From the standpoint of shareholders

Investment made by shareholders in the companies subject to merger

should enhance in value. The sale of shares from one company’s shareholders to another
and holding investment in shares should give rise to greater values i.e. The opportunity
gains in alternative investments. Shareholders may gain from merger in different ways
viz. From the gains and achievements of the company i.e. Through
(a) Realization of monopoly profits;
(b) Economies of scales;

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(c) Diversification of product line;

(d) Acquisition of human assets and other resources not available otherwise;
(e) Better investment opportunity in combinations.

One or more features would generally be available in each merger where

shareholders may have attraction and favour merger.

(2) From the standpoint of managers

Managers are concerned with improving operations of the company, managing the
affairs of the company effectively for all round gains and growth of the company which
will provide them better deals in raising their status, perks and fringe benefits. Mergers
where all these things are the guaranteed outcome get support from the managers. At the
same time, where managers have fear of displacement at the hands of new management
in amalgamated company and also resultant depreciation from the merger then support
from them becomes difficult.

(3) Promoter’s gains

Mergers do offer to company promoters the advantage of increasing the size of

their company and the financial structure and strength. They can convert a closely held
and private limited company into a public company without contributing much wealth
and without losing control.

(4) Benefits to general public

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Impact of mergers on general public could be viewed as aspect of benefits and

costs to:
(a) Consumer of the product or services;
(b) Workers of the companies under combination;
(c) General public affected in general having not been user or consumer
or the worker in the companies under merger plan.

(a) Consumers

The economic gains realized from mergers are passed on to consumers in the form
of lower prices and better quality of the product which directly raise their standard of
living and quality of life. The balance of benefits in favour of consumers will depend
upon the fact whether or not the mergers increase or decrease competitive economic and
productive activity which directly affects the degree of welfare of the consumers through
changes in price level, quality of products, after sales service, etc.

(b) Workers community

The merger or acquisition of a company by a conglomerate or other acquiring

company may have the effect on both the sides of increasing the welfare in the form of
purchasing power and other miseries of life. Two sides of the impact as discussed by the
researchers and academicians are: firstly, mergers with cash payment to shareholders
provide opportunities for them to invest this money in other companies which will
generate further employment and growth to uplift of the economy in general. Secondly,

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any restrictions placed on such mergers will decrease the growth and investment activity
with corresponding decrease in employment. Both workers and communities will suffer
on lessening job

Opportunities, preventing the distribution of benefits resulting from diversification

of production activity.

(c) General public

Mergers result into centralized concentration of power. Economic power is to be

understood as the ability to control prices and industries output as monopolists.
Such monopolists affect social and political environment to tilt everything in their
favour to maintain their power ad expand their business empire. These advances
result into economic exploitation. But in a free economy a monopolist does not
stay for a longer period as other companies enter into the field to reap the benefits
of higher prices set in by the monopolist. This enforces competition in the market
as consumers are free to substitute the alternative products. Therefore, it is
difficult to generalize that mergers affect the welfare of general public adversely or
favorably. Every merger of two or more companies has to be viewed from different
angles in the business practices which protects the interest of the shareholders in
the merging company and also serves the national purpose to add to the welfare of
the employees, consumers and does not create hindrance in administration of the
Government polices.

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Chapter 12: Change in scenario of Banking Sector

1. The first mega merger in the Indian banking sector that of the HDFC Bank with Times
Bank, has created an entity which is the largest private sector bank in the country.

2. The merger of the city bank with Travelers Group and the merger of Bank of America
with Nation Bank have triggered the mergers and acquisition market in the banking
sector world wide.

3. Europe and Japan are also on their way to restructure their financial sector thought
merger and acquisitions. Merger will help banks with added money power, extended
geographical reach with diversified branch Network, improved product mix, and
economies of scale of operations. Merger will also help banks to reduced them
borrowing cost and to spread total risk associated with the individual banks over the
combined entity. Revenues of the combine entity are likely to shoot up due to more
effective allocation of bank funds. ICICI Bank has initiated merger talks with
Centurian Bank but due to difference arising over swap ration the merger didn’t
materialized. Now UTI Bank is egeing Centurian Bank. The proposed merger of UTI
Bank and Centurian Bank will make them third largest private banks in terms of size
and market Capitalization State Bank of India has also planned to merge seven of its
associates or part of its long-term policies to regroup and consolidate its position.
Some of the Indian Financial Sector players are already on their way for mergers to
strengthen their existing base.

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4. In India mergers especially of the PSBS may be subject to technology and trade union
related problem. The strong trade union may prove to be big obstacle for the PSBS
mergers. Technology of the merging banks to should complement each other NPA
management. Management of efficiency, cost reduction, tough competition from the
market players and strengthing of the capital base of the banks are some of the
problem which can be faced by the merge entities. Mergers for private sector banks
will be much smoother and easier as again that of PSBS.


