Beruflich Dokumente
Kultur Dokumente
COPY RIGHT: The contents of this Handbook are strictly under copyright and no part of this study can be photocopied,
extracted or reproduced in any manner whatsoever without permission in writing from Banknet India.
DISCLAIMER: Bnet India Pvt Limited (hereinafter referred to as Banknet India) has not verified any of the information
furnished/compiled in this publication/handbook and makes no claims about the correctness or the accuracy of the
information provided and does not accept any responsibility for any errors or omissions. Banknet India disclaims all
warranties, whether express or implied, for the information provided in the handbook. Neither Banknet India nor its
Directors accept any liability whatsoever nor do they accept responsibility for any financial consequences arising from the
use of the information provided herein & will not be liable for any direct, indirect, incidental, consequential loss of profits or
special damages OR any loss, injury or accident arising from the use of this data, advice or other information it contains.
www.banknetindia.com
SECTION ONE
Chapter- I- Over view of Indian banking Industry
Indian Banking System
Structure & regional spread
SECTION TWO
Chapter- V- Existing Legal Framework
a) Legal Categorization of banks
b) Compliance with Banking Regulation Act
c) Compliance with Securities & Exchange Board in India (SEBI) Regulations
d) Shareholders approval
e) Creditors/Financial Institutions/Banks approval
f) High Court approvals
g) Reserve Bank of Indias approval
www.banknetindia.com
b) Taxation
c) Valuation methods
d) Methods of acquisition pricing
e) Bank earnings and stock prices: Which earnings matter
SECTION THREE
Chapter- X- Foreign Direct Investment (FDI) in banking
a) Main Guidelines
b) Cross Border M&A in Banks
c) Foreign Bank stakes in Indian Banks
www.banknetindia.com
ANNEXURES
Annexure 1- Complete List of Banks in India (as on 30/9/2005)
a) Public Sector Banks
i) Nationalized Banks (19)
ii) State Bank Group (8)
iii) Other Public sector Bank (1)
b) Old Private Banks (20)
c) New Private Banks (9)
d) Foreign Banks (31)
e) Scheduled Urban Co-operative Banks (55)
www.banknetindia.com
www.banknetindia.com
Foreign Banks and (v) Other Indian Scheduled Commercial Banks (in the private sector).
The site provides facility of aggregating data for various bank-groups.
www.banknetindia.com
The State Bank and its seven associates have about 14,000 branches; 19 nationalized
banks 34,000 branches; the RRBs 14,700 branches; and foreign banks around 225
branches. If one includes the branch network of old and new private banks, collectively
the spread could be over 68,000 branches across the country. Besides, there are a few
thousand co-operative bank branches. On an average, one bank branch caters to
15,000 people.
India is the 4th largest economy in terms of the purchasing price parity and 10th place in
terms of the GDP. Indian economy is registering consistent 6 per cent annual growth for
last 5 years. However, only one bank -- State Bank of India -- is among the top 200
banks in the world.
www.banknetindia.com
Other way of classifying merger is upon the basis of what type of corporate
combine. It can be of following types-
1) Horizontal merger: This is the merger of the corporate engaged in the same
kind of business. E.g.: Merger of bank with another bank.
2) Vertical merger: This is the merger of the corporate engaged in various stages of
production in an industry. A vertical merger (entities with different product profiles) may
help in optimal achievement of profit efficiency. Consolidation through vertical merger
would facilitate convergence of commercial banking, insurance and investment banking.
3) Conglomerate merger- A conglomerate merger arises when two or more firms in
different markets producing unrelated goods join together to form a single firm. An
example of a conglomerate merger is that between an athletic shoe company and a soft
drink company. The firms are not competitors producing similar products (which would
www.banknetindia.com
make it a horizontal merger) nor do they have an input-output relation (which would
make it a vertical merger).
B) Acquisition: This may be defined as an act of acquiring effective control by one
corporate over the assets or management of the other corporate without any
combination of both of them. For example recently oracle major software firm has
agreed to acquire a majority stake in Indian banking software company I-flex Solutions.
It can be characterized in terms of the following:
a) The corporate remain independent.
b) They have a separate legal entity.
C) Take over: Under the monopolies and restrictive trade practices act, lake over means
acquisition of not less than 25% of voting powers in a corporate.
Difference between acquisition and take over:
Although the term acquisition and take over are used interchangeably but in fact the
term Take over generally shows a hostile act. To put in simple words, when an
acquisition is forced or unwilling act, then it is called take over.
www.banknetindia.com
www.banknetindia.com
Changing laws
Laws which had prevented many banks from operating in more than one state recently
have been removed or overridden. The advent of interstate banking and branching
means more opportunities for banks operating in different states to merge with each
other.
Diversification
One effective method of controlling risks inherent in bank lending is to diversify
operations across different geographic regions and different types of customers.
Mergers can help diversify such risks.
Broader array of products
Mergers may give banking institutions an opportunity to offer a broader array of services.
A merger of two banks with different expertise can result in a combination more to the
liking of customers looking for one-stop shopping.
Why Consolidation in Indian banking industry
Financial Sector Reforms set in motion in 1991 have greatly changed the face of Indian
Banking. The banking industry has moved gradually from a regulated environment to a
deregulated market economy. The pace of changes gained momentum in the last few
years. Globalization would gain greater speed in the coming years particularly on
account of expected opening up of financial services under WTO.
Banks in India are gradually going for- 1) Consolidation of players through mergers and
acquisitions, 2) Globalization of operations, 3) Development of new technology and 4)
Universalisation of banking.
www.banknetindia.com
It is found that in all major economics, banking industry undergoes some sort of
restructuring process. The economy, which delays this process, leads to
stagnation. That is why, it is important from the point of view of long term
prospect of the economy, the consolidation process should be given prime
attention.
The major gains perceived from bank consolidation are the ability to withstand
the pressures of emerging global competition, to strengthen the performance of
the banks, to effectively absorb the new technologies and demand for
sophisticated products and services, to arrange funding for major development
products in the realm of infrastructure, telecommunication, etc. which require
huge financial outlays and to streamline human resources functions and skills in
tune with the emerging competitive environment.
An important observation which may be induced from various past mergers that
the merger between big and small banks led to greater gains as compared to
www.banknetindia.com
merger between equals. It is also observed from past experiences that if the
merger follows business aided by appropriated technology and diversified
product range, it could lead to greater gains for the banking industry as a whole.
Similarly, consolidation increases the market power and does not cause any
damage to the availability of services to small customers.
Evaluation of banks carried out by individual banks reveal that higher capital
adequacy and lower nonperforming assets explain to a greater extent the growth,
Profitability and productivity of banks since increase in capital and steep
reduction in non-performing assets cannot be entirely left to the individual banks
in the present scenario. Consolidation in the banking industry is of great
relevance to the economy.
Consolidation can also be considered critical from the point of view of quantum of
resources required for strengthening the ability of banks in assets creation. It
indicates that restructuring in Indian banking may not be viewed from the point of
particular group rather it can be evolved across the bank groups.
www.banknetindia.com
among the banks will be one of the ways to increase market power and thereby
increase the revenue-generation of the Banks.
The Reserve Bank of India (central bank) has set up an experts committee to
implement Basel II accord by 2006 to strengthen the financial health of banks by
adopting globally accepted norms for capital adequacy. The RBI also wants all
banks in India to have a capital base of Rs 300 crore (Rs 3 billion) over the next
three years. This will bring about number of acquisitions in the banking industry.
Over the last two years, the RBI has stopped issuing branch licenses to cooperative banks, after the unbridled growth of co-operative banks during the last
decade. For cooperative banks to expand there is no alternative to go for merger
an amalgamation. The Mumbai-based Saraswat Co-operative Bank is now
poised to take over Maharashtra-based Maratha Mandir Co-operative Bank
which is in trouble. This could mark the beginning of voluntary mergers of cooperative banks after the Reserve Bank of India (RBI) unveiled for mergers and
amalgamations among urban co-operative banks. The other suitor for Maratha
Mandir was Pune-based Cosmos Co-operative Bank.
Last but most important reason for consolidation in any industry is tax saving and
this thing is true for the banking industry also.
www.banknetindia.com
www.banknetindia.com
List of the bank mergers in India since 1961Mergers and amalgamations are not new to the Indian banking system too. However, it
is pertinent to note that a majority of such mergers have been undertaken by banks
voluntarily for strategic purposes
Merged /Amalgamated
Date of
Merger/Amalgamation
Ltd.
9-3-1961
25-3-1961
Bank of Maharastra
27-3-1961
Bank of Baroda
29-4-1961
State Bank of
5
Travancore
15-5-1961
Canara Bank
20-5-1961
3-6-1961
State Bank of
8 Bank of New India Ltd.
Travancore
17-6-1961
17-6-1961
Dena Bank
17-6-1961
Canara Bank
17-6-1961
State Bank of
12 Kottayam Orient Bank Ltd
Travancore
17-6-1961
Bank of Maharastra
19-6-1961
Sangli Bank
28-6-1961
Bank of Maharastra
1-7-1961
Indian Bank
1-9-1961
4-9-1961
www.banknetindia.com
Syndicate Bank
4-9-1961
Syndicate Bank
4-9-1961
Ltd.
4-9-1961
4-9-1961
Canara Bank
4-9-1961
23 Bank Ltd.
6-9-1961
Syndicate Bank
11-9-1961
25 Phaltan Bank
11-9-1961
16-1-1961
Canara Banking
27 Bank of Citizen Ltd.
Corporation Ltd
17-10-1961
19-10-1961
Syndicate Bank
14-11-1961
Lakshmi Commercial
30 Pratab Bank Ltd
Bank Ltd.
11-12-1961
20-8-1962
Indian Bank
14-8-1962
Indian Bank
14-8-1963
State Bank of
34 Cochin Nayar Bank Ltd
Travancore
8-2-1964
35 Bank Ltd.
Karur Vysya
1-6-1964
12-8-1964
State Bank of
37 Latin Christian Bank Ltd.
Travancore
17-08-1964
Ltd
24-8-1964
26-10-1964
www.banknetindia.com
16-11-1964
16-11-1964
1-9-1965
43 Ltd.
1-9-1965
6-10-1965
13-10-1965
3-2-1965
23-4-1969
Nationalisation of
since
Banks in India
8-11-1969
20-2-1970
29-7-1985
Canara Bank
24-08-1985
26-08-1985
19-12-1986
Bank of Baroda
13-05-1988
Allahabad Bank
31-10-1989
20-02-1990
Indian Bank
20-02-1990
Bank of India
20-02-1990
29-08-1990
4-9-1993
Bank of India
1993-1994
I-01-1996
Oriental Bank of
63 Punjab Co-op. Bank Ltd.
Commerce
8-4-1997
Oriental Bank of
64 Bari Doab Bank Ltd
Commerce
8-4-1997
www.banknetindia.com
Bank of Baroda
3-6-1999
22-12-1996
26-02-2000
Bank of Baroda
20-07-2002
1-2-2003
70 Bank of Madura
ICICI Bank
10-3-2001
Oriental Bank of
71 Global Trust Bank Ltd.
Commerce
14-08-2004
Effective from 1-4-2005
Announced date (29-
72
Centurion Bank
06-05)
www.banknetindia.com
www.banknetindia.com
Federal Bank and Lord Krishna Bank Ltd (LKBL) have decided to call off their proposed
merger as they could not reach a mutually agreeable valuation for the purpose. However
two new private sector banks Bank of Punjab and Centurian Bank successfully merged
recently to form Centurion Bank of Punjab.
