BANKING INDUSTY – MERGER AND ACQUISTION
OVERVIEW Banking & Financial services companies have come a long way. In the last twenty years they have undergone significant changes and we have witnessed many instances of consolidation, restructuring, rise and fall of new and old banks, growth of non-bank finance companies, etc.In addition, deregulation of banks and financial services companies can operate and what products and services they can offer have encouraged both geographic and product diversification. Today a majority of these companies offer a wide variety of products and services ranging.
What is banking?
Bank is an institution that deals in money and its substitutes and provides other financial services. Banks accept deposits and make loans and derive profit from the difference in the interest rates paid and charged, respectively.
EVOLUTION OF BANKING SECTOR (A BRIEF REVIEW)
The origin of the Banking sector is traced to Italy. The word “Bank” is derived from the German word “Banck” which means a mound or heap. Many others believe that the word Bank has derived from Bancus or Banc or Banque which means a bench on which the money changers, money lenders or mediaeval bankers used to change one kind of money into another, lend money to the needy farmers, small scale industries, businessman etc.
MEANING OF BANK
The term is derived from the French word “Banco” which means a bench or a desk used by money changers. In old days, money lenders and money changers in European countries used to exhibit their coins for the purpose of lending or changing money. The dictionary meaning of a bank is that it is an institution for lending, borrowing, exchanging, issuing or safeguarding money. Thus, a bank is a financial institution which deals in money as a commodity. A bank is an establishment for custody of money which it pays out on customer’s orders.
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TYPES OR KINDS OF BANK
1. CONSUMER BANK A consumer bank is one which provides loans for buying consumer items, like scooter, motor car, refrigerators, television sets, furniture, washing machine, kitchenware etc. The consumer who desires to buy certain product through the bank finance has to deposit a certain initial amount with the bank. It is a part of the total price of the product. The bank then issues cheques in favour of the seller, from whom the borrower desires to buy the product. The cheque is issued for the total price of the product. The consumer is able to buy the product immediately on basis of such cheques. Thereafter he has to repay the bank loan along with interest. 2. INDIGENOUS BANK They are money lenders operating in rural and urban areas and charge a high rate of interest for the loan granted. 3. COMMERCIAL BANKS A commercial bank accepts deposit from public in the form of Savings A/c, Current A/c,R.D.and F.C.A/c .it lends their money in the form of O.D., cash credit, loans, discounting of bills. The difference between the interest received on lending and the interest paid on deposits is its profit margin. In addition to these primary functions, a commercial bank provides agency functions and utility function. Examples of such banks are Bank of Baroda, Canara Bank, Dena Bank etc.
4. SAVINGS BANK A savings bank is formed with object of inculcating the savings habit among the society. It collects the savings of the society and invests the same securities of different companies. It pays interest to the deposit holder out of the income from investments. In India Postal Savings Bank is an example of such a bank. Moreover, Corporation banks and Commercial banks also act as saving bank since they have a separate section for savings deposit. 5. AGRICULTURE BANK /LAND MORTGAGE BANK These banks have been established to provide long term finance to the agriculture sector. They provide financial assistance against the mortgage /security of land by the farmer or agriculturist. Long term loans are offered for the purpose of land, construction of wells, fertilizers, good quality seeds, purchase of agricultural equipments like tractors, pumps etc.In for making any other permanent improvements in the land so as to increase the productivity.
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6. INDUSTRIAL BANKS It provide long term loans to industrialists .These funds are raised by issue of shares and debentures and also by accepting long term deposit from the public. They subscribe for shares and debentures of company. They underwrite the shares and debenture issued by the company .Industrial banks are also known as specified financial institutions. Some of the Industrial Banks in India are: IDBI, IFCI, ICICI. 7. MIXED BANK It is a combination of commercial bank and industrial bank. Commercial banks accept deposits from public and provide short term loan. An industrial bank provides medium and long term loan to industrialist. Mixed banks performs both the jobs of accepting deposits from public and providing short, medium and long term loans. 8. RURAL BANKS Banks which are established in the rural area are called Rural Banks. They help in development of rural areas. These include the commercial banks in rural area and the agricultural bank. 9. CO –OPERATIVE BANKS Co-Operative banks are organized on the basis of co-operation. They are registered under the Co-operative Societies Act. Co-operative Banks provide loans to their members on easy terms. It is easy to get a loan from a co-operative bank than commercial banks. A co-operative bank runs on the democratic management. One man, one vote is the principle and service is the motto. In, India, co-operative banks operate in a three tier structure. At the district level, district co-operative banks and at village level primary co- operative banks operate. They are linked to each other from village to the state level. These banks are useful in rural functioning. 10. EXCHANGE BANKS These banks are started by the government to help the import trade and export trade. For eg. Export import bank of India (EXIM BANK).
11. CENTRAL BANK: The central bank is the apex bank in a country, which controls its monetary and banking structure. It is owned by government of the country and operates in the national interest. It regulates and issues currency performs banking and a agency services for the state, keeps cash reserves of commercial banks, keeps and manages international currency. It controls the credit and lends finance to needy individuals, businesses, firms etc.The Reserve Bank of India is the central bank in India.
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CONTEMPORARY MOVE OF COOPERATIVE BANKS
TECHNOLOGY UPGRADATION HIGHLIGHTS
SBI’s Information Technology Programme aims at achieving efficiency in operations, meeting customer and market expectations and facing competition. Our achievements are summarized below:
FULL BRANCH COMPUTERISATION (FCBs): All the 9038 branches of the Bank are now fully computerised. This strategy has contributed to improvement in customer service.
ATM SERVICES: There are 3814 ATMs on the ATM Network including 2760 ATMs of SBI and 1054 from the 7 Associate Banks. These ATMs are located in 1210 centres spread across the length and breadth of the country, thereby creating a truly national network of ATMs with an unparalleled reach. Value added services like ATM locator, payment of fees for college students, multilingual screens, voice over and drawal of cash advance by SBI credit card holders have been introduced.
INTERNET BANKING (INB): This on-line channel enables customers to access their account information and initiate transactions on a 24x7, boundary less basis. 1116 branches, covering 237 centres, are extending INB service to their customers. All functionalities other than Cash and Clearing have been extended to individual retail customers. A separate Internet Banking Module for Corporate customers has been launched and available at 461 branches. Bulk upload of data for Corporate, Inter-branch funds transfer for Retail customers, Electronic Bill Presentment & Payment, SMS Alerts, E-Poll, IIT GATE Fee Collection, Off-line Customer Registration Process and Railway Ticket Booking are the new features deployed.
TELEBANKING & REMOTE LOGIN FOR CORPORATE CUSTOMERS:
This is a Value added service to retail and corporate customers which support Transactional requests. Tele banking facility has been extended at 593 branches and Remote-Login at 269 branches.
SEFT: SBI has launched the Special Electronic Fund Transfer (SEFT) Scheme of RBI, to facilitate efficient and expeditious Inter-bank transfer of funds. 323 branches of our Bank in various LHO Centres are participating in the scheme. Security of message transmission has been enhanced.
4 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION MICR Centres: MICR Cheque Processing systems are operational at 15 centres viz. Mumbai, New Delhi, Chennai, Kolkata, Vadodara, Surat, Patna, Jabalpur, Gwalior, Jodhpur, Trichur, Calicut, Nasik, Raipur and Bhubaneswar.
WAN : The bank has set up a Wide Area Network which provides connectivity to 1419 branches across 49 cities in the first phase. The networking project provides across the board benefits by providing nationwide connectivity for its business applications. Under phase two, Datacraft India will undertake turnkey implementation of SBI’s corporate backbone – also known as SBI Connect – from design, provision, supply and project management. It will help the Bank to network an additional 1400 branches of SBI at an additional 251 centres. 1700 branches of our Associates will also be connected in this phase at all the 300 SBI connect centres. In addition ATMs and other electronic delivery channels also will be connected.
Trade Finance : The solution has been implemented, providing efficiency in handling Trade Finance transactions with Internet access to customers and greatly enhances the bank’s services to Corporates and Commercial Network branches. This new Trade Finance solution, EXIMBILLS, will be implemented at all domestic branches as well as at Foreign offices engaged in trade finance business during the year.
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Financial and Banking Sector Reforms
The last decade witnessed the maturity of India's financial markets. Since 1991, every governments of India took major steps in reforming the financial sector of the country. The important achievements in the following fields is discussed under serparate heads
• Financial markets • Regulators • The banking system • Non-banking finance companies • The capital market • Mutual funds • Overall approach to reforms • Deregulation of banking system • Capital market developments • Consolidation imperative
Now let us discuss each segment seperately.