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Bank traditionally just borrower and lenders, has started providing complete
corporate and retail financial services to its customers

1. Technology drive has benefited the customers in terms of faster improve convenient
banking services and Varity of financial products to suit their requirement. Atms,
Phone Banking, Net banking, Any time and Any where banking are the services which
bank have started offering following the changing trend in sectors. In plastic money
segment customer have also got a new option of debits cards against the earlier
popular credit card. Earlier customers had to conduct their banking transaction within
the restricted time frame of banking hours. Now banking hours are extended.

2. Atms ,Phone banking and Net banking had enable the customer to transact as per their
convince customer can now without money at any time and from any branch across
country as certain their account transaction, order statements of their account and give
instruction using the tally banking or on online banking services.

3. Bank traditionally involve working capital financing have started offering consumer
loans and housing loans. Some of the banks have started offering travel loans, as well
as many banks have started capitalizing on recent capital market boom by providing
IPO finance to the investors.

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Chapter 5: Procedure of Mergers & Acquisitions

Public announcement:

To make a public announcement an acquirer shall follow the following procedure:

1. Appointment of merchant banker:

The acquirer shall appoint a merchant banker registered as category – I with SEBI to
advise him on the acquisition and to make a public announcement of offer on his behalf.

2. Use of media for announcement:

Public announcement shall be made at least in one national English daily one
Hindi daily and one regional language daily newspaper of that place where the shares of
that company are listed and traded.

3. Timings of announcement:

Public announcement should be made within four days of finalization of

negotiations or entering into any agreement or memorandum of understanding to acquire
the shares or the voting rights.

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4. Contents of announcement:
Public announcement of offer is mandatory as required under the SEBI

Procedure of Bank Merger

 The procedure for merger either voluntary or otherwise is outlined in the respective
state statutes/ the Banking regulation Act. The Registrars, being the authorities
vested with the responsibility of administering the Acts, will be ensuring that the
due process prescribed in the Statutes has been complied with before they seek the
approval of the RBI. They would also be ensuring compliance with the statutory
procedures for notifying the amalgamation after obtaining the sanction of the RBI.

 Before deciding on the merger, the authorized officials of the acquiring bank and
the merging bank sit together and discuss the procedural modalities and financial
terms. After the conclusion of the discussions, a scheme is prepared incorporating
therein the all the details of both the banks and the area terms and conditions.

 Once the scheme is finalized, it is tabled in the meeting of Board of directors of

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respective banks. The board discusses the scheme thread bare and accords its
approval if the proposal is found to be financially viable and beneficial in long run.

 After the Board approval of the merger proposal, an extra ordinary general meeting
of the shareholders of the respective banks is convened to discuss the proposal and
seek their approval.

 After the board approval of the merger proposal, a registered valuer is appointed to
valuate both the banks. The valuer valuates the banks on the basis of its share
capital,market capital, assets and liabilities, its reach and anticipated growth and
sends its report to the respective banks.

 Once the valuation is accepted by the respective banks , they send the proposal

along with all relevant documents such as Board approval, shareholders approval,
valuation report etc to Reserve Bank of India and other regulatory bodies such
Security & exchange board of India (SEBI) for their approval.

 After obtaining approvals from all the concerned institutions, authorized officials

of both the banks sit together and discuss and finalize share allocation proportion
by the acquiring bank to the shareholders of the merging bank (SWAP ratio)

 After completion of the above procedures , a merger and acquisition agreement is

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signed by the bank

Chapter 9: RBI Guidelines on Mergers & Acquisitions of Banks

 With a view to facilitating consolidation and emergence of strong entities and

providing an avenue for non disruptive exit of weak/unviable entities in the
banking sector, it has been decided to frame guidelines to encourage
merger/amalgamation in the sector.

 Although the Banking Regulation Act, 1949 (AACS) does not empower Reserve
Bank to formulate a scheme with regard to merger and amalgamation of banks, the
State Governments have incorporated in their respective Acts a provision for
obtaining prior sanction in writing, of RBI for an order, inter alia, for sanctioning a
scheme of amalgamation or reconstruction.

 The request for merger can emanate from banks registered under the same State
Act or from banks registered under the Multi State Co-operative Societies Act
(Central Act) for takeover of a bank/s registered under State Act. While the State
Acts specifically provide for merger of co-operative societies registered under
them, the position with regard to take over of a co-operative bank registered under
the State Act by a co-operative bank registered under the CENTRAL

 Although there are no specific provisions in the State Acts or the Central Act for

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the merger of a co-operative society under the State Acts with that under the
Central Act, it is felt that, if all concerned including administrators of the
concerned Acts are agreeable to order merger/ amalgamation, RBI may consider
proposals on merits leaving the question of compliance with relevant statutes to the
administrators of the Acts. In other words, Reserve Bank will confine its
examination only to financial aspects and to the interests of depositors as well as
the stability of the financial system while considering such proposals.