The process of consolidation in the urban co-operative banking sector has been kicked
off with regulatory approval for three mergers.
1. The Mumbai-based Saraswat Co-operative Bank is to take over Maharashtra-based
Maratha Mandir Co-operative Bank which is in trouble.
2. RBI, has also approved a proposal from Pune based Cosmos Bank to acquire
Secunderabad-based Premier Co-operative Bank.
3. Gujarat-based Kalupur Co-operative Bank has got approval to acquire Mahila Cooperative Bank.
Mumbai -based Shamrao Vittal Co-operative (SVC) Bank has embarked into an
acquisition spree of smaller co-operative banking entities and all set to acquire Samartha
Nagar Co-operative bank. It is also acquiring similar entities in Maharashtra and
Karnataka.
www.banknetindia.com
WEB SITE
http://www.allahabadbank.com/
http://www.andhrabank-india.com/
http://www.bankofbaroda.com/
http://www.boi.com/
http://www.bankofpunjab.com/
http://www.bankofrajasthan.com/
http://www.canbankindia.com/
http://www.centurionbank.com/
http://www.cityunionbank.com/
http://www.corpbank.com/
http://www.denabank.com
http://www.federal-bank.com/
http://www.hdfcbank.com/
http://www.icicibank.com/
http://www.idbi.com/
http://iob.com/
http://www.indusind.com/
http://www.jammuandkashmirbank.com/
http://www.ktkbankltd.com/ktk/Index.jsp
http://www.kvb.co.in/
http://www.obcindia.com/
http://www.pnbindia.com/
http://www.southindianbank.com/
http://www.sbbjbank.com
http://www.statebankofindia.com/
http://www.sbtr.com/
http://www.syndicatebank.com/
http://www.unionbankofindia.com
http://www.uwbankindia.com/
http://www.utibank.com/
http://www.vijayabank.com/
http://www.vysbank.com/
http://www.yesbankltd.com/
www.banknetindia.com
www.banknetindia.com
www.banknetindia.com
www.banknetindia.com
www.banknetindia.com
www.banknetindia.com
and carry forward of loss and allowance for depreciation shall apply accordingly. The
expression specified bank in sub-section (1) above is defined as State Bank of India or
corresponding new bank. The effect of this provision is that benefit of carry forward loss
and unabsorbed depreciation is available only in case where a banking company is
merged with State Bank of India or subsidiary of State Bank of India or a corresponding
new bank. If there are mergers of corresponding new banks or State Bank of India and
corresponding new bank or subsidiary and corresponding new bank the benefit now
section 72A is not available.
Bank mergers prompted by the Government action - `Involuntary' mergers - would be
given tax breaks under the Income-Tax Act with the Finance Minister, proposing
insertion of a new clause to provide for set off of losses of a banking company against
profit of a banking institution under a scheme of amalgamation.
"With a view to provide carry forward and set off of accumulated loss and unabsorbed
depreciation allowance of a baking company against the profits of a banking institution
under a scheme of amalgamation sanctioned by the Central Government, it is proposed
to insert a new Section 72AA in the Income Tax Act, 1961," the Budget 2005-06 has
said.
The Section propose that the accumulated loss and unabsorbed depreciation of the
amalgamating banking company will be deemed to be the loss or the allowance for
depreciation of the banking company for the previous year in which the scheme of
amalgamation is brought into force and that all the provisions of the I-T Act relating to set
off and carry forward of loss and depreciation shall apply to the merger.
The Reserve Bank of India, in a bid to smoothen the merger/amalgamation of Urban
Cooperative Banks (UCBs), has proposed to permit the acquirer UCB to amortize the
losses taken over from the acquired UCB, for a period not in excess of five years. This
period includes the year of merger.
c) Valuation methods
Beauty lies in the eyes of the beholder; valuation in those of the buyer.
www.banknetindia.com
Value of a business is a function of the business logic driving the M&A and is
based on the bargaining powers of buyers and sellers.
There are several techniques to value a business and broadly they are classified as
under:A) Earnings based valuation
Discounted Cash flow / Free cash flow
Cost to create approach
Capitalized earnings method.
www.banknetindia.com
The discounted cash flow approach to corporate valuation involves four broad
steps:
Rhoades study:
Compared to low premium target banks, high premium target banks have:
www.banknetindia.com
The market may capitalize operating earnings at a higher multiple than securities
gains or losses:
Barth, Beaver, and Wolfson study found that bank stock prices were
positively related to operating earnings and negatively related to
securities gains and losses.
Price of target banks increases on average about 11.5% during the week
of an M&A announcement. Cash transactions were more profitable for
targets than stock deals.
In the long run banks involved in acquisitions showed higher than normal
cash flow performance and greater asset growth. Thus, in the long run
both targets and bidders benefited from an acquisition.
www.banknetindia.com
www.banknetindia.com
What impact could be the creations of mega bank have on monetary policy, the
management of interest rates. What threat to the Indian economy would be
posed by the difficulties experienced by a mega bank in its international
activities?
The impact that the merger might have on the overall structure of the industry.
The possible costs and benefits to customer and to small and medium size
businesses, including the impact on bank branches the availability of financing
price, quality and the availability of services.
The timing and the socioeconomic impact of any branch closures resulting from
the merger.
The manner in which the proposal will contribute to the international
competitiveness of the financial services sector.
The manner in which the proposal would
quality of jobs in the sector, with a distinction made between transitional and
permanent effects.
The manner in which the proposal would increase the ability of the banks to
develop and adopt new technologies.
Remedial steps that the merger applicants would be willing to take to mitigate the
adverse effects identified to arise from the merger.
www.banknetindia.com
ii.
iii.
iv.
v.
vi.
www.banknetindia.com
ii.
iii.
To protect the right of the shareholders of the banking company it will also be
necessary to give an option to the shareholders of the banking company to
accept the shares of the merged entity as per the swap ratio as fixed by the
scheme or accept the shares of the merged entity as per the swap ratio as fixed
by the scheme or accept the payment for shareholders. Since the merger
scheme is to be framed under section 9(2) (C) of the Nationalization Act, there is
no express statutory requirement for the purpose of obtaining the consent of the
shareholders of the banking company for the mergers.
CMDs of the two Banks approach GOI and obtain clearance to proceed to
evaluate proposal.
ii.
The Central Government may then ask the Two CMDs to conduct a strategic
due diligence to be able to further evaluate the logic of the merger.
iii.
The CMDs would go back to GOI with the results of the strategic due diligence.
www.banknetindia.com
iv.
If the proposal finds favor with the Central Government, it would then frame a
draft scheme under section 9 of the Banking Companies (Acquisition and
Transfer of Undertakings) Act, 1980. The Central Government would require
valuation to be conducted by experts to work out the swap ratios. The experts so
chosen should be requested to submit their report in a sealed cover directly to
the Central Government. This is necessary so that persons connected with the
corresponding new banks who are involved in the process are protected from
any allegation that sensitive information was leaked or disclosed.
v.
The Central Government would then place all the material before the Reserve
Bank of India by way of consultation in terms of Section 9(1).After the Reserve
Bank offers its comments and suggestions, if any, the draft scheme could be
fine-tuned.
vi.
vii.
The next step would be to publish the draft scheme in its final form in various
newspapers across the country for the information of the investing shareholders
and inviting them to make their suggestions, if any, in relation to the scheme. A
reasonable period for not less than 21 to 30 days could be given for this purpose.
Natural justice dose not entail personal hearing in all cases. This is particularly so
in cases where a large body of persons are involved. In such cases natural
justice is complied with if the persons concerned are given an opportunity for
making suggestions or objections. It would be perfectly reasonable to give an
opportunity of placing objection and suggestions in writing, which could then be
considered by the Central Government in a fair and objective manner.
viii.
Since the merger scheme is to be framed under section 9(2) (C) of the
Nationalization Act, there is no express statutory requirement for the purpose of
obtaining the consent of the shareholders of the banking company for the
mergers.
www.banknetindia.com
ix.
x.
After all the suggestions that are received from minority shareholders are
considered, the Central Government could proceed to notify the scheme. The
effective date will need to be indicated in the notification.
xi.
Thereafter the scheme would have to be placed before both the Houses of
Parliament as provided in Section 9(6).
In a corresponding new bank the controlling shares are held by the Central
Government and respect of State bank of India, the controlling shares are held
by Reserve Bank of India. Initiation of any proposal for merger of corresponding
new bank with State Bank of India would therefore need approval of the Central
Government as well as the Reserve Bank of India.
ii.
Since the provision of section 9(2) (c) read with explanation I to section 9(5) of
the Nationalization Act contemplate the merger of a public sector bank with State
Bank of India, it would be permissible for the Central Government of formulate a
scheme under section 9(2) (c) for the purpose of amalgamation of a
corresponding new bank with State Bank of India.
iii.
If the corresponding new bank has raised capital by issue of shares to public it
will be necessary to make a valuation of shares and decide the swap ratio for
shares of the state Bank of India. Provision will have to be made for payment of
www.banknetindia.com
In addition to the requirement stated above, the other requirement in the matter
of formulation of the scheme under section 9 (2) (c) as stated earlier above will
apply in respect of merger of a corresponding new bank with State Bank of India.
www.banknetindia.com
g) Merger/Amalgamation in the cooperative banking sectorAs co-operative banks are under dual control, with both the RBI and the RCS (Registrar
of Co-operative Societies) .for merger to take place the RBI must issue a no-objection
certificate (NOC) to RCS. Amalgamation and mergers of co-operative banks falls under
the purview of the RCS.