Financial Markets
In the last decade, Private Sector Institutions played an important role. They grew rapidly in commercial banking and asset management business. With the openings in the insurance sector for these institutions, they started making debt in the market.
Competition among financial intermediaries gradually helped the interest rates to decline. Deregulation added to it. The real interest rate was maintained. The borrowers did not pay high price while depositors had incentives to save. It was something between the nominal rate of interest and the expected rate of inflation.
Regulators
The Finance Ministry continuously formulated major policies in the field of financial sector of the country. The Government accepted the important role of regulators. The Reserve Bank of India (RBI) has become more
6 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION independant. Securities and Exchange Board of India (SEBI) and the Insurance Regulatory and Development Authority (IRDA) became important institutions. Opinions are also there that there should be a super-regulator for the financial services sector instead of multiplicity of regulators.
The banking system
Almost 80% of the business are still controlled by Public Sector Banks (PSBs). PSBs are still dominating the commercial banking system. Shares of the leading PSBs are already listed on the stock exchanges.
The RBI has given licences to new private sector banks as part of the liberalisation process. The RBI has also been granting licences to industrial houses. Many banks are successfully running in the retail and consumer segments but are yet to deliver services to industrial finance, retail trade, small business and agricultural finance.
The PSBs will play an important role in the industry due to its number of branches and foreign banks facing the constrait of limited number of branches. Hence, in order to achieve an efficient banking system, the onus is on the Government to encourage the PSBs to be run on professional lines.
Development finance institutions
FIs's access to SLR funds reduced. Now they have to approach the capital market for debt and equity funds.
Convertibility clause no longer obligatory for assistance to corporates sanctioned by term-lending institutions.
Capital adequacy norms extended to financial institutions.
DFIs such as IDBI and ICICI have entered other segments of financial services such as commercial banking, asset management and insurance through separate ventures. The move to universal banking has started.
Non-banking finance companies
In the case of new NBFCs seeking registration with the RBI, the requirement
7 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION of minimum net owned funds, has been raised to Rs.2 crores.
Until recently, the money market in India was narrow and circumscribed by tight regulations over interest rates and participants. The secondary market was underdeveloped and lacked liquidity. Several measures have been initiated and include new money market instruments, strengthening of existing instruments and setting up of the Discount and Finance House of India (DFHI).
The RBI conducts its sales of dated securities and treasury bills through its open market operations (OMO) window. Primary dealers bid for these securities and also trade in them. The DFHI is the principal agency for developing a secondary market for money market instruments and Government of India treasury bills. The RBI has introduced a liquidity adjustment facility (LAF) in which liquidity is injected through reverse repo auctions and liquidity is sucked out through repo auctions.
On account of the substantial issue of government debt, the gilt- edged market occupies an important position in the financial set- up. The Securities Trading Corporation of India (STCI), which started operations in June 1994 has a mandate to develop the secondary market in government securities.
Long-term debt market: The development of a long-term debt market is crucial to the financing of infrastructure. After bringing some order to the equity market, the SEBI has now decided to concentrate on the development of the debt market. Stamp duty is being withdrawn at the time of dematerialisation of debt instruments in order to encourage paperless trading.
The capital market
The number of shareholders in India is estimated at 25 million. However, only an estimated two lakh persons actively trade in stocks. There has been a dramatic improvement in the country's stock market trading infrastructure during the last few years. Expectations are that India will be an attractive emerging market with tremendous potential. Unfortunately, during recent times the stock markets have been constrained by some unsavoury developments, which has led to retail investors deserting the stock markets.
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Mutual funds
The mutual funds industry is now regulated under the SEBI (Mutual Funds) Regulations, 1996 and amendments thereto. With the issuance of SEBI guidelines, the industry had a framework for the establishment of many more players, both Indian and foreign players.
The Unit Trust of India remains easily the biggest mutual fund controlling a corpus of nearly Rs.70,000 crores, but its share is going down. The biggest shock to the mutual fund industry during recent times was the insecurity generated in the minds of investors regarding the US 64 scheme. With the growth in the securities markets and tax advantages granted for investment in mutual fund units, mutual funds started becoming popular.
The foreign owned AMCs are the ones which are now setting the pace for the industry. They are introducing new products, setting new standards of customer service, improving disclosure standards and experimenting with new types of distribution.
The insurance industry is the latest to be thrown open to competition from the private sector including foreign players. Foreign companies can only enter joint ventures with Indian companies, with participation restricted to 26 per cent of equity. It is too early to conclude whether the erstwhile public sector monopolies will successfully be able to face up to the competition posed by the new players, but it can be expected that the customer will gain from improved service.
The new players will need to bring in innovative products as well as fresh ideas on marketing and distribution, in order to improve the low per capita insurance coverage. Good regulation will, of course, be essential.
Overall approach to reforms
The last ten years have seen major improvements in the working of various financial market participants. The government and the regulatory authorities have followed a step-by-step approach, not a big bang one. The entry of foreign players has assisted in the introduction of international practices and systems. Technology developments have improved customer service. Some gaps however remain (for example: lack of an inter-bank interest rate
9 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION benchmark, an active corporate debt market and a developed derivatives market). On the whole, the cumulative effect of the developments since 1991 has been quite encouraging. An indication of the strength of the reformed Indian financial system can be seen from the way India was not affected by the Southeast Asian crisis.
However, financial liberalisation alone will not ensure stable economic growth. Some tough decisions still need to be taken. Without fiscal control, financial stability cannot be ensured. The fate of the Fiscal Responsibility Bill remains unknown and high fiscal deficits continue. In the case of financial institutions, the political and legal structures hve to ensure that borrowers repay on time the loans they have taken. The phenomenon of rich industrialists and bankrupt companies continues. Further, frauds cannot be totally prevented, even with the best of regulation. However, punishment has to follow crime, which is often not the case in India.
Deregulation of banking system
Prudential norms were introduced for income recognition, asset classification, provisioning for delinquent loans and for capital adequacy. In order to reach the stipulated capital adequacy norms, substantial capital were provided by the Government to PSBs.
Government pre-emption of banks' resources through statutory liquidity ratio (SLR) and cash reserve ratio (CRR) brought down in steps. Interest rates on the deposits and lending sides almost entirely were deregulated.
New private sector banks allowed to promote and encourage competition. PSBs were encouraged to approach the public for raising resources. Recovery of debts due to banks and the Financial Institutions Act, 1993 was passed, and special recovery tribunals set up to facilitate quicker recovery of loan arrears.
Bank lending norms liberalised and a loan system to ensure better control over credit introduced. Banks asked to set up asset liability management (ALM) systems. RBI guidelines issued for risk management systems in banks encompassing credit, market and operational risks.
A credit information bureau being established to identify bad risks. Derivative
10 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION products such as forward rate agreements (FRAs) and interest rate swaps (IRSs) introduced.
Capital market developments
The Capital Issues (Control) Act, 1947, repealed, office of the Controller of Capital Issues were abolished and the initial share pricing were decontrolled. SEBI, the capital market regulator was established in 1992.
Foreign institutional investors (FIIs) were allowed to invest in Indian capital markets after registration with the SEBI. Indian companies were permitted to access international capital markets through euro issues.
The National Stock Exchange (NSE), with nationwide stock trading and electronic display, clearing and settlement facilities was established. Several local stock exchanges changed over from floor based trading to screen based trading.
Private mutual funds permitted
The Depositories Act had given a legal framework for the establishment of depositories to record ownership deals in book entry form. Dematerialisation of stocks encouraged paperless trading. Companies were required to disclose all material facts and specific risk factors associated with their projects while making public issues.
To reduce the cost of issue, underwriting by the issuer were made optional, subject to conditions. The practice of making preferential allotment of shares at prices unrelated to the prevailing market prices stopped and fresh guidelines were issued by SEBI.
SEBI reconstituted governing boards of the stock exchanges, introduced capital adequacy norms for brokers, and made rules for making client or broker relationship more transparent which included separation of client and broker accounts.
Buy back of shares allowed
The SEBI started insisting on greater corporate disclosures. Steps were taken
11 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION to improve corporate governance based on the report of a committee.
SEBI issued detailed employee stock option scheme and employee stock purchase scheme for listed companies.
Standard denomination for equity shares of Rs. 10 and Rs. 100 were abolished. Companies given the freedom to issue dematerialised shares in any denomination.
Derivatives trading starts with index options and futures. A system of rolling settlements introduced. SEBI empowered to register and regulate venture capital funds.
