The Telegraph
Since 1st March, 1999
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Private bank merger norms tightened

Mumbai, May 12: Consolidation of private banks will require wider support in boardrooms under a new set of guidelines on mergers and acquisitions unveiled today.

The norms were released by the Reserve Bank of India (RBI), which said two-third of shareholders ' not just those present at a meeting ' must agree to a merger.

If a non-banking finance company (NBFC) is being merged with a private sector bank, the latter will have to seek RBI clearance after the plan is approved by its board, but before it is submitted to high courts for sanction.

One of the interesting features in the guidelines relates to the safeguards for dissenting shareholders, who will now get a fair value of their shares decided by the Reserve Bank.

“If a dissenting shareholder feels that the swap ratio in a merger is not correct, the RBI will fix the fair value to be paid,” a senior official of the central bank said.

Bank industry officials welcomed the move, saying it will speed up the existing process under which those who feel cheated are forced to get their dues from high courts.

According to the Reserve Bank, mergers are normally decided on business considerations such as the need for increasing market share and synergy in business, but it is equally important to ensure that systemic benefits and “advantages to the residual entity” are measured fully.

Under existing norms, the draft scheme of amalgamation between two private banks must be approved by shareholders of both entities through a resolution. This must be passed by two-third of shareholders by value; they could be present in person or vote by proxy. This has now been modified to make it compulsory for two-third of the board members to clear it first.

Directors who participate in meetings called to clear bank mergers should have signed on the “Deeds of Covenants” laid out by the Ganguly working group on corporate governance. The report was sent to banks in June 2002.

While granting the approval, the boards need to give special consideration to various issues. These include the values at which the assets, liabilities and the reserves of the amalgamated company will be incorporated into the books of the acquirer bank, the Reserve Bank said. They will also confirm that a due diligence has taken place.

The board of the acquiring bank should take into account the sum being paid to the shareholders of the entity being merged. It will check whether the swap ratio, to be fixed by independent valuers, is fair and proper.

Apart from this, the board of the bank snapping up a rival should consider the impact of the merger on its own profitability and capital adequacy ratio in the long run.

Once shareholders have agreed, the banks will submit supporting documents, including copies of the reports of valuers who have computed the swap ratios.

The draft scheme of amalgamation, placed before shareholders of banks for approval, will have to be furnished as well. These documents must say how many shareholders were present at the meeting called to approve a merger, in person or by proxy, the number that voted in favour of the resolution and those against it.

PSU riddle

One aspect of the guidelines that raised a few eyebrows was a Reserve Bank statement where it said the principles underlying today’s guidelines will also apply “as appropriate” to public sector banks. Only RBI and central government approval is needed for merger of state-owned banks.

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