Reserve Bank of India will consider proposals for merger and amalgamation in the urban
banks sector in the following circumstances:
1) When the networth of the acquired bank is positive and the acquirer bank assures to
protect entire deposits of all the depositors of the acquired bank;
2) When the networth of acquired bank is negative but the acquirer bank on its own
assures to protect deposits of all the depositors of the acquired bank; and
3) When the networth of the acquired bank is negative and the acquirer bank assures to
protect the deposits of all the depositors with financial support from the State
Government extended upfront as part of the process of merger.
The Reserve Bank also proposes that in all cases of merger/amalgamation, the financial
parameters of the acquirer bank post merger will have to conform to the prescribed
minimum prudential and regulatory requirement for urban co-operative banks. The
realizable value of assets will have to be assessed through a process of due diligence.
(See detailed guidelines in the annexure)
www.banknetindia.com
profits
and
to
take
immediate
steps
to
augment
the
capital.
The bank reported some progress in making recoveries and also the attempts underway
to have equity infusion. However, it was not able to finalize a programme of capital
augmentation till June 2004 through domestic sources as advised. Later, the bank
submitted in July 2004, a proposal received from an overseas equity investor fund for
recapitalization of the bank. The proposal was not found acceptable by Reserve Bank on
prudential and other considerations.
As the financial position of the bank was deteriorating progressively and the solvency of
the bank was being seriously affected, the Reserve Bank had to place the bank under
moratorium on July 24, 2004 to protect the interests of the large body of small depositors
of the bank and in the interest of the banking system.
A firm proposal for merger of the bank was received from Oriental Bank of Commerce
(OBC). OBCs perception on the issue was examined by the Reserve Bank, keeping in
www.banknetindia.com
view, its financial parameters, its retail network and synergies as well as strategic
advantages. Taking into account the interests of OBC and depositors of GTB, as well as
the banks strengths and weaknesses, GTB was merged with OBC with effect from
August 14, 2004 under the powers vested with the Reserve Bank under the Banking
Regulations Act, 1949 through a scheme sanctioned by the Government of India.
FINANCIALS BEFORE AND AFTER
Oriental Bank of Commerce:
Company Profile:
Oriental Bank of Commerce (OBC) is a Delhi Based public sector bank with a Major
presence in northern India. With the recent acquisition of the ailing erstwhile Global Trust
Bank (GTB), OBC has expanded its presence in the Southern and Western India. The
bank caters to the Corporate, Retail and the Agricultural sector With various loan and fee
based products. It reaches out to its 8mn strong customer base through a network of
1121 branches and 396 ATMs.
At FY04, the bank held a market share of 2.2% and 2.4% in credit and deposit
respectively of all the SCBs In India. The financial of the OBC given bellow before GTB
merger. Just by seeing the number we can tell that financial condition of OBC bank is
quit strong. There is a clear 50% increase in the net profit from 2003 to 2004 and
maintaining 14% CAR (Capital Adequacy Ratio) is sign of financial soundness.
crore
31.03.04
31.03.03
S.N
Particulars
Interest Earned
3300.54
3304.27
Other Income
721.71
531.39
4022.25
3835.66
Interest Expended
1844.74
2089.94
Operating Expenses
644.48
582.66
www.banknetindia.com
2489.22
2672.6
1533.33
1163.6
contingencies
387.43
427.55
459.53
278.56
(F)Net Profit/Loss(C-D-E)
686.07
456.95
14.47
14.04
35.63
23.73
provisions
and
Analytical ratio
All figure
GTB financial result as on 31 march 2004
in crore
31.03.04
31.03.03
s.no
Particulars
Interest Earned
354.19
539.59
Other Income
161.06
191.36
515.25
730.95
Interest Expended
435.13
517.41
Operating Expenses
158.91
177.1
www.banknetindia.com
594.04
694.51
-78.79
36.44
708.19
309.09
25.4
0.05
(F)Net Profit/Loss(C-D-E)
-812.38
-272.7
-66.94
-22.47
Analytical ratio
OBC after merger with GTBAs per the scheme of amalgamation notified by the Government of India the erstwhile
Global Trust Bank Ltd. (GTB) has been amalgamated with Oriental Bank of Commerce
w.e.f. 14.08.2004.
It is observed that as per the scheme of amalgamation the valuation of Assets and the
determination of Liabilities have been made by the Auditors nominated by the Reserve
Bank of India and the assets are classified into Readily Realizable and Not Readily
Realizable.
The excess of liabilities over assets taken over amounting to Rs. 1225.72 crores has
been debited to an account titled Amalgamation Adjustment Account and included
under Other Assets. The Bank has decided to write off the intangible asset
Amalgamation Adjustment Account equally over a period of five years commencing
from the year ended March 31, 2005.
We can see the financial of the OBC after merger with GTB %CAR gown down
significantly from 14 % in 2004 to 9% in 2005 and net profit gown up just up by just 10%
in 2005 one should keep in mind that before merger this figure was 50%.
OBC financial result as on 31 march 2005
s.no
Particulars
Interest Earned
31.03.05
31.03.04
3571.9
3300.54
www.banknetindia.com
Other Income
505.2
721.71
4077.1
4022.25
Interest Expended
2048.22
1844.74
Operating Expenses
795.73
644.48
2843.95
2489.22
1233.15
1533.33
400.15
387.43
72.19
459.53
(F)Net Profit/Loss(C-D-E)
760.81
686.07
9.21
14.47
39.51
35.63
Liabilities
Deposits
Analytical ratio
Borrowings
Other Liabilities and
provision
Total
Contingent liabilities
Rs
367.12
162.44
692.04 Investment
Advances
Fixed Assets
Other Assets
Excess of liabilities over assets
taken over
6064.71 Total
2083.17
1808.9
1712.97
252.69
534.87
1225.72
6064.71
The accounting treatment for the amalgamation is given on the basis of the purchasing
method as per the accounting standards 14 accounting of the amalgamation issued by
the institute of chartered accountants of the India. The prudential norms in respect of the
investment and advances taken over have been applies on an ongoing basis.
Challenges in front of OBC after merger with GTBa) Recovery of the bad loans:
For OBC acquisition of GTB rather than a matter of choice, was a mandate from the
www.banknetindia.com
Government. Standalone OBC had a gross NPL (non performing loan) ratio of 6.2% and
amounting to Rs12.1bn less than GTBs Rs13.4bn. The bank had 100% provision
coverage and As a result the incremental loan loss provision (LLP) was voluntary which
was seen in OBCs LLP in the first quarter, which was zero. The bank could absorb
EGTBs bad Loans and make provisioning without excessively straining its accounts.
OBC is hoping for a recovery of 75-80% of the bad assets either through cash
Recoveries or up-gradations and restructuring. The bank has upped its expectations
From the earlier 65-70% on back of strong recovery during FY05. Although 75-90%
Could be recovered, we feel even if 60-65% is recovered the acquisition cost could
Fall significantly.
OBC could very well achieve its earlier status of Zero NPA by the end of FY06,
Provided it achieves its recovery targets and incremental slippages are kept under
Control. This is possible as the bank has a good risk management system in place and
with low NPA level can concentrate on faster recoveries.
b) Managing Human resources:
For any merger to successful it is very
resources this fact is true with this merger. At the time of the merger it was announced
that Oriental Bank of Commerce will retrain the staff of Global Trust Bank to enable them
to carry out lending activities at branch level and attain three times more business from
the acquired unit. It is fact that of the 1,300 staff of GTB, 160 has quit after the merger
despite OBC offering job protection and retaining their high pay package.
At present, GTB branches are functioning as OBC branches following lifting of the
moratorium on GTB.
www.banknetindia.com
The bank is also on a recruiting spree to bolster its manpower requirement for the
increased number of branches and in view of expanding business by 30 per cent to Rs
80,000 crore in coming year.
c) IT implementationIn this merger IT plays an important role because both bank GTB and OBC both
enjoyed same IT platform before merger so in this merger there was no issue as far as
the IT implementation is concerned. OBC has gained a significant amount just because
both enjoys same IT platform.
This is the classic case of the merger in banks where in both bank gains significantly
Oriental Bank of Commerce stands to gain about Rs 950 crore including Rs 300 crore in
tax benefit, from this merger. On the other hand GTB regains this customers and
credibility.
www.banknetindia.com
The ceiling applies to aggregate foreign investment in private banks from all
sources (FDI, FII, and NRI). The limit of 74 per cent will be reckoned by taking
the direct and indirect holding and at all times, at least 26 per cent of the paid up
capital of the private sector bank will have to be held by residents.
There is to be a limit of 10 per cent for individual FII investment with the
aggregate limit for all FIIs restricted to 24 per cent which can be raised to 49 per
cent with the approval of the Board / General Body.
There is a limit of 5 per cent for individual NRI portfolio investment with the
aggregate limit for all NRIs restricted to 10 per cent which can be raised to 24 per
cent with the approval of Board / General Body.
The Government has also permitted foreign banks to set up wholly owned
subsidiaries in India. The government, however, has not taken any decision on
raising voting rights beyond the present 10% cap to the extent of shareholding.
The new FDI norms will not apply to PSU banks, where the FDI ceiling is still
capped at 20%. Foreign investment in private banks with a joint venture or
subsidiary in the insurance sector will be monitored by RBI and the IRDA to
ensure that the 26 per cent equity cap applicable for the insurance sector is not
breached.
All entities making FDI in private sector banks will be mandatory required to have
credit rating.
Private sector banks have the potential to attract $16.3 billion of foreign direct
investment (FDI) if foreign banks are allowed to buy up to 74 per cent of equity in these
www.banknetindia.com
banks. Another $2.3 billion of foreign portfolio investment is possible if the government
raises foreign institutional investors (FII) ceiling to 30 per cent in public sector banks,
according to a study by ICICI Securities (I-Sec) in July 2004 on bank ownership reforms.
I-Sec, feels the FII limit in public sector banks would be increased immediately. Although
the increase in FII ownership ceiling from 20 per cent to 30 per cent could be the only
immediate reform, the increased capital needs of banks could force the government to
expedite other reforms such as scaling down government stake to 33 per cent from 51
per cent.
Similarly, a merger of State Bank of India (SBI) subsidiaries could also be possible.
Investor interest in the first phase of reforms is likely to centre on frontline public sector
banks. SBI and Bank of Baroda (BoB), with FII investment already touching 20 per cent,
will be the immediate beneficiaries.
The existing guidelines announced in January 2004 permit FDI to the extent of 74 per
cent in private sector banks. But the Reserve Bank of Indias (RBI) draft guidelines
issued in July 2004 has put the brakes on FDI flow in private sector banks. The January
2004 guidelines had also raised FII holdings in banks to 49 per cent subject to the
concerned bank board and subsequently the shareholders passing a resolution raising
FII limit.
