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"Mergers and Aqusisitions" in Indian Banking Industry

This document discusses mergers and acquisitions (M&As) in the Indian banking industry. It provides an overview of the banking industry and conceptual background of M&As. Major M&As that have occurred since 1969 are listed. The Reserve Bank of India (RBI) guidelines for voluntary mergers are outlined. Advantages of M&As like growth, economies of scale, and increased efficiency are described. A case study of IDBI Bank acquiring United Western Bank is presented. Future scenarios involving potential PSB mergers are discussed. Findings on share prices and network expansion playing a role in growth are provided. Suggestions for specific bank mergers are made. The conclusion states M&As will continue to be an inevitable trend

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230 views17 pages

"Mergers and Aqusisitions" in Indian Banking Industry

This document discusses mergers and acquisitions (M&As) in the Indian banking industry. It provides an overview of the banking industry and conceptual background of M&As. Major M&As that have occurred since 1969 are listed. The Reserve Bank of India (RBI) guidelines for voluntary mergers are outlined. Advantages of M&As like growth, economies of scale, and increased efficiency are described. A case study of IDBI Bank acquiring United Western Bank is presented. Future scenarios involving potential PSB mergers are discussed. Findings on share prices and network expansion playing a role in growth are provided. Suggestions for specific bank mergers are made. The conclusion states M&As will continue to be an inevitable trend

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“MERGERS AND

AQUSISITIONS” IN
INDIAN BANKING
INDUSTRY
CONTENTS:
1. Conceptual Background of M&As
2. Overview of Indian Banking Industry
3. Mergers and Acquisitions In Indian Banking Industry
4. RBI Guidelines
5. Advantages of M&As
6. Case of IDBI and UWB
7. Future Scenario
8. Findings
9. Suggestions
10.Conclusion
CONCEPTUAL BACKGROUND
OF M&As:
Merger involves coming together of two or more concerns
resulting in continuation of one of the existing entities or forming of
entirely new entity.
 Mergers may be classified as horizontal, vertical, conglomerate
and reverse merger.
Acquisition is an art of acquiring effective control over the assets
or management of the corporate without any physical combination
of both of them.
OVERVIEW OF INDIAN
BANKING INDUSTRY:
Bank of Bengal the country’s first bank in the year 1786.
Rapid growth was experienced after nationalization of banks in
1969.
Economic reforms brought considerable improvement in the health
of banks and financial institutions.
The limit for foreign direct investment in private banks has been
increased from 49% to 74% .
The limit for foreign institutional investment in private banks is
49%.
STRUCTURE OF INDIAN BANKING
INDUSTRY:

Central Bank

Scheduled Commercial Unscheduled


Banks Banks

Public Sector Banks Private Banks Foreign Banks Cooperative Banks


MERGERS AND
ACQUISITIONS IN INDIA:
In 1921 first merger In the Indian banking Industry took place.

From 566 commercial banks at the end of 1951, the number


came down to 292 at end 1961, to 100 at the end of 1966; and to
85 by the end of 1969.

All mergers were not for economic considerations and usually


distress mergers were there.
LIST OF BANK M&As Since 1969 to 2006:
YEAR BANK MERGED WITH
1969 Bank of Bihar SBI
1970 National Bank of Lahore SBI
1971 Eastern Bank Chartered Bank
1984-85 Lakshi Commercial Bank Canara Bank
1984-85 Bank of Cochin SBI
1986 Hindustan Commercial Bank PNB
1989-90 United Industrial Bank Bank of Allahbad
1989-90 Bank of Tamil Nadu Indian Overseas Bank
1993-94 New Bank of India Bank of Punjab
1993-94 Bank of Karad Bank of India
1997 Punjab Cooperative Bank OBC
1997 Bari Doab Bank Limited OBC
1999 Bareilley Corporation Bank BOB
1999 Sikkim Bank Limited Union Bank
2000 Times Bank HDFC Bank
2001 Bank of Madura ICICI Bank
2002 ICICI ICICI Bank
2002 Benaras State bank Limited BOB
2003 Nedungadi Bank PNB
2004 GTB OBC
2005 Bank of Punjab Centurion Bank of Punjab
2005 Centurion Bank Centurion Bank of Punjab
2006 Ganesh Bank of Kurundw ad Fedral Bank
RBI GUIDELINES:
‘Voluntary’ merger between two banks requires approval by two-
thirds of the total board members and disclosure of the valuation
details, financials and share price movements.
Dissenting shareholders would get the value as per the valuation
computed by the RBI.
Banks should have minimum net worth of Rs 300 crore else smaller
private banks can merge with bigger banks.
The financial parameters of the acquirer bank after merger will
have to conform to the prescribed minimum prudential and regulatory
requirement.
ADVANTAGES OF M&As:

Growth in size.
Economies of scale.
Reduced competition.
Enhanced customer base.
Increased efficiency, profitability and synergy .
Lower costs.
FUTURE SCENARIO:
The Finance Minister, Mr Pranab Mukherjee on June
10, 2009 had emphasised that the PSBs should look at
consolidation as a serious option in order to reduce risk to
financial stability and to face competition.

The prospective mergers in coming years are:


SBI and its subsidiary State Bank of Indore
Andhra Bank, Indian Bank and Vijaya Bank
Indian Overseas Bank with Punjab National Bank
CASE STUDY OF IDBI BANK
AND UWB:
  IDBI UWB (in RS Crore)
Net worth 6484   --
CAR(%) 14 0.67
Net NPAs(%) 1.02 5.87
Branches 181 230
Net Profit 151 -6
All figures are as on June, 2006
Source: Hindu Business Line

The deal was done in 150.55 cr at Rs 28 a share, a premium of 31%


over UWB’s closing price of Rs. 21.45 on BSE.
FINDINGS:
Share price of the target company is positive, while the share
price of acquiring company is negative in the medium and long
term after the merger announcement.
Of the major mergers that have taken place between 1969 and
2005 in as many as 22 mergers the transferee bank was a
government one.
Network expansions plays a significant role in bank’s growth.
 When the Banking Industry will open for Foreign Banks all the
Small banks have to merge with Bigger entity for their Survival.
SUGGESTIONS:
Banglore based Vijaya Bank should buy a northern bank while
PNB should look southwards.

OBC should keep its options open to buy-out another bank with
a presence in south India.

Associate banks should ideally merge with State Bank of India


to stand on their own feet. As these associates will be too small in
the phase when foreign banks will set up business in India.

Government should support through reforms and liberal


policies.
CONCLUSION:
M&As, as a corporate strategy of inorganic growth, is gaining
popularity owing to globalization, technological change, market
deregulation and liberalization.
But it is contended that the element for success is not the potential
amount of synergy to be released in combining two companies but it
is the existence of “managers of change”.
The question about the optimal number of banks in the country,
and the associated issues of their capital adequacy are matters to be
yet settled.

“Mergers and Acquisitions-an inevitable trend in


future”
REFERENCES:
WEBSITES:
http://www.naukrihub.com/india/banking-
insurance/overview/
http://www.managementparadise.com/forums/archive/ind
ex.php/t-61005.html
www.theepochtimes.com/news/4-9-29/23509.html
www.labnol.org/india/corporate/sbi...merge...banks/467/
www.merinews.com/catFull.jsp?articleID=126717
http://en.wikipedia.org/wiki/State_Bank_of_India
http://www.bharatbook.com/Market-Research-
Reports/Global-Banking-Industry.html
www.banknetindia.com/banking/bop.htm
www.banknetindia.com/banking/roundtable.htm
www.economist.com/displaystory.cfm?story_id
www.rediff.com/money/2004/nov/30merger
BOOKS and MAGAZINES:
Merger and Acquisition Indian Scenario by Bhagban Das
and Alok Kumar Pramanik 2007 Edition
Management Of Banking and Fianancial Services by
Justin Paul and Padmalatha Suresh 2007 Edition
Chartered Financial Analyst January and February 2007

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