The SEBI (Credit Rating Agencies) Regulations, 1999 issued for regulating new credit rating agencies as well as introducing a code of conduct for all credit rating agencies operating in India.
Consolidation imperative
Another aspect of the financial sector reforms in India is the consolidation of existing institutions which is especially applicable to the commercial banks. In India the banks are in huge quantity. First, there is no need for 27 PSBs with branches all over India. A number of them can be merged. The merger of Punjab National Bank and New Bank of India was a difficult one, but the situation is different now. No one expected so many employees to take voluntary retirement from PSBs, which at one time were much sought after jobs. Private sector banks will be self consolidated while co-operative and rural banks will be encouraged for consolidation, and anyway play only a niche role.
In the case of insurance, the Life Insurance Corporation of India is a behemoth, while the four public sector general insurance companies will probably move towards consolidation with a bit of nudging. The UTI is yet again a big institution, even though facing difficult times, and most other public sector players are already exiting the mutual fund business. There are a number of small mutual fund players in the private sector, but the business being comparatively new for the private players, it will take some time.
We finally come to convergence in the financial sector, the new buzzword
12 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION internationally. Hi-tech and the need to meet increasing consumer needs is encouraging convergence, even though it has not always been a success till date. In India organisations such as IDBI, ICICI, HDFC and SBI are already trying to offer various services to the customer under one umbrella. This phenomenon is expected to grow rapidly in the coming years. Where mergers may not be possible, alliances between organisations may be effective. Various forms of bancassurance are being introduced, with the RBI having already come out with detailed guidelines for entry of banks into insurance. The LIC has bought into Corporation Bank in order to spread its insurance distribution network. Both banks and insurance companies have started entering the asset management business, as there is a great deal of synergy among these businesses. The pensions market is expected to open up fresh opportunities for insurance companies and mutual funds.
It is not possible to play the role of the Oracle of Delphi when a vast nation like India is involved. However, a few trends are evident, and the coming decade should be as interesting as the last one.
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Introduction to Mergers and Acquisition
We have been learning about the companies coming together to from another company and companies taking over the existing companies to expand their business.
With recession taking toll of many Indian businesses and the feeling of insecurity surging over our businessmen, it is not surprising when we hear about the immense numbers of corporate restructurings taking place, especially in the last couple of years. Several companies have been taken over and several have undergone internal restructuring, whereas certain companies in the same field of business have found it beneficial to merge together into one company.
In this context, it would be essential for us to understand what corporate restructuring and mergers and acquisitions are all about.
All our daily newspapers are filled with cases of mergers, acquisitions, spin-offs, tender offers, & other forms of corporate restructuring. Thus important issues both for business decision and public policy formulation have been raised. No firm is regarded safe from a takeover possibility. On the more positive side Mergers & Acquisition’s may be critical for the healthy expansion and growth of the firm. Successful entry into new product and geographical markets may require Mergers & Acquisition’s at some stage in the firm's development. Successful competition in international markets may depend on capabilities obtained in a timely and efficient fashion through Mergers & Acquisition's. Many have argued that mergers increase value and efficiency and move resources to their highest and best uses, thereby increasing shareholder value. .
14 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION To opt for a merger or not is a complex affair, especially in terms of the technicalities involved. We have discussed almost all factors that the management may have to look into before going for merger. Considerable amount of brainstorming would be required by the managements to reach a conclusion. e.g. a due diligence report would clearly identify the status of the company in respect of the financial position along with the networth and pending legal matters and details about various contingent liabilities. Decision has to be taken after having discussed the pros & cons of the proposed merger & the impact of the same on the business, administrative costs benefits, addition to shareholders' value, tax implications including stamp duty and last but not the least also on the employees of the Transferor or Transferee Company.
Merger:
Merger is defined as combination of two or more companies into a single company where one survives and the others lose their corporate existence. The survivor acquires all the assets as well as liabilities of the merged company or companies. Generally, the surviving company is the buyer, which retains its identity, and the extinguished company is the seller.
Merger is also defined as amalgamation. Merger is the fusion of two or more existing companies. All assets, liabilities and the stock of one company stand transferred to transferee company in consideration of payment in the form of:
• Equity shares in the transferee company, • Debentures in the transferee company, • Cash, or • A mix of the above modes.
Acquisition:
Acquisition in general sense is acquiring the ownership in the property. In the context of business combinations, an acquisition is the purchase by one
15 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION company of a controlling interest in the share capital of another existing company.
Methods of Acquisition:
An acquisition may be affected by
(a) agreement with the persons holding majority interest in the company management like members of the board or major shareholders commanding majority of voting power; (b) purchase of shares in open market; (c)to make takeover offer to the general body of shareholders; (d) purchase of new shares by private treaty; (e) Acquisition of share capital through the following forms of considerations viz. means of cash, issuance of loan capital, or insurance of share capital.
Takeover:
A ‘takeover’ is acquisition and both the terms are used interchangeably. Takeover differs from merger in approach to business combinations i.e. the process of takeover, transaction involved in takeover, determination of share exchange or cash price and the fulfillment of goals of combination all are different in takeovers than in mergers. For example, process of takeover is unilateral and the offeror company decides about the maximum price. Time taken in completion of transaction is less in takeover than in mergers, top management of the offeree company being more co-operative.
De-merger or corporate splits or division:
De-merger or split or divisions of a company are the synonymous terms signifying a movement in the company.
16 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION What will it take to succeed?
Funds are an obvious requirement for would-be buyers. Raising them may not be a problem for multinationals able to tap resources at home, but for local companies, finance is likely to be the single biggest obstacle to an acquisition. Financial institution in some Asian markets are banned from leading for takeovers, and debt markets are small and illiquid, deterring investors who fear that they might not be able to sell their holdings at a later date. The credit squeezes and the depressed state of many Asian equity markets have only made an already difficult situation worse. Funds apart, a successful Mergers & Acquisition growth strategy must be supported by three capabilities: deep local networks, the abilities to manage uncertainty, and the skill to distinguish worthwhile targets. Companies that rush in without them are likely to be stumble.
Assess target quality:
To say that a company should be worth the price a buyer pays is to state the obvious. But assessing companies in Asia can be fraught with problems, and several deals have gone badly wrong because buyers failed to dig deeply enough. The attraction of knockdown price tag may tempt companies to skip crucial checks. Concealed high debt levels and deferred contingent liabilities have resulted in large deals destroying value. But in other cases, where buyers have undertaken detailed due diligence, they have been able to negotiate prices as low as half of the initial figure.
Due diligence can be difficult because disclosure practices are poor and companies often lack the information buyer need. Moreover, most Asian conglomerates still do not present consolidated financial statements, leaving the possibilities that the sales and the profit figures might be bloated by transactions between affiliated companies. The financial records that are available are often unreliable, with different projections made by different departments within the same company, and different projections made for different audiences. Banks and investors, naturally, are likely to be shown optimistic forecasts.
17 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION Purpose of Mergers and Acquisition
The purpose for an offeror company for acquiring another company shall be reflected in the corporate objectives. It has to decide the specific objectives to be achieved through acquisition. The basic purpose of merger or business combination is to achieve faster growth of the corporate business. Faster growth may be had through product improvement and competitive position.
Other possible purposes for acquisition are short listed below: -
(1)Procurement of supplies:
1. to safeguard the source of supplies of raw materials or intermediary product; 2. to obtain economies of purchase in the form of discount, savings in transportation costs, overhead costs in buying department, etc.; 3. to share the benefits of suppliers economies by standardizing the materials.
(2)Revamping production facilities:
1. to achieve economies of scale by amalgamating production facilities through more intensive utilization of plant and resources; 2. to standardize product specifications, improvement of quality of product, expanding 3. market and aiming at consumers satisfaction through strengthening after sale 4. services; 5. to obtain improved production technology and know-how from the offeree company 6. to reduce cost, improve quality and produce competitive products to retain and
18 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION 7. improve market share.
(3) Market expansion and strategy:
1. to eliminate competition and protect existing market; 2. to obtain a new market outlets in possession of the offeree; 3. to obtain new product for diversification or substitution of existing products and to enhance the product range; 4. strengthening retain outlets and sale the goods to rationalize distribution; 5. to reduce advertising cost and improve public image of the offeree company; 6. strategic control of patents and copyrights.
(4) Financial strength:
1. to improve liquidity and have direct access to cash resource; 2. to dispose of surplus and outdated assets for cash out of combined enterprise; 3. to enhance gearing capacity, borrow on better strength and the greater assets backing; 4. to avail tax benefits; 5. to improve EPS (Earning Per Share).