The government is soon expected to announce fresh guidelines on banking sector
ownership reforms. The FDI potential in private sector banks is based on the assumption
that foreign banks acquire stake through new issue of shares.
b) Cross Border M& A in Banks
India remains a lucrative market for foreign investor and banking industry is not
exception. All over Asia the merger activity gains popularity just to Gaining market share
as a complement / supplement to organic growth, Rapid expansion or access to new
markets / products and Acquisition of partners capabilities and customers. Graph given
bellow gives an idea about the M&A activity for bank in Asia.
www.banknetindia.com
Asia 10 Total
6
5
4
3
2
1
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
YTD
www.banknetindia.com
www.banknetindia.com
www.banknetindia.com
www.banknetindia.com
www.banknetindia.com
When two banks merge into one then there is an inevitable increase in the size of
the organization. Big size may not always be better. The size may get too widely
and go beyond the control of the management. The increased size may become
a liability rather than as asset.
Consolidation does not lead to instant results and there is an incubation period
before the results arrive. Merges and acquisitions are sometimes followed by
losses and tough intervening periods before the eventual profits pour in.
Patience, forbearance and resilience are required in ample measure to make any
merger a success story. All may not be up to plan, which explains why there are
high rate of failure in mergers.
Consolidation mainly comes due to decision taken at the top. It is a top heavy
decision and willingness of the rank and file of the both entities may not be
forthcoming. This leads to problems of industrial relations, deprivation.
Depression and demotivation among the employees. Such a work force can
never churn out good results. Therefore, personal management at the highest
order with humane touch alone can pave the way.
The structure, systems and the procedures followed in two banks may be vastly
different, for example, a PSU bank or old generation bank and that of a
technologically superior foreign bank. The erstwhile structures, systems and
procedures may not be conducive in the new milieu. A through overhauling and
systems analysis to be done to assimilate both the organizations. This is a time
consuming process and requires lot of cautions approaches to reduce the
frictions.
www.banknetindia.com
www.banknetindia.com
Recently we have seen the merger between global trust bank and oriental bank of the
commerce in that merger IT implication played an important part because both bank
enjoyed the same platform.
Human resources issueAll over world it is observed that after merger very high number of employees losses
there job. Same theory applicable to Indian banking also it is important to short out this
issue before merger. Human resources are another sensitive issue on the road to
consolidation.
As per a study of the Indian Banking Industry by FICCI in October 2005, 88 percent of
public and private sector banks considered HRD related issues as one of the biggest
challenge in the process of consolidation. while 64 percent of them voted for Cultural
differences as one the confronting issues.
In 2001, about 11 per cent of the over-800,000 strong bank employees opted for the
first-ever voluntary retirement scheme in the state-run banking industry. The
consolidation drive will make more employees redundant, a political time bomb ticking
away. Besides, it will also call for large-scale redeployment of employees. Traditionally,
employees in public sector banks are loath to move from one table to another of the
same branch. Now the trade unions seem to be willing to allow mobility for employees
within a district. Mergers will force them to move from one state to another.
For merger to succeed banks will have to carefully forge a cultural fit among all
employees, ingeniously devise HRD policies and concentrate not only on cost-reduction
but also on enhancing revenue and profitability.
Cultural shiftBefore a merger is carried out cultural issues should be looked into. A bank based
primarily out of North India might want to acquire a bank based primarily out of South
India to increase its geographical presence but their cultures might be very different.
These so the integration process might become very difficult. Even if there are synergies
in technology, geographical presence and profile of assets, the birth of mega banks
through mergers may not be of great use unless the mindset of public sector banks
www.banknetindia.com
changes. Having chased zero-risk government bonds in a low interest rate regime, most
bankers have forgotten the art of lending. Unless they re-discover this, consolidation will
be meaningless.
www.banknetindia.com
www.banknetindia.com
www.banknetindia.com
Rs crore
USD million
Deposits
14248.77
3257.24
Borrowings
16979.43
3881.45
Other liabilities
8641.1
7975.34
Total
39869.3
9114.03
10274.07
2348.63
Advances(Gross)
24122.97
5536.85
5472.26
1228.55
Total Assets
39869.3
9114.03
Resources
Deployment
Subsidiaries*
Loans
Investments
USD
Rs
USD
Rs crore
million
crore
million
1801.99
411.93
1567.61
358.35
USD
Rs crore
million
1847.17 422.25
337.44
77.138
723.26
298.46
68.227
Joint
Ventures/Associates*
165.335
www.banknetindia.com
The merger of the SBI and its associate on the cards. SBI has already integrated
technology platform and treasury of all seven associate.
State Bank of India has the following seven Associate Banks (ABs) with controlling
interest ranging from 75% to 100%.
State Bank of Bikaner and Jaipur (SBBJ)
State Bank of Hyderabad (SBH)
State Bank of Indore
State Bank of Mysore (SBM)
State Bank of Patiala (SBP)
State Bank of Saurashtra (SBS)
State Bank of Travancore (SBT)
The seven SBIs have a combined network of 4596 branches in India which are fully
computerized and 1070 ATMs networked with SBI ATMs, providing value added
services to clientele.
To conclude: State Bank of India, the largest Indian Bank plans to scale up its
global assets, which currently stand at about $13 billion, to $26 billion and attain
HSBC's size by 2008. At present state bank of India among top 100 banks and its
aiming to achieve top 50 banks by the end of the 2008.Global acquisition by SBI
would certainly help him to achieve its target.
www.banknetindia.com
www.banknetindia.com
Indian Overseas Bank, UCO Bank, Bank of India, SBI, ICICI Bank have their operations
in Singapore. The agreement has opened Indian shores for three Singapore Banks
Development Bank of Singapore (DBS), Overseas Chinese Banking Corporation and
United Overseas Bank.
Size is increasingly becoming important for the banks, as it is crucial to improve their
overall efficiency. 75 percent of the FICCI survey respondents also concur with the
notion that Large size is the key to further performance improvement. This view was
equally supported by Public sector banks as well as the Private and Foreign banks.
Consolidation in the banking industry seems to be inevitable in the next 2-5 years.
Opening up of the financial sector from 2005, under WTO, would see a number of Global
banks taking large stakes and control over banking entities in the country. They would
bring with them capital, technology and management skills. This will increase the
competitive spirit in the system leading to greater efficiencies. Government policy to
allow greater FDI in banking and the move to amend Banking Regulation Act to remove
the existing 10% cap on voting rights of shareholders is pointers to these developments.
Public Sector Banks had, in the past, relied on Government support for capital
augmentation. However, with the Government making a conscious decision to reduce
its holding in Banks, most Banks have approached the capital market for raising
resources. This process could gain further momentum when the government holding
gets reduced to 33% or below.
It is expected that pressures of market forces would be the determining factor for the
consolidation in the structure of these banks. If the process of consolidation through
mergers and acquisitions gains momentum, we could see the emergence of a few large
Indian banks with international character. There could be some large national banks
and several local level banks.
Consolidation would take place not only in the structure of the banks, but also in the
case of services. For instance, some banks would like to shed their non-core business
portfolios to others. This could see the emergence of niche players in different functional
areas and business segments such as housing, cards, mutual funds, insurance, sharing
of their infrastructure including ATM Network, etc
www.banknetindia.com
Structure and ownership pattern would undergo changes. There would be greater
presence of international players in the Indian financial system. Similarly, some of the
Indian banks would become global players. Government is taking steps to reduce its
holdings in Public sector banks to 33%. However the indications are that their PSB
character may still be retained.
According to Indian Banks Association Banking Industry Vision 2010, Mergers and
acquisitions would gather momentum as managements will strive to meet the
expectations of stakeholders. This could see the emergence of 4-5 world class Indian
Banks. As Banks seek niche areas, we could see emergence of some national banks of
global scale and a number of regional players.
The Union Finance Minister, P.Chidambaram gave inklings of the governments Stance
on mergers in the banking sector when he stated in December 2004, The government
would encourage consolidation among banks in order to make them globally
competitive. The Government will not force consolidation, but if two banks want to
consolidate, we would encourage them. We will encourage them if it helps bank grow in
size, Scale and muscle so that they can compete globally.
The finance minister said the banking sector displayed a high degree of fragmentation
with the market share of the top five banks in India at 41.5 per cent against 75 per cent
in China. A fragmented banking sector is the antithesis of a profitable banking sector,
he added.
India has 19 government owned banks and around 30 privately-owned banks. With the
entry of new private sector banks, the banking sector has become even more
fragmented in the reform years since 1992. Public sector banks need to consolidate
amongst themselves and with private-sector banks to survive increasing competition,
Chidambaram said.
Mergers and acquisitions in the banking sector are going to be the order of the day. India
is slowly but surely moving from a regime of `large number of small banks' to `small
number of large banks'. The new era in banking in India is going to be one of
consolidation around identified core competencies.
www.banknetindia.com
Annexure 1
Complete List of Banks in India
www.banknetindia.com
www.banknetindia.com
www.banknetindia.com
www.banknetindia.com
www.banknetindia.com
Annexure 2
Bank valuation
The valuation process One-way of viewing is through the use of the use if the accounting
paradigm, but using market values. We rewrite the balance sheet by moving the current
liabilities from the liabilities / equity side of the asset side of the balance sheet:
USING THE BALANCE SHEET AS AN
ENTERPRISE VALUATION MODEL
ORIGINAL BALANCE SHEET
ASSETS
Liabilities
Debt
Equity
Goodwill
Total assets
THE
ENTERPRISE
VALUATION
''BALANCE
SHEET''
Assets
Liabilities
Dept
Goodwill
Market Value
Market value
www.banknetindia.com
Thus to value
A company, we set,
Market value = Initial cash balances + {(FCF) / (1+WACC)}
If s\we are valuing the equity of the firm, we subtract the value of the debt:
Equity value = Market value Debt
= Initial cash balances + {(FCF)/ (1 + WACC)} Debt
= {(FCF) / (1 +WACC)} (Debt Initial cash)
Note that means that we can write the enterprise balance sheet in a slight different form:
THE
ENTERPRISE
VALUATION''
BALANCE
SHEET''
A Slight variation (cash netted out debt)
Assets
Operating current assets
-Operating current liabilities
Liabilities
Debt -cash & Mkt, securities]
=Net debt
Goodwill
Enterprise Value
Enterprise Value
Note that both variations on the enterprise valuation '' balance sheet''
Give the same equity value.
www.banknetindia.com
The same logic we have used above can be applied to banks. There are some
important differences between and ordinary companies, however:
On the asset side: For an ordinary company, Cash and Marketable Securities
are usually a store of value (like negative debt), whereas for a bank most
marketable securities (and some of the cash) an operating current asset.
