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M&A in Indian Banking System An Executive Handbook

Edition: November 2005


Published by Banknet India
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SECTION ONE
Chapter- I- Over view of Indian banking Industry
Indian Banking System
Structure & regional spread

Chapter- II Essentials of M &A.?


a) Merger and amalgamation.
b) Acquisition.
c) Take over.

Chapter- III- Benefits of Consolidation


a) Why Merger in banks- the benefits
b) Why Consolidation in Indian banking industry- 15 reasons

Chapter- IV- Merger in Indian banks


a) Four category of target banks
b) List of 72 bank mergers in India since 1961
c) Indian Banks listed on the stock exchanges

SECTION TWO
Chapter- V- Existing Legal Framework
a) Legal Categorization of banks
b) Compliance with Banking Regulation Act
c) Compliance with Securities & Exchange Board in India (SEBI) Regulations
d) Shareholders approval
e) Creditors/Financial Institutions/Banks approval
f) High Court approvals
g) Reserve Bank of Indias approval

Chapter- VI- Accounting, Taxation & Valuation


a) Accounting Procedure

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b) Taxation
c) Valuation methods
d) Methods of acquisition pricing
e) Bank earnings and stock prices: Which earnings matter

Chapter- VII- Reserve Banks Review Process


Reserve Bank of Indias bank merger review process

Chapter- VIII- Procedure for merger/amalgamation of banks


a) Merger of private banks
b) Merger of a private bank with a nationalized bank
c) Merger of nationalized banks
d) Merger of a nationalized bank with SBI
e) Merger of a nationalized bank with subsidiary of SBI
f) Merger of a private bank with the SBI or its subsidiaries
g) Merger/Amalgamation in the cooperative banking sector

Chapter- IX- A Case Study


Merger/Amalgamation of Global Trust Bank with Oriental Bank of Commerce

SECTION THREE
Chapter- X- Foreign Direct Investment (FDI) in banking
a) Main Guidelines
b) Cross Border M&A in Banks
c) Foreign Bank stakes in Indian Banks

Chapter- XI- Road map for foreign banks


RBIs Road map for foreign banks in India
a) Phase I: (March 2005 to March 2009)
b) Phase II: April 2009

Chapter- XII- Critical Factors for merger success


a) Why bank merger generally do not succeed
b) How to make mergers successful

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Chapter- XIII- Future of M&A in Indian Banking Industry


a) State Bank of India, a global bank in making- A case study
b) The Road Ahead

ANNEXURES
Annexure 1- Complete List of Banks in India (as on 30/9/2005)
a) Public Sector Banks
i) Nationalized Banks (19)
ii) State Bank Group (8)
iii) Other Public sector Bank (1)
b) Old Private Banks (20)
c) New Private Banks (9)
d) Foreign Banks (31)
e) Scheduled Urban Co-operative Banks (55)

Annexure 2- Bank valuation worksheet


a) Using the balance sheet as an enterprise value model.
b) The banks free cash flow method.

Annexure 3- RBI circulars related to merger/amalgamation


a) Guidelines for merger/amalgamation of private sector banks
b) Amalgamation/Merger of Non-Banking Finance Companies with Banks
c) Guidelines for merger / amalgamation of Urban Co-operative Banks (UCBs)

Annexure 4- Foreign bank entry and expansion norms in India


Annexure 5-Guidelines on Ownership & Governance in Private Banks
Annexure 6- Narasimhan Committee Report (1991 & 1998)
Annexure 7- M&A Terminology
Annexure 8- Sources and References
ABOUT BANKNET INDIA

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Chapter- I- Over view of Indian banking Industry


India has an extensive banking network, in both urban and rural areas. All large Indian
banks are nationalized, and all Indian financial institutions are in the public sector. The
Reserve Bank of India is the central banking institution. It is the sole authority for issuing
bank notes and the supervisory body for banking operations in India. It supervises and
administers exchange control and banking regulations, and administers the
government's monetary policy. It is also responsible for granting licenses for new bank
branches. 36 foreign banks operate in India with full banking licenses.
Indian Banking System
The banking system has three tiers. These are the scheduled commercial banks; the
regional rural banks which operate in rural areas not covered by the scheduled banks;
and the cooperative and special purpose rural banks.
Commercial banks are categorized as scheduled and non-scheduled banks, but for the
purpose of assessment of performance of banks, the Reserve Bank of India categories
them as public sector banks, old private sector banks, new private sector banks and
foreign banks.
Scheduled and non Scheduled Banks
There are 93 scheduled commercial banks, Indian and foreign; 196 regional rural banks.
In cooperative sector- nearly 2000 cooperative banks operate, which include non
scheduled banks. In terms of business, the public sector banks, namely the State Bank
of India and the nationalized banks, dominate the banking sector.
Scheduled Commercial Banks (SCBs) in India are categorized in five different groups
according to their ownership and/or nature of operation. These bank groups are: (I) State
Bank of India and its associates, (ii) Nationalized Banks, (iii) Regional Rural Banks, (iv)

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Foreign Banks and (v) Other Indian Scheduled Commercial Banks (in the private sector).
The site provides facility of aggregating data for various bank-groups.

Scheduled Banking Structure in India (As on March 31, 2003)

Regional Spread of Banking


The total number of branches of SCBs as at end-June 2004 stood at 67,097 comprising
32,207 rural branches, 15,028 semi-urban branches and 19,837 urban and metropolitan
branches. In line with the regional distribution of income, the Southern region accounted
for the highest percentage of bank branches, followed by Eastern Region, Northern
Region, Western Region and North-Eastern region.

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The State Bank and its seven associates have about 14,000 branches; 19 nationalized
banks 34,000 branches; the RRBs 14,700 branches; and foreign banks around 225
branches. If one includes the branch network of old and new private banks, collectively
the spread could be over 68,000 branches across the country. Besides, there are a few
thousand co-operative bank branches. On an average, one bank branch caters to
15,000 people.
India is the 4th largest economy in terms of the purchasing price parity and 10th place in
terms of the GDP. Indian economy is registering consistent 6 per cent annual growth for
last 5 years. However, only one bank -- State Bank of India -- is among the top 200
banks in the world.

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Chapter- II - What is M &A.?


Merger is a combination of two or more companies into one company. In India, mergers
are called as amalgamations, in legal parlance. The acquiring company, (also referred to
as the amalgamated company or the merged company) acquires the assets and
liabilities of the target company (or amalgamating company). Typically, shareholders of
the amalgamating company get shares of the amalgamated company in exchange for
their existing shares in the target company. Merger may involve absorption or
consolidation.
A) Merger and amalgamation: the term merger or amalgamation refers to a
combination of two or more corporate into a single entity. It may involve either;
a) absorption- one bank acquires the other.
Or
b) consolidation- two or more banks combine to former a new entity. In India the legal
term for merger is amalgamation.

Other way of classifying merger is upon the basis of what type of corporate
combine. It can be of following types-

1) Horizontal merger: This is the merger of the corporate engaged in the same
kind of business. E.g.: Merger of bank with another bank.

2) Vertical merger: This is the merger of the corporate engaged in various stages of
production in an industry. A vertical merger (entities with different product profiles) may
help in optimal achievement of profit efficiency. Consolidation through vertical merger
would facilitate convergence of commercial banking, insurance and investment banking.
3) Conglomerate merger- A conglomerate merger arises when two or more firms in
different markets producing unrelated goods join together to form a single firm. An
example of a conglomerate merger is that between an athletic shoe company and a soft
drink company. The firms are not competitors producing similar products (which would

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make it a horizontal merger) nor do they have an input-output relation (which would
make it a vertical merger).
B) Acquisition: This may be defined as an act of acquiring effective control by one
corporate over the assets or management of the other corporate without any
combination of both of them. For example recently oracle major software firm has
agreed to acquire a majority stake in Indian banking software company I-flex Solutions.
It can be characterized in terms of the following:
a) The corporate remain independent.
b) They have a separate legal entity.
C) Take over: Under the monopolies and restrictive trade practices act, lake over means
acquisition of not less than 25% of voting powers in a corporate.
Difference between acquisition and take over:
Although the term acquisition and take over are used interchangeably but in fact the
term Take over generally shows a hostile act. To put in simple words, when an
acquisition is forced or unwilling act, then it is called take over.

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Chapter- III- Benefits of Consolidation


Why Merger in banks- the benefits.
A merger involves a marriage of two or more banks. It is generally accepted that
mergers promote synergies. The basic idea is that the combined will create more value
than the individual banks operating independently. Economist refers to the phenomenon
of the 2+2=5 effect brought about by synergy.
Economies of scale refer to the lower operating costs (per unit) arising from spreading
the fixed costs over a wider scale of production and economies of scope refer to the
utilization of skill assets employed in the production in order to produced similar products
or services.
The resulting combined entity gains from operating and financial synergies. In a
combined entity, the skill used to produce separate and limited results will be used to
produce results on wider scale. Additional financial synergies refer to the effect of a
merger on the financial activities of the resulting company. The cash flows arising from
the merger are expected to present opportunities in respect of the cost of financing and
investment.
Greater efficiency
Banks often are able to operate more cost effectively by increasing their size. The costs
of many functions don't double when the scale of operation doubles. As a result,
mergers are one way to keep costs and prices down.
Leveraging technology
Banks and their customers have become increasingly accustomed to the advantages of
new and expensive technologies. Many of these technologies are too expensive unless
costs can be spread over a large number of customers. Mergers are often
necessary to allow banks to introduce and maintain the technologies customers
increasingly demand.

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Changing laws
Laws which had prevented many banks from operating in more than one state recently
have been removed or overridden. The advent of interstate banking and branching
means more opportunities for banks operating in different states to merge with each
other.
Diversification
One effective method of controlling risks inherent in bank lending is to diversify
operations across different geographic regions and different types of customers.
Mergers can help diversify such risks.
Broader array of products
Mergers may give banking institutions an opportunity to offer a broader array of services.
A merger of two banks with different expertise can result in a combination more to the
liking of customers looking for one-stop shopping.
Why Consolidation in Indian banking industry
Financial Sector Reforms set in motion in 1991 have greatly changed the face of Indian
Banking. The banking industry has moved gradually from a regulated environment to a
deregulated market economy. The pace of changes gained momentum in the last few
years. Globalization would gain greater speed in the coming years particularly on
account of expected opening up of financial services under WTO.
Banks in India are gradually going for- 1) Consolidation of players through mergers and
acquisitions, 2) Globalization of operations, 3) Development of new technology and 4)
Universalisation of banking.

With the international banking scenario being dominated by larger banks, it is


important that India too should have a fair number of large banks, which could
play a meaningful role in the emerging economics. Among the top twenty banks
in the emerging economics, India has only one, whereas China has five banks
and Brazil had six banks.

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The performance of banks in India indicates that certain performance


characteristic is not restricted to a particular bank. Therefore, consolidation of
banking industry is critical from several aspects. Mainly, the reasons for mergers
and acquisitions can include motives for value maximizations well non-value
maximization. The factors including mergers and acquisitions usually include
technological progress, excess capacity, emerging opportunities, consolidation of
international banking markets and deregulations of geographic, functional and
product restrictions. Policy inducements such as the governments incentives that
could accrue to the top managers are also other important factors, which may
determine the pace of consolidation.

It is found that in all major economics, banking industry undergoes some sort of
restructuring process. The economy, which delays this process, leads to
stagnation. That is why, it is important from the point of view of long term
prospect of the economy, the consolidation process should be given prime
attention.

The major gains perceived from bank consolidation are the ability to withstand
the pressures of emerging global competition, to strengthen the performance of
the banks, to effectively absorb the new technologies and demand for
sophisticated products and services, to arrange funding for major development
products in the realm of infrastructure, telecommunication, etc. which require
huge financial outlays and to streamline human resources functions and skills in
tune with the emerging competitive environment.

The international experience reveals a wide range of processes and practices


involving consolidation, their impact on the banking market and the trends in post
merger performance of banking institutions. These experiences could provide
useful inputs to the banking policy in India.

An important observation which may be induced from various past mergers that
the merger between big and small banks led to greater gains as compared to

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merger between equals. It is also observed from past experiences that if the
merger follows business aided by appropriated technology and diversified
product range, it could lead to greater gains for the banking industry as a whole.
Similarly, consolidation increases the market power and does not cause any
damage to the availability of services to small customers.

Evaluation of banks carried out by individual banks reveal that higher capital
adequacy and lower nonperforming assets explain to a greater extent the growth,
Profitability and productivity of banks since increase in capital and steep
reduction in non-performing assets cannot be entirely left to the individual banks
in the present scenario. Consolidation in the banking industry is of great
relevance to the economy.

A diagnostic performance evolution study would reveal out important aspects of


divergence in the performance of the domestic banking institutions. A high
degree of variations is found in the performance of various groups of banks.
Since, public sector banks account for the large scale of banking assets and the
lower performance ratio reflect the entire banking industry, it is considered
important that suitable consolidation process may be initiated at the earliest, so
that, the efficiency gain made by the large number of banks of other groups will
be reflected which could lead to a positive impact on the image of banking.

Consolidation can also be considered critical from the point of view of quantum of
resources required for strengthening the ability of banks in assets creation. It
indicates that restructuring in Indian banking may not be viewed from the point of
particular group rather it can be evolved across the bank groups.

Indians banks have unique character in displaying similar characteristics of


performance despite consisting of different size and ownership. This trend further
substantiates the scope for consolidation across banks group.

As per the Quantitative Impact Study published by Basel Committee in May


2003, there would be increase in capital requirements by 12% for banks in
developing countries on the implementations of the Basel II Accord. Mergers

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among the banks will be one of the ways to increase market power and thereby
increase the revenue-generation of the Banks.

The Reserve Bank of India (central bank) has set up an experts committee to
implement Basel II accord by 2006 to strengthen the financial health of banks by
adopting globally accepted norms for capital adequacy. The RBI also wants all
banks in India to have a capital base of Rs 300 crore (Rs 3 billion) over the next
three years. This will bring about number of acquisitions in the banking industry.

Over the last two years, the RBI has stopped issuing branch licenses to cooperative banks, after the unbridled growth of co-operative banks during the last
decade. For cooperative banks to expand there is no alternative to go for merger
an amalgamation. The Mumbai-based Saraswat Co-operative Bank is now
poised to take over Maharashtra-based Maratha Mandir Co-operative Bank
which is in trouble. This could mark the beginning of voluntary mergers of cooperative banks after the Reserve Bank of India (RBI) unveiled for mergers and
amalgamations among urban co-operative banks. The other suitor for Maratha
Mandir was Pune-based Cosmos Co-operative Bank.

Last but most important reason for consolidation in any industry is tax saving and
this thing is true for the banking industry also.

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Chapter- IV- Merger in Indian banks


Target Group of Banks for M&A
There are four categories of banks interested in M&A in a big way.
1) First, there are banks (like Indian Bank) that have survived on the government's
largesse in the form of thousands of crores of recapitalization bonds over the past
decade. They are now keen to take over other banks to become strong and acquire
widespread reach.
2) In the second category are two types of banks. In one group are strong public sector
banks with large domestic presence (like State Bank of India) that want to acquire a
bank with an overseas presence to become global entities.
The other group of banks has been looking at increasing their domestic presence and
reach. For instance, Bank of Baroda -- which has a solid presence in western India -has started looking out for opportunities in the north, east and south. Vijaya Bank, which
is based in Bangalore, is interested in picking up a northern bank. North India major
Punjab National Bank, headquartered in Delhi, is looking southwards.
3) In the third category, are "make-believe" M&As that are purely personality-driven.
These are banks headed by CEOs who were denied opportunities to head big banks
and are believed to be taking the initiative to acquire other banks so that they can prove
their leadership qualities.
4) In the fourth category is a weak and small bank, which needs to be taken over by
larger banks to remain viable. These can be the potential targets of foreign banks and
investors.
Over 90 per cent of private sector banks have a capital base of less than Rs 100 crore
(Rs 1 billion). Some of them even do not have a net worth of Rs 300 crore. Large
numbers of urban cooperative banks are in trouble and looking for take-over/acquisition
to survive.

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List of the bank mergers in India since 1961Mergers and amalgamations are not new to the Indian banking system too. However, it
is pertinent to note that a majority of such mergers have been undertaken by banks
voluntarily for strategic purposes

Name of Bank Merged


Sr.No (Transferor Bank)

Merged /Amalgamated

Date of

with (Transferee Bank)

Merger/Amalgamation

National Bank of Lahore


1 Prabhat Bank Ltd

Ltd.

9-3-1961

2 Indo-Commercial Bank Ltd

Punjab National Bank

25-3-1961

3 Bank of Nagpur Ltd

Bank of Maharastra

27-3-1961

4 New Citizen Bank Ltd

Bank of Baroda

29-4-1961

State Bank of
5

Travancore Forward Bank Ltd

Travancore

15-5-1961

6 Bank of Kerala Ltd.

Canara Bank

20-5-1961

7 Bank of Poona Ltd.

Sangli Bank Ltd

3-6-1961

State Bank of
8 Bank of New India Ltd.