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Chapter 10: Amalgamation of Urban Banks

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Chapter 11: Information & Documents to be furnished by BY THE ACQUIRER OF


1. Draft scheme of amalgamation as approved by the Board of Directors of the acquirer


2. Copies of the reports of the valuers appointed for the determination of realizable value
of assets (net of amount payable to creditors having precedence over depositors) of
the acquired bank.

3. Information which is considered relevant for the consideration of the scheme of merger
including in particular:-

A. Annual reports of each of the Banks for each of the three completed financial
years immediately preceding the proposed date for merger.

B. Financial results, if any, published by each of the Banks for any period
subsequent to the financial statements prepared for the financial year immediately
preceding the proposed date of merger.

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C. Pro-forma combined balance sheet of the acquiring bank as it will appear

consequent on the merger.

D. Computation based on such pro-forma balance sheet of the following:-

I. Tier I Capital

Ii. Tier II Capital

Iii. Risk-weighted Assets

Iv. Gross and Net npas

V. Ratio of Tier I Capital to Risk-weighted Assets

Vi. Ratio of Tier II Capital to Risk-weighted Assets

Vii. Ratio of Total Capital to Risk-weighted Assets

Viii. Tier I Capital to Total Assets

Ix. Gross and Net npas to Advances

X. Cash Reserve Ratio

Xi. Statutory Liquidity Ratio

4. Information certified by the values as is considered relevant to understand the net

realizable value of assets of the acquired bank including in particular:-

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A. The method of valuation used by the values

B. The information and documents on which the values have relied and the
extent of the verification, if any, made by the values to test the accuracy of such

C. If the values have relied upon projected information, the names and
designations of the persons who have provided such information and the extent of
verification, if any, made by the values in relation to such information

D. Details of the projected information on which the values have relied

E. Detailed computation of the realizable value of assets of the acquired bank.

5. Such other information and explanations as the Reserve Bank may require.

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Chapter 6: Mergers in the Banking Sector



ICICI Bank (formerly Industrial Credit and Investment Corporation of

India) is India's largest private bank. ICICI Bank has total assets of about
Rs.20.05bn (end-Mar 2005), a network of over 550 branches and offices, and about

1900 atms. ICICI Bank offers a wide range of banking products and financial
services to corporate and retail customers through a variety of delivery channels
and through its specialized subsidiaries and affiliates in the areas of investment
banking, life and non-life insurance, venture capital and asset management. ICICI

Bank's equity shares are listed in India on stock exchanges at Kolkata and

Vadodara, the Stock Exchange, Mumbai and the National Stock Exchange of India
Limited and its adrs are listed on the New York Stock Exchange (NYSE). During the
year 2005 ICICI bank was involved as a defendant in cases of alleged criminal
practices in its debt collection operations and alleged fraudulent tactics to sell its

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The industrial Credit and Investment Corporation of India Limited now known as ICICI
Ltd. Was founded b the World bank, the Government of India and representatives
of private industry on January 5, 1955. The objective was to encourage and assist
industrial development and investment in India. Over the years, ICICI has evolved
into a diversified financial institution. ICICI’s principal business activities include:

 Project Finance
 Infrastructure Finance
 Corporate Finance
 Securitization
 Leasing
Deferred Credit
Consultancy services
Custodial services

The ICICI Groups draws its strength from the core competencies of its
individual companies. Today, top Indian Corporate look towers ICICI as a business
partner for providing solutions to their varied financial requirements. The Group also
offers a gamut of personal finance solutions to individuals. To lead the financial services
into the new millennium, the Group is now truly positioned as a Virtual Universal Bank.
The liberalization of the Indian economy in the 1990s offered ICICI an opportunity to
provide a wide range of financial services. For regulatory and strategic reasons, ICICI set
up specialized subsidiaries in the areas of commercial banking, investment banking, non-

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banking finance, investor servicing brooking, venture capital financing and state level
infrastructure financing.

ICICI plans to focus on its retail finance business and expect the same to
contribute upto 15-20 % of its turnover in the next five years. It is trying to change the
perception that it is a corporate oriented bank. The bank hard selling its image as a retail
segment bank has for the first time come up with an advertisement that addresses its
products at the individual. This is to drive home the point that the bank has product and
services catering to all individuals. For this purpose the network of ICICI Bank shall
come into use. The parent plants to sell its products and also raise retail funds through the
banking subsidiary.