On the liability side: For an ordinary company, we put all debt items together,
even if from an accounting point of view they are current liabilities. Thus:
Debt = Long-term debt + Notes payable portion of LTD +
For a bank, most (all?) short term debt items debt items are operating current liabilities
and are therefore part of the banks working capital
The banks free cash (FCF)
Recall that throughout this book we have valued a firms permanent capital firms free
cash flows at its weighted cost of capital. Thus for a firm which has only equity and debt:
Enterprise value = value of firms Equity + Debt = (anticipated FCF,) / (1 + WACC),
The FCF calculations for an industrial company employed elsewhere in the bank have to
be modified somewhat when considering a financial company. Recall that the standard
FCF calculation for an industrial company is along following lines:
www.banknetindia.com
Explanation
Depreciation
is
usually
not
very
significant item
Add back after tax interest on permanent This leaves the net interest income on the
debt item (typically Long-Term debt)
banks
productive
activities-its
financial
intermediation.
Subtract out increase in operating NWC
www.banknetindia.com
Explanation
NWC
is
financial
burden
on
the
www.banknetindia.com
Annexure 3
a) Guidelines for merger/amalgamation of private sector banks
Ref.DBOD.No.PSBS.BC. 89/16.13.100/2004-05 May 11, 2005
1. General
1.1 The Reserve Bank has discretionary powers to approve the voluntary amalgamation
of two banking companies under the provisions of Section 44A of the Banking
Regulation Act, 1949.
1.2 These powers do not extend to the voluntary amalgamation of a banking company
with a non-banking company where amalgamations are governed by sections 391 to 394
of the Companies Act, 1956 in terms of which, the scheme of amalgamation has to be
approved by the High Court.
1.3 However, in both situations, the Reserve Bank is concerned that while
amalgamations are normally decided on business considerations such as the need for
increasing the market shares, synergies in the operations of businesses, acquisition of a
business unit or segment etc., it is essential that considerations like sound rationale for
the amalgamation, the systemic benefits and the advantage accruing to the residual
entity are evaluated in detail.
1.4 These guidelines cover two situations namely:(a) An amalgamation of two banking companies
(b) An amalgamation of a non-banking finance company (NBFC) with a banking
company.
2. Amalgamation between two banking companies
2.1.1 Section 44A of the Banking Regulation Act, 1949 requires that the draft scheme of
amalgamation has to be approved by the shareholders of each banking company by a
resolution passed by a majority in number representing two-thirds in value of the
shareholders, present in person or by proxy at a meeting called for the purpose.
Banknet India- Banking Knowledge, Research & Conferences
www.banknetindia.com
2.1.2 Before convening the meeting for the purposes of obtaining the shareholders'
approval, the draft scheme of amalgamation needs to be approved individually by the
Boards of Directors of the two banking companies. When according this approval, the
Boards need to give particular consideration to the following matters:(a) The values at which the assets, liabilities and the reserves of the amalgamated
company are proposed to be incorporated into the books of the amalgamating banking
company and whether such incorporation will result in a revaluation of assets upwards or
credit being taken for unrealized gains.
(b) Whether due diligence exercise has been undertaken in respect of the amalgamated
company.
(c) The nature of the consideration, which, the amalgamating banking company will pay
to the shareholders of the amalgamated company.
(d) Whether the swap ratio has been determined by independent valuers having required
competence and experience and whether in the opinion of the Board such swap ratio is
fair and proper.
(e) The shareholding pattern in the two banking companies and whether as a result of
the amalgamation and the swap ratio the shareholding of any individual, entity or group
in the amalgamating banking company will be violative of the Reserve Bank guidelines
or require its specific approval.
(f) The impact of the amalgamation on the profitability and the capital adequacy ratio of
the amalgamating banking company.
(g) The changes which are proposed to be made in the composition of the board of
directors of the amalgamating banking company, consequent upon the amalgamation
and whether the resultant composition of the Board will be in conformity with the
Reserve Bank guidelines in that behalf.
Banknet India- Banking Knowledge, Research & Conferences
www.banknetindia.com
2.2.1. Section 44A of the Banking Regulation Act, 1949 also requires that after the
scheme of amalgamation is approved by the requisite majority of shareholders in
accordance with the provisions of the Section, it shall be submitted to the Reserve Bank
for sanction.
2.2.2. To enable the Reserve Bank to consider the application for sanction, the
amalgamating banking company should submit to the Reserve Bank the information and
documents specified in
2.3.1 The aforementioned Section provides that a dissenting shareholder is entitled, in
the event of the scheme being sanctioned by the Reserve Bank, to claim from the
banking company concerned, in respect of the shares held by him in that company, their
value as determined by the Reserve Bank when sanctioning the scheme and such
determination by the Reserve Bank as to the value of the shares to be paid to the
dissenting shareholders shall be final for all purposes.
2.3.2 To enable the Reserve Bank to determine such value, the amalgamated banking
company should submit the following: (a) a report on the valuation of the share of the amalgamated company made for this
purpose by the valuers appointed for the determination of the swap ratio
(b) detailed computation of such valuation
(c) Where the shares of the amalgamated company are quoted on the stock exchange:(I) Details of the monthly high and low of the quotation on the exchange where the
shares are most widely traded together with number of shares traded during the six
months immediately preceding the date on which the scheme of amalgamation is
approved by the Boards.
(ii) The quoted price of the share at close on each of the fourteen days immediately
proceeding the date on which the scheme of amalgamation is approved by the Boards.
(d) Such other information and explanations as the Reserve Bank may require.
www.banknetindia.com
will
become
accounts
of
the
banking
company
after
amalgamation.
(c) The NBFC has availed of credit facilities from banks/FIs and if so, whether the loan
agreements mandate the NBFC to seek consent of the bank/FI concerned for the
proposed merger/amalgamation.
3.3 To enable the Reserve Bank of India to consider the application for approval, the
banking company should furnish to Reserve Bank of India information and documents
listed in excluding item 4 and also the information and documents listed in paragraph
2.3.2 above.
3.4 The provision of paragraphs 3.1 to 3.3 above will also apply mutatis mutandis in the
rare cases where a banking company is amalgamated into an NBFC.
4. Norms for promoter buying or selling shares directly/indirectly, before, during and after
discussion period
4.1 Regulation 2(ha) of the SEBI (Prohibition of Insider Trading) Regulations, 1992,
which is applicable to the securities of listed companies, defines price sensitive
information, as "any information which relates directly or indirectly to a company and
which if published is likely to materially affect the price of the securities of the company".
www.banknetindia.com
4.2 SEBI regulations on Prohibition of Insider Trading should be strictly complied with, as
the various information relating to takeover/merger and transfer of shares of listed banks
/ NBFCs are price sensitive. Even the unlisted banks / companies should follow the SEBI
guidelines in spirit and to the extent applicable.
Information and documents to be furnished along with the application of Scheme of
Amalgamation
1. Draft scheme of amalgamation as placed before the shareholders of the respective
banking companies for approval.
2. Copies of the notices of every meeting of the shareholders called for such approval
together with newspaper cuttings evidencing that notices of the meetings were published
in newspapers at least once a week for three consecutive weeks in two newspapers
circulating in the locality or localities in which the registered offices of the banking
companies are situated and that one of the newspapers was in a language commonly
understood in the locality or localities.
3. Certificates signed by each of the officers presiding at the meeting of shareholders
certifying the following:
(a) A copy of the resolution passed at the meeting;
(b) The number of shareholders present at the meeting in person or by proxy;
(c) The number of shareholders who voted in favor of the resolution and the aggregate
number of shares held by them;
(d) The number of shareholders who voted against the resolution and the aggregate
number of shares held by them;
(e) the number of shareholders whose votes were declared as invalid and the aggregate
number of shares held by them;
www.banknetindia.com
(f) the names and ledger folios of the shareholders who voted against the resolution and
the number of shares held by each such shareholder;
(g) the names and designations of the scrutineers appointed for counting the votes at the
meeting together with certificates from such scrutineers confirming the information given
in items (c) to (f) above;
(h) the name of shareholders who have given notice in writing to the Presiding Officer
that they dissented from the scheme of amalgamation together with the number of
shares held by each of them.
4. Certificates from the concerned officers of the banking companies giving names of
shareholders who have given notice in writing at or prior to the meeting to the banking
company that they dissented from the scheme of amalgamation together with the
number of shares held by each of them.
5. The names, addresses and occupations of the Directors of the amalgamating banking
company as proposed to be reconstituted after the amalgamation and indicating how the
composition will be in compliance with Reserve Bank regulations.
6. The details of the proposed Chief Executive Officer of the amalgamating banking
company after the amalgamation.
7. Copies of the reports of the valuers appointed for the determination of the swap ratios.
8. Information which is considered relevant for the consideration of the scheme of
amalgamation and the swap ratio including in particular:
(a) annual reports of each of the banking companies for each of the three completed
financial years immediately preceding the Appointed Date for amalgamation;
(b) financial results, if any, published by each of the banking companies for any period
subsequent to the financial statements prepared for the financial year immediately
preceding the Appointed Date;
www.banknetindia.com
(c) pro-forma combined balance sheet of the amalgamating banking company as it will
appear as of the Appointed Date consequent on the amalgamation;
(b) the information and documents on which the valuers have relied and the extent of the
verification, if any, made by the valuers to test the accuracy of such information;
(c) if the valuers have relied upon projected information, the names and designations of
the persons who have provided such information and the extent of verification, if any,
made by the valuers in relation to such information;
www.banknetindia.com
(d) details of the projected information on which the valuers have relied;
(e) detailed computations of the swap ratios containing explanations for adjustments
made to the published financial information for the purposes of the valuation; (f) if these
adjustments are made based on valuations made by third parties, details regarding the
persons who have made such valuations;
(g) capitalization factor and weighted average cost of capital (WACC) used for the
purposes
of
the
valuation
and
justification
for
the
same;
(h) if market values of shares have been considered in the computation of the swap
ratio, the market values considered and the source from which such values have been
derived;
(i) if there are more than one valuer, whether each of the valuers have recommended a
different swap ratio and if so, the above details should be given separately in respect of
each valuer and it may be indicated how the final swap ratio is arrived at.
10. Such other information and explanations as the Reserve Bank may require.
www.banknetindia.com
www.banknetindia.com
www.banknetindia.com
authorities vested with the responsibility of administering the Acts, will be ensuring that
the due process prescribed in the Statutes has been complied with before they seek the
approval of the RBI. They would also be ensuring compliance with the statutory
procedures for notifying the amalgamation after obtaining the sanction of the RBI.