(5) General gains:
1. to improve its own image and attract superior managerial talents to manage its affairs; 2. to offer better satisfaction to consumers or users of the product.
(6) Own developmental plans:
The purpose of acquisition is backed by the offeror company’s own developmental plans. A company thinks in terms of acquiring the other company only when it has arrived at its own development plan to expand its operation having examined its own internal strength where it might not have any problem
19 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION of taxation, accounting, valuation, etc. but might feel resource constraints with limitations of funds and lack of skill managerial personnel’s. It has to aim at suitable combination where it could have opportunities to supplement its funds by issuance of securities, secure additional financial facilities, eliminate competition and strengthen its market position.
(7) Strategic purpose:
The Acquirer Company view the merger to achieve strategic objectives through alternative type of combinations which may be horizontal, vertical, product expansion, market extensional or other specified unrelated objectives depending upon the corporate strategies. Thus, various types of combinations distinct with each other in nature are adopted to pursue this objective like vertical or horizontal combination.
(8) Corporate friendliness:
Although it is rare but it is true that business houses exhibit degrees of cooperative spirit despite competitiveness in providing rescues to each other from hostile takeovers and cultivate situations of collaborations sharing goodwill of each other to achieve performance heights through business combinations. The combining corporates aim at circular combinations by pursuing this objective.
(9) Desired level of integration:
Mergers and acquisition are pursued to obtain the desired level of integration between the two combining business houses. Such integration could be operational or financial. This gives birth to conglomerate combinations. The purpose and the requirements of the offeror company go a long way in selecting a suitable partner for merger or acquisition in business combinations.
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Types of mergers
Merger or acquisition depends upon the purpose of the offeror company it wants to achieve. Based on the offerors’ objectives profile, combinations could be vertical, horizontal, circular and conglomeratic as precisely described below with reference to the purpose in view of the offeror company.
(A) Vertical combination:
A company would like to takeover another company or seek its merger with that company to expand espousing backward integration to assimilate the resources of supply and forward integration towards market outlets. The acquiring company through merger of another unit attempts on reduction of inventories of raw material and finished goods, implements its production plans as per the objectives and economizes on working capital investments. In other words, in vertical combinations, the merging undertaking would be either a supplier or a buyer using its product as intermediary material for final production.
The following main benefits accrue from the vertical combination to the acquirer company i.e. (1) it gains a strong position because of imperfect market of the intermediary products, scarcity of resources and purchased products; (2) has control over products specifications.
(B) Horizontal combination :
It is a merger of two competing firms which are at the same stage of industrial process. The acquiring firm belongs to the same industry as the target company. The mail purpose of such mergers is to obtain economies of scale in production by eliminating duplication of facilities and the operations and broadening the product line, reduction in investment in working capital, elimination in competition concentration in product,
21 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION reduction in advertising costs, increase in market segments and exercise better control on market.
(C) Circular combination:
Companies producing distinct products seek amalgamation to share common distribution and research facilities to obtain economies by elimination of cost on duplication and promoting market enlargement. The acquiring company obtains benefits in the form of economies of resource sharing and diversification.
(D) Conglomerate combination:
It is amalgamation of two companies engaged in unrelated industries like DCM and Modi Industries. The basic purpose of such amalgamations remains utilization of financial resources and enlarges debt capacity through re-organizing their financial structure so as to service the shareholders by increased leveraging and EPS, lowering average cost of capital and thereby raising present worth of the outstanding shares. Merger enhances the overall stability of the acquirer company and creates balance in the company’s total portfolio of diverse products and production processes.
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Advantages of mergers and takeovers
Mergers and takeovers are permanent form of combinations which vest in management complete control and provide centralized administration which are not available in combinations of holding company and its partly owned subsidiary. Shareholders in the selling company gain from the merger and takeovers as the premium offered to induce acceptance of the merger or takeover offers much more price than the book value of shares. Shareholders in the buying company gain in the long run with the growth of the company not only due to synergy but also due to “boots trapping earnings”.
Motivations for mergers and acquisitions
Mergers and acquisitions are caused with the support of shareholders, manager’s ad promoters of the combing companies. The factors, which motivate the shareholders and managers to lend support to these combinations and the resultant consequences they have to bear, are briefly noted below based on the research work by various scholars globally.
(1) From the standpoint of shareholders
Investment made by shareholders in the companies subject to merger should enhance in value. The sale of shares from one company’s shareholders to another and holding investment in shares should give rise to greater values i.e. the opportunity gains in alternative investments. Shareholders may gain from merger in different ways viz. from the gains and achievements of the company i.e. through
(a) realization of monopoly profits; (b) economies of scales;
23 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION (c) diversification of product line; (d) acquisition of human assets and other resources not available otherwise; (e) better investment opportunity in combinations.
One or more features would generally be available in each merger where shareholders may have attraction and favour merger.
(2) From the standpoint of managers
Managers are concerned with improving operations of the company, managing the affairs of the company effectively for all round gains and growth of the company which will provide them better deals in raising their status, perks and fringe benefits. Mergers where all these things are the guaranteed outcome get support from the managers. At the same time, where managers have fear of displacement at the hands of new management in amalgamated company and also resultant depreciation from the merger then support from them becomes difficult.
(3) Promoter’s gains
Mergers do offer to company promoters the advantage of increasing the size of their company and the financial structure and strength. They can convert a closely held and private limited company into a public company without contributing much wealth and without losing control.
(4) Benefits to general public
Impact of mergers on general public could be viewed as aspect of benefits and costs to:
(a) Consumer of the product or services; (b) Workers of the companies under combination;
24 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION (c) General public affected in general having not been user or consumer or the worker in the companies under merger plan.
(a) Consumers
The economic gains realized from mergers are passed on to consumers in the form of lower prices and better quality of the product which directly raise their standard of living and quality of life. The balance of benefits in favour of consumers will depend upon the fact whether or not the mergers increase or decrease competitive economic and productive activity which directly affects the degree of welfare of the consumers through changes in price level, quality of products, after sales service, etc.
(b) Workers community
The merger or acquisition of a company by a conglomerate or other acquiring company may have the effect on both the sides of increasing the welfare in the form of purchasing power and other miseries of life. Two sides of the impact as discussed by the researchers and academicians are: firstly, mergers with cash payment to shareholders provide opportunities for them to invest this money in other companies which will generate further employment and growth to uplift of the economy in general. Secondly, any restrictions placed on such mergers will decrease the growth and investment activity with corresponding decrease in employment. Both workers and communities will suffer on lessening job opportunities, preventing the distribution of benefits resulting from diversification of production activity.
(c) General public
25 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION Mergers result into centralized concentration of power. Economic power is to be understood as the ability to control prices and industries output as monopolists. Such monopolists affect social and political environment to tilt everything in their favour to maintain their power ad expand their business empire. These advances result into economic exploitation. But in a free economy a monopolist does not stay for a longer period as other companies enter into the field to reap the benefits of higher prices set in by the monopolist. This enforces competition in the market as consumers are free to substitute the alternative products. Therefore, it is difficult to generalize that mergers affect the welfare of general public adversely or favorably. Every merger of two or more companies has to be viewed from different angles in the business practices which protects the interest of the shareholders in the merging company and also serves the national purpose to add to the welfare of the employees, consumers and does not create hindrance in administration of the Government polices.
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Consideration of Merger and Takeover
Mergers and takeovers are two different approaches to business combinations. Mergers are pursued under the Companies Act, 1956 vide sections 391/394 thereof or may be envisaged under the provisions of Income-tax Act, 1961 or arranged through BIFR under the Sick Industrial Companies Act, 1985 whereas, takeovers fall solely under the regulatory framework of the SEBI Regulations, 1997.
Minority shareholders rights
SEBI regulations do not provide insight in the event of minority shareholders not agreeing to the takeover offer. However section 395 of the Companies Act, 1956 provides for the acquisition of shares of the shareholders. According to section 395 of the Companies Act, if the offerer has acquired at least 90% in value of those shares may give notice to the non-accepting shareholders of the intention of buying their shares. The 90% acceptance level shall not include the share held by the offerer or it’s associates. The procedure laid down in this section is briefly noted below.
1. In order to buy the shares of non-accepting shareholders the offerer must have reached the 90% acceptance level within 4 months of the date of the offer, and notice must have been served on those shareholders within 2 months of reaching the 90% level.
2. The notice to the non-accepting shareholders must be in a prescribed manner. A copy of a notice and a statutory declaration by the offerer (or, if the offerer is a company, by a director) in the prescribed form confirming that the conditions for giving the notice have been satisfied must be sent to the target.