 ICICI Bank Limited,
 ICICI Securities and Finance Company Limited (ICICI Securities),
 ICICI Credit Corporation Limited ( ICICI Credit),

 ICICI Investors Services Limited (ICICI Services),

 ICICI Venture Funds Management Limited (ICICI Venture),

 ICICI international Limited,

 ICICI -KINFRA Limited (I-KIN),

Mr. K.V. Kamath, CEO of ICICI Limited, has recently voiced the intentions of
ICICI Limited towards banking and ICICI Bank. ICICI Limited is endeavoring to forge a
closer relationship with ICICI bank. Mr. K V Kamath recently quoted in a leading daily

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“Banking is dead. Universal banking is in offering with a whole range of financial

products and services. The basic idea is for banks to do business along with “banking”.
Bankers will have to emerge as businessmen.”

ICICI Bank is a focused banking company coping with the changing times of the
banking industry. So it can be a lucrative target for other player in the same line of
operations. However, when merged with ICICI Limited the attraction is reduced manifold
considering the magnitude of operations of the ICICI limited.

Of course, one would still need a bank to open letters of credit, offer guarantees,
handle documentation, and maintain current account facilities etc. So banks will not
superfluous. But nobody needs so many of them any more.

Secondly, besides credit, a customer may also want from a bank efficient cash
management, advisory services and market research on his product. Thus the importance
of fee based is increasing in comparison with the fund-based income.

The pre--merger status of ICICI Bank is as follows: it had liabilities of Rs.12,073 crore,
equity market capitalization of Rs.2,466 crore and equity volatility of 0.748. Working
through options reasoning, we find that this share price and volatility are consistent with
assets worth Rs.13,249 crore with volatility 0.15. Thus, ICICI bank had assets which are
9.7% ahead of liabilities, which is roughly consistent with the spirit of the Basle Accord,
and has leverage of 5.37 times.

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History of ICICI Bank

The World bank the Government of India and representatives of Indian industry form
ICICI Limited as a development finance institution to provide medium-term and long-
term project financing to Indian businesses in 1955.

• 1994 ICICI establishes ICICI Bank as a subsidiary.

• 1999 ICICI becomes the first Indian company and the first bank or financial
institution from non-Japan Asia to list on the NYSE.

• 2001 ICICI acquired Bank of Madura (est. 1943). Bank of Madura was a Chettiar
bank, and had acquired Chettinad Mercantile Bank (est. 1933) and Illanji Bank
(established 1904) in the 1960s.

• 2002 The Boards of Directors of ICICI and ICICI Bank approve the merger of
ICICI, ICICI Personal Financial Services Limited and ICICI Capital Services
Limited, with ICICI Bank. After receiving all necessary regulatory approvals,

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ICICI integrates the group's financing and banking operations, both wholesale and
retail, into a single.


The pre--merger status of Bank of Madura is as follows: it had liabilities of

Rs.4,444 crore, equity market capitalization of Rs.100 crore and equity volatility of 0.69.
Working through options reasoning, we may say that the stock market thinks that its
assets are worth Rs.4, 095 crore with a volatility of 0.02. Hence, bom is bankrupt (with
assets which are Rs.350 crore behind liabilities) and has a leverage of 41 times. If we
needed to bring bom up to a point where its assets were 10% ahead of liabilities, which is
broadly consistent with the Basle Accord, this would require an infusion of Rs.800 crore
of equity capital.
How do we combine these to think of the merged entity? Assets and liabilities are
additive, so the total assets of the merged entity would prove to be roughly Rs.17,345
crore and the liabilities would prove to be Rs.16,517 crore. The merged entity would
hence need roughly Rs.800 crore of fresh equity capital in order to come up to a point
where assets were atleast 10% ahead of liabilities.

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How can we estimate the market capitalization of the merged entity? The value of
equity is the value of a call option on the assets of the merged entity. Pricing the call
requires an estimate of the volatility of the merged assets, i.e. It requires knowledge of the
extent to which the assets of the two banks are uncorrelated. We find that using values of
the correlation coefficient ranging from 80% to 95%, the volatility of assets of the
merged entity proves to be around 0.12. In this case, the valuation of the call option, i.e.
An estimate of the market capitalization of the merged entity, proves to be roughly
Rs.2,500 crore.

This number is not far from the pre--merger market capitalisation of ICICI Bank,
which was Rs.2,466 crore. Hence, we can say that on purely financial arguments, the
merger is roughly neutral to ICICI Bank shareholders if bom was merged into ICICI
Bank for free. Indeed, if banking regulators took their jobs more seriously, they would
force the shareholders of bom to walk into such a merger at a zero share price as a way of

The number of bankrupt banks in India by one. Such a forced-merger would be a

politically easier alternative for the RBI when compared with closing down bom.

