Mergers and Acquisition in the Banking Sector
Mergers and acquisitions in the Indian banking sector.

The aim of a business organisation is to grow and maximise profits. Mergers and acquisitions (M&As) are considered as a reliable mechanism to achieve the same.

For an organisation, it is crucial to embrace a mergers and acquisitions wave to find sustenance in the globalisation-led ever-growing world of market competition.

Financial markets play an essential role in the development and well being of a country. The expansion and consolidation of it have become the need of the hour. The banking sector can be privatised and strengthened with significant mergers and acquisitions activity.

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Gaining a competitive advantage over domestic and international markets has become the banks’ priority. For this, mergers and acquisitions is a prerequisite.

But before taking the leap of faith into the wave of mergers and acquisitions, there are a few aspects that the banks need to reconsider. Their compatibility, user-friendliness, preparedness of banks, etc., need to be considered.

Let us learn more about these below.

What Are Mergers in the Banking Sector

In simple terms, merging can be defined as the process by which the board of directors of two companies decide, come together and amalgamate their companies to vote in its favour. In this process, the acquired company ceases to have a separate or distinctive existence but becomes a part of the acquiring company.

A company does a merger to expand into new territories and acquire more markets until the product line of both companies unites.

Here, through amalgamation, the assets and liabilities of the selling company are engulfed and absorbed by the buying company.

What Are Acquisitions in the Banking Sector

An acquisition is more like a game of control. Here, an entity buys most of the shares of another entity to have control over it. That is, the buying company acquires more than 50 per cent of the shares or ownership stakes of the target company.

Examples of Mergers and Acquisitions

Here are some of the examples of major M&As in the Indian banking sector:

  • 1993 – Punjab National Bank acquired the New Bank of India.
  • 2017 – Bharatiya Mahila Bank was merged with the State Bank of India.
  • 2017 – State Bank Associate Banks were merged with the State Bank of India.
  • 2019 – 27 Public Sector Banks were merged to reduce it to 12. This was a central government forced bank merger.

Why Mergers and Acquisitions

The Indian banking sector is growing at a rapid pace. This sector is the most prominent service sector in India.

In the last few decades, the achievements made by the banking sector contributed to the development of the country as a whole. Due to this growth at an astonishing pace, new dimensions are to be achieved.

Mergers and acquisitions are the vital ingredients that will accelerate new dimensions in the banking industry. These help the local banks to modernise and achieve a world-class level of competence.

Moreover, in countries like India, the Public Sector Banks (PSBs), where the involvement of mid-level employees, corruption and political interference is high, the accumulation of NPAs (Non-Performing Assets) and bad debts can cause stagnation and deterioration of the banking system as a whole.

This can be prevented through mergers and acquisitions as it helps in more control over these banks. An example is the centre forced bank mergers after the accumulation of high levels of NPAs during 2018-19.

Mergers and acquisitions help in:

  • Improvement and revamping of production.
  • The expansion of markets.
  • Protecting the existing markets.
  • The stabilisation of markets.
  • The strengthening of the financial sector.
  • The disposal of underperforming, outdated and unwanted assets.
  • Satisfaction of the customers through grassroot level services and expanded geographical outreach.

History of Mergers and Acquisitions

India’s history in mergers and acquisitions dates back to 1921, when the Imperial Bank of India was formed through the amalgamation of three presidency banks.

Narasimham II Committee Report, 1998 as ‘Committee on Banking Sector Reforms’ stated that India needs to have larger and stronger banks for the betterment of the economy. For this, necessary M&As are to be promoted in the banking sector. After the three phases of banking reforms, India stands strong on its own feet with a stabilised financial position and global competence.

Government’s Interest in Mergers and Acquisitions

Mergers and acquisitions are one of the main strategic agendas utilised by the government to have control and supervision over domestic banks and reform the banking sector to achieve a position in the global financial system.

The M&A in the banking sector renders us a prospective future to compete with the global markets, but it has to be controlled to prevent unlawful practices. These are the provisions relating to various statutes which regulate mergers and acquisitions in the banking sector. This is not an exhaustive list, but it includes some significant aspects that control and restrict M&As practices.