3. Once the notice has been given, the offerer is entitled and bound to acquire the outstanding shares on the terms of the offer. 27 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION
4. If the terms of the offer give the shareholders a choice of consideration, the notice must give particulars of options available and inform the shareholders that he has six weeks from the date of the notice to indicate his choice of consideration in writing.
5. At the end of the six weeks from the date of the notice to the non- accepting shareholders the offerer must immediately send a copy of notice to the target and pay or transfer to the target the consideration for all the shares to which the notice relates. Stock transfer forms executed on behalf of the non-accepting shareholders by a person appointed by the offerer must also be sent. Once the company has received stock transfer forms it must register the offerer as the holder of the shares.
6. The consideration money, which is received by the target, should be held on trust for the person entitled to shares in respect of which the sum was received.
7. Alternatively, if the offerer does not wish to buy the non-accepting shareholder’s shares, it must still within one month of company reaching the 90% acceptance level give such shareholders notice in the prescribed manner of the rights that are exercisable by them to require the offerer to acquire their shares. The notice must state that the offer is still open for acceptance and specify a date after which the right may not be exercised, which may not be less than 3 months from the end of the time within which the offer can be accepted. If the offerer fails to send such notice it (and it’s officers who are in default) are liable to a fine unless it or they took all reasonable steps to secure compliance.
8. If the shareholder exercises his rights to require the offerer to purchase his shares the offerer is entitled and bound to do so on the terms of the offer or on such other terms as may be agreed. If a choice of consideration was originally offered, the shareholder may indicate his choice when requiring the offerer to acquire his shares. The notice given to shareholder will specify the choice of consideration and which consideration should apply in default of an election.
28 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION 9. On application made by an happy shareholder within six weeks from the date on which the original notice was given, the court may make an order preventing the offerer from acquiring the shares or an order specifying terms of acquisition differing from those of the offer or make an order setting out the terms on which the shares must be acquired.
In certain circumstances, where the takeover offer has not been accepted by the required 90% in value of the share to which offer relates the court may, on application of the offerer, make an order authorizing it to give notice under the Companies Act, 1985, section 429. It will do this if it is satisfied that:
a. the offerer has after reasonable enquiry been unable to trace one or more shareholders to whom the offer relates; b. the shares which the offerer has acquired or contracted to acquire by virtue of acceptance of the offerer, together with the shares held by untraceable shareholders, amount to not less than 90% in value of the shares subject to the offer; and c. the consideration offered is fair and reasonable.
The court will not make such an order unless it considers that it is just and equitable to do so, having regard, in particular, to the number of shareholder who has been traced who did accept the offer.
Alternative modes of acquisition
The terms used in business combinations carry generally synonymous connotations and can be used interchangeably. All the different terms carry one single meaning of “merger” but each term cannot be given equal treatment in the discussion because law has created a dividing line between ‘take-over’ and acquisitions by way of merger, amalgamation or reconstruction. Particularly the takeover Regulations for substantial acquisition of shares and takeovers known as SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 vide section 3 excludes any attempt of merger done by way of any one or more of the following modes:
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(a) by allotment in pursuant of an application made by the shareholders for right issue and under a public issue;
(b) preferential allotment made in pursuance of a resolution passed under section 81(1A) of the Companies Act, 1956;
(c)allotment to the underwriters pursuant to underwriters agreements;
(d) inter-se-transfer of shares amongst group, companies, relatives, Indian promoters and Foreign collaborators who are shareholders/promoters;
(e) acquisition of shares in the ordinary course of business, by registered stock brokers, public financial institutions and banks on own account or as pledges;
(f) acquisition of shares by way of transmission on succession or inheritance;
(g) acquisition of shares by government companies and statutory corporations;
(h) transfer of shares from state level financial institutions to co- promoters in pursuance to agreements between them;
(i) acquisition of shares in pursuance to rehabilitation schemes under Sick Industrial Companies (Special Provisions) Act, 1985 or schemes of arrangements, mergers, amalgamation, De-merger, etc. under the Companies Act, 1956 or any other law or regulation, Indian or Foreign;
30 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION (j) acquisition of shares of company whose shares are not listed on any stock exchange. However, this exemption in not available if the said acquisition results into control of a listed company;
(k) such other cases as may be exempted from the applicability of Chapter III of SEBI regulations by SEBI.
The basic logic behind substantial disclosure of takeover of a company through acquisition of shares is that the common investors and shareholders should be made aware of the larger financial stake in the company of the person who is acquiring such company’s shares. The main objective of these Regulations is to provide greater transparency in the acquisition of shares and the takeovers of companies through a system of disclosure of information.
Escrow account
To ensure that the acquirer shall pay the shareholders the agreed amount in redemption of his promise to acquire their shares, it is a mandatory requirement to open escrow account and deposit therein the required amount, which will serve as security for performance of obligation.
The Escrow amount shall be calculated as per the manner laid down in regulation 28(2). Accordingly: For offers which are subject to a minimum level of acceptance, and the acquirer does want to acquire a minimum of 20%, then 50% of the consideration payable under the public offer in cash shall be deposited in the Escrow account.
Payment of consideration
Consideration may be payable in cash or by exchange of securities. Where it is payable in cash the acquirer is required to pay the amount of consideration within 21 days from the date of closure of the offer. For this purpose he is required to open special account with the bankers to an issue
31 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION (registered with SEBI) and deposit therein 90% of the amount lying in the Escrow Account, if any. He should make the entire amount due and payable to shareholders as consideration. He can transfer the funds from Escrow account for such payment. Where the consideration is payable in exchange of securities, the acquirer shall ensure that securities are actually issued and dispatched to shareholders in terms of regulation 29 of SEBI Takeover Regulations.
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Reverse Merger
Generally, a company with the track record should have a less profit earning or loss making but viable company amalgamated with it to have benefits of economies of scale of production and marketing network, etc. As a consequence of this merger the profit earning company survives and the loss making company extinguishes its existence. But in many cases, the sick company’s survival becomes more important for many strategic reasons and to conserve community interest. The law provides encouragement through tax relief for the companies that are profitable but get merged with the loss making companies. Infact this type of merger is not a normal or a routine merger. It is, therefore, called as a Reverse Merger.
The allurement for such mergers is the tax savings under the Income- tax Act, 1961. Section 72A of the Act ensures the tax relief which becomes attractive for amalgamations of sick company with a healthy and profitable company to take the advantage of carry forward losses. Taking advantage of the provisions of section 72A through merger or amalgamation is known as reverse merger, which gives survival to the sick unit by merging it with the healthy unit. The healthy unit extincts loosing its name and the surviving sick company retains its name. Companies to take advantage of the section follow this route but after a year or so change their names to the one of the healthy company as were done amongst others by Kirloskar Pneumatics Ltd. The company merged with Kirloskar Tractors Ltd, a sick unit and initially lost its name but after one year it changed its name as was prior to merger.
Reverse Merger under Tax Laws
Section 72A of the Income-tax Act, 1961 is meant to facilitate rejuvenation of sick industrial undertaking by merging with healthier industrial
33 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION companies having incentive in the form of tax savings designed with the sole intention to benefit the general public through continued productive activity, increased employment avenues and generation of revenue.
34 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION (1) Background
Under the existing provisions of the Income-tax Act, so much of the business loss of a year as cannot be set off by him against the profits of the following year from any business carried on by him. If the loss cannot be so wholly set off, the amount not so set off can be carried forward to the next following year and so on, up to a maximum of eight assessment years immediately succeeding the assessment year for which the loss was first computed. The benefit of carry forward and set off of business loss is, however, not available unless the business in which the loss was originally sustained is continued to be carried on by the assessee. Further, only the assessee who incurred the loss by his predecessor. Similarly, if a business carried on one assessee is taken over by another, the unabsorbed depreciation allowance due to the predecessor in business and set off against his profits in subsequent years. In view of these provisions, the accumulated business loss and unabsorbed depreciation allowance of a company which merges with another company under a scheme of amalgamation cannot be carried forward and set off by the latter company against its profits.
The very purpose of section 72A is to revive the business of an undertaking, which is financially non-viable and to bring it back to health. Sickness among industrial undertakings is a matter of grave national concern. Experience has shown that taking over of such units by Government is not always the most satisfactory or the most economical solution. The more effective course suggested was to facilitate the amalgamation of sick industrial units with sound ones by providing incentives and removing impediments in the way of such amalgamation. To save the Government from social costs in terms of loss of production and employment and to relieve the Government of the uneconomical burden of taking over and running sick industrial units is one of the motivating factors in introducing section 72A. To achieve this objective so as to facilitate the merger of sick industrial units with sound one, the general rule of carry forward and set off of accumulated losses and unabsorbed depreciation allowance of amalgamating company by the amalgamated company was statutorily related. By a deeming fiction, the accumulated loss or the unabsorbed depreciation of the amalgamating is treated to be the loss or, as the case may be, allowance for depreciation of
35 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION the amalgamated company for the previous year in which amalgamation was effected.