The shareholders of ICICI Bank have paid a non-zero fee for bom. This reflects a
hope that the products and processes of ICICI Bank will rapidly improve the value of
assets of bom in order to compensate. In addition, the merged entity will have to rapidly
raise roughly Rs.800 crore of equity capital to obtain a 10% buffer between assets and

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Hence, this proposed merger is a godsend for bom, which was otherwise a
bankrupt entity which was headed for closure given the low probability that it would
manage to raise Rs.800 crore of equity on a base of Rs.100 crore of market capitalisation.
It is useful to observe that bom probably did not see things in this way, given the
willingness of India's banking regulators to interminably tolerate the existence of
bankrupt banks. Closure of bom would normally involve pain for bom's shareholders and
workers; instead both groups will get an extremely pleasant ride if the merger goes

The proposed merger is a daunting problem for ICICI Bank. It will need to rapidly
find roughly Rs.800 crore in equity. If India's banking regulators were serious about
capital adequacy, ICICI Bank should have to pay roughly zero to merge with bom (it is
doing a favour to bom and to India's banking system); instead ICICI Bank has paid a
positive price for bom. The key question that will be answered in the next two/three years
is: Will ICICI Bank's superior knowledge of products and processes revitalize the assets
and employees of bom, and generate shareholder value in the merged entity? ICICI's top
management clearly thinks so, and it would be a very happy outcome if this did indeed
The proposed merger is a good thing for India's economy, since the headcount of
bankrupt banks will go down by one, and there is a possibility of obtaining higher value
added out of the poorly utilized assets and employees of bom. If the merger goes through,
then it will reduce the say of the management team of bom in India's resource allocation,
which is a good thing.

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Chapter 13: Merger of ICICI Bank with Bank of Madura

The proposed merger between ICICI Bank and Bank of Madura (bom) is a
remarkable one. The pre--merger market capitalization of ICICI Bank was roughly
Rs.2500 crore while bom was at roughly Rs.100 crore. Bom is known to have a poor
asset portfolio. What will the merged entity be worth?

The key rationale underlying every merger is the question of synergy. Can ICICI
Bank's products and technology bring new life to the 263 branches of bom? Will ICICI
Bank (which has 1,700 employees) be able to overcome the 2,600 employees that bom
carries, given that Indian labour law makes it troublesome and expensive to sack

In applying these ideas to ICICI Bank and to bom, we need to believe that the stock
market effectively processes information to produce estimates of the price and volatility

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of the shares of both these banks. This assumption is suspect, because both securities
have poor stock market liquidity. Hence, we should be cautious in interpreting the
numbers shown here. There are many other aspects in which this reasoning leans on
models, which are innately imperfect depictions of reality. However, these models are
powerful tools for understanding the basic factors at work, and they probably convey the
broad picture quite effectively.

The stock of ICICI Bank may be in the limelight on the back of the proposed
acquisition of Bank of Madura.

Though the stock has gained sharply in the last two months after hitting a recent
low of Rs 110, some upside may be left as the bank could get re-rated on account of the
merger. Existing shareholders could hold their exposures in ICICI Bank while investors
with an appetite for risk could contemplate exposures despite the impressive gains of the
past few months. ICICI Bank continues to be one of the better options in the banking
sector at the moment and the possible merger with ICICI may well be on the backburner.

The merger would pitchfork ICICI Bank as the leading private sector bank. The
merger may be viewed favorably since Bank of Madura has focused strengths and a
reasonably good quality balance sheet. The board of directors is to meet on December 11
to consider the merger.

It is quite likely that the swap ratio may be fixed in a manner that holds out a good
deal for the shareholders of Bank of Madura. This may also be influenced by the fact that

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the Bank of Madura stock has gained sharply by around 70 per cent in the past fortnight
in the homestretch to the deal.

As the acquisition is to be financed by issuance of stock, the rise in the market

capitalization of Bank of Madura may mean a higher degree of equity issuance by ICICI
Bank. But the price may well be worth paying as this is the only way that ICICI Bank
may be able to get control over banks with reasonable quality balance sheets that could
make a difference in the medium to long-term.

Bank of Madura has assets of Rs 3,988 crore and deposits of Rs 3,395 crore as of
March 2000. The fact that the bank has a capital adequacy of 15.8 per cent with
shareholder funds of Rs 263 crore may mean that ICICI Bank (post-merger phase) will
have more leeway to pursue growth without expanding the equity base (other than paying
for the acquisition).
Strong capital adequacy, a strong beachhead on the Internet arena, a revamped IT
architecture, a growing retail client base through a brick-and-click strategy, and
improving asset quality and earnings growth are positive features as far as ICICI Bank is

Despite these factors, the share had been on a downtrend from after touching a high
of Rs 271, eight months ago. The uptrend then was on the back of the announcement of
its ADR issue and new technology initiatives. The subsequent downtrend was triggered
by the possibility of the merger with its parent. There is continuing concern on asset
quality of ICICI. It has been a stated goal of the ICICI group to go in for universal

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banking. It is clear that once regulatory hurdles are removed, such a possibility becomes
distinctly feasible. But

Given the battering that bank stock took, ICICI may now hesitate to pursue this path.
Also ICICI Bank is the most visible investor-friendly face for the group in terms of
returns to shareholders and it may well be maintained as a separate entity. In this
backdrop, the stock may hold scope for improvement in the valuation of the stock.

