mergers in indian banking system

7/29/2019 mergers in indian banking system

1/3

SHODH SAMIKSHA AUR MULYANKAN1

International Referred Research Journal, August,2010 ISSN- 0974-2832VoL.II *ISSUE-19

Merger is defined as combination of two or morecompanies into a single company where one survivesand the others lose their corporate existence. Thesurvivor acquires all the assets as well as liabilities of themerged company or companies. Generally, the survivingcompany is the buyer, which retains its identity, and theextinguished company is the seller.

Merger is a combination of two or more companies intoone company. In India, mergers are called asamalgamations, in legal parlance. The acquiringcompany, (also referred to as the amalgamated companyor the merged company) acquires the assets and liabilitiesof the target company (or amalgamating company).Typically, shareholders of the amalgamating companyget shares of the amalgamated company in exchange fortheir existing shares in the target company. Merger mayinvolve absorption or consolidation.Merger is alsodefined as amalgamation. Merger is the fusion of two ormore existing companies. All assets, liabilities and thestock of one company stand transferred to TransfereeCompany in consideration of payment in the form of:

Equity shares in the transferee company,* Debenturesin the transferee company, * Cash, or* A mix of the above modesWHAT IS ACQUISITION?

Acquisition in general sense is acquiring theownership in the property. In the context of businesscombinations, an acquisition is the purchase by onecompany of a controlling interest in the share capital ofanother existing company. Corporate are over the assetsor management of the other corporate without anycombination of both of them. For example, recently oracle

major software firm has agreed to acquire a majoritystake in Indian banking software company I-flexSolutions. It can be characterized in terms of the following:a) The corporate remain independent. b) They have aseparate legal entity.Methods of Acquisition:An acquisition may be affectedby a) Agreement with the persons holding majorityinterest in the company management likemembers of the board or major shareholders commandingmajority of voting power; b) Purchase of shares in openmarket; c) To make takeover offer to the general body ofshareholders; d) Purchase of new shares by privatetreaty; e) Acquisition of share capital through thefollowing forms of considerations viz. Means of cash,issuance of loan capital, or insurance of share capital.Takeover: A takeover is acquisition and both the termsare used interchangeably. Takeover differs from mergerin approach to business combinations i.e. the processof takeover, transaction involved in takeover,determination of share exchange or cash price and thefulfilment of goals of combination all are different in

takeovers from in mergers. For example, process oftakeover is unilateral and the offer or company decidesabout the maximum price. Time taken in completion oftransaction is less in takeover than in mergers, topmanagement of the offered company being more co-operative. Under the monopolies and restrictive tradepractices act, lake over means Acquisition of not lessthan 25% of voting powers in a corporate.Difference between acquisition and take over:Although the term acquisition and take over are usedinterchangeably but in fact the term Take over

The aim of this paper is to probe into the various motivations for mergers and acquisitions in the IndianBanking sector. India is slowly but surely moving from a regime of large number of small banks to smallnumber of large banks. However, literature is reviewed to look into the various motivations behind a banksmerger acquisition event. This paper is also taken us through the international mergers & acquisitions

scenario comparing it with the Indian circumstances. This paper analyzes some critical issues of consolidationin Indian banking with particular emphasis on the views of two important stakeholders viz. shareholdersand managers. First we review the trends in consolidation in global and Indian banking. Then to ascertainthe shareholders views, we conduct an event study analysis of bank stock returns, which reveals that inthe case of forced mergers, neither the bidder nor the target banks shareholders have benefited.

Research Paper -

August, 2010

MERGERS & ACQUISITIONS IN THE

INDIAN BANKING SYSTEM-AN OVERVIEW

* Mrs. Sadhana Prajapati

*Research Scholar H.C.P.G.College Varanasi (U.P.)

A B S T R A C T


2/3

kks/k leh{kk vkSj ewY;kadu2

International Referred Research Journal, August,2010 ISSN- 0974-2832VoL.II *ISSUE-19generally shows a hostile act. To put in simple words,

when an acquisition is forced or unwilling act, thenit is called take over. A merger involves a marriage oftwo or more banks. It is generally accepted that mergerspromote synergies. The basic idea is that the combinedwill create more value than the individual banks operatingindependently. Economist refers to the phenomenon ofthe 2+2=5 effect brought about by synergy.