5. An application for merger giving the proposed scheme will have to be submitted by
the banks concerned to the Registrar of Co-operative Societies (RCS) / Central
Registrar of Co-operative Societies (CRCS). The acquirer bank shall also forward a copy
of the scheme to the Reserve Bank along with information as in Annexure I. The
Reserve Bank will be examining the same with reference to the financial aspects and the
interests of depositors based on the criteria/factors outlined in Annexure II and convey
its decision to the concerned State RCS and in case the acquirer is a Multi-state Bank,
to the CRCS and the RCS of the State in which the acquired bank is situated.
6. The State Acts also provide for compulsory amalgamation of the cooperative societies
by the RCS. In such cases too, prior approval of RBI is necessary. The schemes
received from RCS will be examined with reference to the financial aspects and the
interests of depositors as well as the stability of the financial system, based on the
criteria/factors outlined in Annexure II and decision conveyed to the RCS.
Annexures
i) Information and documents to be furnished by the acquirer UCB along with the
application of a Scheme of Amalgamation
1. Draft scheme of amalgamation as approved by the Board of Directors of the acquirer
bank.
2. Copies of the reports of the valuers appointed for the determination of realizable value
of assets (net of amount payable to creditors having precedence over depositors) of the
acquired bank.
3. Information which is considered relevant for the consideration of the scheme of
merger including in particular:a. Annual reports of each of the UCBs for each of the three completed financial years
immediately preceding the proposed date for merger.
www.banknetindia.com
b. Financial results, if any, published by each of the UCBs for any period subsequent to
the financial statements prepared for the financial year immediately preceding the
proposed date of merger.
c. Pro-forma combined balance sheet of the acquiring bank as it will appear consequent
on the merger.
d. Computation based on such pro-forma balance sheet of the following:i. Tier I Capital
ii. Tier II Capital
iii. Risk-weighted Assets
iv. Gross and Net NPAs
v. Ratio of Tier I Capital to Risk-weighted Assets
vi. Ratio of Tier II Capital to Risk-weighted Assets
vii. Ratio of Total Capital to Risk-weighted Assets
viii. Tier I Capital to Total Assets
ix. Gross and Net NPAs to Advances
x. Cash Reserve Ratio
xi. Statutory Liquidity Ratio
4. Information certified by the valuers as is considered relevant to understand the net
realizable value of assets of the acquired bank including in particular:a. The method of valuation used by the valuers
b. The information and documents on which the valuers have relied and the extent of the
verification, if any, made by the valuers to test the accuracy of such information
c. If the valuers have relied upon projected information, the names and designations of
the persons who have provided such information and the extent of verification, if any,
made by the valuers in relation to such information
d. Details of the projected information on which the valuers have relied
e. Detailed computation of the realizable value of assets of the acquired bank
5. Such other information and explanations as the Reserve Bank may require.
b) Annexures
Guidelines on merger/ amalgamation for UCBs
1. Reserve Bank of India may consider proposals for merger and amalgamation in the
following circumstances:
www.banknetindia.com
(i) When the networth of the acquired bank is positive and the acquirer bank assures to
protect entire deposits of all the depositors of the acquired bank.
(ii) When the networth of acquired bank is negative and the acquirer bank on its own
assures to protect deposits of all the depositors of the acquired bank.
(iii) When the networth of the acquired bank is negative and the acquirer bank assures to
protect the deposits of all the depositors of the acquired bank with financial support from
the State Government extended upfront as part of the process of merger.
2. In all cases of merger/ amalgamation the financial parameters of the acquirer bank
post merger should conform to the prescribed minimum prudential and regulatory
requirement for urban co-operative banks.
3. The realizable value of assets has to be assessed through a process of due diligence.
www.banknetindia.com
Annexure 4
Foreign bank entry and expansion norms in India February 28, 2005
Currently, permission for opening of branches by foreign banks in India is guided by the
commitment of 12 branches in a year to the World Trade Organization (WTO). In
practice, however, a higher number has also been permitted on merits. It is now
proposed to adopt a more liberalized policy in this regard for branches to be set up in
unbanked areas.
Applications from Indian and foreign banks would henceforth be processed on a
continuous basis and in a time bound manner, as per a simplified procedure.
The guidelines for setting up of wholly owned banking subsidiaries (WOS) by foreign
banks and conversion of existing branches of foreign banks into WOS are given
hereunder:
Eligibility of the parent bank
1. Foreign banks applying to the RBI for setting up a WOS in India must satisfy RBI that
they are subject to adequate prudential supervision in their home country. In considering
the standard of supervision exercised by the home country regulator, the RBI will have
regard to the Basel standards.
2. The setting up of a wholly-owned banking subsidiary in India should have the approval
of the home country regulator.
3. Other factors (but not limited to) that will be taken into account while considering the
application are given below:
i. Economic and political relations between India and the country of incorporation of the
foreign bank
ii. Financial soundness of the foreign bank
iii. Ownership pattern of the foreign bank
www.banknetindia.com
Not less than 50 per cent of the directors should be Indian nationals resident in
India.
Not less than 50 per cent of the Directors should be non-executive directors
The directors shall conform to the Fit and Proper criteria as laid down in RBIs
extant guidelines dated June 25, 2004.
RBIs approval for the directors may be obtained as per the procedure adopted in
the case of the erstwhile Local Advisory Boards of foreign bank branches.
www.banknetindia.com
www.banknetindia.com
branches operating in India and arrive at the aggregate net worth of the branches. RBIs
assessment of the net worth will be final.
9. Acquisition of holding in select private sector banks
Foreign banks may apply to the Reserve Bank for making investment in private sector
banks that are identified by RBI for restructuring. Reserve Bank will examine the
application with regard to the eligibility criteria prescribed for foreign banks to set up a
WOS vide paragraphs 1 to 4 above as well as their track record in restructuring banks.
While permitting foreign banks to acquire stake in the identified private sector banks, RBI
may undertake enhanced due diligence on the major shareholders to determine their Fit
and Proper status. Reserve Bank may also prescribe additional conditions in this regard
as may be considered appropriate.
10. Application procedure
Applications for setting up of wholly-owned banking subsidiaries by foreign banks
including conversion of existing branches should be made to the Chief General
Manager-in-Charge, Department of Banking Operations and Development, Reserve
Bank of India, World Trade Centre, Cuffe Parade, Colaba, Mumbai 400 005. The
prescribed application form will be placed on the RBI's web site.
www.banknetindia.com
Annexure 5
Guidelines on Ownership and Governance in Private Sector Banks
Introduction
Banks are "special" as they not only accept and deploy large amount of uncollateralized
public funds in fiduciary capacity, but they also leverage such funds through credit
creation. The banks are also important for smooth functioning of the payment system. In
view of the above, legal prescriptions for ownership and governance of banks laid down
in Banking Regulation Act, 1949 have been supplemented by regulatory prescriptions
issued by RBI from time to time. The existing legal framework and significant current
practices in particular cover the following aspects:
i. The composition of Board of Directors comprising members with demonstrable
professional and other experience in specific sectors like agriculture, rural economy, cooperation, SSI, law, etc., approval of Reserve Bank of India for appointment of CEO as
well as terms and conditions thereof, and powers for removal of managerial personnel,
CEO and directors, etc. in the interest of depositors are governed by various sections of
the B.R. Act, 1949.
ii. Guidelines on corporate governance covering criteria for appointment of directors, role
and responsibilities of directors and the Board, signing of declaration and undertaking by
directors, etc., were issued by RBI on June 20, 2002 and June 25, 2004, based on the
recommendations of Ganguly Committee and a review by the BFS.
iii. Guidelines for acknowledgement of transfer/allotment of shares in private sector
banks were issued in the interest of transparency by RBI on February 3, 2004.
iv. Foreign investment in the banking sector is governed by Press Note dated March 5,
2004 issued by the Government of India, Ministry of Commerce and Industries.
v. The earlier practice of RBI nominating directors on the Boards of all private sector
banks has yielded place to such nomination in select private sector banks.
www.banknetindia.com
www.banknetindia.com
the required level of net worth will have to submit a time-bound programme for capital
augmentation to RBI. Where the net worth declines to a level below Rs.300 crore, it
should be restored to Rs. 300 crore within a reasonable time.
5. Shareholding
i. The RBI guidelines on acknowledgement for acquisition or transfer of shares issued on
February 3, 2004 will be applicable for any acquisition of shares of 5 per cent and above
of the paid up capital of the private sector bank.
ii. In the interest of diversified ownership of banks, the objective will be to ensure that no
single entity or group of related entities has shareholding or control, directly or indirectly,
in any bank in excess of 10 per cent of the paid up capital of the private sector bank. Any
higher level of acquisition will be with the prior approval of RBI and in accordance with
the guidelines of February 3, 2004 for grant of acknowledgement for acquisition of
shares.
iii. Where ownership is that of a corporate entity, the objective will be to ensure that no
single individual/entity has ownership and control in excess of 10 per cent of that entity.
Where the ownership is that of a financial entity the objective will be to ensure that it is a
well established regulated entity, widely held, publicly listed and enjoys good standing in
the financial community.
iv, Banks (including foreign banks having branch presence in India)/FIs should not
acquire any fresh stake in a banks equity shares, if by such acquisition, the investing
banks/FIs holding exceeds 5 per cent of the investee banks equity capital as indicated
in RBI circular dated July 6, 2004.
v. As per existing policy, large industrial houses will be allowed to acquire, by way of
strategic investment, shares not exceeding 10 per cent of the paid up capital of the bank
subject to RBIs prior approval. Furthermore, such a limitation will also be considered if
appropriate, in regard to important shareholders with other commercial affiliations.
vi. In case of restructuring of problem/weak banks or in the interest of consolidation in
the banking sector, RBI may permit a higher level of shareholding, including by a bank.
www.banknetindia.com
www.banknetindia.com
At all times, at least 26 per cent of the paid up capital of the private sector banks will
have to be held by resident Indians.
7.1 Foreign Direct Investment (FDI) (other than by foreign banks or foreign bank group)
I. The policy already articulated in the February 3, 2004 guidelines for determining fit
and proper status of shareholding of 5 per cent and above will be equally applicable for
FDI. Hence any FDI in private banks where shareholding reaches and exceeds 5 per
cent either individually or as a group will have to comply with the criteria indicated in the
aforesaid guidelines and get RBI acknowledgement for transfer of shares.
ii. To enable assessment of fit and proper the information on ownership/beneficial
ownership as well as other relevant aspects will be extensive.