There are three statutory conditions which are to be fulfilled under section 72A(1) for the benefits prescribed therein to be available to the amalgamated company, namely –
(i) The amalgamating company was, immediately before such amalgamation, financially non-viable by reason of its liabilities, losses and other relevant factors; (ii) The amalgamation is in the public interest; (iii) Such other conditions as the Central Government may by notification in the Official Gazette, specify, to ensure that the benefit under this section is restricted to amalgamation, which would facilitate the rehabilitation or revival of the business of amalgamating company.
(2) Reverse merger
As it can be now understood, a reverse merger is a method adopted to avoid the stringent provisions of Section 72A but still be able to claim all the losses of the sick unit. For doing so, in case of a reverse merger, instead of a healthy unit taking over a sick unit, the sick unit takes over/ amalgamates with the healthy unit.
High Court discussed 3 tests for reverse merger: a. assets of transferor company being greater than transferee company; b. equity capital to be issued by the transferee company pursuant to the acquisition exceeding its original issued capital, and c. the change of control in the transferee company clearly indicated that the present arrangement was an arrangement, which was a typical illustration of takeover by reverse bid.
Court held that prime facie the scheme of merging a prosperous unit with a sick unit could not be said to be offending the provisions of section 72A
36 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION of the Income Tax Act, 1961 since the object underlying this provision was to facilitate the merger of sick industrial unit with a sound one.
(3) Salient features of reverse merger under section 72A
1. Amalgamation should be between companies and none of them should be a firm of partners or sole-proprietor. In other words, partnership firm or sole-proprietary concerns cannot get the benefit of tax relief under section 72A merger.
2. The companies entering into amalgamation should be engaged in either industrial activity or shipping business. In other words, the tax relief under section 72A would not be made available to companies engaged in trading activities or services.
3. After amalgamation the “sick” or “financially unviable company” shall survive and other income generating company shall extinct. In other words essential condition to be fulfilled is that the acquiring company will be able to revive or rehabilitate having consumed the healthy company.
4. One of the merger partner should be financially unviable and have accumulated losses to qualify for the merger and the other merger partner should be profit earning so that tax relief to the maximum extent could be had. In other words the company which is financially unviable should be technically sound and feasible, commercially and economically viable but financially weak because of financial stringency or lack of financial recourses or its liabilities have exceeded its assets and is on the brink of insolvency. The second requisite qualification associated with financial unavailability is the accumulation of losses for past few years.
5. Amalgamation should be in the public interest i.e. it should not be against public policy, should not defeat basic tenets of law, and must safeguard the interest of employees, consumers, creditors, customers and shareholders apart from promoters of company through the revival of the company.
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6. The merger must result into following benefit to the amalgamated company i.e. (a) carry forward of accumulated business loses of the amalgamated company; (b) carry forward of unabsorbed depreciation of the amalgamating company and (c) accumulated loss would be allowed to be carried forward set of for eight subsequent years.
7. Accumulated loss should arise from “Profits and Gains from business or profession” and not be loss under the head “Capital Gains” or “Speculation”.
8. For qualifying carry forward loss, the provisions of section 72 should have not been contravened.
9. Similarly for carry forward of unabsorbed depreciation the conditions of section 32 should not have been violated.
10. Specified authority has to be satisfied of the eligibility of the company for the relief under section 72 of the Income Tax Act. It is only on the recommendations of the specified authority that Central Government may allow the relief.
11. The company should make an application to a “specified authority” for requisite recommendation of the case to the Central Government for granting or allowing the relief.
12. Procedure for merger or amalgamation to be followed in such cases is same as in any other cases. Specified Authority makes recommendation after taking into consideration the court’s direction on scheme of amalgamation.
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Procedure for Takeover and Acquisition
Public announcement:
To make a public announcement an acquirer shall follow the following procedure:
1. Appointment of merchant banker:
The acquirer shall appoint a merchant banker registered as category – I with SEBI to advise him on the acquisition and to make a public announcement of offer on his behalf.
2. Use of media for announcement:
Public announcement shall be made at least in one national English daily one Hindi daily and one regional language daily newspaper of that place where the shares of that company are listed and traded.
3. Timings of announcement:
Public announcement should be made within four days of finalization of negotiations or entering into any agreement or memorandum of understanding to acquire the shares or the voting rights.
39 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION 4. Contents of announcement:
Public announcement of offer is mandatory as required under the SEBI Regulations. Therefore, it is required that it should be prepared showing therein the following information:
(1) paid up share capital of the target company, the number of fully paid up and partially paid up shares.
(2) Total number and percentage of shares proposed to be acquired from public subject to minimum as specified in the sub-regulation (1) of Regulation 21 that is: a) The public offer of minimum 20% of voting capital of the company to the shareholders; b) The public offer by a raider shall not be less than 10% but more than 51% of shares of voting rights. Additional shares can be had @ 2% of voting rights in any year.
(3) The minimum offer price for each fully paid up or partly paid up share;
(4) Mode of payment of consideration;
(5) The identity of the acquirer and in case the acquirer is a company, the identity of the promoters and, or the persons having control over such company and the group, if any, to which the company belong;
(6) The existing holding, if any, of the acquirer in the shares of the target company, including holding of persons acting in concert with him;
(7) Salient features of the agreement, if any, such as the date, the name of the seller, the price at which the shares are being acquired, the manner of payment of the consideration and the number and percentage of shares in respect of which the 40 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION acquirer has entered into the agreement to acquirer the shares or the consideration, monetary or otherwise, for the acquisition of control over the target company, as the case may be;
(8) The highest and the average paid by the acquirer or persons acting in concert with him for acquisition, if any, of shares of the target company made by him during the twelve month period prior to the date of the public announcement;
(9) Objects and purpose of the acquisition of the shares and the future plans of the acquirer for the target company, including disclosers whether the acquirer proposes to dispose of or otherwise encumber any assets of the target company: Provided that where the future plans are set out, the public announcement shall also set out how the acquirers propose to implement such future plans;
(10) The ‘specified date’ as mentioned in regulation 19;
(11) The date by which individual letters of offer would be posted to each of the shareholders;
(12) The date of opening and closure of the offer and the manner in which and the date by which the acceptance or rejection of the offer would be communicated to the share holders;
(13) The date by which the payment of consideration would be made for the shares in respect of which the offer has been accepted;
(14) Disclosure to the effect that firm arrangement for financial resources required to implement the offer is already in place, including the details regarding the sources of the funds
41 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION whether domestic i.e. from banks, financial institutions, or otherwise or foreign i.e. from Non-resident Indians or otherwise;
(15) Provision for acceptance of the offer by person who own the shares but are not the registered holders of such shares;
(16) Statutory approvals required to obtained for the purpose of acquiring the shares under the Companies Act, 1956, the Monopolies and Restrictive Trade Practices Act, 1973, and/or any other applicable laws;
(17) Approvals of banks or financial institutions required, if any;
(18) Whether the offer is subject to a minimum level of acceptances from the shareholders; and
(19) Such other information as is essential fort the shareholders to make an informed design in regard to the offer.
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Why Mergers fail?
Why Mergers Fail?
Revenue deserves more attention in mergers; indeed, a failure to focus on this important factor may explain why so many mergers don’t pay off. Too many companies lose their revenue momentum as they concentrate on cost synergies or fail to focus on post merger growth in a systematic manner. Yet in the end, halted growth hurts the market performance of a company far more than does a failure to nail costs.
Policy needed for bank mergers
About a year ago, the head of a prominent south India-based public sector bank identified on a non-attributable basis a prominent south India-based private bank as a takeover target.
He said his boys were examining the target's books and a consultant to oversee the takeover was likely to be appointed soon. The takeover never came and the head of the aspiring acquirer bank has now retired. But the idea had a respectable bank with financial clout to back it.
The same cannot be said of the announcement later by the head of a Kolkata- based public sector bank that he was also targeting two south India-based private banks!
In this case the aspiring acquirer bank was one of the weakest public sector banks and had been considered as such until lately. Most recently, the head of
43 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION another public sector bank announced an ambitious plan to make an international acquisition and in a few days moved on to a regulatory position.