Travancore

17-6-1961

9 Venadu Bank Ltd

South Indian Bank Ltd

17-6-1961

10 Wankaner Bank Ltd

Dena Bank

17-6-1961

11 Seasia Midland Bank Ltd

Canara Bank

17-6-1961

State Bank of
12 Kottayam Orient Bank Ltd

Travancore

17-6-1961

13 Bank of Konkan Ltd.

Bank of Maharastra

19-6-1961

14 Poona Investors Bank Ltd

Sangli Bank

28-6-1961

15 Bharat Industrial Bank Ltd

Bank of Maharastra

1-7-1961

16 Rayalaseema Bank Ltd

Indian Bank

1-9-1961

17 Cuttack Bank Ltd

United Bank of India

4-9-1961

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18 Pie Money Bank Pvt.Ltd

Syndicate Bank

4-9-1961

19 Moolky Bank Ltd

Syndicate Bank

4-9-1961

Tanjore Permanent Bank


20 Merchants Bank Ltd

Ltd.

4-9-1961

21 Tezpur Industrial Bank Ltd.

United Bank of India

4-9-1961

22 G.Raghunathmull Bank Ltd.

Canara Bank

4-9-1961

Satara Swadeshi Commercial

United Western Bank Ltd

23 Bank Ltd.

6-9-1961

24 Catholic Bank Ltd .

Syndicate Bank

11-9-1961

25 Phaltan Bank

Sangli Bank Ltd

11-9-1961

26 Jodhpur Commerical Bank Ltd.

Central Bank of India

16-1-1961

Canara Banking
27 Bank of Citizen Ltd.

Corporation Ltd

17-10-1961

28 Karur Mercantile Bank Ltd

Laxmi Vilas Bank Ltd.

19-10-1961

29 People Bank Ltd

Syndicate Bank

14-11-1961

Lakshmi Commercial
30 Pratab Bank Ltd

Bank Ltd.

11-12-1961

31 Unity Bank Ltd

State Bank of India

20-8-1962

32 Bank of Algapuri Ltd.

Indian Bank

14-8-1962

33 Metropolitan Bank Ltd

Indian Bank

14-8-1963

State Bank of
34 Cochin Nayar Bank Ltd

Travancore

8-2-1964

35 Bank Ltd.

Karur Vysya

1-6-1964

36 Unnao Commerical Ltd.

Bareilly Corporation Ltd

12-8-1964

Salem Shri Kannikaprameshwari

State Bank of
37 Latin Christian Bank Ltd.

Travancore

17-08-1964

United Industrial Bank


38 Southern Bank Ltd

Ltd

24-8-1964

Belgaum Bank Ltd

26-10-1964

Shri Jadeya Shankarling Bank


39 Ltd.

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40 Bareilly Bank Ltd.

Benarus State Bank Ltd.

16-11-1964

41 Thiya Bank Ltd

Lord Krishna Bank Ltd.

16-11-1964

State of india Ltd.

1-9-1965

43 Ltd.

Bank of Madura Ltd

1-9-1965

44 Malnad Bank Ltd

State Bank of Mysore

6-10-1965

45 Josna Bank Ltd

Lord Krishna Bank Ltd.

13-10-1965

46 Amrit Bank Ltd

State Bank of Patiala

3-2-1965

47 Chawla Bank Ltd

New Bank of India

23-4-1969

Allahabad Trading & Bkg. Corp


42 .Ltd
Vettaikaran Padur Mahajan Bank

Banks Amalgamated/ Merged

Nationalisation of

since

Banks in India

48 Bank of Bihar Ltd

State Bank of India

8-11-1969

49 National Bank of Lahore Ltd.

State Bank of India

20-2-1970

50 Miraj State Bank Ltd

Union Bank of India

29-7-1985

51 Lakshmi Commercial Bank Ltd

Canara Bank

24-08-1985

52 Bank of Cochin Ltd

State Bank of India

26-08-1985

53 Hindustan Commercial Bank Ltd.

Punjab National Bank

19-12-1986

54 Traders Bank Ltd

Bank of Baroda

13-05-1988

55 United Industrial Bank Ltd.

Allahabad Bank

31-10-1989

56 Bank of Tamilnadu Ltd

Indian Overseas Bank

20-02-1990

57 Bank of Thanjavur Ltd.

Indian Bank

20-02-1990

58 Parur Central Bank Ltd

Bank of India

20-02-1990

59 Purbanchal Bank Ltd

Central Bank of India

29-08-1990

60 New Bank of India

Punjab National Bank

4-9-1993

61 Bank of Karad Ltd.

Bank of India

1993-1994

62 Kashi Nath Seth Bank

State Bank of India

I-01-1996

Oriental Bank of
63 Punjab Co-op. Bank Ltd.

Commerce

8-4-1997

Oriental Bank of
64 Bari Doab Bank Ltd

Commerce

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65 Bareilly Corp. Bank Ltd.

Bank of Baroda

3-6-1999

66 Sikkam Bank Ltd

Union Bank of India

22-12-1996

67 Times Bank India

HDFC Bank Ltd

26-02-2000

68 Benaras State Bank Ltd

Bank of Baroda

20-07-2002

69 Nedungadi Bank Ltd

Punjab National Bank

1-2-2003

70 Bank of Madura

ICICI Bank

10-3-2001

Oriental Bank of
71 Global Trust Bank Ltd.

Commerce

14-08-2004
Effective from 1-4-2005
Announced date (29-

72

Bank of Punjab (BoP)

Centurion Bank

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Federal Bank and Lord Krishna Bank Ltd (LKBL) have decided to call off their proposed
merger as they could not reach a mutually agreeable valuation for the purpose. However
two new private sector banks Bank of Punjab and Centurian Bank successfully merged
recently to form Centurion Bank of Punjab.
The process of consolidation in the urban co-operative banking sector has been kicked
off with regulatory approval for three mergers.
1. The Mumbai-based Saraswat Co-operative Bank is to take over Maharashtra-based
Maratha Mandir Co-operative Bank which is in trouble.
2. RBI, has also approved a proposal from Pune based Cosmos Bank to acquire
Secunderabad-based Premier Co-operative Bank.
3. Gujarat-based Kalupur Co-operative Bank has got approval to acquire Mahila Cooperative Bank.
Mumbai -based Shamrao Vittal Co-operative (SVC) Bank has embarked into an
acquisition spree of smaller co-operative banking entities and all set to acquire Samartha
Nagar Co-operative bank. It is also acquiring similar entities in Maharashtra and
Karnataka.

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Indian Banks listed on the Stock Exchanges:


NAME OF THE LISTED BANKS
Allahabad Bank
Andhra Bank
Bank of Baroda
Bank of India
Bank of Punjab Ltd.
Bank of Rajasthan Ltd.
Canara Bank
Centurion Bank Ltd.
City Union Bank Ltd.
Corporation Bank
Dena Bank
Federal Bank Ltd.
HDFC Bank Ltd.
ICICI Bank Ltd.
IDBI Bank Ltd.
Indian Overseas Bank
IndusInd Bank Ltd.
Jammu and Kashmir Bank Ltd.
Karnataka Bank Ltd.
Karur Vysya Bank Ltd.
Oriental Bank of Commerce
Punjab National Bank
South Indian Bank Ltd.
State Bank of Bikaner and Jaipur
State Bank of India
State Bank of Travancore
Syndicate Bank
Union Bank of India
United Western Bank
UTI Bank Ltd.
Vijaya Bank
Vysya Bank Ltd.
Yes Bank Ltd

WEB SITE
http://www.allahabadbank.com/
http://www.andhrabank-india.com/
http://www.bankofbaroda.com/
http://www.boi.com/
http://www.bankofpunjab.com/
http://www.bankofrajasthan.com/
http://www.canbankindia.com/
http://www.centurionbank.com/
http://www.cityunionbank.com/
http://www.corpbank.com/
http://www.denabank.com
http://www.federal-bank.com/
http://www.hdfcbank.com/
http://www.icicibank.com/
http://www.idbi.com/
http://iob.com/
http://www.indusind.com/
http://www.jammuandkashmirbank.com/
http://www.ktkbankltd.com/ktk/Index.jsp
http://www.kvb.co.in/
http://www.obcindia.com/
http://www.pnbindia.com/
http://www.southindianbank.com/
http://www.sbbjbank.com
http://www.statebankofindia.com/
http://www.sbtr.com/
http://www.syndicatebank.com/
http://www.unionbankofindia.com
http://www.uwbankindia.com/
http://www.utibank.com/
http://www.vijayabank.com/
http://www.vysbank.com/
http://www.yesbankltd.com/

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Chapter- V- Existing Legal Framework


Legal Categorization of banks
Legal categorization of banks is with reference to the statute under which they are
constituted. They are classified as nationalized banks, banking companies, SBI and its
subsidiaries, RRBs, Cooperatives and Multi-state cooperative banks.
Nationalized Banks
Nationalized banks are corporate bodies established by the Banking Companies
(Acquisition and Transfer of Undertaking) Act, 1970 and Banking Companies
(Acquisition and Transfer of Undertaking) Act, 1980. The total numbers of such banks is
19. These are predominantly owned and controlled by the Central Government. All these
are constituted by an Act of parliament and governed by the aforesaid statutes.
By section 51 of the Banking Regulation Act, 1949 (BR Act), certain provisions of the BR
Act are made applicable to these banks, however the provisions of the Companies Act
do not apply to these banks.
Banking Companies
Although all private sector banks are companies registered under the Companies Act,
1956 and operating as banking companies after obtaining banking license from Reserve
Bank of India such banks further grouped into following categories:
Old private sector banks
New private sector banks
Local area banks
All the above category of banks are banking companies except that their minimum share
capitals are different.
In the matter of amalgamation /merger and winding up of banking companies, the
concerned High Court will continue to have jurisdiction under the provisions of the
Companies Act.

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State Bank of India and its Subsidiaries


The State Bank of India is constituted under the State Bank of India Act, 1955 by
transfer of the undertaking of the Imperial Bank of India to the State Bank of India and all
the shares in the capital of Imperial Bank of India were transferred to the Reserve Bank
of India. By section 51 of the Banking Regulation Act, 1949 certain of the said Act are
made applicable to State Bank of India, but the provisions of the Companies Act do not
apply. The subsidiaries of state Bank of India are constituted as subsidiary banks under
State Bank of India (Subsidiary Banks) Act, 1959. The subsidiary banks are bodies
corporate and are governed by the provisions of the above Act and the provisions of the
Companies Act do not apply. Like other public sector banks, provisions of the BR Act,
1949 are made applicable to subsidiary banks by virtue of section 51 of the said Act.
Regional Rural Banks (RRBs)
Regional Rural Banks (RRBs) are constituted under Regional Rural Banks Act, 1976
(RRB Act, 1976). Section 6(2) of the RRB Act, 1976.
Such RRBs are bodies corporate governed by the RRB Act, 1976 and the provisions of
the Companies Act do not apply. For the purpose of Income Tax Act or any other law for
the time being in force relating to any tax on income, profits or gains, the RRB shall be
deemed to be a co-operative society (section 22 of the RRB Act) and provisions of the
companies Act do not apply to the RRBs. Provisions of Banking Regulation Act as
specified under section 51 of the BR Act, apply to the RRBs to the extent specified
therein.
Co-operative Banks
The definition of banking company contained in the BR Act, 1949 as modified by
section 56 of the Act includes co-operative banks within the definition of banking
company. While the provisions relating to regulation and supervision of the co-operative
banks are contained in the BR Act, 1949 the status for such co-operative banks as cooperative societies are governed by the respective co-operative societies laws in force in
various States under which the concerned co-operative bank may be registered as a cooperative society.

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Multi-State Co-operative Banks


In the category of co-operative banks, there is a special category of co-operative banks
having their area of operation in more than one States and such societies are registered
under a central law viz. Multi-State Co-operative Societies Act, 2002.

b) Compliance with Regulations of the Banking Regulation Act


Under Banking Regulation Act, there is presently no provision for obtaining approval of
the Reserve Bank of India for any acquisition or merger of any financial business by any
banking institution. In other words, if a banking institution desires to acquire a nonbanking finance company there is no requirement of approval of the Reserve Bank of
India. Further, in case of a merger of an all India financial institution with own subsidiary
bank, there was no express requirement of obtaining the approval of Reserve Bank of
India for such merger, under the provisions of the Banking Regulation Act or the
Reserve Bank of India Act. Such approval of the Reserve Bank of India is required only
in the context of relaxation of regulatory norms to be complied with by a bank.
However, for a regulator, it is a matter of concern to ensure that such acquisitions or
mergers do not adversely affect the concerned banking institutions or the depositors of
such banking institutions.
c) Compliance with Securities and Exchange Board of India (SEBI) Regulations
The regulations apply to the companies registered under the Companies Act as well as
to corporations established by Acts of Parliament by virtue of listing agreements. It is for
this reason that corresponding new banks increasing capital by issue of shares to the
public are required to comply with SEBI regulations in spite of the fact that the other
provisions of the companies Act in regard to issue of shares etc. do not apply to the
corresponding new banks. In view of this position in respect of acquisitions and mergers
of any banking institutions whose shares are listed at the Stock Exchanges will be
required to comply with all the relevant regulations of SEBI.
In India take-over are regulated by SEBIs Takeover Code for substantial
acquisitions of shares in listed companies of November 1994. SEBI announced a
take-over code for the regulation of substantial acquisition of shares, aimed at

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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.
d) 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".
e) Creditors/Financial Institutions/Banks approval
Approvals from these are required for the scheme of amalgamation in terms of the
agreement signed with them.
f) 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.
g) 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.
Reserve Bank approval is also required in case of mergers involving a banking
entity.

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Chapter- VI- Accounting, Taxation & Valuation


a) Accounting Procedure
Section 29 of the Banking Regulation Act, 1949 requires every banking company to
prepare a balance-sheet and profit and loss account in the forms set out in the Third
Schedule to the Act. Sub-section (3) of section 29 further provides that provisions of the
Companies Act, 1956 relating to balance sheet and profit and loss account shall apply
to banking companies to the extent they are not inconsistent with the Banking
Regulation Act.
In view of the above position , the system of maintaining account , forms of balance
sheet , profit and loss account and other related accounting practices are standardized
any merger of two banks may not pose problems in relation to accounting practices
except a need to fine-tune any divergent practices in respect of specific heads of income
or expenditure.
One critical area that needs careful consideration is integration of different technology
platforms and software which not only have process and control implications but may
involve substantial costs in terms of money and time and retraining of personnel.
In regard to actual banking operations each bank has different nomenclatures for deposit
schemes and loan products. Similarly in the internal working and inter-branch
transaction, the banks have different nomenclatures for the debit and credit vouchers.
On any merger, such variations in the schemes and products and other practices will
need to be integrated.
b) Taxation
Under section 72A (1) of the Income Tax Act where there has been an amalgamation of
a banking company referred to in clause (c) of the Section 5 of the Banking Regulation
Act with a specified bank the accumulated loss and the unabsorbed depreciation of the
amalgamating company shall be deemed to be loss or as the case may be allowance for
depreciation of the amalgamated company for the previous year in which the
amalgamation was effected and the provisions of the Income tax Act relating to set-off

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and carry forward of loss and allowance for depreciation shall apply accordingly. The
expression specified bank in sub-section (1) above is defined as State Bank of India or
corresponding new bank. The effect of this provision is that benefit of carry forward loss
and unabsorbed depreciation is available only in case where a banking company is
merged with State Bank of India or subsidiary of State Bank of India or a corresponding
new bank. If there are mergers of corresponding new banks or State Bank of India and
corresponding new bank or subsidiary and corresponding new bank the benefit now
section 72A is not available.
Bank mergers prompted by the Government action - `Involuntary' mergers - would be
given tax breaks under the Income-Tax Act with the Finance Minister, proposing
insertion of a new clause to provide for set off of losses of a banking company against
profit of a banking institution under a scheme of amalgamation.
"With a view to provide carry forward and set off of accumulated loss and unabsorbed
depreciation allowance of a baking company against the profits of a banking institution
under a scheme of amalgamation sanctioned by the Central Government, it is proposed
to insert a new Section 72AA in the Income Tax Act, 1961," the Budget 2005-06 has
said.
The Section propose that the accumulated loss and unabsorbed depreciation of the
amalgamating banking company will be deemed to be the loss or the allowance for
depreciation of the banking company for the previous year in which the scheme of
amalgamation is brought into force and that all the provisions of the I-T Act relating to set
off and carry forward of loss and depreciation shall apply to the merger.
The Reserve Bank of India, in a bid to smoothen the merger/amalgamation of Urban
Cooperative Banks (UCBs), has proposed to permit the acquirer UCB to amortize the
losses taken over from the acquired UCB, for a period not in excess of five years. This
period includes the year of merger.
c) Valuation methods

Beauty lies in the eyes of the beholder; valuation in those of the buyer.

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Value of a business is a function of the business logic driving the M&A and is
based on the bargaining powers of buyers and sellers.

Since business is based on expectations which is dynamic, valuation also tends


to be dynamic and not static which means that that same transaction would be
valued by the same players at different values at two different times.

There are several techniques to value a business and broadly they are classified as
under:A) Earnings based valuation
Discounted Cash flow / Free cash flow
Cost to create approach
Capitalized earnings method.