Economies of scale refer to the lower operatingcosts (per unit) arising from spreading the fixed costsover a wider scale of production and economies ofscope refer to the utilization of skill assets employed inthe production in order to produced similar products orservices. The resulting combined entity gains fromoperating and financial synergies. In a combined entity,

the skill used to produce separate and limited results willbe used to produce results on wider scale. Additionalfinancial synergies refer to the effect of a merger on thefinancial activities of the resulting company. The cashflows arising from the merger are expected to presentopportunities in respect of the cost of financing andinvestment. Fragmentation poses increasing risk in theIndian Banking Sector. During the financial period 2001-2005, only four banks have been able to cross the marketcapitalization of Rs. 50 billion included Bank of Baroda,HDFC Bank, ICICI Bank, and State Bank of India.Considerable fragmentation exists in the Banking sectorfor banks with market capitalization of less than Rs. 50

billion. Moreover, the created value is moving away

from the top 5 banks thus indicating fragmentation indeed

has increased over the period of last five years. Shownbelow are the deposit shares of the Banks operating inIndia over the period 2000-2004.

Data was drawn from around 45 banks, whichincluded state-controlled public sector banks, privatesector banks and even foreign banks operating in India.It is observed that the share of the top 5 players haseroded and been consumed by the next fifteen players.Considering that the base of total deposits has beenconsistently increasing, consequently the value indeposits gained by the next 15 banks has beentremendous. the goal of globally competent banks wouldbe missed. In other words, while a fragmented Indianbanking structure may very well be beneficial to the

customers (given increased competition due to lowermarket power of existing players), at the same time thisalso creates the problem of no player having the criticalmass to play the game at the global banking industrylevel. This has to be looked at significantly from thestates long-term strategic perspective.

The second most perceived benefit of mergeris access to new markets. This is more evident fromvoluntary mergers such as merger between CenturionBank and New Bank of Punjab. Significant number ofbanks have assigned modest ranking to benefits likereduction in cost of funds, diversification of loanportfolio and expansion of range of services available to

the public. Majority of the banks have assigned lowest


3/3

SHODH SAMIKSHA AUR MULYANKAN

3

International Referred Research Journal, August,2010 ISSN- 0974-2832VoL.II *ISSUE-19

1. Abel Istvan and Siklos Pierre L.(2004) Secrets to the Successful Hungarian Bank Privatization: The Benefits of ForeignOwnership through Strategic Partnerships, Economic Systems, 28(2): 111 123.2. Bank for International Settlements. (2001)The Banking Industry in the Emerging Market Economies: Competition, Consolidation, and Systematic Stability, BIS PapersNo. 4. 3. Baradwaj B, Fraser D, and Furtado E. (1990) Hostile Bank Takeover Offers: Analysis and Implications, Journal of Banking

and Finance, 14(6): 1229-1242. 4. Berger AN and Humphrey D(1994) Bank Scale Economics, Mergers, Concentration, andEfficiency: The U. S. Experience, Center for Financial institutions Working Papers 94 25, Wharton School Center for FinancialInstitutions, University of Pennsylvania. 5. Berger AN, Demetz RS, Strahan PE (1999) The Consolidation of the Financial ServicesIndustry: Causes, Consequences and Implications for the Future, Journal of Banking and Finance, 23: 135-194. 6. Berger, AN andHumphrey D. (1992) Mega Mergers in Banking and the Use of Cost Efficiency as an Anti Trust Defense The Anti Trust Bulletin,37: 541-600. 7. Berger, AN. (1997) The Efficiency Effects of Bank Mergers and Acquisitions: A Preliminary Look at the 1990s data. In Arnihud Y, Miller G (Eds), Mergers of Financial Institutions. Business One-Irwin, Homewood, IL. 8. Bernanke, B. andGertler, M. (1995) Inside the Black Box: The Credit Channel of Monetary Policy Transmission, Journal of Economic Perspectives,9(4): 27 48. 9. Boot, Arnoud W. A. (1999) European Lessons on Consolidation in Banking Journal of Banking and Finance, 23:609 663. 10. Brealey, R.A and Myers SC. (2000) Principles of Corporate Finance, 6th Edition, New Delhi: Tata McGraw-Hill.11. Chong, Beng-Soon, Ming-Hua Liu and Kok-Huai Tan. (2006) The Wealth Effect of Forced Bank Mergers and Cronyism, Journalof Banking and Finance, 30: 3215-3233. 12. Cornett MM Teharnian H. (1992) Changes in Corporate Performance Associatedwith Bank Acquisitions, Journal of Financial Economics, 31: 211-234 13. Damodaran A. (1994) Damodaran on Valuation: SecurityAnalysis for Investment and Corporate Finance, New York: John Wiley and Sons

R E F E R E N C E

priority to the fact that mergers may bring improvement

in employee incentives and extension of careeropportunities. This pessimism regarding benefits to

employees once again highlights the importance of

managing human resources during mergers as discussedbefore.

mergers in indian banking system

Documents