It has been open season for some time now for public sector bank chiefs to talk about takeover plans without much eventual action. Some of the non- attributable statements have subsequently been denied and predictably the bank at the other end has also denied that it is at all up for sale.
On the other hand, the one person who never talked about it, the head of Oriental Bank of Commerce, when the time came, moved his organisation swiftly to take over Global Trust Bank, undoubtedly on instructions from the banking regulator and the government.
The big recent change in the overall banking scene is that as opposed to the earlier phase of free individual talk of takeovers, consolidation in the state- owned banking sector has now been officially blessed.
So it is absolutely imperative to have a policy on takeover among public sector banks. That should put an end to free talk of takeover by senior officials of banks when many of the predators and targets are now listed.
One blessing in disguise is that this is likely to be a year of declining profits for most banks. They will be deprived of the treasury earnings that over the last few years gave them windfall earnings and emboldened the heads of banks that were considered weak till lately to articulate takeover ambitions.
The declining earnings will separate the men from the boys and hopefully shorten the list of aspiring acquirers. The process of going about it the right way has already started and one of the better-run public sector banks, Corporation Bank, has armed itself with a mandate from its board to look for acquisitions while firmly declaring that the bank itself is not open to a takeover bid.
A declared official policy to govern mergers will allow the system to gain most from a few well- thought-out mergers completed within a reasonable period of time without loose cannons confusing the scene.
This is primarily because the top bank managements are not their own masters. Public sector bank chiefs are all career officials who in part lobby their way to the top and remain there for variable lengths of time. Most of them who have talked about takeovers will not even be there to personally see the process through.
In both India and mature economies private firms led by professionals who may not have significant personal stakes do play the M&A game but they do
44 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION so only while enjoying sufficient shareholder confidence and appropriate mandates from their boards.
In fact, takeovers are mostly lengthy processes that are best seen through by the same leadership. Not just hostile takeovers, even the friendly ones sometimes need clearances from the competition regulators of more than one country.
The Indian nationalised banking scene is quite different from this and the chief executives of nationalised banks are really more like senior bureaucrats enjoying the confidence of their political bosses.
The only big difference is that while secretaries to the government get transferred quite often, a nationalised bank CMD is usually left undisturbed to retire, unless of course he has tenure left to move on to greener pastures.
It is axiomatic that M&As between public sector banks will have to be ultimately blessed by the governments. So the government's assertion that it approves of consolidation and is even thinking of allowing tax concessions for it but will not tell the players what to do, will not wash.
It is time that in the best interests of public confidence and transparency, the government and also the central bank laid down a few rules or principles to govern mergers.
First, norms for separating weak from strong banks for takeover should be laid down so that people do not talk out of turn. For example, reserves and resources need not be an issue.
LIC will happily bankroll what Corporation Bank, in which it is a key shareholder, may decide to acquire. What is more important is whether the acquiring bank has a management culture and style of efficient functioning that needs to be spread and not subsumed under a more efficient management culture.
Second, complementarity and synergy should be declared as key considerations for allowing amalgamations. A marriage between two institutions should only be considered if they are strong in non-overlapping regions.
Similarly, a union should happen between two entities whose management cultures have some kind of affinity. A habitually cautious and a habitually aggressive bank may not jell.
Additionally, some of the most attractive merger prospects can be those where the merged entity has a wider portfolio of business. Two banks,
45 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION respectively strong in retail and corporate lending, would logically be made for each other. Once such norms are there, mergers can fall into place without there being much opposition or reluctance.
And while on the issue of evolving a policy for nationalised bank M&As, the government should relook at the halfway house that the State Bank of India group is in. Should its subsidiaries be merged with it? Or should the healthier ones with a consistent track record be set free from the laggard parent entirely?
9 PSU banks consider merger
Don't be surprised if your bank vanishes overnight to re-emerge with a new name.
The finance ministry thus wants the country's nationalised banks to develop better brand equity, and become stronger and smarter.
The ministry believes that the merger of existing nationalised banks that will create a stronger identity can help win the confidence of depositors more than any of the mushrooming private banks.
Already there is talk of a possible merger of the Bank of India and the Union Bank of India. If it goes through it will create the second largest bank in India after the State Bank of India.
However, to merge the banks need the approval of their respective boards of directors and the final nod from the Reserve Bank of India.
The finance ministry has already forwarded the merger plan to the RBI for its approval.
As both are leading banks, discussions are focused on what name the new 'merged identity' should have. The Bank of India is insisting on retaining its brand name on the ground that it is bigger in terms of assets, net worth and profits. The Union Bank of India, meanwhile, points out that it has higher market capitalization -- Rs 4,279 crore (Rs 42.79 billion) as against BoI's Rs 3,438 crore (Rs 34.38 billion).
46 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION Reportedly, Andhra Bank, Indian Bank and Vijaya Bank constitute the other lot of the nationalised banks that have informed the government about their intent to merge and form the leading bank in the southern states.
Together, they will have a spread of 3,400 branches across the country, majority of them in the southern region.
Canara Bank and United Commercial Bank too are learnt to have sent proposals to the finance ministry for their merger, while Indian Overseas Bank with Punjab National Bank too are considering the possibility of a merger
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Case Studies
CASE STUDY 1 India's biggest ever merger in the financial sector
On February 25th the boards of HDFC Bank and Centurion Bank of Punjab (CBoP) agreed to the biggest merger in Indian banking history, valued at around Rs95.2bn (US$2.4 billion). The merger is subject to statutory and regulatory approvals and will take some four months to go through. CBoP shareholders will get one share of HDFC Bank for 29 shares of CBoP. The merged entity will be called HDFC Bank and CBoP's non-executive chairman, Rana Talwar, and its managing director and CEO, Shailendra Bhandari, will join the new board as a non-executive and executive director, respectively.
HDFC Bank was one of the first private-sector banks to get off the ground when Indian regulators began giving out new private-sector banking licences in the early 1990s. It was set up by the blue-blooded Housing Development Finance Corporation (HDFC), India's most reputed mortgage-finance company. HDFC Bank has lived up to its parent's pedigree, turning out consistent growth of at least 30% in net profits year after year and becoming a stockmarket favourite. It was also the first of the new private banks to merge with another, Times Bank, in 1999.
Meanwhile, CBoP, a floundering new-generation private bank, was taken over in 2003 by a group of investors spearheaded by Sabre Capital, a fund started by Mr Talwar, a former Standard Chartered Bank chairman. Newly aggressive, it pushed through three acquisitions, taking over the Indian operations of Bank Muscat in 2003, and then acquiring the Bank of Punjab in 2005 and Lord Krishna Bank in 2007--two small regional banks strong in the northern state of Punjab and the southern state of Kerala respectively.
More benefits
That regional strength is one of the benefits that HDFC Bank was looking for, but the merger will also offer several others. HDFC Bank says it was looking to
48 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION supplement organic growth with a merger that would add scale, geographical reach and experienced staff, which are in short supply. HDFC Bank has 23,000 employees while CBoP has about 7,500. The deal will add 394 branches and 452 ATMs to HDFC Bank's existing 754 branches and 1,906 ATMs, giving the combined entity 1,148 branches. That will be the country's largest private branch network, larger than private-sector leader ICICI Bank's 955 branches.
But even post-merger, HDFC Bank will be only the third-largest bank by assets in India after the market leaders, the State Bank of India (SBI) and ICICI Bank, both of which will outrank it by a wide margin. Based on figures from end-December 2007, the new entity will have assets of about Rs1.5trn, against SBI's Rs5.7trn and ICICI Bank's Rs3.8trn. The merged entity will also have a deposit base of around Rs1.2trn and net advances of around Rs850bn.
On the day the swap ratio was announced, CBoP shares, which had run up in anticipation, fell 14.5% to Rs48.25 per share in adjustment to the ratio. HDFC Bank shares, however, fell 3.5% to close at Rs1,422.70 a share, reflecting investor concerns that CBoP's valuation was too high. CBoP's asset quality and resource profile, though healthy, are slightly weaker than HDFC Bank's own and could impact HDFC Bank adversely in the short term. For example, HDFC Bank's net non-performing assets as a percentage of net advances for fiscal year 2006/07 stood at an excellent 0.43%, compared to the higher--though still acceptable--figure of 1.26% for CBoP. HDFC Bank's capital adequacy is 13.8% against CBoP's 11.5%.