B) Market based valuation


Market capitalization for listed companies
Market multiples of comparable companies for unlisted company.
C) Asset based valuation
Net Adjusted Asset Value or economic book value
Intangible Asset Valuation
Liquidation Value.
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.

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The discounted cash flow approach to corporate valuation involves four broad
steps:

Forecast the free cash flow

Compute the cost of the capital

Estimate the continuing value

Calculate and interpret results

d) Methods of acquisition pricing

Rhoades study:

Merger premiums paid to target banks dependent on target asset growth,


growth of its market share, and capital/assets ratio of target

Fraser and Kolari study:

Compared to low premium target banks, high premium target banks have:

Higher net income.

Larger fractions of non-interest bearing deposits.

Lower loan losses.

Beatty, Santomero, and Smirlock study:

Higher merger premiums paid to target banks with:

Higher net income.

Lower ratios of U.S. Treasury securities/total assets.

Lower loan losses.

e) Bank earnings and stock prices: Which earnings matter?

Earnings before securities gains and losses:

Focus on fundamental deposit taking and lending activities of banks.

Securities gains and losses:

More transitory and volatile than other components of earnings.

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The market may capitalize operating earnings at a higher multiple than securities
gains or losses:

Barth, Beaver, and Wolfson study found that bank stock prices were
positively related to operating earnings and negatively related to
securities gains and losses.

Apparently, the market views securities

gains and losses as an attempt by bank management to smooth earnings


(which does not fool the market).
Evidence from market responses to bank M&A announcements.

Hawawini and Swary study:

Price of target banks increases on average about 11.5% during the week
of an M&A announcement. Cash transactions were more profitable for
targets than stock deals.

Bidding bank stock values dropped by 1% to 2%.

Why buy other banks if your stock price falls?


Managerial agency costs (maximize their welfare at expense of
shareholders).

Cornett and Tehranian study:

In the long run banks involved in acquisitions showed higher than normal
cash flow performance and greater asset growth. Thus, in the long run
both targets and bidders benefited from an acquisition.

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Chapter- VII- Reserve Banks Review Process


Reserve bank of India has laid down guidelines for the process of merger proposal,
determination of swap ratios, disclosures, the stages at which boards will get involved in
the merger process and norms of buying and selling of shares by the promoters before
and during the process of merger
Reserve bank of India (RBI) in its capacity of the primary regulator and supervisor of the
banking systems has information on the present functioning of all the banks in India, the
RBI is the best suited to undertake the merger review process.
While undertaking the merger review process, RBI will need to examine the proposal for
the merger from a prudential perspective to gauge the impact on the stability and the
financial well being of the merger applicants and on the financial systems. In addition to
the assessment of the proposed merger on the competitiveness and stability of the
financial systems, RBI will also need to examine the implications on regional
development, impact on society etc. as a result of merger since banks in India also have
to fulfill have to fulfill various social obligations.
The RBI will need to examine the reasonableness of financial projection, including
business plan and earning assumptions as well as the effect of the proposed merger on
the merged entitys capital position. Finally RBI will have to consider potential changes to
risk profile and the capacity of the merger applicants ` risk management systems,
particularly the extent to which the level of risk would change as a result of the proposed
merger and the merged entitys ability to measure, monitor and manage those risks.
Broadly the information that will need to be examined by RBI while evaluating a proposal
for merger would include:
The objective to be achieved by the merger.
What impact could the merger have on the financial markets?

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What impact could be the creations of mega bank have on monetary policy, the
management of interest rates. What threat to the Indian economy would be
posed by the difficulties experienced by a mega bank in its international
activities?
The impact that the merger might have on the overall structure of the industry.
The possible costs and benefits to customer and to small and medium size
businesses, including the impact on bank branches the availability of financing
price, quality and the availability of services.
The timing and the socioeconomic impact of any branch closures resulting from
the merger.
The manner in which the proposal will contribute to the international
competitiveness of the financial services sector.
The manner in which the proposal would

indirectly affect employment and the

quality of jobs in the sector, with a distinction made between transitional and
permanent effects.
The manner in which the proposal would increase the ability of the banks to
develop and adopt new technologies.
Remedial steps that the merger applicants would be willing to take to mitigate the
adverse effects identified to arise from the merger.

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Chapter- VIII- Procedure for merger/amalgamation of banks


a) Merger of private banksThe Reserve of India has the power to sanction of merger of banking companies under
section 44A of the Banking Regulation Act. Various steps for such a scheme are as
under:
i.

Draft scheme of merger has to be placed before shareholders of each banking


Company and approved by the majority representing 2/3rd in value of
shareholders of each banking company present and voting (including proxies)

ii.

Notice of meeting to be given to shareholders of each banking company and


notice of meeting to be published in two newspapers of the locality at least once
in week for three consecutive weeks.

iii.

Any dissenting shareholder to be paid value of shares held by as fixed by


Reserve Bank of India while approving in draft scheme.

iv.

On obtaining shareholders approval, scheme to be submitted to Reserve Bank of


India for approval /sanction.

v.

Reserve Bank of India to issue an order sanctioning the scheme. Consequences


of such amalgamation scheme such as vesting of assets and liabilities in the
transferee bank etc ensure as provided in sub-sections (6), (6A), (6B), (6C) of
section 44A.

vi.

Except the variations on account of requirement of sections 44A, other


requirement for actual framing of the scheme will apply as stated in section on
power of Acquisition or Takeover of banking Institutions (Section 4.1)

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b) Merger of a private bank with a nationalized banki.

Since the definition of banking institution under section 9 of the bank


nationalization Act includes a banking company, a scheme under section 9(2) (C
) can be framed by the Central Government for the purpose of mergers of a
banking company will corresponding new bank. All the requirement stated under
section on power of Acquisition Takeover of banking Institution (Section 4.1)
would apply in respect of such a scheme.

ii.

If such a banking company to be merged with corresponding new bank is a listed


company it would be necessary to comply with the requirement of the Listing
Agreement.

iii.

To protect the right of the shareholders of the banking company it will also be
necessary to give an option to the shareholders of the banking company to
accept the shares of the merged entity as per the swap ratio as fixed by the
scheme or accept the shares of the merged entity as per the swap ratio as fixed
by the scheme or accept the payment for shareholders. Since the merger
scheme is to be framed under section 9(2) (C) of the Nationalization Act, there is
no express statutory requirement for the purpose of obtaining the consent of the
shareholders of the banking company for the mergers.

c) Merger of nationalized banksThe following steps will need to be undertaken:


i.

CMDs of the two Banks approach GOI and obtain clearance to proceed to
evaluate proposal.

ii.

The Central Government may then ask the Two CMDs to conduct a strategic
due diligence to be able to further evaluate the logic of the merger.

iii.

The CMDs would go back to GOI with the results of the strategic due diligence.

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iv.

If the proposal finds favor with the Central Government, it would then frame a
draft scheme under section 9 of the Banking Companies (Acquisition and
Transfer of Undertakings) Act, 1980. The Central Government would require
valuation to be conducted by experts to work out the swap ratios. The experts so
chosen should be requested to submit their report in a sealed cover directly to
the Central Government. This is necessary so that persons connected with the
corresponding new banks who are involved in the process are protected from
any allegation that sensitive information was leaked or disclosed.

v.

The Central Government would then place all the material before the Reserve
Bank of India by way of consultation in terms of Section 9(1).After the Reserve
Bank offers its comments and suggestions, if any, the draft scheme could be
fine-tuned.

vi.

The Government scheme so fine-tuned would be placed before the Boards of


both Banks. At this stage, it would be necessary for listed entities to ensure that
compliance with SEBI guidelines is ensured.

vii.

The next step would be to publish the draft scheme in its final form in various
newspapers across the country for the information of the investing shareholders
and inviting them to make their suggestions, if any, in relation to the scheme. A
reasonable period for not less than 21 to 30 days could be given for this purpose.
Natural justice dose not entail personal hearing in all cases. This is particularly so
in cases where a large body of persons are involved. In such cases natural
justice is complied with if the persons concerned are given an opportunity for
making suggestions or objections. It would be perfectly reasonable to give an
opportunity of placing objection and suggestions in writing, which could then be
considered by the Central Government in a fair and objective manner.

viii.

Since the merger scheme is to be framed under section 9(2) (C) of the
Nationalization Act, there is no express statutory requirement for the purpose of
obtaining the consent of the shareholders of the banking company for the
mergers.

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ix.

The treatment of transferee bank employees will need to be indicated by the


GOI. It will be necessary to provide an option to workmen staff to continue in
service on same terms and conditions or accept retrenchment compensation and
other terminal benefits as may be payable under the rules, as governed by the
Industrial Disputes Act 1947. As far as non-workmen employees are concerned
the scheme may offer continuation initially for a specified period on same terms
and conditions and from the date to be specified on terms that are applicable to
such employees in the transferee bank. Those who do not accept the offer may
be paid terminal benefits as per the rules applicable.

x.

After all the suggestions that are received from minority shareholders are
considered, the Central Government could proceed to notify the scheme. The
effective date will need to be indicated in the notification.

xi.

Thereafter the scheme would have to be placed before both the Houses of
Parliament as provided in Section 9(6).

d) Merger of a nationalized bank with State Bank of India (SBI)i.

In a corresponding new bank the controlling shares are held by the Central
Government and respect of State bank of India, the controlling shares are held
by Reserve Bank of India. Initiation of any proposal for merger of corresponding
new bank with State Bank of India would therefore need approval of the Central
Government as well as the Reserve Bank of India.

ii.

Since the provision of section 9(2) (c) read with explanation I to section 9(5) of
the Nationalization Act contemplate the merger of a public sector bank with State
Bank of India, it would be permissible for the Central Government of formulate a
scheme under section 9(2) (c) for the purpose of amalgamation of a
corresponding new bank with State Bank of India.

iii.

If the corresponding new bank has raised capital by issue of shares to public it
will be necessary to make a valuation of shares and decide the swap ratio for
shares of the state Bank of India. Provision will have to be made for payment of

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compensation in cash to the dissenting shareholders of the corresponding new


bank, who do not dissenting shareholders of corresponding new bank, who do
not accept the shares of the State Bank of India as per the swap ratio.
iv.

In addition to the requirement stated above, the other requirement in the matter
of formulation of the scheme under section 9 (2) (c) as stated earlier above will
apply in respect of merger of a corresponding new bank with State Bank of India.

e) Merger of a nationalized bank with a subsidiary bank of State Bank of India


The position as stated earlier, in respect of merger of a corresponding new bank with
State Bank of India shall apply in respect of merger of corresponding new bank with a
subsidiary of State bank of India also. The only modification that may be required is that
approval of State Bank of India in addition to Reserve Bank of India and the Central
Government would be necessary for initiation of negotiation for merger, since the entire
shareholding of a subsidiary bank vests in State Bank of India; expect the above
modification, rest of the steps and applicable law will be the same as stated in 4.1
above.
f) Merger of a private bank with State bank of India or its subsidiaries
Although the State Bank of India has power to acquire any banking institution under
section 35 of the State Bank of India Act, 1955 the definition Banking Institution does
not expressly include a banking company. It is therefore doubtful whether powers under
section 35 of the State Bank of India Act, 1955 or under section 38 of the State Bank of
India (Subsidiary Banks) Act, 1959 can be exercised for the purpose of such merger. As
far as the power of the Central Government is concerned a scheme under section 9(2)
(c) cannot be framed for the purpose of merger of a banking company with State Bank of
India or subsidiary bank.

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g) Merger/Amalgamation in the cooperative banking sectorAs co-operative banks are under dual control, with both the RBI and the RCS (Registrar
of Co-operative Societies) .for merger to take place the RBI must issue a no-objection
certificate (NOC) to RCS. Amalgamation and mergers of co-operative banks falls under
the purview of the RCS.
Reserve Bank of India will consider proposals for merger and amalgamation in the urban
banks sector in the following circumstances:
1) When the networth of the acquired bank is positive and the acquirer bank assures to
protect entire deposits of all the depositors of the acquired bank;
2) When the networth of acquired bank is negative but the acquirer bank on its own
assures to protect deposits of all the depositors of the acquired bank; and
3) When the networth of the acquired bank is negative and the acquirer bank assures to
protect the deposits of all the depositors with financial support from the State
Government extended upfront as part of the process of merger.
The Reserve Bank also proposes that in all cases of merger/amalgamation, the financial
parameters of the acquirer bank post merger will have to conform to the prescribed
minimum prudential and regulatory requirement for urban co-operative banks. The
realizable value of assets will have to be assessed through a process of due diligence.
(See detailed guidelines in the annexure)

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Chapter- IX- A Case Study


Merger/Amalgamation of Global Trust Bank with Oriental Bank of
Commerce- A Case Study
The Reserve Bank had granted license to Global Trust Bank (GTB) Ltd. In September
1994 as a part of the policy to set up new private sector banks. The bank was promoted
by a group of professionals led by Dr. Jayanta Madhab and Shri Ramesh Gelli, the then
Chairman of Vysya Bank Ltd. with the participation of International Finance Corporation
(IFC) and Asian Development Bank (ADB) as associates.
The financial position of GTB started weakening in 2002 due to very high exposure to
capital market which had turned into problem assets. After it came to the notice of the
Reserve Bank that the bank had incurred huge net loss in 2002, it was put under close
monitoring. The bank was instructed to adopt a prudential policy of containing growth of
risk weighted assets, to make maximum recoveries of NPAs, to reduce its high capital
market exposure to the prudential limit, provide against impairment of assets out of the
operating

profits

and

to

take

immediate

steps

to

augment

the

capital.

The bank reported some progress in making recoveries and also the attempts underway
to have equity infusion. However, it was not able to finalize a programme of capital
augmentation till June 2004 through domestic sources as advised. Later, the bank
submitted in July 2004, a proposal received from an overseas equity investor fund for
recapitalization of the bank. The proposal was not found acceptable by Reserve Bank on
prudential and other considerations.
As the financial position of the bank was deteriorating progressively and the solvency of
the bank was being seriously affected, the Reserve Bank had to place the bank under
moratorium on July 24, 2004 to protect the interests of the large body of small depositors
of the bank and in the interest of the banking system.
A firm proposal for merger of the bank was received from Oriental Bank of Commerce
(OBC). OBCs perception on the issue was examined by the Reserve Bank, keeping in

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view, its financial parameters, its retail network and synergies as well as strategic
advantages. Taking into account the interests of OBC and depositors of GTB, as well as
the banks strengths and weaknesses, GTB was merged with OBC with effect from
August 14, 2004 under the powers vested with the Reserve Bank under the Banking
Regulations Act, 1949 through a scheme sanctioned by the Government of India.
FINANCIALS BEFORE AND AFTER
Oriental Bank of Commerce:
Company Profile:
Oriental Bank of Commerce (OBC) is a Delhi Based public sector bank with a Major
presence in northern India. With the recent acquisition of the ailing erstwhile Global Trust
Bank (GTB), OBC has expanded its presence in the Southern and Western India. The
bank caters to the Corporate, Retail and the Agricultural sector With various loan and fee
based products. It reaches out to its 8mn strong customer base through a network of
1121 branches and 396 ATMs.
At FY04, the bank held a market share of 2.2% and 2.4% in credit and deposit
respectively of all the SCBs In India. The financial of the OBC given bellow before GTB
merger. Just by seeing the number we can tell that financial condition of OBC bank is
quit strong. There is a clear 50% increase in the net profit from 2003 to 2004 and
maintaining 14% CAR (Capital Adequacy Ratio) is sign of financial soundness.

OBC financial result as on 31 All figure in


march 2004

crore
31.03.04

31.03.03

S.N

Particulars

Interest Earned

3300.54

3304.27

Other Income

721.71

531.39

(A) TOTAL INCOME(1+2)

4022.25

3835.66

Interest Expended

1844.74

2089.94

Operating Expenses

644.48

582.66

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(B) TOTAL EXPENDITURE

2489.22

2672.6

1533.33

1163.6

contingencies

387.43

427.55

(E)Provision for Taxes

459.53

278.56

(F)Net Profit/Loss(C-D-E)

686.07

456.95

Capital adequacy ratio (%)

14.47

14.04

Earning per shares(in RS)

35.63

23.73

OPERATING PROFIT /LOSS (AB)


(D)Other

provisions

and

Analytical ratio

Global Trust Bank:


Global Trust Bank Ltd., (GTB) was placed under an Order of Moratorium on July 24,
2004. The option available with the Reserve Bank was to compulsory merger under
section 45 of the Banking Regulation Act, 1949. Oriental Bank of Commerce (OBC)
interest was examined by the Reserve Bank of India keeping in view its financial
parameters, its retail network and its synergies as well as strategic advantages. GTB
strongly present in western part of India having 1million costumer and 1300 employees
taken over by OBC.
If we see the financial of the GTB before to the merged with the OBC it is quite evident
that Net profit was continuously deteriorating.

