MERGER OF ICICI BANK WITH ICICI LTD.

ICICI was formed in 1955 at the initiative of the World Bank, the Government of India and representatives of Indian Industry. The principal objective was to create a development financial institution for providing mediumterm project financing to Indian businesses. In the 1990s, ICICI transformed its business from a development financial institution offering only project finance to diversified financial services group offering a wide variety of products and services, both directly and though a number of subsidiaries and affiliates like ICICI Bank. In 1999, ICICI became the first Indian company and the first bank or financial institution from non-Japan Asia to be listed on the NYSE. It is Indias second-largest bank with total assets of about Rs. 146,214 crore at December 31, 2004 and profit after tax of Rs. 1,391 crore in the nine months ended December 31, 2004 (Rs.1,637 crore in fiscal 2004). ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialized subsidiaries and affiliates in the areas of investment banking, life and non-life insurance, venture capital and assets management. ICICI Bank set up its international banking group in fiscal 2002 to cater to the cross border needs of clients and leverage on its domestic banking strengths to offer products internationally, ICICI Bank currently has subsidiaries in the United kingdom and Canada, branches in Singapore and Bahrain and representative offices in the United States, China, United Arab Emirates, Bangladesh and South Africa. ICICI Banks equity shares are listed in India on the Stock Exchange, Mumbai and the National Stock Exchange of India Limited and its American Depository Receipts (ADRs) are listed on the New York Stock Exchange (NYSE). ICICI Bank was originally promoted in 1994 by ICICI Limited an Indian financial institution and was its whollyowned subsidiary. Purpose of Strategic Move After consideration of various corporate structuring alternatives in the context of the emerging competitive scenario in the Indian banking industry, and the move towards universal banking, the managements of ICICI and ICICI Bank formed the view that the merger of ICICI with ICICI Bank would be the optimal strategic alternative for both entities, and would create the optimal legal structure for the ICICI groups universal banking strategy. The ICICI universal bank will control assets of Rs. 940 billion surpassed only by SBIs Rs. 3.16 trillion and ahead of their-placed state-run Industrial Development Bank of India with Rs.718 billion. For ICICI, it is a great benefit as it would have access to the low-cost funds of the bank. FIs, especially ICICI, have been trying to become universal banks with an eye on cheap funds. At present they do not have access to lowcost saving and current account funds, the mainstay of banks. The merger would enhance value for ICICI through the merged entitys access to lowcost deposits, great opportunities for earning fee-based income and the ability to participate in the payments system and provide transaction banking services. The

merger would enhance value for ICICI bank through a large capital base and scale of operations, seamless access to ICICIs strong corporate relationships built up over five decades, entry into new business segments, higher market share in various business segments, particularly fee-based services, and access to the vast talent pool of ICICI and its subsidiaries. Circumstance Leading to Strategic Action Analysts say ICICI wants to merge with its banking subsidiary to obtain access to cheaper funds for lending, and to increase its appeal to investors so that it can raise capital needed to write off bad loans. This is basically a survival move from ICICI, as their core business doesnt look too good and they need some kind of a bank because only a bank has access to low-cost funds, said an analyst with a foreign brokerage. As of March 31, ICICI had Rs. 637.87 billion in outstanding loans. But net loans or total loans less dud loans already written off- stood at Rs. 575.06 billion, of which a further 5.2 per cent or Rs. 28.7 billion of loans were classified as doubtful or sub standard. By contrast, only 1.31 per cent of ICICI Banks loans looked dodgy. The bad loan figure for the merged entity is estimated at 3.5 per cent, which would be the second lowest in the Indian banking industry after the three per cent at HDFC Bank, says an investment fund manager. ICICIs asset quality could deteriorate over the next year or two as steel and textile makers fail, said an analyst with a foreign brokerage. That would require more capital. Loans and loan guarantees to companies in the steel and textile industries account for nearly a fifth of ICICIs outstanding loans. Its very difficult to expect them to service the loans, said another analyst working for a foreign brokerage. The amount is so large I expect they (ICICI) will need to raise $ 1 billion over the next couple of years. CHEAP CASH Another reason for merging is to get access to cheaper funds after the Reserve Bank of India last Monday said it would begin processing applications to create universal banks. Current rules prohibit ICICI and other long-term lenders from raising deposits of less than one-year maturity, which usually pay lower rates of interest. But that restriction is not applicable to commercial banks. That would enable ICICI to compete more effectively in the retail finance market dominated by banks, to compensate for slowing loan demand from corporations and for big projects.