According to rating agency CRISIL, however, the benefits of an expanded branch network and wider geographical coverage will more than offset any short-term negatives. HDFC Bank is also likely to make a preferential offer to its promoter, HDFC, to allow it to maintain its shareholding in the merged entity. HDFC held 23.3% in HDFC Bank at end-December 2007; this share will fall to about 19% after the merger. HDFC will probably invest about Rs39bn to bring its shareholding back up, a infusion that will further bolster the bank's capitalisation.
Ahead of the curve
Although some analysts say there was no clear immediate imperative for the merger, both banks were simply preparing for the future. The Indian banking sector is currently girded with all sorts of restrictions on bank ownership and mergers. Until 2009, for example, foreign banks are restricted from acquiring stakes in Indian banks. After April 2009, the central bank will formulate new rules to change that. It may also loosen the current stringent restrictions on voting rights and shareholding by a single group that apply to all Indian banks. This will make them more attractive takeover targets. In preparation, Indian banks must scale up, strengthen themselves, or get ready to be taken
49 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION over. Current restrictions may have hindered major consolidation among Indian banks so far, but HDFC Bank's latest move might just prompt them to sit up and take notice.
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CASE STUDY 2
Deutsche – Dresdner Bank ( Merger Failure )
The merger that was announced on march 7, 2000 between Deutsche Bank and Dresdner Bank, Germany’s largest and the third largest bank respectively was considered as Germany’s response to increasingly tough competition markets.
The merger was to create the most powerful banking group in the world with the balance sheet total of nearly 2.5 trillion marks and a stock market value around 150 billion marks. This would put the merged bank for ahead of the second largest banking group, U.S. based citigroup, with a balance sheet total amounting to 1.2 trillion marks and also in front of the planned Japanese book mergers of Sumitomo and Sukura Bank with 1.7 trillion marks as the balance sheet total.
The new banking group intended to spin off its retail banking which was not making much profit in both the banks and costly, extensive network of bank branches associated with it.
The merged bank was to retain the name Deutsche Bank but adopted the Dresdner Bank’s green corporate color in its logo. The future core business lines of the new merged Bank included investment Banking, asset management, where the new banking group was hoped to outside the traditionally dominant Swiss Bank, Security and loan banking and finally financially corporate clients ranging from major industrial corporation to the mid-scale companies.
With this kind of merger, the new bank would have reached the no.1 position of the US and create new dimensions of aggressiveness in the international mergers.
51 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION But barely 2 months after announcing their agreement to form the largest bank in the world, negotiations for a merger between Deutsche and Dresdner Bank failed on April 5, 2000.
The main issue of the failure was Dresdner Bank’s investment arm, Kleinwort Benson, which the executive committee of the bank did not want to relinquish under any circumstances.
In the preliminary negotiations it had been agreed that Kleinwort Benson would be integrated into the merged bank. But from the outset these considerations encountered resistance from the asset management division, which was Deutsche Bank’s investment arm.
Deutsche Bank’s asset management had only integrated with London’s investment group Morgan Grenfell and the American Banker’s trust. This division alone contributed over 60% of Deutsche Bank’s profit. The top people at the asset management were not ready to undertake a new process of integration with Kleinwort Benson. So there was only one option left with the Dresdner Bank i.e. to sell Kleinwort Benson completely. However Walter, the chairman of the Dresdner Bank was not prepared for this. This led to the withdrawal of the Dresdner Bank from the merger negotiations.
In economic and political circles, the planned merger was celebrated as Germany’s advance into the premier league of the international financial markets. But the failure of the merger led to the disaster of Germany as the financial center.
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Standard Chartered Grindlay’s ( Acquisition Success )
It has been a hectic year at London-based Standard Chartered Bank, going by its acquisition spree across the Asia-Pacific region. At the helm of affairs, globally, is Rana Talwar, group CEO. The quintessential general, he knew what he was up against when he propounded his 'emerging stronger' strategy - of growth through consolidation of emerging markets - for the turn of the Millennium: loads of scepticism. The central issue: Stan Chart’s August 2000 acquisition of ANZ Grindlays Bank, for $1.3 billion.
Everyone knows that acquisition is the easy part, merging operations is not. And recent history has shown that banking mergers and acquisitions (MERGERS & ACQUISITION’s), in particular, are not as simple to execute as unifying balance sheets. Can Stan Chart’s proposed merger with ANZ Grindlays be any different?
The '1' refers to the new entity, which will be India's No 1 foreign bank once the integration is completed. This should take around 18 months; till then, ANZ Grindlays will exist separately as Standard Chartered Grindlays (SCG). The '2' and '3' are Citibank and Hong Kong and Shanghai Banking Corp (HSBC), India's second and third largest foreign banks, respectively.
That makes the new entity the world's biggest 'emerging markets' bank. By way of strengths, it will have treasury operations that will probably go unchallenged as the country's most sophisticated. Best of all, it will be a dynamic bank. Thanks to pre-merger initiatives taken by both banks, it could per- haps boast of the country's fastest growing retail-banking business.
StanChart is rated highly on other parameters too. It is currently targeting global cost-savings of $108 million in 2001, having reported a profit- before-tax of $650 million in the first half of 2000, up 31 per cent from the same period last year. Net revenue increased 6 per cent to $2 billion for the
53 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION same period. Consumer banking, a typically low-profit business which accounted for less than 40 per cent of its global operating profits till four years ago, now brings in 55 per cent of profits. So the company's global report card looks fairly good.
StanChart knows it mustn't let its energy dissipate. It has been growing at a claimed annual rate of 25 per cent in the last two years, well over the industry average of below 10 per cent. But maintaining this pace won't prove easy, with Citibank and HSBC just waiting to snip at it. The ANZ Grindlays acquisition had happened just before that, though the process started in early 1999, at Stan Chart’s headquarters in London. At first, it was just talk of a strategic tie-up with ANZ Grindlays, which had the same colonial British antecedents.
But this plan was abandoned when it became evident that all decision- making would vacillate between Melbourne and London, where the two are headquartered. By December, ANZ had expressed a willingness to sell out, and StanChart initiated the due-diligence proceedings. It wasn't until March that a few senior Indian bank executives were let into the secret. Now, it's time to get going. A new vehicle, navigators in place, engines revving and map charted, the road ahead is challenging and full of promise. To steer clear of trouble is the only caution advised by industry analysts, as the two banks integrate their businesses. Sceptics don't see how StanChart can really be greater than the sum of its parts.
The aggression, though, is not as raw as it sounds. Behind it all is a strategy that everyone at StanChart seems to be in synchrony with. And behind that strategy is Talwar, very much the originator of the oft-repeated phrase uttered by every executive - "getting the right footprint". The other key words that tend to find their way into every discussion are 'focus' and 'growth'.
StanChart India's net non-performing loans, as a percentage of net total advances, is reported at just 2 per cent for 1999-2000. In terms of capital adequacy too, the banks are doing fine. StanChart has a capital base of 9.5 per cent of its risk-weighted assets, while SCG has 10.9 per 54 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION cent. So, with or without a safety net provided by the global group, the Indian operations are on firm ground.
55 | P a g e BANKING INDUSTY – MERGER AND ACQUISTION Fact Files of Banks in India
The first, the oldest, the largest, the biggest, get all such types of informations about Banking in India in this section.
The first bank in India to be given an ISO Certification Canara Bank
The first bank in Northern India to get ISO 9002 Punjab and Sind certification for their selected branches Bank
The first Indian bank to have been started solely with Punjab National Indian capital Bank
The first among the private sector banks in Kerala to South Indian become a scheduled bank in 1946 under the RBI Act Bank
India's oldest, largest and most successful commercial bank, offering the widest possible range of domestic, State Bank of international and NRI products and services, through its India vast network in India and overseas
India's second largest private sector bank and is now the The Federal Bank largest scheduled commercial bank in India Limited
Bank which started as private shareholders banks, mostly Imperial Bank of Europeans shareholders India
The first Indian bank to open a branch outside India in Bank of India, London in 1946 and the first to open a branch in founded in 1906 continental Europe at Paris in 1974 in Mumbai
The oldest Public Sector Bank in India having branches all Allahabad Bank over India and serving the customers for the last 132 years
The first Indian commercial bank which was wholly owned Central Bank of and managed by Indians India
Bank of India was founded in 1906 in Mumbai. It became the first Indian bank to open a branch outside India in London in 1946 and the first to open a branch in continental Europe at Paris in 1974.
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CONCLUSION
Currently (2007), banking in India is generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true.
With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. One may also expect M&As, takeovers, and asset sales.
In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them.
Currently, India has 88 scheduled commercial banks (SCBs) - 27 public sector banks (that is with the Government of India holding a stake)after merger of New Bank of India in Punjab National Bank in 1993, 29 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively.
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