7.2 Foreign Institutional Investors (FIIs)
i. Currently there is a limit of 10 per cent for individual FII investment with the aggregate
limit for all FIIs restricted to 24 per cent which can be raised to 49 per cent with the
approval of Board/General Body. This dispensation will continue.
ii. The present policy requires RBIs acknowledgement for acquisition/transfer of shares
of 5 per cent and more of a private sector bank by FIIs based upon the policy guidelines
on acknowledgement of acquisition/transfer of shares issued on February 3, 2004. For
this purpose RBI may seek certification from the concerned FII of all beneficial interest.
7.3 Non-Resident Indians (NRIs)
Currently there is a limit of 5 per cent for individual NRI portfolio investment with the
aggregate limit for all NRIs restricted to 10 per cent which can be raised to 24 per cent
with the approval of Board/General Body. Further, the policy guidelines of February 3,
2004 on acknowledgement for acquisition/transfer will be applied.
8. Due diligence process
The process of due diligence in all cases of shareholders and directors as above, will
involve reference to the relevant regulator, revenue authorities, investigation agencies
and independent credit reference agencies as considered appropriate.
Banknet India- Banking Knowledge, Research & Conferences
www.banknetindia.com
9. Transition arrangements
i. The current minimum capital requirements for entry of new banks is Rs.200 crore to be
increased to Rs.300 crore within three years of commencement of business. A few
private sector banks which have been in existence before these capital requirements
were prescribed have less than Rs.200 crore net worth. In the interest of having
sufficient minimum size for financial stability, all the existing private banks should also be
able to fulfill the minimum net worth requirement of Rs.300 crore required for a new
entry. Hence any bank with net worth below this level will be required to submit a time
bound programme for capital augmentation to RBI for approval.
ii. Where any existing shareholding of any individual entity/group of entities is 5 per cent
and above, due diligence outlined in the February 3, 2004 guidelines will be undertaken
to ensure fulfillment of fit and proper criteria.
iii. Where any existing shareholding by any individual entity/group of related entities is in
excess of 10 per cent, the bank will be required to indicate a time table for reduction of
holding to the permissible level. While considering such cases, RBI will also take into
account the terms and conditions of the banking licenses.
iv. Any bank having shareholding in excess of 5 per cent in any other bank in India will
be required to indicate a time bound plan for reduction in such investments to the
permissible limit. The parent of any foreign bank having presence in India, having
shareholding directly or indirectly through any other entity in the banking group in excess
of 5 per cent in any other bank in India will be similarly required to indicate a time bound
plan for reduction of such holding to 5 per cent.
v. Banks will be required to undertake due diligence before appointment of directors and
Chairman/CEO on the basis of criteria that will be separately indicated and provide all
the necessary certifications/information to RBI.
vi. Banks having more than one member of a family, or close relatives or associates on
the Board will be required to ensure compliance with these requirements at the time of
considering any induction or renewal of terms of such directors.
www.banknetindia.com
vii. Action plans submitted by private sector banks outlining the milestones for
compliance with the various requirements for ownership and governance will be
examined by RBI for consideration and approval.
10. Continuous monitoring arrangements
i. Where RBI acknowledgement has already been obtained for transfer of shares of 5 per
cent and above, it will be the banks responsibility to ensure continuing compliance of the
fit and proper criteria and provide an annual certificate to the RBI of having undertaken
such continuing due diligence.
ii. Similar continuing due diligence on compliance with the fit and proper criteria for
directors/CEO of the bank will have to be undertaken by the bank and certified to RBI
annually.
iii. RBI may, when considered necessary, undertake independent verification of fit and
proper test conducted by banks through a process of due diligence as described in
paragraph 8
11. On the basis of such continuous monitoring, RBI will consider appropriate measures
to enforce compliance.
www.banknetindia.com
Annexure 6
Narasimhan Committee Report (1991 and 1998)- Relevant Extracts
Narasimhan Committee Report (1991)
The first Report of the Narasimham Committee (November 1991) on the financial system
has recommended a broad of the structure of the banking system as under.
(a) 3 or 4 large banks (including the State Bank of India) which could become
international in character
(b) 8 to 10 national banks with a network of branches throughout the country engaged in
universal banking;
(c) Local banks whose operations would be generally confined to a specific region; And
(d) Rural banks (including RRBs) whose operations would be confined to the rural and
whose business in financing of agriculture and allied activities.
The Narasimhan Committee was of the view that the move towards this revised system
should be market driven and based on profitability consideration and brought about
through a process of mergers band acquisitions.
Narasimhan Committee Report (1998)
The second Report of the Narasimham Committee (April 1998) on Banking Sector on
the structural issues made following recommendations:
Mergers between banks and between banks and DFIs and NBFCs need to be based on
synergies and locational and business specific complimentaries
of the concerned institutions and must obviously make sound commercial sense.
Mergers of public sector banks should emanate from the management of banks with the
Government as the common shareholders playing a supportive role. Such mergers,
however, can be worthwhile if they lead to rationalization of work force and branch
www.banknetindia.com
network; otherwise the mergers of public sector banks would tie down the management
with operational issues and distract attention from the real issue. It would be necessary
to evolve policies aimed at rightsizing and redeployment of the surplus staff
either by way of retraining them and giving them appropriate alternate employment or
the introduction a VRS with appropriate incentives. This would necessitate the cooperation and understanding of the employees and towards this direction, management
should initiate discussions with the representatives of staff and would need to convince
their employees about the intrinsic soundness of the idea, the competitive benefits that
would accrue and potential for employees own professional advancement in a larger
institution. Mergers should not be seen as a means of bailing out weak banks.
Mergers between strong banks/ FIs would make for greater economic and commercial
sense and would be a case where be a case where the whole is greater than the sum of
its parts and have a force multiplier effect (Chapter V, paras 5.13 5.15)
www.banknetindia.com
Annexure 7
M&A Terminology
Acquisition - The act of one company taking over controlling interest in another
company. Investors often look for companies that are likely acquisition candidates,
because the acquiring firms are often willing to pay a premium to the market price for the
shares.
Allocation - The amount of securities assigned to an investor, broker, or underwriter in
an offering. An allocation can be equal to or less than the amount indicated by the
investor during the subscription process depending on market demand for the securities.
Angel Financing - Capital raised for a private company from independently wealthy
investors. This capital is generally used as seed financing. (See Seed Money)
Balanced Fund - A venture fund investment strategy that includes the investment in
portfolio companies at a variety of stages of development. (See Early Stage, Later
Stage, Leveraged Buyouts, and Seed Money)
Bootstrapping - A means of finding creative ways to support a start-up business until it
turns profitable. This method may include negotiating delayed payment to suppliers and
advances from potential partners and customers.
Business Development Company (BDC) - A vehicle established by Congress to allow
smaller, retail investors to participate in and benefit from investing in small private
businesses as well as the revitalization of larger private companies.
Capital Gains - The difference between an assets purchase price and selling price,
when the selling price is greater. Long-term capital gains (on assets held for a year or
longer) are taxed at a lower rate than ordinary income.
Capital Gains Distribution - A funds distribution of gains from investments to the
investors in the fund. These gains can be distributed in the form of cash or stock.
www.banknetindia.com
Capital (or Assets) Under Management - The amount of capital available to a fund
management team for venture investments.
Cash flow - Cash earnings minus cash outflows for fixed- and working-capital
investment. (Cash earnings are earnings before deducting noncash items, such as
depreciation and amortization.)
Carried Interest - The portion of any gains realized by the fund to which the fund
managers are entitled, generally without having to contribute capital to the fund. Carried
interest payments are customary in the venture capital industry, in order to create a
significant economic incentive for venture capital fund managers to achieve capital
gains.
Closed-end Fund - A type of fund that has a fixed number of shares outstanding, which
are offered during an initial subscription period, similar to an initial public offering. After
the subscription period is closed, the shares are traded on an exchange between
investors, like a regular stock. The market price of a closed-end fund fluctuates in
response to investor demand as well as changes in the values of its holdings or its Net
Asset Value. Unlike open-end mutual funds, closed-end funds do not stand ready to
issue and redeem shares on a continuous basis. (See Initial Public Offering, Mutual
Fund, Net Asset Value, and Open-end Fund)
Common Stock - A unit of ownership of a corporation. In the case of a public company,
the stock is traded between investors on various exchanges. Owners of common stock
are typically entitled to vote on the selection of directors and other important events and
in some cases receive dividends on their holdings. Investors who purchase common
stock hope that the stock price will increase so the value of their investment will
appreciate. Common stock offers no performance guarantees. Additionally, in the event
that a corporation is liquidated, the claims of secured and unsecured creditors and
owners of bonds and preferred stock take precedence over the claims of those who own
common stock. (See Liquidation and Preferred Stock)
Convertible Security - A financial security (usually preferred stock or bonds) that is
exchangeable for another type of security (usually common stock) at a pre-stated price.
Convertibles are appropriate for investors who want higher income, or liquidation
www.banknetindia.com
preference protection, than is available from common stock, together with greater
appreciation potential than regular bonds offer. (See Common Stock, Dilution, and
Preferred Stock)
Dilution - Dilution has two meanings in finance. The first is the process by which an
investors ownership percentage in a company is reduced by the issuance of new
securities. The second is the effect on earnings per share and book value per share if all
convertible securities were converted and all warrants or stock options were exercised.
(See Stock Options and Warrants)
Early Stage - A fund investment strategy involving investments in companies to enable
product development and initial marketing, manufacturing and sales activities. Early
stage investors can be influential in building a companys management team and
direction. While early stage venture capital investing involves more risk at the individual
deal level than later stage venture investing, investors are able to buy company stock at
very low prices and these investments may have the ability to produce high returns. (See
Seed Money)
Exit Strategy - A fund's intended method for liquidating its holdings while achieving the
maximum possible return. These strategies depend on the exit climates including market
conditions and industry trends. Exit strategies can include selling or distributing the
portfolio companys shares after an initial public offering (IPO), a sale of the portfolio
company or a re-capitalization. (See Acquisition, Initial Public Offering and Recapitalization)
Flipping - The act of buying shares in an IPO and selling them immediately for a profit.
Brokerage firms underwriting new stock issues tend to discourage flipping, and will often
try to allocate shares to investors who intend to hold on to the shares for some time.
However, the temptation to flip a new issue once it has risen in price sharply is too
irresistible for many investors who have been allocated shares in a hot issue. (See Hot
Issue and New Issue)
Fund Focus (or Investment Stage) - The indicated area of specialization of a venture
capital fund usually expressed as Balanced, Seed and Early Stage, Later Stage,
www.banknetindia.com
Mezzanine or Leveraged Buyout (LBO). (See all of the stated fund types for further
information)
Fund Size - The total amount of capital committed by the investors of a venture capital
fund.