THE PROCESS ADOPTED Precisely, in October 2001, the Board of Directors of ICICI and ICICI Bank approved the merger of ICICI and two of its wholly-owned retail finance subsidiaries, ICICI Personal Financial Services Limited and ICICI Capital Services Limited, with ICICI Bank. The merger was approved by shareholders of ICICI and ICICI Bank in January 2002, by the High Court of Gujarat at Ahmedabad in March 2002, and by the High Court of Judicature at Mumbai and the Reserve Bank of India in April 2002. Consequent to the merger, the ICICI groups financing and banking operations, both wholesale and retail, have been integrated in a single entity. A meeting of the equity shareholders of ICICI Limited (NYSE:I C) was held on January 30, 2002 at Mumbai (India) in terms of the order of the High Court of Judicature at Bombay (the Court), to consider the scheme of Amalgamation (the scheme) of ICICI Personal Financial Services limited with ICICI bank Limited (NYSE:IBN). On January 31, 2002, Mumbai, in terms of the order of the Court, the approval of the shareholders for the scheme was sought through the process of ballot. The Scheme was approved by an overwhelming majority of 99.9 percent of the votes polled by shareholders present and voting at the meeting. The scheme was earlier approved by the shareholders of ICICI Bank at their meeting held on January 25, 2002 at Vadodara. The scheme was further subject to the approval of the High court of Judicature at Bombay, the High Court of Gujarat at Ahmedabad, Reserve Bank of India and such other authorities as may be required. The scheme would come into effect from the date on which the Reserve Bank of Indias approval becomes effective or the Effective Date of the Court order, whichever is later. Terms Finalized The merger ratio was set at two ICICI shares for every one ICICI Bank share. The ICICI, as a universal bank control assets of Rs. 940 billion. The merged entity has a capital base of Rs. 95 billion, 8,300 employees and a huge nationwide branch network. Consequent to the merger of ICICI with ICICI Bank, the Board of Directors of ICICI Bank is proposed to be reconstituted in compliance with the Banking Regulation Act, 1949 and in accordance with best practices in Corporate Governance. IT is proposed that Mr. N. Vague as the non-executive Chairman would head the Board of Directors of the merged entity. The executive management at the Board level would comprise Mr. K.V. Kamath as Managing Director and Chief Executive Officer, Mr. H.N. Sinor and Mrs. Lalita D. Gupte as Joint Managing Directors and Mrs. Kalpana Morparia, Mr. S Mukherji, Mrs. Chanda D. Kochhar and Dr. Nachiket M. Mor as Executive Director, The executive management at the Board level would not constitute more than one-half of the total strength of the Board.

Basis of Terms Finalized The share exchange ratio approved by the Boards of the two entities was based on a valuation process incorporating international best practices in respect of a merger of two affiliate companies. JM Morgan Stanley was appointed by ICICI to advise it on a fair exchange ratio, while ICICI Bank appointed DSP Merrill Lynch for the same purpose. Thereafter, ICICI and ICICI Bank jointly appointed the leading accounting firm, Deloitte, Haskins Sells to recommend the final share exchange ratio to the Boards of the two entities. Results of implementation of the Strategy ICICI Bank after its merger with the parent ICICI, has emerged as the second largest bank in the country after SBI in terms of asset size. The bank is a professionally managed entity and provides a range of corporate and retail banking services. ICICI Bank also prides itself as the first universal bank in the country due to the fact that it provides a wide variety of services. It is also the first Indian bank to offer Internet banking and also the first to get listed on the NYSE. Business: After its merger in FY02, ICICI Bank has reoriented its focus towards the fast growing retail sector (36% of advances). In this process, the bank has reduced its exposure to the corporate segment both on the assets as well as the liabilities side. The bank has aggressively focused on reducing its interest expenses by concentrating on the retail segment in order to raise low cost demand and savings deposits. ICICI Bank has, thus, over the last 2-3 years emerged as one of the largest players in the retail segment. While the bank has aggressively targeted the retail segment off late, it still has a large exposure to the corporate segment, especially sectors like steel, chemicals and textiles (38% of total advances). This has led to high level of NPAs for the bank. In fact, after its merger with ICICI, ICICI Banks NPAs have risen further. They currently stand at over 4% and, compared to its peers like HDFC Bank, UTI Bank, this ratio indicates poor performance from ICICI Bank. Strong retail focus: After the merger with parent ICICI, ICICI Bank is focusing strongly on the retail segment in order to fuel its growth for the future. The bank has been very aggressive in this segment, so much so that retail assets now make up nearly 48% of total advances of the bank. ICICI Banks market share in incremental retail loans disbursed is close to 30%. Wide reach: ICICI Bank has been on an expansion spree during the last year and in this period it has seen its branch size increase to around 540 branches. The bank is also leveraging on a large ATM network in order to augment its reach further. At the end of FY03, the bank had an ATM network of over 1,500 ATMs spread across the country. Restructuring operations: In an effort to reduce its interest costs ICICI Bank undertook an exercise to reduce its parent ICICIs high cost liabilities. In this offer the bank has met with significant success. ICICI Bank has paid back a large part of ICICIs long-term high cost borrowing and replaced it with low cost deposits. This has helped the bank to improve its interest spread to 1.5% (FY03) from 1.2% in FY02.

