Strategies of M&A in Banking Sector in India
Karan Singh | Updated: Sep 07, 2021 | Category: Mergers and Acquisitions
The transactions regarding M&A in banking sector are mainly reviewed as a large ticket strategy that doesn’t deliver extreme gains. It should be noted that the economy of India essentially offers a benefit to the banks and also furnishes unique values in the transaction regarding M&A in banking sector, which proves to be useful to the bidders, unlike other Mergers and Acquisitions regimes of banks in the USA.
After the introduction of universal banking in the year 1999, it has been noted that in the worldwide transactions regarding Mergers and Acquisitions, the M&A in banking sector remains a particular category from the other Mergers and Acquisitions transactions because of the industry-related aspects revolving around banks like valuation, their means to accomplish a profit, and their capital treatment.
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Industry-Related Mergers and Acquisitions
The environment of the Indian economy is surrounded by the arguments of higher growth & award performance proportionately as bigger games accrued, and the market expects the same. The banks create vast development opportunities, and while the Mergers and Acquisitions transactions directly show on the economic growth of a country of a specified sector, M&A in the banking sector more particularly favours the economic development and these gains at the value of the merged company, which is shared between the Target and Acquirer Company.
Before venturing into the examination of M&A in banking sector, it is vital to know that the merger’s nature in this particular industry or sector is a Horizontal Merger. In a banking merger, the variety gains are ruled out as it is a merger between the equals that incorporates two different organisations in similar product markets. Regarding the banking industries, the cost of funds is vital for valuations & also entails economies of scale dimension; hence, financing the deal is a vital factor of Mergers and Acquisitions as it supports a successful transaction and removes the failed one.
It is vital to remember that India’s banking system has achieved a huge feat in a comparatively short time for the most varied democracy. The complete Reform Process of the banking sector of this industry or sector is basically a part of the Government agenda, which is focused with a purpose to repositions and combine the Indian banking sector in the core of the international financial system.
The Mergers and Acquisitions transactions have vigorously helped the banking industry to raise diversity. This is because the transactions regarding Mergers and Acquisitions are relatively quick & effective in their way to cover up new markets and introduce new & advanced technologies; for instance, consider the case of PNB (Punjab National Bank) in 1993 acquired a new Bank of India.
It is also vital to examine that Mergers and Acquisitions is an essential process via which financial service industries achieve the preferred economic group. The purpose for the M&A in banking sector is for cost reduction, diversification, strengthening, and reduction of the strategic position; it was noted that in India, originally the Banking Regulation Act, 1949[1] didn’t contain any provisions for the Mergers and Acquisitions among the banking companies; but, the Banking Laws (Amendment) Act, 1950 for the very 1st time identified the right to a Voluntary Amalgamation of Banking firms or companies by incorporating Section 44A to the Banking Act, 1949.
Also, remember that the Mergers and Acquisitions transactions regulating the banks are not identical in nature and because of this, in some cases, the Reserve Bank of India needs to sanction scheme whereas in the compulsory merger as given under Section 45 of the Banking Regulation Act, 1949. The Reserve Bank of India should prepare the scheme & the same will be shown before the Central Government for its sanction.
The Amalgamation of 2 or more entities, either in the public interest or in order to protect the proper companies’ management, is recognised by the Constitution. Speaking of the combine of Private Banking Companies in India, the Banking Regulation Act plays an essential role, and it safeguards the rights as guaranteed under Article 14 & 19 of the Constitution.
Regulatory Structure for Bank Merges in India
First, you have to know the difference between the merger under the Banking Regulation Act and the Companies Act, 2013. Because of the delicate nature of the banking sector, the whole process is regulated under Section 44A of the Banking Regulation Act.
| Merger under Banking Regulation Act | Merger under Companies Act |
| These transactions are coming under Section 44A of the Banking Regulation and the guidelines of the merger. Additionally, only the CCI has any regulatory jurisdiction over the merger. | Section 230-232 and 391-394 in the case of the Companies Act governs the same. |
| Subject to the consent and inspection of RBI, a merger is driven by the parties themselves. | The merger is a court-driven process. |
| The scheme should be consented by the Reserve Bank of India. | The scheme should be sanctioned by the NCLT. |
Significance of M&A in Banking Sector
It should be noted that, like all other business companies, banks need protection against risks, and at the same time, they require to exploit opportunities that are specified by present and anticipated trends. In the past, it has been viewed that M&A in banking sector are increasing internationally and in India also. Hence, it is essential to know the major problems surrounding Mergers and Acquisitions deals with a special focus on India.
The global banking situation has observed major chaos within the last few years speaking terms of Mergers and Acquisitions. Deregulation has been the key driver via three key routes that are listed as the dismantlement of interest rate controls, barriers that has been led to disintermediation, the investor difficulty to please high returns, reduced margins, price-reducing war, and competition across geographies force in banks to appear for new ways. Driven by obvious edges of scale economies, lower costs, geographical diversification through the branch, and workers rationalisation, the consolidation has emerged as a planned tool receiving international recognition for the growth.
Conclusion
In the end, it is crucial to note that the primary reason for the banking company regulation is that it is an institution that is furnished with huge responsibilities to the money of depositor and to alleviate the failure risk of a banking entity is the main responsibility of the regulators and in this particular Bank mergers are no exception to it.
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