All figure
GTB financial result as on 31 march 2004

in crore
31.03.04

31.03.03

s.no

Particulars

Interest Earned

354.19

539.59

Other Income

161.06

191.36

(A) TOTAL INCOME(1+2)

515.25

730.95

Interest Expended

435.13

517.41

Operating Expenses

158.91

177.1

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(B) TOTAL EXPENDITURE

594.04

694.51

OPERATING PROFIT /LOSS (A-B)

-78.79

36.44

(D)Other provisions and contingencies

708.19

309.09

(E)Provision for Taxes

25.4

0.05

(F)Net Profit/Loss(C-D-E)

-812.38

-272.7

Capital adequacy ratio (%)

Earning per shares(in RS)

-66.94

-22.47

Analytical ratio

OBC after merger with GTBAs per the scheme of amalgamation notified by the Government of India the erstwhile
Global Trust Bank Ltd. (GTB) has been amalgamated with Oriental Bank of Commerce
w.e.f. 14.08.2004.
It is observed that as per the scheme of amalgamation the valuation of Assets and the
determination of Liabilities have been made by the Auditors nominated by the Reserve
Bank of India and the assets are classified into Readily Realizable and Not Readily
Realizable.
The excess of liabilities over assets taken over amounting to Rs. 1225.72 crores has
been debited to an account titled Amalgamation Adjustment Account and included
under Other Assets. The Bank has decided to write off the intangible asset
Amalgamation Adjustment Account equally over a period of five years commencing
from the year ended March 31, 2005.
We can see the financial of the OBC after merger with GTB %CAR gown down
significantly from 14 % in 2004 to 9% in 2005 and net profit gown up just up by just 10%
in 2005 one should keep in mind that before merger this figure was 50%.
OBC financial result as on 31 march 2005
s.no

Particulars

Interest Earned

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31.03.05

31.03.04

3571.9

3300.54

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Other Income

505.2

721.71

(A) TOTAL INCOME(1+2)

4077.1

4022.25

Interest Expended

2048.22

1844.74

Operating Expenses

795.73

644.48

(B) TOTAL EXPENDITURE

2843.95

2489.22

OPERATING PROFIT /LOSS (A-B)

1233.15

1533.33

(D)Other provisions and contingencies

400.15

387.43

(E)Provision for Taxes

72.19

459.53

(F)Net Profit/Loss(C-D-E)

760.81

686.07

Capital adequacy ratio (%)

9.21

14.47

Earning per shares(in RS)

39.51

35.63

Liabilities
Deposits

Analytical ratio

The Detail of Asset and Liabilities Taken Over are as under


(Amount in crore)
Rs
Assets
5187.87 Cash and Bank Balance

Borrowings
Other Liabilities and
provision

Total
Contingent liabilities

185 Balance with Banks

Rs
367.12
162.44

692.04 Investment
Advances
Fixed Assets
Other Assets
Excess of liabilities over assets
taken over
6064.71 Total
2083.17

1808.9
1712.97
252.69
534.87
1225.72
6064.71

The accounting treatment for the amalgamation is given on the basis of the purchasing
method as per the accounting standards 14 accounting of the amalgamation issued by
the institute of chartered accountants of the India. The prudential norms in respect of the
investment and advances taken over have been applies on an ongoing basis.
Challenges in front of OBC after merger with GTBa) Recovery of the bad loans:
For OBC acquisition of GTB rather than a matter of choice, was a mandate from the

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Government. Standalone OBC had a gross NPL (non performing loan) ratio of 6.2% and
amounting to Rs12.1bn less than GTBs Rs13.4bn. The bank had 100% provision
coverage and As a result the incremental loan loss provision (LLP) was voluntary which
was seen in OBCs LLP in the first quarter, which was zero. The bank could absorb
EGTBs bad Loans and make provisioning without excessively straining its accounts.
OBC is hoping for a recovery of 75-80% of the bad assets either through cash
Recoveries or up-gradations and restructuring. The bank has upped its expectations
From the earlier 65-70% on back of strong recovery during FY05. Although 75-90%
Could be recovered, we feel even if 60-65% is recovered the acquisition cost could
Fall significantly.

OBC could very well achieve its earlier status of Zero NPA by the end of FY06,
Provided it achieves its recovery targets and incremental slippages are kept under
Control. This is possible as the bank has a good risk management system in place and
with low NPA level can concentrate on faster recoveries.
b) Managing Human resources:
For any merger to successful it is very

important to handle the issue of the human

resources this fact is true with this merger. At the time of the merger it was announced
that Oriental Bank of Commerce will retrain the staff of Global Trust Bank to enable them
to carry out lending activities at branch level and attain three times more business from
the acquired unit. It is fact that of the 1,300 staff of GTB, 160 has quit after the merger
despite OBC offering job protection and retaining their high pay package.
At present, GTB branches are functioning as OBC branches following lifting of the
moratorium on GTB.

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The bank is also on a recruiting spree to bolster its manpower requirement for the
increased number of branches and in view of expanding business by 30 per cent to Rs
80,000 crore in coming year.
c) IT implementationIn this merger IT plays an important role because both bank GTB and OBC both
enjoyed same IT platform before merger so in this merger there was no issue as far as
the IT implementation is concerned. OBC has gained a significant amount just because
both enjoys same IT platform.
This is the classic case of the merger in banks where in both bank gains significantly
Oriental Bank of Commerce stands to gain about Rs 950 crore including Rs 300 crore in
tax benefit, from this merger. On the other hand GTB regains this customers and
credibility.

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Chapter- X- Foreign Direct Investment (FDI) in banking


a) Main Guidelines
For the any industry to grow fresh flow of the capital is very important. Fresh flow is
required to expand the existing business and to grab the new opportunity.
To give the strength to the Indian banking industry RBI and finance ministry have given
some guide lines for the Foreign Direct Investment.
The main guidelines in this regards are given bellow:

The ceiling applies to aggregate foreign investment in private banks from all
sources (FDI, FII, and NRI). The limit of 74 per cent will be reckoned by taking
the direct and indirect holding and at all times, at least 26 per cent of the paid up
capital of the private sector bank will have to be held by residents.

There is to be a limit of 10 per cent for individual FII investment with the
aggregate limit for all FIIs restricted to 24 per cent which can be raised to 49 per
cent with the approval of the Board / General Body.

There is a limit of 5 per cent for individual NRI portfolio investment with the
aggregate limit for all NRIs restricted to 10 per cent which can be raised to 24 per
cent with the approval of Board / General Body.

The Government has also permitted foreign banks to set up wholly owned
subsidiaries in India. The government, however, has not taken any decision on
raising voting rights beyond the present 10% cap to the extent of shareholding.

The new FDI norms will not apply to PSU banks, where the FDI ceiling is still
capped at 20%. Foreign investment in private banks with a joint venture or
subsidiary in the insurance sector will be monitored by RBI and the IRDA to
ensure that the 26 per cent equity cap applicable for the insurance sector is not
breached.

All entities making FDI in private sector banks will be mandatory required to have
credit rating.

Private sector banks have the potential to attract $16.3 billion of foreign direct
investment (FDI) if foreign banks are allowed to buy up to 74 per cent of equity in these

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banks. Another $2.3 billion of foreign portfolio investment is possible if the government
raises foreign institutional investors (FII) ceiling to 30 per cent in public sector banks,
according to a study by ICICI Securities (I-Sec) in July 2004 on bank ownership reforms.
I-Sec, feels the FII limit in public sector banks would be increased immediately. Although
the increase in FII ownership ceiling from 20 per cent to 30 per cent could be the only
immediate reform, the increased capital needs of banks could force the government to
expedite other reforms such as scaling down government stake to 33 per cent from 51
per cent.
Similarly, a merger of State Bank of India (SBI) subsidiaries could also be possible.
Investor interest in the first phase of reforms is likely to centre on frontline public sector
banks. SBI and Bank of Baroda (BoB), with FII investment already touching 20 per cent,
will be the immediate beneficiaries.
The existing guidelines announced in January 2004 permit FDI to the extent of 74 per
cent in private sector banks. But the Reserve Bank of Indias (RBI) draft guidelines
issued in July 2004 has put the brakes on FDI flow in private sector banks. The January
2004 guidelines had also raised FII holdings in banks to 49 per cent subject to the
concerned bank board and subsequently the shareholders passing a resolution raising
FII limit.
The government is soon expected to announce fresh guidelines on banking sector
ownership reforms. The FDI potential in private sector banks is based on the assumption
that foreign banks acquire stake through new issue of shares.
b) Cross Border M& A in Banks
India remains a lucrative market for foreign investor and banking industry is not
exception. All over Asia the merger activity gains popularity just to Gaining market share
as a complement / supplement to organic growth, Rapid expansion or access to new
markets / products and Acquisition of partners capabilities and customers. Graph given
bellow gives an idea about the M&A activity for bank in Asia.

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Cross Border Banking M&A - Asia 10 Targets

Total M&A Value, US$ bn

Asia 10 Total

6
5
4
3
2
1
0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
YTD

Source: Thomson Financial Securities Data Company (SDC)


Note: Asia 10 refers to China, Hong Kong, India, Indonesia, Malaysia,
The Philippines, Singapore, South Korea, Taiwan and Thailand
In 2002 the M&A activity slowed down in Asia as we can see in graph given above just
because of 9/11 event occurred in that year, at that time foreign investment slowed
down in the whole world. But later M&A activity picked up in Asia.
Now Indian banks are also aggressively looking acquisition of banks outside India. The
Reserve Bank of India (RBI on announced that applications from Indian banks for
setting up representative offices/branches/ subsidiary outside India as well as
applications received from foreign banks for their branch presence in India would be
considered based on a liberalized policy and a simplified procedure for expeditious
disposal.
While examining the applications made by Indian banks, the RBI would consider, interalia, the supervisory comfort, the banks' sustainable financial and competitive strength
and robustness of their systems for Know Your Customer (KYC)/Anti Money Laundering
(AML). Likewise, applications from Indian banks for acquisition of banks outside India
would be examined by the RBI keeping, additionally in view, other factors, such as,
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overseas regulatory approval, due diligence on investee bank and degree of


management control.

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Chapter- XI- Road map for foreign banks


RBIs Road map for foreign banks in India
The banking sector in India is robust and its standards are broadly in conformity with
international standards. In further enhancing its efficiency and stability to the best global
standards a two-track and gradualist approach will be adopted.
One track is consolidation of the domestic banking system in both public and private
sectors. The second track is gradual enhancement of the presence of foreign banks in a
synchronized manner.
[The policy decisions announced on March 5, 2004* on FDI, FII and the presence of
foreign banks will be implemented in a phased manner. This will also be synchronized
with the two-track approach and will be consistent with Indias commitments to the WTO]
In this background, the road map for the implementation of the policy decisions is as
follows:
Phase I: (March 2005 to March 2009)
1. New Banks first time presence
Foreign banks wishing to establish presence in India for the first time could either
choose to operate through branch presence or set up a 100% wholly owned subsidiary
(WOS), following the one-mode presence criterion.
2. Existing banks Branch expansion policy
For new and existing foreign banks, it is proposed to go beyond the existing WTO
commitment of 12 branches in a year. The number of branches permitted each year has
already been higher than the WTO commitments. A more liberal policy for underbanked
areas will be followed. Branch licensing procedure will continue to be as per current
practice.

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Conversion of existing branches to Wholly Owned Subsidiaries


In the first phase, foreign banks already operating in India will be allowed to convert their
existing branches to WOS while following the one-mode presence criterion
The WOS will be treated on par with the existing branches of foreign banks for branch
expansion in India. The Reserve Bank may prescribe market access and national
treatment limitation consistent with WTO, as also other appropriate limitations to the
operations of WOS consistent with international practices and the country's
requirements.
3. Acquisition of Shareholding in Select Indian Private Sector Banks
In order to allow Indian Banks sufficient time to prepare themselves for global
competition, initially entry of foreign banks will be permitted only in private sector banks
that are identified by RBI for restructuring. In such banks, foreign banks would be
allowed to acquire a controlling stake in a phased manner.
In considering an application made by a foreign bank, for acquisition of 5 % or more in
the private bank, RBI will take into account the standing and reputation of the foreign
bank, globally as well as in India, and the desired level and nature of presence of the
foreign bank in India. RBI may, if it is satisfied that such investment by the foreign bank
concerned will be in the long-term interest of all the stakeholders in the invested bank,
permit acquisition of such percentage as it may deem fit. The RBI may also specify, if
necessary, that the investor bank shall make a minimum acquisition of 15 per cent or
more and may also specify the period of time for such acquisition. The over all limit of 74
per cent will be applicable.
Where such acquisition is by a foreign bank already having presence in India, a time
bound plan covering a period not exceeding six months to conform to the 'one form of
presence' concept will have to be submitted by the foreign bank along with the
application for acquisition.
Appropriate amending legislation will be proposed to the Banking Regulation Act, 1949,
in order to provide that the economic ownership of investors is reflected in the voting

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rights. Simultaneous amendments will be proposed to provide for regulatory approvals


from the RBI.
Phase II: April 2009
1 According Full National Treatment to Wholly Owned Subsidiaries of Foreign
Banks
In the second phase, the removal of limitations on the operations of the WOS and
treating them on par with domestic banks to the extent appropriate will be designed and
implemented after reviewing the experience with Phase I and after due consultations
with all stakeholders in the banking sector.
2 Dilution of Stake in Wholly Owned Subsidiaries
In this phase, the WOS of foreign banks on completion of a minimum prescribed period
of operation will be allowed to list and dilute their stake so that at least 26 per cent of the
paid up capital of the subsidiary is held by resident Indians at all times consistent with
Para 1(b) of the Press Note 2 of March 5, 2004. The dilution may be either by way of
Initial Public Offer or as an offer for Sale.
3 Mergers and Acquisition of any Private Sector Bank in India
In the second phase, after a review is made with regard to the extent of penetration of
foreign investment in Indian banks and functioning of foreign banks, foreign banks may
be permitted, subject to regulatory approvals and such conditions as may be prescribed,
to enter into merger and acquisition transactions with any private sector bank in India
subject to the overall investment limit of 74 percent.

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Chapter- XII- Critical Factors for merger success


a) Why merger do not succeed
Risk and return always go hand in hand, this is also true of the merger in the banks
these are the few risk associated with the merger:

When two banks merge into one then there is an inevitable increase in the size of
the organization. Big size may not always be better. The size may get too widely
and go beyond the control of the management. The increased size may become
a liability rather than as asset.

Consolidation does not lead to instant results and there is an incubation period
before the results arrive. Merges and acquisitions are sometimes followed by
losses and tough intervening periods before the eventual profits pour in.
Patience, forbearance and resilience are required in ample measure to make any
merger a success story. All may not be up to plan, which explains why there are
high rate of failure in mergers.

Consolidation mainly comes due to decision taken at the top. It is a top heavy
decision and willingness of the rank and file of the both entities may not be
forthcoming. This leads to problems of industrial relations, deprivation.
Depression and demotivation among the employees. Such a work force can
never churn out good results. Therefore, personal management at the highest
order with humane touch alone can pave the way.

The structure, systems and the procedures followed in two banks may be vastly
different, for example, a PSU bank or old generation bank and that of a
technologically superior foreign bank. The erstwhile structures, systems and
procedures may not be conducive in the new milieu. A through overhauling and
systems analysis to be done to assimilate both the organizations. This is a time
consuming process and requires lot of cautions approaches to reduce the
frictions.

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There is problem of valuations associated with all mergers. The shareholder of


existing entities has to be given for transfer and compensations is yet to emerge.

Further, there is also problem of brand projection. This becomes more


complicated when existing brands themselves have a good appeal. Questions
arise whether the earlier brands should continue to be projected or should they
by submerged in favor of a new comprehensive identify. Goodwill is often
towards a brand and its sub-merger id usually not taken kindly.

b) How to make mergers successful


However, for mergers to be successful, following issues need to be given due
importance-.
IT implicationTechnology increasingly lies at the heart of a modern bank and it is a critical issue that
can make or break a merger. Therefore, to carefully consider prior to the merger whether
the technology platforms are similar or at least capable of talking to each other, what the
overlapping technology costs are and what the cost of process integration.
The degree of technology overlap depends upon the IT maturity of the two
organizations. The more techno-savvy the organization, the higher the redundancy. At
the same time, a tech-savvy bank offers greater benefit to the acquirer in the form of a
larger pool of technology experts.
The biggest challenge is whether the existing infrastructure of the acquiring bank can
scale up to the degree envisaged over a span of two to three years. Each bank has its
own data centre.
By consolidating data centers, an enormous amount of costs can be saved. There could
be cases where both banks have different hardware, different networks, different
database vendors, use different technologies for scanning cheques and they may not
even speak the same computer language.