Bearing the excesses of the Past: The reverse merger of its parent is likely to impact the asset quality and financial ratios of the bank. ICICI Banks high non-performing assets (NPAs) will impact the earnings growth of the combined entity until the NPAs are completely written off. In FY03, ICICI Banks net NPA to advances ratio stood at 4.9%. Subsidiary concerns: One of the concerns regarding the bank is the state of its subsidiaries, especially the life insurance subsidiary. ICICI Banks insurance subsidiary is loss making and being in the insurance business it may be a while before it breaks even. Till then it will continue to remain a drag on the banks finances. The subsidiary reported a net loss of Rs 1 bn in FY03. GAINS (a) Acquirer (merger gains for ICICI bank) Forward leap in the hierarchy of Indian Banks. Achieve size and scale of operations by leveraging ICICIs capital and client base for higher fee income and higher profitability by leveraging on technology and low cost structure and access to its talent pool. Offer a complete product suite with immense cross-selling opportunities through ICICIs presence in retail finance, insurance, investment banking and venture capital. On April 4, 2005 ICICI Bank with free float market capitalization of about Rs. 30800 billion (US $ 700 billion) ranked third amongst all the companies listed on the Indian stock exchange. Acquired (merger gains for ICICI) Improved ability to further diversify asset portfolio and business revenues. Lower funding costs through ability to accept / offer checking accounts, availability of float money through active participation in payment system and diversified funds raising through access to retail funds. Increased fee income opportunities facilitated by the ability to offer all baking products. Competitive advantages of the merged bank with an asset base of nearly Rs.1 lakh crores and being the 2nd largest bank next only to SBI will be 1. Vast talent pool. 2. Technology enabled distribution architecture. 3. Low operating costs. 4. Extensive customer relationships and strong brand franchise. 5. Complete product suite. 6. Large capital base. 7. ICICIs retail operation (ICICI PFS and ICICI Capital Services) will be merged with ICICI Bank. 8. To summarise, the merger will create a strong entity that will redefine banking in the highly competitive era of globalization and liberalization.

(b)

(c) Gains to shareholders of acquirer (ICICI Bank) The merger would enhance value for shareholders of ICICI Bank through the large capital base and scale of operations, access to ICICIs strong corporate relationship built up over five decades, entry into new business segments, higher market share in various business segments, particularly fee-based services, and access to the vast talent pool of ICICI and its subsidiaries.. (d) Gains to shareholders of acquired (ICICI) The merger would enhance value for shareholders of ICICI through the merged entitys access to low-cost deposits, greater opportunities for earning fee-based income and the ability to participate in the payments system and provide transaction-banking services. (e) Gains to Customers Wide Reach: At the end of FY03, the bank had an ATM networks of over 1,500 ATMs spread across the country. So it is easy for customers to withdraw money. Restructuring Operation: The bank is giving loans, etc. at a very nominal rate. (f) Gains to managers and other employees: For both organizations, they are at an advantage, for they are getting experience to work under a universal bank which offers growth and also increase in salary is expected. Gains to government: In 1999, ICICI became the first Indian company and the first bank or financial institution from non-Japan Asia to be listed on the NYSE. Moreover, ICICI has the following advantages. 1. Strong brand identity. 2. Technologyenabled delivery channels as reflected in the largest ATM network in India and the highest number of Internet banking registrations. 3. Large product suite largest auto financier, largest incremental issuer of credit, debit and ATM cards. 4. Amongst the first banks in India to commerce lead generation for insurance products. So, it has international acceptance and helps government in foreign dealings with the experience it has and also with its international reputation. (h) Gains for society at large: Economies of scale though volumes in operating costs Economies and technology development. of scope through large product suite and cross-selling potential. Optimization of human and financial capital.

(g)

Also, ICICI Bank is Indias second-largest bank with total assets of about Rs. 146,214 crore on December 31, 2004 and profit after tax of Rs. 1,391 crore in the nine months ended December 31, 2004 (Rs.1,637 crore in fiscal 2004). ICICI Bank has a network of about 530 branches and extension counters and over 1,880 ATMs. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialized subsidiaries and

affiliates in the areas of investment banking, life and non-life insurance, venture capital and asset management. So, as its a growing organization. Other than a lot of products and services, ICICI also provides opportunity for employment, growth, security for money, wide area for investment in various fields and, thus, helps society in improving its standards of living. Losses due to merger: This merger is a joint decision by the management of the companies. ICICI Ltd. is at an advantage as compared to ICICI Bank. This is because as of March 31, ICICI had Rs. 637.87 billion in outstanding loans. But net loans-or total loans less dud loans already written off-stood at Rs. 575.06 billion, of which a further 5.2 percent or Rs. 28.7 billion of loans were classified as doubtful or substandard. By contrast, only 1.31 per cent of ICICI Banks loans looked dodgy. So, post merger ICICI Banks balance sheet condition would deteriorate as compared to its pre-merger condition.