Holding Period - The amount of time an investment must be held to qualify for capital
gains tax benefits. (See Capital Gains)
Hot Issue - A newly issued stock that is in great public demand. Hot issues usually
experience a dramatic rise in price at their initial public offering because the market
demand outweighs the supply.
Investment Philosophy - The stated investment approach or focus of a fund manager.
Initial Public Offering (IPO) - The sale or distribution of a stock of a portfolio company to
the public for the first time. IPOs are often an opportunity for the existing investors (often
venture capitalists) to receive significant returns on their original investment. During
periods of market downturns or corrections the opposite is true.
Later Stage - A fund investment strategy involving financing for the expansion of a
company that is producing, shipping and increasing its sales volume. Later stage funds
often provide the financing to help a company achieve critical mass in order to position
itself for an IPO. Later stage investing can have less risk than early stage financing
because these companies have already established themselves in their market and
generally have a management team in place. Later stage and Mezzanine level financing
are often used interchangeably. (See Early Stage, Initial Public Offering and Mezzanine
Level)
Leveraged Buyout (LBO) - A takeover of a company, using a combination of equity and
borrowed funds (or loans). Generally, the target companys assets act as the collateral
for the loans taken out by the acquiring group. The acquiring group then repays the loan
from the cash flow of the acquired company. For example, a group of investors may
borrow funds, using the assets of the company as collateral, in order to take over a
company. Or the management of the company may use this vehicle as a means to
www.banknetindia.com
regain control of the company by converting a company from public to private. In most
LBOs, public shareholders receive a premium to the market price of the shares.
LBO funds are important players in the U.S. private equity markets. Leveraged buyout
funds have generated returns by acquiring profitable, stable businesses in more mature
sectors of the economy, or businesses characterized by high cash flows. Leveraged
buyout firms also play an important role as consolidators of large, highly fragmented
industries. Although traditionally LBO funds invested exclusively in mature economic
sectors, recently several prominent LBO firms have extended their focus to more
dynamic industries such as health care services and telecommunications. (See
Acquisition)
Limited Partnerships - An organization comprised of a general partner, who manages a
fund, and limited partners, who invest money but have limited liability and are not
involved with the day-to-day management of the fund. In the typical venture capital fund,
the general partner receives a management fee and a percentage of the profits (or
carried interest). The limited partners receive income, capital gains, and tax benefits.
(See Capital Gains and Carried Interest)
Liquidation - Liquidation has two meanings in finance. The first is converting securities
into cash. The second is the sale of the assets of a company to one or more acquirers in
order to pay off debts. In the event that a corporation is liquidated, the claims of secured
and unsecured creditors and owners of bonds and preferred stock take precedence over
the claims of those who own common stock. (See Acquisition, Common Stock and
Preferred Stock)
Lock-up Period - The period of time that certain stockholders have agreed to waive their
right to sell their shares of a public company. Investment banks that underwrite initial
public offerings generally insist upon lockups of at least 180 days from large
shareholders (1% ownership or more) in order to allow an orderly market to develop in
the shares. The shareholders that are subject to lockup usually include the management
and directors of the company, strategic partners and such large investors. These
shareholders have typically invested prior to the IPO at a significantly lower price to that
offered to the public and therefore stand to gain considerable profits. If a shareholder
www.banknetindia.com
attempts to sell shares that are subject to lockup during the lockup period, the transfer
agent will not permit the sale to be completed. (See Initial Public Offering)
Management Fee - Compensation for the management of a venture fund's activities,
paid from the fund to the general partner or investment advisor. This compensation
generally includes an annual management fee.
Management Team - The persons who oversee the activities of a venture capital fund.
Mezzanine Financing - Refers to the stage of venture financing for a company
immediately prior to its IPO. Investors entering in this round have lower risk of loss than
those investors who have invested in an earlier round. Mezzanine level financing can
take the structure of preferred stock, convertible bonds or subordinated debt (the level of
financing senior to equity and below senior debt). (See Convertible Securities, Early
Stage, Initial Public Offering, Later Stage and Preferred Stock)
Mutual Fund - A mutual fund, or an open-end fund, sells as many shares as investor
demand requires. As money flows in, the fund grows. If money flows out of the fund the
number of the funds outstanding shares drops. Open-end funds are sometimes closed
to new investors, but existing investors can still continue to invest money in the fund. In
order to sell shares an investor usually sells the shares back to the fund. If an investor
wishes to buy additional shares in a mutual fund, the investor must buy newly issued
shares directly from the fund.
Net Asset Value (NAV) - NAV is calculated by adding the value of all of the investments
in the fund and dividing by the number of shares of the fund that are outstanding. NAV
calculations are required for all mutual funds (or open-end funds) and closed-end funds.
The price per share of a closed-end fund will trade at either a premium or a discount to
the NAV of that fund, based on market demand. Closed-end funds generally trade at a
discount to NAV.
New Issue - A stock or bond offered to the public for the first time. New issues may be
initial public offerings by previously private companies or additional stock or bond issues
by companies already public. New public offerings are registered with the Securities and
Exchange Commission. (SEBI in India)
www.banknetindia.com
Open-end Fund - An open-end fund, or a mutual fund, generally sells as many shares as
investor demand requires. As money flows in, the fund grows. If money flows out of the
fund the number of the funds outstanding shares drops. Open-end funds are sometimes
closed to new investors, but existing investors can still continue to invest money in the
fund. In order to sell shares an investor generally sells the shares back to the fund. If an
investor wishes to buy additional shares in a mutual fund, the investor generally buys
newly issued shares directly from the fund.
Option Pool - The number of shares set aside for future issuance to employees of a
private company.
Portfolio Companies - Portfolio companies are companies in which a given fund has
invested.
Post-money Valuation - The valuation of a company immediately after the most recent
round of financing. This value is calculated by multiplying the company's total number of
shares by the share price of the latest financing.
Preferred Stock - A class of capital stock that may pay dividends at a specified rate and
that has priority over common stock in the payment of dividends and the liquidation of
assets. Many venture capital investments use preferred stock as their investment
vehicle. This preferred stock is convertible into common stock at the time of an IPO.
Pre-money Valuation -The valuation of a company immediately prior to the most recent
round of financing.
Private Equity - Private equities are equity securities of companies that have not gone
public (in other words, companies that have not listed their stock on a public exchange).
Private equities are generally illiquid and thought of as a long-term investment. As they
are not listed on an exchange, any investor wishing to sell securities in private
companies must find a buyer in the absence of a marketplace. In addition, there are
many transfer restrictions on private securities. Investors in private securities generally
receive their return through one of three ways: an initial public offering, a sale or merger,
or a re-capitalization.
www.banknetindia.com
Private Securities - Private securities are securities that are not registered and do not
trade on an exchange. The price per share is set through negotiation between the buyer
and the seller or issuer.
Prospectus - A formal written offer to sell securities that provides an investor with the
necessary information to make an informed decision. A prospectus explains a proposed
or existing business enterprise and must disclose any material risks and information
according to the securities laws. A prospectus must be filed with the SEC and be given
to all potential investors. Companies offering securities, mutual funds, and offerings of
other investment companies including Business Development Companies are required
to issue prospectuses describing their history, investment philosophy or objectives, risk
factors and financial statements. Investors should carefully read them prior to investing.
Red Herring - The common name for a preliminary prospectus, due to the red SEC
required legend on the cover
Re-capitalization - The reorganization of a companys capital structure. A company may
seek to save on taxes by replacing preferred stock with bonds in order to gain interest
deductibility. Re-capitalization can be an alternative exit strategy for venture capitalists
and leveraged buyout sponsors.
Reconfirmation - The act a broker/dealer makes with an investor to confirm a
transaction.
Registration - The SECs review process of all securities intended to be sold to the
public. The SEC requires that a registration statement be filed in conjunction with any
public securities offering. This document includes operational and financial information
about the company, the management and the purpose of the offering. The registration
statement and the prospectus are often referred to interchangeably. Technically, the
SEC does not "approve" the disclosures in prospectuses
Restricted Securities - Public securities that are not freely tradable due to SEC/SEBI
regulations.
www.banknetindia.com
Secondary Sale- The sale of private or restricted holdings in a portfolio company to other
investors.
Seed Money -The first round of capital for a start-up business. Seed money usually
takes the structure of a loan or an investment in preferred stock or convertible bonds,
although sometimes it is common stock. Seed money provides start-up companies with
the capital required for their initial development and growth. Angel investors and earlystage venture capital funds often provide seed money.
Series A Preferred Stock - The first round of stock offered during the seed or early stage
round by a portfolio company to the venture investor or fund. This stock is convertible
into common stock in certain cases such as an IPO or the sale of the company. Later
rounds of preferred stock in a private company are called Series B, Series C and so on.
Stock
Options
There
are
two
definitions
of
stock
options.
1. The right to purchase or sell a stock at a specified price within a stated period.
Options are a popular investment medium, offering an opportunity to hedge positions in
other securities, to speculate on stocks with relatively little investment, and to capitalize
on changes in the market value of options contracts themselves through a variety of
options
strategies.
2. A widely used form of employee incentive and compensation. The employee is given
an option to purchase its shares at a certain price (at or below the market price at the
time the option is granted) for a specified period of years.
Syndicate - Underwriters or broker/dealers who sell a security as a group.
Venture Capital - Money provided by investors to privately held companies with
perceived long-term growth potential. Professionally managed venture capital firms
generally are limited partnerships funded by private and public pension funds,
endowment funds, foundations, corporations, wealthy individuals, foreign investors, and
the venture capitalists themselves.
Warrants - The type of security that entitles the holder to buy a proportionate amount of
common stock or preferred stock at a specified price for a period of years. Warrants are
usually issued together with a loan, a bond or preferred stock --and act as sweeteners,
www.banknetindia.com
to enhance the marketability of the accompanying securities. They are also known as
stock-purchase warrants and subscription warrants.
Write-off - The act of changing the value of an asset to an expense or a loss. A write-off
is used to reduce or eliminate the value an asset and reduce profits.
Write-up/Write-down - An upward or downward adjustment of the value of an asset for
accounting and reporting purposes. These adjustments are estimates and tend to be
subjective; although they are usually based on events affecting the investee company or
its securities beneficially or detrimentally
www.banknetindia.com
Annexure 8
Sources and ReferencesWebsites, Publications, Annual Reports, Studies of1. Reserve Bank of India
2. Ministry of Finance
2. State Bank of India
3. Oriental Bank of Commerce
4. Global Trust Bank
5. Indian Bankers Association
6. Banknet India
www.banknetindia.com
Strengths:
www.banknetindia.com