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Recently we have seen the merger between global trust bank and oriental bank of the
commerce in that merger IT implication played an important part because both bank
enjoyed the same platform.
Human resources issueAll over world it is observed that after merger very high number of employees losses
there job. Same theory applicable to Indian banking also it is important to short out this
issue before merger. Human resources are another sensitive issue on the road to
consolidation.
As per a study of the Indian Banking Industry by FICCI in October 2005, 88 percent of
public and private sector banks considered HRD related issues as one of the biggest
challenge in the process of consolidation. while 64 percent of them voted for Cultural
differences as one the confronting issues.
In 2001, about 11 per cent of the over-800,000 strong bank employees opted for the
first-ever voluntary retirement scheme in the state-run banking industry. The
consolidation drive will make more employees redundant, a political time bomb ticking
away. Besides, it will also call for large-scale redeployment of employees. Traditionally,
employees in public sector banks are loath to move from one table to another of the
same branch. Now the trade unions seem to be willing to allow mobility for employees
within a district. Mergers will force them to move from one state to another.
For merger to succeed banks will have to carefully forge a cultural fit among all
employees, ingeniously devise HRD policies and concentrate not only on cost-reduction
but also on enhancing revenue and profitability.
Cultural shiftBefore a merger is carried out cultural issues should be looked into. A bank based
primarily out of North India might want to acquire a bank based primarily out of South
India to increase its geographical presence but their cultures might be very different.
These so the integration process might become very difficult. Even if there are synergies
in technology, geographical presence and profile of assets, the birth of mega banks
through mergers may not be of great use unless the mindset of public sector banks

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changes. Having chased zero-risk government bonds in a low interest rate regime, most
bankers have forgotten the art of lending. Unless they re-discover this, consolidation will
be meaningless.

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Chapter- XIII- Future of M&A in Indian Banking Industry


a) State Bank of India, a global bank in making- A case study
State Bank of India sees itself as a strong world class standard bank in coming future.
SBI vision can be summed up as:
To become world class institution by March 2008
To become top 5 Banks in Asia by March 2008
To become top 50 banks in the world by March 2008
State Bank of India is planning to acquire four banks overseas with assets ranging from
$50 million to $200 million. The bank is in the process of raising funds through a $1billion Medium Term Notes programme, which will be used to further its global expansion
plans.
Future plans of SBI for global expansionTo continue focus on the opening new offices to grow in business and profit and SBI
expect the number of foreign offices to increase to 75 by March 2006 and 100 by March
2007.
To focus on making suitable network in the USA
UK, Canada and South Africa where there is large concentration of ethnic Indians.
Upgradation of the SBIs Shanghai Representative Office into a full-fledged branch
during 2005-2006.
To stabilizing the finacle software across all overseas office.12 foreign office of the
bank went live on the new technology plateform i.e. finacle software. The plan is to bring
the bank's international operations under a single technology platform. It is expected that
by December 2005 most of the remaining office will switch over to this software.
Currently, SBI has a presence in 28 countries through 54 offices, which it plans to
expand to 70 offices in 36 countries by the end of the current fiscal.

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International acquisitions- to become international player it is paramount to open up


new branches or acquire local Banks. In the same line SBI has/planning to acquire some
foreign banks.
State Bank of India has announced in November 2005, acquiring of 76 per cent stake in
an Indonesian bank, PT Bank IndoMonex. This is SBI's third overseas acquisition. The
bank had acquired a 51-per cent stake in Indian Ocean International Bank in Mauritius in
February for $8 million and a 76-per cent stake in a Kenyan bank, Giro Commercial
Bank, for $7 million, in October.
As per reports, SBI is also going to bid for Rupali Bank of Bangladesh, for which it has
already obtained permission from the RBI. It is in the process of acquiring two more
banks with similar asset sizes ranging from $50 million to $200 million.
Following the stringent capital adequacy norms of the Central Bank of Nigeria, SBI also
merged its Nigerian subsidiary - Indo Nigerian bank -- with Nal Bank. The merged entity
will be a universal bank with NAL Bank's experience in corporate and investment
banking.
Expansion of foreign networkAs on 31.03.2005, the Bank had a network of 54 overseas offices spread over 28
countries covering all over zone. For efficient and extensive international operations the
Bank maintains comprehensive correspondent relationships with 539 international banks
in 124 countries across all time zones.
SBI, besides acquisition attempts, is also simultaneously moving ahead with
strengthening its foreign network. It is going to open new branches in Angola and
Shanghai. In Shanghai, the bank is upgrading its representative office into a full-fledged
branch.
Two new branches at Sydney and Muscat become operative during the year 2004-05.
The bank also opened its second offshore banking unit in India at Kochi Commercial
bank of India LLC Moscow (CBIL), a joint venture operations during 2004-05.

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Performance of foreign operation-Asset/liabilities of foreign offices as at 31.03.2005


(Excluding Subsidiaries and joint ventures).
ITEMS

Rs crore

USD million

Deposits

14248.77

3257.24

Borrowings

16979.43

3881.45

Other liabilities

8641.1

7975.34

Total

39869.3

9114.03

Investment and Placement

10274.07

2348.63

Advances(Gross)

24122.97

5536.85

All Other Assets

5472.26

1228.55

Total Assets

39869.3

9114.03

Resources

Deployment

Aggregate working result of foreign Subsidiaries/Joint Venture/ Associate Abroad


Deposits

Subsidiaries*

Loans

Investments

USD

Rs

USD

Rs crore

million

crore

million

1801.99

411.93

1567.61

358.35

USD
Rs crore

million

1847.17 422.25

337.44

77.138

723.26

298.46

68.227

Joint
Ventures/Associates*

165.335

*Subsidiaries-SBI (Canada), SBI (California), Indo-Nigerian Bank Ltd and SBI


International (Mauritius).
*Joint ventures/ Associates-as on 15.07.2004, Bank of Bhutan and commercial bank or
India, LLC, Moscow as on 31.12.2004.
#Conversion rate =1 USD =INR 43.7450

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The merger of the SBI and its associate on the cards. SBI has already integrated
technology platform and treasury of all seven associate.
State Bank of India has the following seven Associate Banks (ABs) with controlling
interest ranging from 75% to 100%.
State Bank of Bikaner and Jaipur (SBBJ)
State Bank of Hyderabad (SBH)
State Bank of Indore
State Bank of Mysore (SBM)
State Bank of Patiala (SBP)
State Bank of Saurashtra (SBS)
State Bank of Travancore (SBT)
The seven SBIs have a combined network of 4596 branches in India which are fully
computerized and 1070 ATMs networked with SBI ATMs, providing value added
services to clientele.
To conclude: State Bank of India, the largest Indian Bank plans to scale up its
global assets, which currently stand at about $13 billion, to $26 billion and attain
HSBC's size by 2008. At present state bank of India among top 100 banks and its
aiming to achieve top 50 banks by the end of the 2008.Global acquisition by SBI
would certainly help him to achieve its target.

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b) The Road Ahead for consolidation in Indian banking industry


Consolidation has been a dominant feature of the banking sector in most countries. Most
large banks in the world have acquired repeatedly and integrated successfully.
In Asia, Malaysia has reduced the number of banks from 55 to 10, Taiwan aims to bring
down the number of state banks from 12 to six this year, and Singapore government
guided the system down to three players with DBS being supported to become a
regional leader. Similar initiatives are happening in Indonesia, South Korea and Japan.
Only 22 of Indian banks figure among the top 1,000 banks in the world. In Asia, SBI (the
largest in India) is the only local entity that has made it to the top-25 list. In comparison,
China's fourth-largest bank is 2.5 times that of SBI. The market capitalization of the
entire Indian banking sector is about $40-45 billion, which would make the entire Indian
banking sector rank after the 30 largest banks in the world.
The present capital structure of public sector banks will make them vulnerable to
takeovers unless the M&As take place. It is necessary for Indian banks complete their
M&A activities by 08-09, to ensure that they have the strength to take on competition
from foreign banks, once sector opens up to foreign banks.
About 46 percent of public & Private sector banks covered in FICCI survey conducted in
September 2005 have extended their operations overseas in the past 2 Years. About 47
percent of the banks have formulated strategies for further global expansion. UAE is the
most preferred destination voted by the bankers followed by China, U.K. ASEAN and
U.S.A. in the list.
Free Trade Agreements (FTAs) are indeed a positive step in the area of banking and
financial services, as it would facilitate free cross-border trade of such services to
flourish. The available market size and the level of access provided to Indian banks in
foreign countries should be the key factors in consideration.
Recently signed Comprehensive Economic Cooperation Agreement (CECA) between
India and Singapore has considerably enhanced the scope if Indian banking operations
in Singapore and vice versa. CECA is the first if its kind signed by India with another
country. It is much more than a Free Trade Agreement (FTA). Presently, Indian Bank,

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Indian Overseas Bank, UCO Bank, Bank of India, SBI, ICICI Bank have their operations
in Singapore. The agreement has opened Indian shores for three Singapore Banks
Development Bank of Singapore (DBS), Overseas Chinese Banking Corporation and
United Overseas Bank.
Size is increasingly becoming important for the banks, as it is crucial to improve their
overall efficiency. 75 percent of the FICCI survey respondents also concur with the
notion that Large size is the key to further performance improvement. This view was
equally supported by Public sector banks as well as the Private and Foreign banks.
Consolidation in the banking industry seems to be inevitable in the next 2-5 years.
Opening up of the financial sector from 2005, under WTO, would see a number of Global
banks taking large stakes and control over banking entities in the country. They would
bring with them capital, technology and management skills. This will increase the
competitive spirit in the system leading to greater efficiencies. Government policy to
allow greater FDI in banking and the move to amend Banking Regulation Act to remove
the existing 10% cap on voting rights of shareholders is pointers to these developments.
Public Sector Banks had, in the past, relied on Government support for capital
augmentation. However, with the Government making a conscious decision to reduce
its holding in Banks, most Banks have approached the capital market for raising
resources. This process could gain further momentum when the government holding
gets reduced to 33% or below.
It is expected that pressures of market forces would be the determining factor for the
consolidation in the structure of these banks. If the process of consolidation through
mergers and acquisitions gains momentum, we could see the emergence of a few large
Indian banks with international character. There could be some large national banks
and several local level banks.
Consolidation would take place not only in the structure of the banks, but also in the
case of services. For instance, some banks would like to shed their non-core business
portfolios to others. This could see the emergence of niche players in different functional
areas and business segments such as housing, cards, mutual funds, insurance, sharing
of their infrastructure including ATM Network, etc

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Structure and ownership pattern would undergo changes. There would be greater
presence of international players in the Indian financial system. Similarly, some of the
Indian banks would become global players. Government is taking steps to reduce its
holdings in Public sector banks to 33%. However the indications are that their PSB
character may still be retained.
According to Indian Banks Association Banking Industry Vision 2010, Mergers and
acquisitions would gather momentum as managements will strive to meet the
expectations of stakeholders. This could see the emergence of 4-5 world class Indian
Banks. As Banks seek niche areas, we could see emergence of some national banks of
global scale and a number of regional players.
The Union Finance Minister, P.Chidambaram gave inklings of the governments Stance
on mergers in the banking sector when he stated in December 2004, 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 bank grow in
size, Scale and muscle so that they can compete globally.
The finance minister said the banking sector displayed a high degree of fragmentation
with the market share of the top five banks in India at 41.5 per cent against 75 per cent
in China. A fragmented banking sector is the antithesis of a profitable banking sector,
he added.
India has 19 government owned banks and around 30 privately-owned banks. With the
entry of new private sector banks, the banking sector has become even more
fragmented in the reform years since 1992. Public sector banks need to consolidate
amongst themselves and with private-sector banks to survive increasing competition,
Chidambaram said.
Mergers and acquisitions in the banking sector are going to be the order of the day. India
is slowly but surely moving from a regime of `large number of small banks' to `small
number of large banks'. The new era in banking in India is going to be one of
consolidation around identified core competencies.

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Annexure 1
Complete List of Banks in India

a) Public Sector Banks


i) Nationalized Banks
1. Allahabad Bank
2. Andhra Bank
3. Bank of Baroda
4. Bank of India
5. Bank of Maharashtra
6. Canara Bank
7. Central Bank of India
8. Corporation Bank
9. Dena Bank
10. Indian Bank
11. Indian Overseas Bank
12. Oriental Bank of Commerce
13. Punjab and Sind Bank
14. Punjab National Bank
15. Syndicate Bank
16. UCO Bank
17. Union Bank of India
18. United Bank of India
19. Vijaya Bank
ii) State Bank Group
20. State Bank of India
21. State Bank of Bikaner and Jaipur
22. State Bank of Hyderabad
23. State Bank of Indore
24. State Bank of Mysore
25. State Bank of Patiala

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26. State Bank of Saurashtra


27. State Bank of Travancore
iii) Other Public Sector Bank
28. IDBI Ltd.
b) Old Private Sector Banks
1. Bank of Rajasthan Ltd.
2. Bharat Overseas Bank Ltd.
3. Catholic Syrian Bank Ltd.
4. City Union Bank Ltd
5. Dhanalakshmi Bank Ltd.
6. Federal Bank Ltd.
7. Ganesh Bank of Kurundwad Ltd.
8. ING Vysya Bank Ltd.
9. Jammu and Kashmir Bank Ltd.
10. Karnataka Bank Ltd.
11. Karur Vysya Bank Ltd.
12. Lakshmi Vilas Bank Ltd.
13. Lord Krishna Bank Ltd.
14. Nainital Bank Ltd.
15. Ratnakar Bank Ltd.
16. Sangli Bank Ltd.
17. SBI Commercial and International Bank Ltd.
18. South Indian Bank Ltd.
19. Tamilnad Mercantile Bank Ltd.
20. United Western Bank Ltd.
c) New Private Sector Banks
21. Bank of Punjab Ltd. (since merged with Centurian Bank)
22. Centurion Bank Ltd.(now called Centurian Bank of Punjab)
23. Development Credit Bank Ltd.
24. HDFC Bank Ltd.
25. ICICI Bank Ltd.

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26. IndusInd Bank Ltd.


27. Kotak Mahindra Bank Ltd.
28. UTI Bank Ltd.
29. Yes Bank Ltd.
d) Foreign Banks in India
1. ABN-AMRO Bank N.V.
2. Abu Dhabi Commercial Bank Ltd.
3. American Express Bank Ltd.
4. Antwerp Diamond Bank
5. Arab Bangladesh Bank Ltd.
6. Bank Internasional Indonesia
7. Bank of America NA
8. Bank of Bahrain and Kuwait B.S.C.
9. Bank of Ceylon
10. Bank of Nova Scotia
11. Bank of Tokyo-Mitsubishi Ltd.
12. Barclays Bank PLC
13. BNP Paribas
14. Chinatrust Commercial Bank
15. Chohung Bank
16. Citibank N.A.
17. Calyon Bank
18. Deutsche Bank AG
19. DBS Bank Ltd.
20. HSBC Ltd.
21. ING Bank N.V.
22. JPMorgan Chase Bank
23. Krung Thai Bank Public Co. Ltd.
24. Mashreqbank psc
25. Mizuho Corporate Bank Ltd.
26. Oman International Bank S.A.O.G.
27. Societe Generale
28. Sonali Bank

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29. Standard Chartered Bank


30. State Bank of Mauritius Ltd.
31. UFJ Bank Ltd.
e) Scheduled Urban Co-operative Banks
1. A P Mahesh Co-op Urban Bank Ltd.
2. Abhyudaya Co-op Bank Ltd.
3. Ahmedabad Mercantile Co-op Bank Ltd.
4. Akola Janata Commercial Co-op Bank Ltd.
5. Akola Urban Co-op Bank Ltd.
6. Amanath Co-op Bank Ltd.
7. Bassein Catholic Co-op Bank Ltd.
8. Bharat Co-op Bank (Mumbai) Ltd.
9. Bharati Sahakari Bank Ltd.
10. Bombay Mercantile Co-op Bank Ltd.
11. Charminar Co-op Urban Bank Ltd.
12. Citizencredit Co-op Bank Ltd.
13. Co-operative Bank of Ahmedabad
14. Cosmos Co-op Bank Ltd.
15. Dombivli Nagari Sahakari Bank Ltd.
16. Goa Urban Co-op Bank Ltd.
17. Greater Bombay Co-op Bank Ltd.
18. Ichalkaranji Janata Sahakari Bank Ltd.
19. Indian Mercantile Co-op Bank Ltd.
20. Jalgaon Janata Sahakari Bank Ltd.
21. Janakalyan Sahakari Bank Ltd.
22. Janalaxmi Co-op Bank Ltd.
23. Janata Sahakari Bank Ltd.
24. Kalupur Commercial Co-op Bank Ltd.
25. Kalyan Janata Sahakari Bank Ltd.
26. Kapol Co-op Bank Ltd.
27. Karad Urban Co-op Bank Ltd.
28. Khamgaon Urban Co-op Bank Ltd.
29. Madhavpura Mercantile Co-op Bank Ltd.

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30. Mahanagar Co-op Bank Ltd.


31. Mandvi Co-op Bank Ltd.
32. Mapusa Urban Co-op Bank of Goa Ltd.
33. Mehsana Urban Co-op Bank Ltd.
34. Nagar Urban Co-op Bank Ltd.
35. Nagpur Nagrik Sahakari Bank Ltd.
36. Nasik Merchants Co-op Bank Ltd.
37. New India Co-op Bank Ltd.
38. North Kanara G.S.B. Co-op Bank Ltd.
39. Nutan Nagarik Sahakari Bank Ltd.
40. Parsik Janata Sahakari Bank Ltd.
41. Pravara Sahakari Bank Ltd.
42. Punjab and Maharashtra Co-op Bank Ltd.
43. Rajkot Nagrik Sahakari Bank Ltd.
44. Rupee Co-op Bank Ltd.
45. Sangli Urban Co-op Bank Ltd.
46. Saraswat Co-op Bank Ltd.
47. Sardar Bhiladwala Pardi Peoples Co-op Bank Ltd.
48. Shamrao Vithal Co-op Bank Ltd.
49. Shikshak Sahakari Bank Ltd.
50. Solapur Janata Sahakari Bank Ltd.
51. Surat Peoples Co-op Bank Ltd.
52. Thane Bharat Sahakari Bank Ltd.
53. Thane Janata Sahakari Bank Ltd.
54. Vasavi Co-operative Urban Bank Ltd.
55. Zoroastrian Co-op Bank Ltd.