Financial standing of ICICI Bank & Bank of Madura

Parameters ICICI Bank Bank of Madura

1998-1999 1999-2000 1998-1999 1999-2000
Net worth 308.33 1129.90 211.32 247.83
Total Deposit 6072.94 9866.02 3013.00 3631.00
Advances 3377.60 5030.96 1393.92 1665.42
Net Profit 63.75 105.43 30.13 45.58
Share Capital 165.07 196.81 11.08 11.08
Capital Adequacy 11.06% 19.64% 18.83% 14.25%
Gross Advances / 4.72% 2.54% 8.13% 11.09%
Gross NP’s

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Net Advances / 2.88% 1.53% 4.66% 6.23%

Net NP’s

Source: Complied from Annual Report (March 2000) of ICICI Bank & Bank of

Crucial Parameters: - How they stand

Name of the Bank of ICICI

Bank Madura Bank
Book value of bank on
the day of merger 183.0 58.0
Market price on the day
announcement of 183.0 169.90
Earning per share 38% 5.4
Dividend paid (in%) 55% 15%
P/E Ratio 1.73 783

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 The Generation Gap:- the merger of 57 year old BOM sooth bared old generation

bank with a fast growing technology say new Generation bank will help the latter and
the start merger is likely to bring cheer to shareholder and bank employees of BOM
and some amount of discomfort and anxiety to those of ICICI bank.

The scheme of amalgamation will increase the equity bank of ICICI Bank to RS
220.36 CR. ICICI Bank will issue 235.4-lakh share of RS 10 each to the shareholder of
BOM. The merger entity will have an increase of a net base over RS 160 bn and deposit
base of RS 131 bn.

The merged entity will have 360 branches and a similar number of ATM’s across
the country and also enable the ICICI to serve a large customer bone of 1.2 million
customers of BOM through a wider network, adding to the antoma bare to 2.7 million.

Managing rural branches:

ICICI major branches are in major and cities, where as BOM spreads its wings
mostly in semi urban and city segments of south India. There in a task ahead lying for
the merged entity to increase dramatically the business mix of rural branches of BOM.

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On the other hand due to Geographical location of its branches and level of
competition. ICICI Bank will have a tough time to cope with.

Managing software:

Another task which stand on the way is technology while ICICI bank which is fully

 Quality of assets:- the nature of assets a bank is holding would signify its operational

efficiency. Usually the level of Non – performing Assets ( NPAS) judges the quality
of assets. The lower the NAPS to total advances or total assets the better the quality is
and vice versa.

 Staff productivity: - One of the key area where banks can develop competition

advantage. The measurement of staff productivity becomes one of the essential factors
while measuring the performance of the banks.

 Liquidity:- While assessing the liquidity of a bank the most sought ratio is net loans

to total assets. A rise in the net loans to total assets may be considered as a fall in the
liquidity of the bank.

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 Book Value per share:- It is simply the net worth of the company (which is equal to

the paid up equity capital plus resource and surplus) divided by the number of
outstanding equity shares.

 Earning per share:- specific valuation per unit of investment given by Net income

after income taxes and after dividends on preferred stock of the company.

 Net work:- Book value of a company is common stock, surplus, resources and

retained earnings.

 Profitability: - the most crucial ratio in measuring the profitability is net profit of the

bank. The ratio such as Net Interest Income (NIL) and Net Interest Margin (NIM)
measure sustenance ability of the bank based on the spread. Entity is using the
package, Banks 2000, BOM computerized 90 percent of its business and was
converted with ISBS software.

The BOM branches are supposed to switch over to Banks 2000. Though it is not a
difficult task, with 80% computer literate staff would need effective retraining which
involves a cost. The ICICI Bank need to invest RS 50 core for upgrading BOM’s 263

Managing Human Resources:

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One of the greatest challenges before ICICI Banks is managing human resources.
When the head count of ICICI Bank is taken it in less than 1500 employees on the other
hand BOM has over 2500.

The merged entity will have bout 4000 employees which will make it one of the
largest banks among the new generation private sector banks. Th staff of ICICI Banks are
drawn from 75 various banks mostly young qualified professionals with computer
background and prefer to work in metro or by either with good remuneration packages.