1. The Banking Regulation Act, 1949

Section 44A of the Banking Regulation Act states that the companies shall amalgamate only if the same is approved by a two-thirds majority of the shareholders of each amalgamating company. Further, it is sent to the RBI for its sanction.

2. The Competition Act, 2002

The Competition Act monitors the restrictive and trade practises in relation to firms that are players in Indian markets. The need is to prevent the abuse of power and stop the anti-competitive practices put in use after the M&As. Sections 5 and 6 deal with the regulation of M&As.

3. The Companies Act, 2013

Chapter XV of the Companies Act, 2013 holds that in case of a merger between a bank and a company, it requires, at first instance, the approval of the High Court and then the Reserve Bank of India.

The amalgamation of a banking company with a non-banking company is also dealt with under sections 391 and 394 of the Companies Act.

4. Income Tax Act, 1961

The Income Tax Act provides the provisions relating to the tax concessions or benefits concerning amalgamation and merging of banks. It also deals with various tax benefits, taxable deductions in relation to M&As.

Positive Impacts of Mergers and Acquisitions in the Banking Sector

One of the most pertinent positive impacts of mergers and acquisitions would be the better monitoring and control of bad debts and NPAs.

Moreover, it has helped the Indian banking industry to grow in a rapid phase.

More productivity and less lethargy of Indian markets, newly introduced and innovative technological advancement, stable financial health, etc., are some of the major achievements of the banking sector.

Other achievements include more job opportunities, new customers, an increase in capital, better managerial skills, etc.

Negative Impacts of Mergers and Acquisitions in the Banking Sector

If we were to consider the negative impacts of the mergers and acquisitions in our banking sector and the economy as a whole, it is the use of tax paid by the common person to save these systems and banks from sinking and failing.

Moreover, due to the very process of mergers and acquisitions, the local and small banks have lost their identity.

Profit maximisation is the sole aim of these business entities. The common person is at the receiving end, being vulnerable to these negative approaches adopted to boost the profit of the banking organisations.

The risk factor is another element that we must consider.

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COVID and Mergers and Acquisitions

As we observe the impact of the COVID-19 crisis, we will see that it has made the economic and corporate process slow down and continue in uncertainty. We can now see different strategies and approaches to mergers and acquisitions after this. This has led to the use of more creative and innovative collaborations. Although the pandemic has slowed down the process, the post-pandemic phase is what we will have to look forward to.

Future of Mergers and Acquisitions in the Banking Sector

The future of mergers and acquisitions in the banking sector revolves around the technological and globalisation led market advancement happening around the world.

In the near future, we will be able to see innovative platforms leading the Indian markets.

As the markets are expanding on a global scale, the strengthening of the domestic banks and opening of the economy to flourish is what it takes to be in a developing economy.

Mergers and acquisitions boost the banking sector if the same is implemented properly and efficiently. Indian banks will be able to capture the market with more customers through M&As. For that, the Indian banks are to be made compatible, self-sufficient and productive at an international level.

The banking sector in India is growing and expanding further. With that, the result is the merging of the world economies together with mergers and acquisitions.

Must See: What Is NCLT and NCLAT Under Company Law?

Conclusion

“Mergers generate substantial synergies” – Roger Altman

As stated above, mergers and acquisitions are beneficial for the banking sector as a whole. Still, to have a successful merger or acquisition, the banks must be compatible for the same. It should have relatedness and must be capable of combating cultural differences.

Moreover, organisational skills play an important role in the success of M&As. The aim should be to have a synergy-based merger that will tackle these players’ shortcomings and improve strategic risk management, corporate governance, etc.

The banking sector must keep its pace steady with the dynamically growing agriculture and industrial sectors.

The growth should be sustainable, and it must work together with the environment and the current needs of society.

Mergers and acquisitions help the economy grow on a global player level.

Read Next:
1. 13 Characteristics of a Company
2. What Is Memorandum of Association of a Company
3. Conversion of a Company Under the Companies Act

ABOUT OUR AUTHOR
Author Sidhida Varma WritingLaw
Sidhida Varma S has written this article. She is a final year BALLB student from Government Law College, Thiruvananthapuram. Sidhida is an avid reader and a passionate writer interested in legal as well as creative writing. She also loves to learn new things.
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