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Annexure 2
Bank valuation
The valuation process One-way of viewing is through the use of the use if the accounting
paradigm, but using market values. We rewrite the balance sheet by moving the current
liabilities from the liabilities / equity side of the asset side of the balance sheet:
USING THE BALANCE SHEET AS AN
ENTERPRISE VALUATION MODEL
ORIGINAL BALANCE SHEET
ASSETS

Liabilities

Cash and marketing securities

Operating current liabilities

Operating current assets

Debt

Net fixed assets

Equity

Goodwill
Total assets

THE

ENTERPRISE

Total liabilities and equity

VALUATION

''BALANCE

SHEET''
Assets

Liabilities

Cash and marketing securities


Operating current assets

Dept

-Operating current liabilities


=Net working capital
Net fixed assets

PV (FCFs discounted at WACC)


Equity

Goodwill
Market Value

Market value

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Thus to value
A company, we set,
Market value = Initial cash balances + {(FCF) / (1+WACC)}
If s\we are valuing the equity of the firm, we subtract the value of the debt:
Equity value = Market value Debt
= Initial cash balances + {(FCF)/ (1 + WACC)} Debt
= {(FCF) / (1 +WACC)} (Debt Initial cash)
Note that means that we can write the enterprise balance sheet in a slight different form:

THE

ENTERPRISE

VALUATION''

BALANCE

SHEET''
A Slight variation (cash netted out debt)
Assets
Operating current assets
-Operating current liabilities

Liabilities
Debt -cash & Mkt, securities]
=Net debt

= Net working capital


Net fixed assets

=PV (FCFs discounted at WACC)


Equity

Goodwill
Enterprise Value

Enterprise Value

Note that both variations on the enterprise valuation '' balance sheet''
Give the same equity value.

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The same logic we have used above can be applied to banks. There are some
important differences between and ordinary companies, however:

On the asset side: For an ordinary company, Cash and Marketable Securities
are usually a store of value (like negative debt), whereas for a bank most
marketable securities (and some of the cash) an operating current asset.

On the liability side: For an ordinary company, we put all debt items together,
even if from an accounting point of view they are current liabilities. Thus:
Debt = Long-term debt + Notes payable portion of LTD +

For a bank, most (all?) short term debt items debt items are operating current liabilities
and are therefore part of the banks working capital
The banks free cash (FCF)
Recall that throughout this book we have valued a firms permanent capital firms free
cash flows at its weighted cost of capital. Thus for a firm which has only equity and debt:
Enterprise value = value of firms Equity + Debt = (anticipated FCF,) / (1 + WACC),
The FCF calculations for an industrial company employed elsewhere in the bank have to
be modified somewhat when considering a financial company. Recall that the standard
FCF calculation for an industrial company is along following lines:

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Free Cash Flow Calculation for


A Financial Company
Item

Explanation

Profit after depreciation

Depreciation

is

usually

not

very

significant item
Add back after tax interest on permanent This leaves the net interest income on the
debt item (typically Long-Term debt)

banks

productive

activities-its

financial

intermediation.
Subtract out increase in operating NWC

Since we define the NBWC to include


deposits, etc., this effectively subtracts
self-funded part of the banks operations
from the FCF.

Subtract increase in Fixed Assets at Cost

Note that Fixed Assets for banks are


typically small relative to total assets.

Free cash Flow

The banks free cash flow (FCF)


Recall that throughout this book we have valued a firms permanent capital by
discounting the firms free cash flows at its weighted average cost of capital. Thus for a
firm which has only equity and debt:
Enterprise value = value of firms Equity + Debt = (anticipated FCF,) (1+ WACC)
The FCF calculations for an industrial company employed elsewhere in the book have to
be modified somewhat when considering a financial company, Recall that the standard
FCF calculation for an industrial company (see Chapter 2) is along the following lines:

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Free Cash Flow Calculation


A Non-Financial Company
Item

Explanation

Profit after taxes

The starting point for FCF

Add back depreciation

Depreciation is non-cash expense

Add back after tax interest

FCF is an operating concept; adding back


after-tax interest costs neutralizes the
effects of interest on the firms Profits

Subtract out increase in operating NWC

NWC

is

financial

burden

on

the

company, which is not accounted for in the


Profit; the emphasis on operating NWC
comes because we include only items like
Accounts Payable, Inventories, etc. For
purposes of calculating NWC, we do not
include changes in Cash (assumed to be a
store of value), Notes Payable, Current
Portion of LTD, etc.
Subtract increase in Fixed Assets at Costs

This measures the cost of purchasing new


productive assets for the company.

=Free Cash Flow


This calculation has to be modified somewhat for a financial company: Since Cash,
Loans Deposits, Short-Term Borrowings, etc. are all part of a banks productive working
capital.

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Annexure 3
a) Guidelines for merger/amalgamation of private sector banks
Ref.DBOD.No.PSBS.BC. 89/16.13.100/2004-05 May 11, 2005
1. General
1.1 The Reserve Bank has discretionary powers to approve the voluntary amalgamation
of two banking companies under the provisions of Section 44A of the Banking
Regulation Act, 1949.
1.2 These powers do not extend to the voluntary amalgamation of a banking company
with a non-banking company where amalgamations are governed by sections 391 to 394
of the Companies Act, 1956 in terms of which, the scheme of amalgamation has to be
approved by the High Court.
1.3 However, in both situations, the Reserve Bank is concerned that while
amalgamations are normally decided on business considerations such as the need for
increasing the market shares, synergies in the operations of businesses, acquisition of a
business unit or segment etc., it is essential that considerations like sound rationale for
the amalgamation, the systemic benefits and the advantage accruing to the residual
entity are evaluated in detail.
1.4 These guidelines cover two situations namely:(a) An amalgamation of two banking companies
(b) An amalgamation of a non-banking finance company (NBFC) with a banking
company.
2. Amalgamation between two banking companies
2.1.1 Section 44A of the Banking Regulation Act, 1949 requires that the draft scheme of
amalgamation has to be approved by the shareholders of each banking company by a
resolution passed by a majority in number representing two-thirds in value of the
shareholders, present in person or by proxy at a meeting called for the purpose.
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2.1.2 Before convening the meeting for the purposes of obtaining the shareholders'
approval, the draft scheme of amalgamation needs to be approved individually by the
Boards of Directors of the two banking companies. When according this approval, the
Boards need to give particular consideration to the following matters:(a) The values at which the assets, liabilities and the reserves of the amalgamated
company are proposed to be incorporated into the books of the amalgamating banking
company and whether such incorporation will result in a revaluation of assets upwards or
credit being taken for unrealized gains.

(b) Whether due diligence exercise has been undertaken in respect of the amalgamated
company.
(c) The nature of the consideration, which, the amalgamating banking company will pay
to the shareholders of the amalgamated company.

(d) Whether the swap ratio has been determined by independent valuers having required
competence and experience and whether in the opinion of the Board such swap ratio is
fair and proper.

(e) The shareholding pattern in the two banking companies and whether as a result of
the amalgamation and the swap ratio the shareholding of any individual, entity or group
in the amalgamating banking company will be violative of the Reserve Bank guidelines
or require its specific approval.

(f) The impact of the amalgamation on the profitability and the capital adequacy ratio of
the amalgamating banking company.

(g) The changes which are proposed to be made in the composition of the board of
directors of the amalgamating banking company, consequent upon the amalgamation
and whether the resultant composition of the Board will be in conformity with the
Reserve Bank guidelines in that behalf.
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2.2.1. Section 44A of the Banking Regulation Act, 1949 also requires that after the
scheme of amalgamation is approved by the requisite majority of shareholders in
accordance with the provisions of the Section, it shall be submitted to the Reserve Bank
for sanction.
2.2.2. To enable the Reserve Bank to consider the application for sanction, the
amalgamating banking company should submit to the Reserve Bank the information and
documents specified in
2.3.1 The aforementioned Section provides that a dissenting shareholder is entitled, in
the event of the scheme being sanctioned by the Reserve Bank, to claim from the
banking company concerned, in respect of the shares held by him in that company, their
value as determined by the Reserve Bank when sanctioning the scheme and such
determination by the Reserve Bank as to the value of the shares to be paid to the
dissenting shareholders shall be final for all purposes.
2.3.2 To enable the Reserve Bank to determine such value, the amalgamated banking
company should submit the following: (a) a report on the valuation of the share of the amalgamated company made for this
purpose by the valuers appointed for the determination of the swap ratio
(b) detailed computation of such valuation

(c) Where the shares of the amalgamated company are quoted on the stock exchange:(I) Details of the monthly high and low of the quotation on the exchange where the
shares are most widely traded together with number of shares traded during the six
months immediately preceding the date on which the scheme of amalgamation is
approved by the Boards.

(ii) The quoted price of the share at close on each of the fourteen days immediately
proceeding the date on which the scheme of amalgamation is approved by the Boards.
(d) Such other information and explanations as the Reserve Bank may require.

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3. Amalgamation of an NBFC with a banking company


3.1 Where the NBFC is proposed to be amalgamated into a banking company, the
banking company should obtain the approval of the Reserve Bank of India after the
scheme of amalgamation is approved by its Board but before it is submitted to the High
Court for approval.
3.2 When according its approval to the scheme, the Board should give consideration to
the matters listed in paragraph 2.1.2 above. In addition, it should examine whether:(a) The NBFC has violated / is likely to violate any of the RBI/SEBI norms and if so,
ensure that these norms are complied with before the scheme of amalgamation is
approved.
(b) The NBFC has complied with the "Know Your Customer" norms for all the accounts,
which

will

become

accounts

of

the

banking

company

after

amalgamation.

(c) The NBFC has availed of credit facilities from banks/FIs and if so, whether the loan
agreements mandate the NBFC to seek consent of the bank/FI concerned for the
proposed merger/amalgamation.
3.3 To enable the Reserve Bank of India to consider the application for approval, the
banking company should furnish to Reserve Bank of India information and documents
listed in excluding item 4 and also the information and documents listed in paragraph
2.3.2 above.
3.4 The provision of paragraphs 3.1 to 3.3 above will also apply mutatis mutandis in the
rare cases where a banking company is amalgamated into an NBFC.
4. Norms for promoter buying or selling shares directly/indirectly, before, during and after
discussion period
4.1 Regulation 2(ha) of the SEBI (Prohibition of Insider Trading) Regulations, 1992,
which is applicable to the securities of listed companies, defines price sensitive
information, as "any information which relates directly or indirectly to a company and
which if published is likely to materially affect the price of the securities of the company".

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4.2 SEBI regulations on Prohibition of Insider Trading should be strictly complied with, as
the various information relating to takeover/merger and transfer of shares of listed banks
/ NBFCs are price sensitive. Even the unlisted banks / companies should follow the SEBI
guidelines in spirit and to the extent applicable.
Information and documents to be furnished along with the application of Scheme of
Amalgamation
1. Draft scheme of amalgamation as placed before the shareholders of the respective
banking companies for approval.
2. Copies of the notices of every meeting of the shareholders called for such approval
together with newspaper cuttings evidencing that notices of the meetings were published
in newspapers at least once a week for three consecutive weeks in two newspapers
circulating in the locality or localities in which the registered offices of the banking
companies are situated and that one of the newspapers was in a language commonly
understood in the locality or localities.
3. Certificates signed by each of the officers presiding at the meeting of shareholders
certifying the following:
(a) A copy of the resolution passed at the meeting;
(b) The number of shareholders present at the meeting in person or by proxy;
(c) The number of shareholders who voted in favor of the resolution and the aggregate
number of shares held by them;

(d) The number of shareholders who voted against the resolution and the aggregate
number of shares held by them;

(e) the number of shareholders whose votes were declared as invalid and the aggregate
number of shares held by them;

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(f) the names and ledger folios of the shareholders who voted against the resolution and
the number of shares held by each such shareholder;

(g) the names and designations of the scrutineers appointed for counting the votes at the
meeting together with certificates from such scrutineers confirming the information given
in items (c) to (f) above;

(h) the name of shareholders who have given notice in writing to the Presiding Officer
that they dissented from the scheme of amalgamation together with the number of
shares held by each of them.
4. Certificates from the concerned officers of the banking companies giving names of
shareholders who have given notice in writing at or prior to the meeting to the banking
company that they dissented from the scheme of amalgamation together with the
number of shares held by each of them.
5. The names, addresses and occupations of the Directors of the amalgamating banking
company as proposed to be reconstituted after the amalgamation and indicating how the
composition will be in compliance with Reserve Bank regulations.
6. The details of the proposed Chief Executive Officer of the amalgamating banking
company after the amalgamation.
7. Copies of the reports of the valuers appointed for the determination of the swap ratios.
8. Information which is considered relevant for the consideration of the scheme of
amalgamation and the swap ratio including in particular:
(a) annual reports of each of the banking companies for each of the three completed
financial years immediately preceding the Appointed Date for amalgamation;
(b) financial results, if any, published by each of the banking companies for any period
subsequent to the financial statements prepared for the financial year immediately
preceding the Appointed Date;

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(c) pro-forma combined balance sheet of the amalgamating banking company as it will
appear as of the Appointed Date consequent on the amalgamation;

(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) Ratio of Gross and Net NPAs to Advances

9. Information certified by the valuers as is considered relevant to understand the


proposed swap ratio including in particular:
(a) The methods of valuation used by the valuers;

(b) the information and documents on which the valuers have relied and the extent of the
verification, if any, made by the valuers to test the accuracy of such information;
(c) if the valuers 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 valuers in relation to such information;

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(d) details of the projected information on which the valuers have relied;
(e) detailed computations of the swap ratios containing explanations for adjustments
made to the published financial information for the purposes of the valuation; (f) if these
adjustments are made based on valuations made by third parties, details regarding the
persons who have made such valuations;
(g) capitalization factor and weighted average cost of capital (WACC) used for the
purposes

of

the

valuation

and

justification

for

the

same;

(h) if market values of shares have been considered in the computation of the swap
ratio, the market values considered and the source from which such values have been
derived;
(i) if there are more than one valuer, whether each of the valuers have recommended a
different swap ratio and if so, the above details should be given separately in respect of
each valuer and it may be indicated how the final swap ratio is arrived at.
10. Such other information and explanations as the Reserve Bank may require.

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b) Amalgamation/Merger of Non-Banking Finance Companies with Banks


DBOD.BP.BC. 89/21.02.043/2003-04 June 9, 2004
With regard to amalgamation/merger of a non-banking finance company (NBFC) with a
bank, it has been decided by RBI that in order to ensure that the post-merger bank
continues to be in compliance with the legal provisions contained in the Banking
Regulation Act, 1949 and other relevant statutes and also the regulatory prescriptions of
RBI, banks should obtain prior approval of Reserve Bank of India before initiating steps
for amalgamation/merger of a NBFC with the bank.

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c) Guidelines for merger / amalgamation of Urban Co-operative Banks (UCBs)


(PCB).Cir. 36/09.169.00/04-05 February 2, 2005
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 co-operative banking
sector, it has been decided to frame guidelines to encourage merger/amalgamation in
the sector.
2. Although the Banking Regulation Act, 1949 (AACS) does not empower Reserve Bank
to formulate a scheme with regard to merger and amalgamation of co-operative banks,
the State Governments have incorporated in their respective Co-operative Societies Acts
a provision for obtaining prior sanction in writing, of RBI for an order, interalia, for
sanctioning a scheme of amalgamation or reconstruction.
3. 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 cooperative bank registered under the Central Act is not clear. Although there are no
specific provisions in the State Acts or the Central Act for 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.
Procedure for Merger
4. The procedure for merger either voluntary or otherwise is outlined in the respective
state statutes/ the Multi State Cooperative Societies Act. The Registrars, being the

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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.
5. An application for merger giving the proposed scheme will have to be submitted by
the banks concerned to the Registrar of Co-operative Societies (RCS) / Central
Registrar of Co-operative Societies (CRCS). The acquirer bank shall also forward a copy
of the scheme to the Reserve Bank along with information as in Annexure I. The
Reserve Bank will be examining the same with reference to the financial aspects and the
interests of depositors based on the criteria/factors outlined in Annexure II and convey
its decision to the concerned State RCS and in case the acquirer is a Multi-state Bank,
to the CRCS and the RCS of the State in which the acquired bank is situated.
6. The State Acts also provide for compulsory amalgamation of the cooperative societies
by the RCS. In such cases too, prior approval of RBI is necessary. The schemes
received from RCS will be examined with reference to the financial aspects and the
interests of depositors as well as the stability of the financial system, based on the
criteria/factors outlined in Annexure II and decision conveyed to the RCS.
Annexures
i) Information and documents to be furnished by the acquirer UCB along with the
application of a Scheme of Amalgamation
1. Draft scheme of amalgamation as approved by the Board of Directors of the acquirer
bank.
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 UCBs for each of the three completed financial years
immediately preceding the proposed date for merger.