While under the influence of tread unions most of the BOM employees have low
career aspiration. The announcement by H.N. signor, CEO and MD of ICICI, that three
would be no VRS or retrenchment, creates a new hope amongst the BOM employees. It is
a tough task ahead to manage. On the other hand their pay would be revised up wards. It
is not a Herevlean task to integrate two work welters?

Managing Client Base:-

The clients base of ICICI Bank after merger, will be as 2.7 Million from it past 0.5
Million, as accumulation of 2.2 Million from BOM. The nature and quality of clients is
not of uniform quality.

The BOM had built up it client base for a long time, in a hard way, on the basis of
personalized services. In order to deal with the BOM clientele, the ICICI Bank needs to
redefine its strategies to suit to the new clientele. The sentiments or a relationship of

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small and medium borrower is hurt it may be difficult for them to reestablish the
relationship which could also hamper the image of the bank.

Given the situation, we need to wait and view, as to how the ICICI will face this

Recommendation of Narasimham Committee on banking sector reforms

 Globally, the banking and financial systems have adopted information and
communications technology. This phenomenon has largely by passed the Indian
banking system, and the committee feels that requisite success needs to be achieved in
the following areas:-

- Banking automation

- Planning, Standardization of electronic payment systems

- Telecom infrastructure

- Data were

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 Merger between banks and dfls and nbfcs need to be based on synergies and should
make a sound commercial sense. Committee also opines that merger between strong
banks / fls would make for greater economic and commercial sense and would be a
case where the whole is greater than the sum of its party and have a ‘force multiplier
effect”. It also have merger should not be seen as a means of bailing out weak banks.

 A weak bank could be nurtured into healthy units. Merger could also be a solution to a
after cleaning up their balances sheets it only say if these is no Voltaire response to a
takeover of such bank, a restructuring commission for such PSB, can consider other
options such as restructuring , merger and amalgamations to it not closure.

 The committee also options that while licensing new private sector banks, the initial
capital requirement need to be review. It also emphasized on a transparent mechanism
for deciding the ability of promoter to professionally manage the bank. The committee
also feels that a minimum threshold capital for old private banks also deserved
threshold capitals. The committee also opined that a promoter group couldn't hold
more that 40 percent of the equity of a bank.
The Narasimham Committee also suggested that the merger could be a solution to
‘Weak banks’ Coney after clearing up the balance sheets) with a strong public sector
Source: Narasimham Committee report on banking sector reforms.

Changes after the merger:-

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While, BOM had an attractive business per employee figure of Rs.202 lakh, a
better technological edge and had a vast base in southern India when compared to Federal
bank. While all these factors sound good, a cultural integration would be a tough task
ahead for ICICI Bank.

ICICI Bank has announced a merger with 57-year-old Bank of Madure, with 263
branches, out of which 82 of them are in rural areas, with most of them in southern India.
As on the day of announcement of merger) 09-12-00), Kotak mahindra group was
holding about 12 percent stake in BOM, the Chairman BOM, Mr.K.M. Thaiagarajan,
along with his associates was holding about 26 percent stake, Spic groups has about 4.7
percent, while LIC and UTI were having marginal holdings. The merger will give ICICI
Bank a hold on South India market, which has high rate of economic development.

The board of Director at ICICI has contemplated the following synergies emerging from
the merger:

Financial Capability: The amalgamation will enable them to have a stronger financial
and operational structure, which is supposed to be capable of greater resourger/deposit
mobilization. And ICICI will emerge a one of the largest private sector banks in the

Branch network: The ICICI’s branch network would not only 264, but also increases
geographic coverage as well as convenience to its customers.

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Customer base: The emerged largest customer base will enable the ICICI bank to offer
banking financial services and products and also facilitate cross-selling of products and
services of the ICICI groups.

Tech edge: The merger will enable ICICI to provide atms, Phone and the Internet
banking and finical services and products and also facilitate cross-selling of products and
services of the ICICI group.

Focus on Priority Sector: The enhanced branch network will enable the Bank to focus on
micro-finance activities through self-help groups, in its priority sector initiatives through
its acquired 87 rural and 88 semi-urban branches.

Source: Report submitted at EGM on January 19, 2001.


The swap ratio has been approved in the ratio of 1:2 – two shares of ICICI Bank for every
one share of Bank of Madera.

The deal with Bank of Madera is likely to dilute the current equity capital by around 12
percent. And the merger is expected to bring 20 percent gains in EPS of bank.

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And also the bank’s comfortable capital Adequacy Ratio (CAR) of 19.64 percent has
declined to 17.6 percent.