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b. Financial results, if any, published by each of the UCBs for any period subsequent to
the financial statements prepared for the financial year immediately preceding the
proposed date of merger.
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 valuers as is considered relevant to understand the net
realizable value of assets of the acquired bank including in particular:a. The method of valuation used by the valuers
b. The information and documents on which the valuers have relied and the extent of the
verification, if any, made by the valuers to test the accuracy of such information
c. If the valuers 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 valuers in relation to such information
d. Details of the projected information on which the valuers 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.
b) Annexures
Guidelines on merger/ amalgamation for UCBs
1. Reserve Bank of India may consider proposals for merger and amalgamation in the
following circumstances:

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(i) When the networth of the acquired bank is positive and the acquirer bank assures to
protect entire deposits of all the depositors of the acquired bank.
(ii) When the networth of acquired bank is negative and the acquirer bank on its own
assures to protect deposits of all the depositors of the acquired bank.
(iii) When the networth of the acquired bank is negative and the acquirer bank assures to
protect the deposits of all the depositors of the acquired bank with financial support from
the State Government extended upfront as part of the process of merger.
2. In all cases of merger/ amalgamation the financial parameters of the acquirer bank
post merger should conform to the prescribed minimum prudential and regulatory
requirement for urban co-operative banks.
3. The realizable value of assets has to be assessed through a process of due diligence.

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Annexure 4
Foreign bank entry and expansion norms in India February 28, 2005
Currently, permission for opening of branches by foreign banks in India is guided by the
commitment of 12 branches in a year to the World Trade Organization (WTO). In
practice, however, a higher number has also been permitted on merits. It is now
proposed to adopt a more liberalized policy in this regard for branches to be set up in
unbanked areas.
Applications from Indian and foreign banks would henceforth be processed on a
continuous basis and in a time bound manner, as per a simplified procedure.
The guidelines for setting up of wholly owned banking subsidiaries (WOS) by foreign
banks and conversion of existing branches of foreign banks into WOS are given
hereunder:
Eligibility of the parent bank
1. Foreign banks applying to the RBI for setting up a WOS in India must satisfy RBI that
they are subject to adequate prudential supervision in their home country. In considering
the standard of supervision exercised by the home country regulator, the RBI will have
regard to the Basel standards.
2. The setting up of a wholly-owned banking subsidiary in India should have the approval
of the home country regulator.
3. Other factors (but not limited to) that will be taken into account while considering the
application are given below:
i. Economic and political relations between India and the country of incorporation of the
foreign bank
ii. Financial soundness of the foreign bank
iii. Ownership pattern of the foreign bank

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iv. International and home country ranking of the foreign bank


v. Rating of the foreign bank by international rating agencies
vi. International presence of the foreign bank
Capital
4. The minimum start-up capital requirement for a WOS would be Rs. 3 billion and the
WOS shall be required to maintain a capital adequacy ratio of 10 per cent or as may be
prescribed from time to time on a continuous basis, from the commencement of its
operations.
5. The parent foreign bank will continue to hold 100 per cent equity in the Indian
subsidiary for a minimum prescribed period of operation.
Corporate Governance
6. The composition of the Board of directors should meet the following requirements:

Not less than 50 per cent of the directors should be Indian nationals resident in
India.

Not less than 50 per cent of the Directors should be non-executive directors

A minimum of one-third of the directors should be totally independent of the


management of the subsidiary in India, its parent or associates.

The directors shall conform to the Fit and Proper criteria as laid down in RBIs
extant guidelines dated June 25, 2004.

RBIs approval for the directors may be obtained as per the procedure adopted in
the case of the erstwhile Local Advisory Boards of foreign bank branches.

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7. Accounting, Prudential Norms and other requirements


i. The WOS will be subject to the licensing requirements and conditions, broadly
consistent with those for new private sector banks
ii. The WOS will be treated on par with the existing branches of foreign banks for branch
expansion. The Reserve Bank may also prescribe market access and national treatment
limitation consistent with WTO as also other appropriate limitations to the operations of
WOS, consistent with international practices and the countrys requirements.
iii. The banking subsidiary will be governed by the provisions of the Companies Act,
1956, Banking Regulation Act, 1949, Reserve Bank of India Act, 1934, other relevant
statutes and the directives, prudential regulations and other guidelines/instructions
issued by RBI and other regulators from time to time.
8. Conversion of existing branches into a WOS
All the above requirements prescribed for setting up a WOS will be applicable to existing
foreign bank branches converting into a WOS. In addition they would have to satisfy the
following requirements.
Supervisory Comfort
Permission for conversion of existing branches of a foreign bank into a WOS will interalia
be guided by the manner in which the affairs of the branches of the bank are conducted,
compliance with the statutory and other prudential requirements and the over all
supervisory comfort of the Reserve Bank.
Capital Requirements
The minimum net worth of the WOS on conversion would not be less than Rs. 3 billion
and the WOS will be required to maintain a minimum capital adequacy ratio of 10 per
cent of the risk weighted assets or as may be prescribed from time to time on a
continuous basis. While reckoning the minimum net worth the local available capital
including remittable surplus retained in India, as assessed by the RBI, will qualify.
Reserve Bank will cause an inspection/ audit to assess the financial position of the

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branches operating in India and arrive at the aggregate net worth of the branches. RBIs
assessment of the net worth will be final.
9. Acquisition of holding in select private sector banks
Foreign banks may apply to the Reserve Bank for making investment in private sector
banks that are identified by RBI for restructuring. Reserve Bank will examine the
application with regard to the eligibility criteria prescribed for foreign banks to set up a
WOS vide paragraphs 1 to 4 above as well as their track record in restructuring banks.
While permitting foreign banks to acquire stake in the identified private sector banks, RBI
may undertake enhanced due diligence on the major shareholders to determine their Fit
and Proper status. Reserve Bank may also prescribe additional conditions in this regard
as may be considered appropriate.
10. Application procedure
Applications for setting up of wholly-owned banking subsidiaries by foreign banks
including conversion of existing branches should be made to the Chief General
Manager-in-Charge, Department of Banking Operations and Development, Reserve
Bank of India, World Trade Centre, Cuffe Parade, Colaba, Mumbai 400 005. The
prescribed application form will be placed on the RBI's web site.

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Annexure 5
Guidelines on Ownership and Governance in Private Sector Banks
Introduction
Banks are "special" as they not only accept and deploy large amount of uncollateralized
public funds in fiduciary capacity, but they also leverage such funds through credit
creation. The banks are also important for smooth functioning of the payment system. In
view of the above, legal prescriptions for ownership and governance of banks laid down
in Banking Regulation Act, 1949 have been supplemented by regulatory prescriptions
issued by RBI from time to time. The existing legal framework and significant current
practices in particular cover the following aspects:
i. The composition of Board of Directors comprising members with demonstrable
professional and other experience in specific sectors like agriculture, rural economy, cooperation, SSI, law, etc., approval of Reserve Bank of India for appointment of CEO as
well as terms and conditions thereof, and powers for removal of managerial personnel,
CEO and directors, etc. in the interest of depositors are governed by various sections of
the B.R. Act, 1949.
ii. Guidelines on corporate governance covering criteria for appointment of directors, role
and responsibilities of directors and the Board, signing of declaration and undertaking by
directors, etc., were issued by RBI on June 20, 2002 and June 25, 2004, based on the
recommendations of Ganguly Committee and a review by the BFS.
iii. Guidelines for acknowledgement of transfer/allotment of shares in private sector
banks were issued in the interest of transparency by RBI on February 3, 2004.
iv. Foreign investment in the banking sector is governed by Press Note dated March 5,
2004 issued by the Government of India, Ministry of Commerce and Industries.
v. The earlier practice of RBI nominating directors on the Boards of all private sector
banks has yielded place to such nomination in select private sector banks.

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2. Against this background, it is considered necessary to lay down a comprehensive


framework of policy in a transparent manner relating to ownership and governance in the
Indian private sector banks as described below.
3. The broad principles underlying the framework of policy relating to ownership and
governance of private sector banks would have to ensure that
(i) The ultimate ownership and control of private sector banks is well diversified. While
diversified ownership minimizes the risk of misuse or imprudent use of leveraged funds,
it is no substitute for effective regulation. Further, the fit and proper criteria, on a
continuing basis, has to be the over-riding consideration in the path of ensuring
adequate investments, appropriate restructuring and consolidation in the banking sector.
The pursuit of the goal of diversified ownership will take account of these basic
objectives, in a systematic manner and the process will be spread over time as
appropriate.
(ii) Important Shareholders (i.e., shareholding of 5 per cent and above) are fit and
proper, as laid down in the guidelines dated February 3, 2004 on acknowledgement for
allotment and transfer of shares.
(iii) The directors and the CEO who manage the affairs of the bank are fit and proper as
indicated in circular dated June 25, 2004 and observe sound corporate governance
principles.
(iv) Private sector banks have minimum capital/net worth for optimal operations and
systemic stability.
(v) The policy and the processes are transparent and fair.
4. Minimum capital
The capital requirement of existing private sector banks should be on par with the entry
capital requirement for new private sector banks prescribed in RBI guidelines of January
3, 2001, which is initially Rs.200 crore, with a commitment to increase to Rs.300 crore
within three years. In order to meet with this requirement, all banks in private sector
should have a net worth of Rs.300 crore at all times. The banks which are yet to achieve

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the required level of net worth will have to submit a time-bound programme for capital
augmentation to RBI. Where the net worth declines to a level below Rs.300 crore, it
should be restored to Rs. 300 crore within a reasonable time.
5. Shareholding
i. The RBI guidelines on acknowledgement for acquisition or transfer of shares issued on
February 3, 2004 will be applicable for any acquisition of shares of 5 per cent and above
of the paid up capital of the private sector bank.
ii. In the interest of diversified ownership of banks, the objective will be to ensure that no
single entity or group of related entities has shareholding or control, directly or indirectly,
in any bank in excess of 10 per cent of the paid up capital of the private sector bank. Any
higher level of acquisition will be with the prior approval of RBI and in accordance with
the guidelines of February 3, 2004 for grant of acknowledgement for acquisition of
shares.
iii. Where ownership is that of a corporate entity, the objective will be to ensure that no
single individual/entity has ownership and control in excess of 10 per cent of that entity.
Where the ownership is that of a financial entity the objective will be to ensure that it is a
well established regulated entity, widely held, publicly listed and enjoys good standing in
the financial community.
iv, Banks (including foreign banks having branch presence in India)/FIs should not
acquire any fresh stake in a banks equity shares, if by such acquisition, the investing
banks/FIs holding exceeds 5 per cent of the investee banks equity capital as indicated
in RBI circular dated July 6, 2004.
v. As per existing policy, large industrial houses will be allowed to acquire, by way of
strategic investment, shares not exceeding 10 per cent of the paid up capital of the bank
subject to RBIs prior approval. Furthermore, such a limitation will also be considered if
appropriate, in regard to important shareholders with other commercial affiliations.
vi. In case of restructuring of problem/weak banks or in the interest of consolidation in
the banking sector, RBI may permit a higher level of shareholding, including by a bank.

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6. Directors and Corporate Governance


I. The recommendations of the Ganguly Committee on corporate governance in banks
have highlighted the role envisaged for the Board of Directors. The Board of Directors
should ensure that the responsibilities of directors are well defined and the banks should
arrange need-based training for the directors in this regard. While the respective entities
should perform the roles envisaged for them, private sector banks will be required to
ensure that the directors on their Boards representing specific sectors as provided under
the B.R. Act, are indeed representatives of those sectors in a demonstrable fashion, they
fulfill the criteria under corporate governance norms provided by the Ganguly Committee
and they also fulfill the criteria applicable for determining fit and proper status of
Important Shareholders (i.e., shareholding of 5 per cent and above) as laid down in RBI
Circular dated June 25, 2004.
ii. As a matter of desirable practice, not more than one member of a family or a close
relative (as defined under Section 6 of the Companies Act, 1956) or an associate
(partner, employee, director, etc.) should be on the Board of a bank.
iii. Guidelines have been provided in respect of 'Fit and Proper' criteria for directors of
banks by RBI circular dated June 25, 2004 in accordance with the recommendations of
the Ganguly Committee on Corporate Governance. For this purpose a declaration and
undertaking is required to be obtained from the proposed / existing directors
iv. Being a Director, the CEO should satisfy the requirements of the fit and proper
criteria applicable for directors. In addition, RBI may apply any additional requirements
for the Chairman and CEO. The banks will be required to provide all information that
may be required while making an application to RBI for approval of appointment of
Chairman/CEO.
7. Foreign investment in private sector banks
In terms of the Government of India press note of March 5, 2004, the aggregate foreign
investment in private banks from all sources (FDI, FII, NRI) cannot exceed 74 per cent.

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At all times, at least 26 per cent of the paid up capital of the private sector banks will
have to be held by resident Indians.
7.1 Foreign Direct Investment (FDI) (other than by foreign banks or foreign bank group)
I. The policy already articulated in the February 3, 2004 guidelines for determining fit
and proper status of shareholding of 5 per cent and above will be equally applicable for
FDI. Hence any FDI in private banks where shareholding reaches and exceeds 5 per
cent either individually or as a group will have to comply with the criteria indicated in the
aforesaid guidelines and get RBI acknowledgement for transfer of shares.
ii. To enable assessment of fit and proper the information on ownership/beneficial
ownership as well as other relevant aspects will be extensive.
7.2 Foreign Institutional Investors (FIIs)
i. Currently there is a limit of 10 per cent for individual FII investment with the aggregate
limit for all FIIs restricted to 24 per cent which can be raised to 49 per cent with the
approval of Board/General Body. This dispensation will continue.
ii. The present policy requires RBIs acknowledgement for acquisition/transfer of shares
of 5 per cent and more of a private sector bank by FIIs based upon the policy guidelines
on acknowledgement of acquisition/transfer of shares issued on February 3, 2004. For
this purpose RBI may seek certification from the concerned FII of all beneficial interest.
7.3 Non-Resident Indians (NRIs)
Currently there is a limit of 5 per cent for individual NRI portfolio investment with the
aggregate limit for all NRIs restricted to 10 per cent which can be raised to 24 per cent
with the approval of Board/General Body. Further, the policy guidelines of February 3,
2004 on acknowledgement for acquisition/transfer will be applied.
8. Due diligence process
The process of due diligence in all cases of shareholders and directors as above, will
involve reference to the relevant regulator, revenue authorities, investigation agencies
and independent credit reference agencies as considered appropriate.
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9. Transition arrangements
i. The current minimum capital requirements for entry of new banks is Rs.200 crore to be
increased to Rs.300 crore within three years of commencement of business. A few
private sector banks which have been in existence before these capital requirements
were prescribed have less than Rs.200 crore net worth. In the interest of having
sufficient minimum size for financial stability, all the existing private banks should also be
able to fulfill the minimum net worth requirement of Rs.300 crore required for a new
entry. Hence any bank with net worth below this level will be required to submit a time
bound programme for capital augmentation to RBI for approval.
ii. Where any existing shareholding of any individual entity/group of entities is 5 per cent
and above, due diligence outlined in the February 3, 2004 guidelines will be undertaken
to ensure fulfillment of fit and proper criteria.
iii. Where any existing shareholding by any individual entity/group of related entities is in
excess of 10 per cent, the bank will be required to indicate a time table for reduction of
holding to the permissible level. While considering such cases, RBI will also take into
account the terms and conditions of the banking licenses.
iv. Any bank having shareholding in excess of 5 per cent in any other bank in India will
be required to indicate a time bound plan for reduction in such investments to the
permissible limit. The parent of any foreign bank having presence in India, having
shareholding directly or indirectly through any other entity in the banking group in excess
of 5 per cent in any other bank in India will be similarly required to indicate a time bound
plan for reduction of such holding to 5 per cent.
v. Banks will be required to undertake due diligence before appointment of directors and
Chairman/CEO on the basis of criteria that will be separately indicated and provide all
the necessary certifications/information to RBI.
vi. Banks having more than one member of a family, or close relatives or associates on
the Board will be required to ensure compliance with these requirements at the time of
considering any induction or renewal of terms of such directors.

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vii. Action plans submitted by private sector banks outlining the milestones for
compliance with the various requirements for ownership and governance will be
examined by RBI for consideration and approval.
10. Continuous monitoring arrangements
i. Where RBI acknowledgement has already been obtained for transfer of shares of 5 per
cent and above, it will be the banks responsibility to ensure continuing compliance of the
fit and proper criteria and provide an annual certificate to the RBI of having undertaken
such continuing due diligence.
ii. Similar continuing due diligence on compliance with the fit and proper criteria for
directors/CEO of the bank will have to be undertaken by the bank and certified to RBI
annually.
iii. RBI may, when considered necessary, undertake independent verification of fit and
proper test conducted by banks through a process of due diligence as described in
paragraph 8
11. On the basis of such continuous monitoring, RBI will consider appropriate measures
to enforce compliance.

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Annexure 6
Narasimhan Committee Report (1991 and 1998)- Relevant Extracts
Narasimhan Committee Report (1991)
The first Report of the Narasimham Committee (November 1991) on the financial system
has recommended a broad of the structure of the banking system as under.
(a) 3 or 4 large banks (including the State Bank of India) which could become
international in character
(b) 8 to 10 national banks with a network of branches throughout the country engaged in
universal banking;
(c) Local banks whose operations would be generally confined to a specific region; And
(d) Rural banks (including RRBs) whose operations would be confined to the rural and
whose business in financing of agriculture and allied activities.
The Narasimhan Committee was of the view that the move towards this revised system
should be market driven and based on profitability consideration and brought about
through a process of mergers band acquisitions.
Narasimhan Committee Report (1998)
The second Report of the Narasimham Committee (April 1998) on Banking Sector on
the structural issues made following recommendations:
Mergers between banks and between banks and DFIs and NBFCs need to be based on
synergies and locational and business specific complimentaries
of the concerned institutions and must obviously make sound commercial sense.
Mergers of public sector banks should emanate from the management of banks with the
Government as the common shareholders playing a supportive role. Such mergers,
however, can be worthwhile if they lead to rationalization of work force and branch

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network; otherwise the mergers of public sector banks would tie down the management
with operational issues and distract attention from the real issue. It would be necessary
to evolve policies aimed at rightsizing and redeployment of the surplus staff
either by way of retraining them and giving them appropriate alternate employment or
the introduction a VRS with appropriate incentives. This would necessitate the cooperation and understanding of the employees and towards this direction, management
should initiate discussions with the representatives of staff and would need to convince
their employees about the intrinsic soundness of the idea, the competitive benefits that
would accrue and potential for employees own professional advancement in a larger
institution. Mergers should not be seen as a means of bailing out weak banks.
Mergers between strong banks/ FIs would make for greater economic and commercial
sense and would be a case where be a case where the whole is greater than the sum of
its parts and have a force multiplier effect (Chapter V, paras 5.13 5.15)

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Annexure 7
M&A Terminology
Acquisition - The act of one company taking over controlling interest in another
company. Investors often look for companies that are likely acquisition candidates,
because the acquiring firms are often willing to pay a premium to the market price for the
shares.
Allocation - The amount of securities assigned to an investor, broker, or underwriter in
an offering. An allocation can be equal to or less than the amount indicated by the
investor during the subscription process depending on market demand for the securities.
Angel Financing - Capital raised for a private company from independently wealthy
investors. This capital is generally used as seed financing. (See Seed Money)
Balanced Fund - A venture fund investment strategy that includes the investment in
portfolio companies at a variety of stages of development. (See Early Stage, Later
Stage, Leveraged Buyouts, and Seed Money)
Bootstrapping - A means of finding creative ways to support a start-up business until it
turns profitable. This method may include negotiating delayed payment to suppliers and
advances from potential partners and customers.
Business Development Company (BDC) - A vehicle established by Congress to allow
smaller, retail investors to participate in and benefit from investing in small private
businesses as well as the revitalization of larger private companies.
Capital Gains - The difference between an assets purchase price and selling price,
when the selling price is greater. Long-term capital gains (on assets held for a year or
longer) are taxed at a lower rate than ordinary income.
Capital Gains Distribution - A funds distribution of gains from investments to the
investors in the fund. These gains can be distributed in the form of cash or stock.

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Capital (or Assets) Under Management - The amount of capital available to a fund
management team for venture investments.
Cash flow - Cash earnings minus cash outflows for fixed- and working-capital
investment. (Cash earnings are earnings before deducting noncash items, such as
depreciation and amortization.)
Carried Interest - The portion of any gains realized by the fund to which the fund
managers are entitled, generally without having to contribute capital to the fund. Carried
interest payments are customary in the venture capital industry, in order to create a
significant economic incentive for venture capital fund managers to achieve capital
gains.
Closed-end Fund - A type of fund that has a fixed number of shares outstanding, which
are offered during an initial subscription period, similar to an initial public offering. After
the subscription period is closed, the shares are traded on an exchange between
investors, like a regular stock. The market price of a closed-end fund fluctuates in
response to investor demand as well as changes in the values of its holdings or its Net
Asset Value. Unlike open-end mutual funds, closed-end funds do not stand ready to
issue and redeem shares on a continuous basis. (See Initial Public Offering, Mutual
Fund, Net Asset Value, and Open-end Fund)
Common Stock - A unit of ownership of a corporation. In the case of a public company,
the stock is traded between investors on various exchanges. Owners of common stock
are typically entitled to vote on the selection of directors and other important events and
in some cases receive dividends on their holdings. Investors who purchase common
stock hope that the stock price will increase so the value of their investment will
appreciate. Common stock offers no performance guarantees. Additionally, in the event
that a corporation is liquidated, the claims of secured and unsecured creditors and
owners of bonds and preferred stock take precedence over the claims of those who own
common stock. (See Liquidation and Preferred Stock)
Convertible Security - A financial security (usually preferred stock or bonds) that is
exchangeable for another type of security (usually common stock) at a pre-stated price.
Convertibles are appropriate for investors who want higher income, or liquidation

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preference protection, than is available from common stock, together with greater
appreciation potential than regular bonds offer. (See Common Stock, Dilution, and
Preferred Stock)
Dilution - Dilution has two meanings in finance. The first is the process by which an
investors ownership percentage in a company is reduced by the issuance of new
securities. The second is the effect on earnings per share and book value per share if all
convertible securities were converted and all warrants or stock options were exercised.
(See Stock Options and Warrants)
Early Stage - A fund investment strategy involving investments in companies to enable
product development and initial marketing, manufacturing and sales activities. Early
stage investors can be influential in building a companys management team and
direction. While early stage venture capital investing involves more risk at the individual
deal level than later stage venture investing, investors are able to buy company stock at
very low prices and these investments may have the ability to produce high returns. (See
Seed Money)
Exit Strategy - A fund's intended method for liquidating its holdings while achieving the
maximum possible return. These strategies depend on the exit climates including market
conditions and industry trends. Exit strategies can include selling or distributing the
portfolio companys shares after an initial public offering (IPO), a sale of the portfolio
company or a re-capitalization. (See Acquisition, Initial Public Offering and Recapitalization)
Flipping - The act of buying shares in an IPO and selling them immediately for a profit.
Brokerage firms underwriting new stock issues tend to discourage flipping, and will often
try to allocate shares to investors who intend to hold on to the shares for some time.
However, the temptation to flip a new issue once it has risen in price sharply is too
irresistible for many investors who have been allocated shares in a hot issue. (See Hot
Issue and New Issue)
Fund Focus (or Investment Stage) - The indicated area of specialization of a venture
capital fund usually expressed as Balanced, Seed and Early Stage, Later Stage,

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Mezzanine or Leveraged Buyout (LBO). (See all of the stated fund types for further
information)
Fund Size - The total amount of capital committed by the investors of a venture capital
fund.
Holding Period - The amount of time an investment must be held to qualify for capital
gains tax benefits. (See Capital Gains)
Hot Issue - A newly issued stock that is in great public demand. Hot issues usually
experience a dramatic rise in price at their initial public offering because the market
demand outweighs the supply.
Investment Philosophy - The stated investment approach or focus of a fund manager.
Initial Public Offering (IPO) - The sale or distribution of a stock of a portfolio company to
the public for the first time. IPOs are often an opportunity for the existing investors (often
venture capitalists) to receive significant returns on their original investment. During
periods of market downturns or corrections the opposite is true.
Later Stage - A fund investment strategy involving financing for the expansion of a
company that is producing, shipping and increasing its sales volume. Later stage funds
often provide the financing to help a company achieve critical mass in order to position
itself for an IPO. Later stage investing can have less risk than early stage financing
because these companies have already established themselves in their market and
generally have a management team in place. Later stage and Mezzanine level financing
are often used interchangeably. (See Early Stage, Initial Public Offering and Mezzanine
Level)
Leveraged Buyout (LBO) - A takeover of a company, using a combination of equity and
borrowed funds (or loans). Generally, the target companys assets act as the collateral
for the loans taken out by the acquiring group. The acquiring group then repays the loan
from the cash flow of the acquired company. For example, a group of investors may
borrow funds, using the assets of the company as collateral, in order to take over a
company. Or the management of the company may use this vehicle as a means to

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regain control of the company by converting a company from public to private. In most
LBOs, public shareholders receive a premium to the market price of the shares.
LBO funds are important players in the U.S. private equity markets. Leveraged buyout
funds have generated returns by acquiring profitable, stable businesses in more mature
sectors of the economy, or businesses characterized by high cash flows. Leveraged
buyout firms also play an important role as consolidators of large, highly fragmented
industries. Although traditionally LBO funds invested exclusively in mature economic
sectors, recently several prominent LBO firms have extended their focus to more
dynamic industries such as health care services and telecommunications. (See
Acquisition)
Limited Partnerships - An organization comprised of a general partner, who manages a
fund, and limited partners, who invest money but have limited liability and are not
involved with the day-to-day management of the fund. In the typical venture capital fund,
the general partner receives a management fee and a percentage of the profits (or
carried interest). The limited partners receive income, capital gains, and tax benefits.
(See Capital Gains and Carried Interest)
Liquidation - Liquidation has two meanings in finance. The first is converting securities
into cash. The second is the sale of the assets of a company to one or more acquirers in
order to pay off debts. In the event that a corporation is liquidated, the claims of secured
and unsecured creditors and owners of bonds and preferred stock take precedence over
the claims of those who own common stock. (See Acquisition, Common Stock and
Preferred Stock)
Lock-up Period - The period of time that certain stockholders have agreed to waive their
right to sell their shares of a public company. Investment banks that underwrite initial
public offerings generally insist upon lockups of at least 180 days from large
shareholders (1% ownership or more) in order to allow an orderly market to develop in
the shares. The shareholders that are subject to lockup usually include the management
and directors of the company, strategic partners and such large investors. These
shareholders have typically invested prior to the IPO at a significantly lower price to that
offered to the public and therefore stand to gain considerable profits. If a shareholder

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attempts to sell shares that are subject to lockup during the lockup period, the transfer
agent will not permit the sale to be completed. (See Initial Public Offering)
Management Fee - Compensation for the management of a venture fund's activities,
paid from the fund to the general partner or investment advisor. This compensation
generally includes an annual management fee.
Management Team - The persons who oversee the activities of a venture capital fund.
Mezzanine Financing - Refers to the stage of venture financing for a company
immediately prior to its IPO. Investors entering in this round have lower risk of loss than
those investors who have invested in an earlier round. Mezzanine level financing can
take the structure of preferred stock, convertible bonds or subordinated debt (the level of
financing senior to equity and below senior debt). (See Convertible Securities, Early
Stage, Initial Public Offering, Later Stage and Preferred Stock)
Mutual Fund - A mutual fund, or an open-end fund, sells as many shares as investor
demand requires. As money flows in, the fund grows. If money flows out of the fund the
number of the funds outstanding shares drops. Open-end funds are sometimes closed
to new investors, but existing investors can still continue to invest money in the fund. In
order to sell shares an investor usually sells the shares back to the fund. If an investor
wishes to buy additional shares in a mutual fund, the investor must buy newly issued
shares directly from the fund.
Net Asset Value (NAV) - NAV is calculated by adding the value of all of the investments
in the fund and dividing by the number of shares of the fund that are outstanding. NAV
calculations are required for all mutual funds (or open-end funds) and closed-end funds.
The price per share of a closed-end fund will trade at either a premium or a discount to
the NAV of that fund, based on market demand. Closed-end funds generally trade at a
discount to NAV.
New Issue - A stock or bond offered to the public for the first time. New issues may be
initial public offerings by previously private companies or additional stock or bond issues
by companies already public. New public offerings are registered with the Securities and
Exchange Commission. (SEBI in India)

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Open-end Fund - An open-end fund, or a mutual fund, generally sells as many shares as
investor demand requires. As money flows in, the fund grows. If money flows out of the
fund the number of the funds outstanding shares drops. Open-end funds are sometimes
closed to new investors, but existing investors can still continue to invest money in the
fund. In order to sell shares an investor generally sells the shares back to the fund. If an
investor wishes to buy additional shares in a mutual fund, the investor generally buys
newly issued shares directly from the fund.
Option Pool - The number of shares set aside for future issuance to employees of a
private company.
Portfolio Companies - Portfolio companies are companies in which a given fund has
invested.
Post-money Valuation - The valuation of a company immediately after the most recent
round of financing. This value is calculated by multiplying the company's total number of
shares by the share price of the latest financing.
Preferred Stock - A class of capital stock that may pay dividends at a specified rate and
that has priority over common stock in the payment of dividends and the liquidation of
assets. Many venture capital investments use preferred stock as their investment
vehicle. This preferred stock is convertible into common stock at the time of an IPO.
Pre-money Valuation -The valuation of a company immediately prior to the most recent
round of financing.
Private Equity - Private equities are equity securities of companies that have not gone
public (in other words, companies that have not listed their stock on a public exchange).
Private equities are generally illiquid and thought of as a long-term investment. As they
are not listed on an exchange, any investor wishing to sell securities in private
companies must find a buyer in the absence of a marketplace. In addition, there are
many transfer restrictions on private securities. Investors in private securities generally
receive their return through one of three ways: an initial public offering, a sale or merger,
or a re-capitalization.

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Private Securities - Private securities are securities that are not registered and do not
trade on an exchange. The price per share is set through negotiation between the buyer
and the seller or issuer.
Prospectus - A formal written offer to sell securities that provides an investor with the
necessary information to make an informed decision. A prospectus explains a proposed
or existing business enterprise and must disclose any material risks and information
according to the securities laws. A prospectus must be filed with the SEC and be given
to all potential investors. Companies offering securities, mutual funds, and offerings of
other investment companies including Business Development Companies are required
to issue prospectuses describing their history, investment philosophy or objectives, risk
factors and financial statements. Investors should carefully read them prior to investing.
Red Herring - The common name for a preliminary prospectus, due to the red SEC
required legend on the cover
Re-capitalization - The reorganization of a companys capital structure. A company may
seek to save on taxes by replacing preferred stock with bonds in order to gain interest
deductibility. Re-capitalization can be an alternative exit strategy for venture capitalists
and leveraged buyout sponsors.
Reconfirmation - The act a broker/dealer makes with an investor to confirm a
transaction.
Registration - The SECs review process of all securities intended to be sold to the
public. The SEC requires that a registration statement be filed in conjunction with any
public securities offering. This document includes operational and financial information
about the company, the management and the purpose of the offering. The registration
statement and the prospectus are often referred to interchangeably. Technically, the
SEC does not "approve" the disclosures in prospectuses
Restricted Securities - Public securities that are not freely tradable due to SEC/SEBI
regulations.

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Secondary Sale- The sale of private or restricted holdings in a portfolio company to other
investors.
Seed Money -The first round of capital for a start-up business. Seed money usually
takes the structure of a loan or an investment in preferred stock or convertible bonds,
although sometimes it is common stock. Seed money provides start-up companies with
the capital required for their initial development and growth. Angel investors and earlystage venture capital funds often provide seed money.
Series A Preferred Stock - The first round of stock offered during the seed or early stage
round by a portfolio company to the venture investor or fund. This stock is convertible
into common stock in certain cases such as an IPO or the sale of the company. Later
rounds of preferred stock in a private company are called Series B, Series C and so on.
Stock

Options

There

are

two

definitions

of

stock

options.

1. The right to purchase or sell a stock at a specified price within a stated period.
Options are a popular investment medium, offering an opportunity to hedge positions in
other securities, to speculate on stocks with relatively little investment, and to capitalize
on changes in the market value of options contracts themselves through a variety of
options

strategies.

2. A widely used form of employee incentive and compensation. The employee is given
an option to purchase its shares at a certain price (at or below the market price at the
time the option is granted) for a specified period of years.
Syndicate - Underwriters or broker/dealers who sell a security as a group.
Venture Capital - Money provided by investors to privately held companies with
perceived long-term growth potential. Professionally managed venture capital firms
generally are limited partnerships funded by private and public pension funds,
endowment funds, foundations, corporations, wealthy individuals, foreign investors, and
the venture capitalists themselves.
Warrants - The type of security that entitles the holder to buy a proportionate amount of
common stock or preferred stock at a specified price for a period of years. Warrants are
usually issued together with a loan, a bond or preferred stock --and act as sweeteners,

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to enhance the marketability of the accompanying securities. They are also known as
stock-purchase warrants and subscription warrants.
Write-off - The act of changing the value of an asset to an expense or a loss. A write-off
is used to reduce or eliminate the value an asset and reduce profits.
Write-up/Write-down - An upward or downward adjustment of the value of an asset for
accounting and reporting purposes. These adjustments are estimates and tend to be
subjective; although they are usually based on events affecting the investee company or
its securities beneficially or detrimentally

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Annexure 8
Sources and ReferencesWebsites, Publications, Annual Reports, Studies of1. Reserve Bank of India
2. Ministry of Finance
2. State Bank of India
3. Oriental Bank of Commerce
4. Global Trust Bank
5. Indian Bankers Association
6. Banknet India

Various articles, reports published inThe Economic Times of India


The Financial Express
Hindu- Business Line
Business Standard

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BANKNET PUBLICATIONS: Banknet India Publications are based on


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Banknet India conferences have:
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