Chapter 14: Reasons behind the recent trend of merger in Banking Sector

The question on top everybody’s mind is

Are banks and bankers on the road to redundancy?
First consider the reasons who one does not need banks in large numbers any more

 A depositor today can open a cheque account with a money market mutual fund and
obtain both higher returns and greater and greater flexibility. Indian mutual funds are
queuing up to offer this facility.

 After can be drawn or a telephone bill paid easily through credit cards.

 Even if a bank is just a safe place to put away your savings, you need not go to it.
There is always an ATM you can do business with.

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 If you are solvent and want to borrow money, you can do so on your credit card- with
far fewer hassles.

 A ‘AAA’ corporate can directly borrow from the market through commercial papers
and get better rates in the bargain. In fact the banks may indeed be left with dad credit
risk or those that cannot access the capital market. This once again makes a shift to
non-fund based the activities all the more important.

Chapter 15: Case Studies

Case study I


The merger that was announced on , 2006 between Deutsche Bank and Dresdner
Bank, Germany’s largest and the third largest bank respectively was considered as
Germany’s response to increasingly tough competition markets.

The merger was to create the most powerful banking group in the world with the
balance sheet total of nearly 2.5 trillion marks and a stock market value around 150
billion marks. This would put the merged bank for ahead of the second largest banking
group, U.S. based citigroup, with a balance sheet total amounting to 1.2 trillion marks and

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also in front of the planned Japanese book mergers of Sumitomo and Sukura Bank with
1.7 trillion marks as the balance sheet total.

The new banking group intended to spin off its retail banking which was not
making much profit in both the banks and costly, extensive network of bank branches
associated with it.

The merged bank was to retain the name Deutsche Bank but adopted the Dresdner
Bank’s green corporate color in its logo. The future core business lines of the new merged
Bank included investment Banking, asset management, where the new banking group
was hoped to outside the traditionally dominant Swiss Bank, Security and loan banking
and finally financially corporate clients ranging from major industrial corporation to the
mid-scale companies.

With this kind of merger, the new bank would have reached the no.1 position of the
US and create new dimensions of aggressiveness in the international mergers.
But barely 2 months after announcing their agreement to form the largest bank in the
world, had negotiations for a merger between Deutsche and Dresdner Bank failed on
April 5, 2000.

The main issue of the failure was Dresdner Bank’s investment arm, Kleinwort
Benson, which the executive committee of the bank did not want to relinquish under any

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In the preliminary negotiations it had been agreed that Kleinwort Benson would be
integrated into the merged bank. But from the outset these considerations encountered
resistance from the asset management division, which was Deutsche Bank’s investment

Deutsche Bank’s asset management had only integrated with London’s investment
group Morgan Grenfell and the American Banker’s trust. This division alone contributed
over 60% of Deutsche Bank’s profit. The top people at the asset management were not
ready to undertake a new process of integration with Kleinwort Benson. So there was
only one option left with the Dresdner Bank i.e. To sell Kleinwort Benson completely.
However Walter, the chairman of the Dresdner Bank was not prepared for this. This led
to the withdrawal of the Dresdner Bank from the merger negotiations.

In economic and political circles, the planned merger was celebrated as Germany’s
advance into the premier league of the international financial markets. But the failure of
the merger led to the disaster of Germany as the financial center.

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Case study II


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COMING TOGETHER: The regional office of Sangli Bank in Mumbai.

The merger that was announced on APRIL 18, 2007 between ICICI Bank and SANGLI Bank.All
branches of Sangli Bank functions as branches of ICICI Bank from April 19, said the Reserve Bank of

Sangli Bank is an unlisted private bank headquartered at Sangli in Maharashtra. As on March 31, 2006,
Sangli Bank had deposits of Rs. 2,004 crore, advances of Rs. 888 crore, net NPA (non-performing
assets) ratio of 2.3 per cent and capital adequacy of 1.6 per cent. Its loss at the end of 2005-06 amounted
to Rs. 29 crore.

It has 198 branches and extension counters, including 158 branches in Maharashtra and 31 branches in

About 50 per cent of the total branches are located in rural and semi-urban areas and 50 per cent in
metropolitan and urban centres. The bank has about 1,850 employees. ICICI Bank is the second largest
bank in India and the biggest in terms of market capitalisation.

As on September 30, 2006, ICICI Bank had total assets of Rs. 282,373 crore. In the six months ended
September 30, 2006, it made a net profit of Rs. 1,375 crore.

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It had 632 branches and extension counters and 2,336 ATMs as on that date, and is in the process of
setting up additional branches and ATMs pursuant to authorisations granted by the RBI. It has about
31,500 employees.

ICICI Bank offers a wide range of financial products and services directly and through subsidiaries in
the areas of life and general insurance, asset management and investment banking.

Its shares are listed on the Bombay Stock Exchange Limited and the National Stock Exchange of India
Limited and its American Depositary Shares are listed on the New York Stock Exchange

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