The Reserve Bank of India (RBI) holds the authority to mandate the amalgamation of weaker private sector banks with stronger institutions under Section 45 of the Banking Regulation Act, 1949. This power is exercised in the interest of public welfare, depositor protection, and the overall stability of the banking system. When a bank faces financial distress, the RBI can draft a merger scheme that is shared with stakeholders, including depositors and shareholders, for feedback. After considering their input, the scheme is submitted to the central government for final approval and publication. This process ensures that the interests of all parties are safeguarded while maintaining the smooth operation of the banking sector.
Judicial review of compulsory mergers under Section 45 is notably limited, with courts generally deferring to the RBI’s expertise in banking matters. Legal precedents, such as the Davis Kuriape v. Union of India case, illustrate that the judiciary intervenes only in cases of evident unreasonableness or arbitrariness in the RBI’s decisions. The courts recognize the RBI’s pivotal role in maintaining banking stability, and its decisions are usually upheld. However, the Competition Commission of India (CCI) remains involved in overseeing voluntary bank mergers, emphasizing the collaborative regulation needed to manage the complexities of the banking sector in India.
COMPULSORY AMALGAMATION OF PRIVATE SECTOR BANKS
“The Reserve Bank of India (RBI) has the authority to force the merger of a weaker bank with a stronger one under Section 45 of the Banking Regulation Act.” The public interest, the interests of the bank’s depositors, the appropriate administration of a financial organisation, or the general stability of the banking system may all be the driving forces behind the creation of such a plan. When a bank experiences financial difficulties and is placed under a moratorium order pursuant to Section 45(2) of the Act, the RBI may develop a merger scheme and submit it to the central government with the intention of transferring the bank’s assets and liabilities to a stronger organisation.
The RBI came up with this scheme, which has to be shared with the appropriate financial institutions for any comments or objections. Depositors, shareholders, and other stakeholders can also provide input. The RBI sends the final merger scheme to the central government for approval and publication in the (OG) official gazette after reviewing these comments.
Presenting a notification to both the houses of parliament is another requirement of Section 45 of the Act, which calls for compulsory merger.
As per Section 45 of the BR Act, the RBI started the majority of mergers involving private sector banks during the post-nationalization era in the benefit of the general public. In these cases, banks that were in financial trouble or weaker financially were combined with stronger public sector organisations. Three main factors guided the evaluation of merger proposals: preventing regulatory leniency, ensuring a timely settlement, and protecting the interests of depositors.
Sections 44A and 45 are clearly different from one another. Under compulsory amalgamation, the RBI can combine a bank with another bank, a nationalised bank, SBI, or one of its subsidiaries. On the other hand, a banking company may only merge with another banking company by voluntary merger.
When two banks merge, the former has the right to pursue legal action and may demand that the transferee company abide by Section 45 I sub-section 4 of the BR Act, 1949 and apply under Section 543 of the CA, 1956. This is demonstrated in cases such as Merchants Bank Ltd. v. M. DharamsambarthaniAmogal.[1]
The RBI spearheaded several mergers involving private-sector banks in the post-nationalization era on behalf of the general public interest. In these cases, banks that were in financial trouble or weaker financially were combined with stronger public sector banks. The mergers of United Western Bank and the former Global Trust Bank with public sector organisations are two recent instances.
Even in these situations, a comprehensive assessment was done of the transferee bank’s commercial objectives and how the merger may affect its profitability.[2] In addition, the ICAI has released standards for amalgamations known as Accounting Standard (AS) 14, “Accounting for Amalgamations,” in addition to the regulations of the Banking Regulation Act.[3]
JUDICIAL REVIEW UNDER SECTION 45
In the Davis Kuriape v. Union of India[4]. case, the scope of judicial review under section 45 of the BR Act was examined. The court decided that judicial review is restricted to a very narrow scope when a scheme is developed for amalgamation under Section 45. In particular, the High Court cannot use its writ jurisdiction as an appellate authority over a judgement made by the Reserve Bank under the second proviso of Section 45(5)(i) when there is a disagreement or controversy about the equivalency of experience. It can only step in where there is blatant unreasonableness or arbitrariness.
The Reserve Bank is considered the most qualified judge when it comes to evaluating the equivalency of experience between two merging banks, as the High Court lacks the requisite knowledge and experience in banking operations to take on such a delicate task.
Part IIC of the BR Act, 1949 deals with the Central government’s acquisition of the undertakings of banking companies. “This section was introduced when the government decided to take control of privately operated banking companies. In 1968, the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance was issued, which eventually became the Bank Nationalisation Act in 1969.”
In order to facilitate government acquisitions of private banking firms, Part IIC was created. The Central government is not authorised by Section 36AE to take over a banking company’s operations on its own. The RBI is obligated to produce a report, and it can only do so if the banking company has not complied with Section 21 or Section 35A directions, or if its management has been acting in a manner that is harmful to the interests of its depositor’s.
RESTRICTIONS ON ACQUISITION OF SHARES OR VOTING RIGHTS IN BANKING COMPANIES
Section 12B was added to the BR Act of 1949 by the Banking Laws (Amendment) Act, 2012. The purchase of shares or voting rights in banking companies is restricted under this provision. The interests of the banking company and, by extension, the public interest may be harmed if a person or organisation obtains more than 5% of the voting rights or total paid up share capital without the central government’s consent. In addition the Section 3(2D) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, provides that any relevant new banks’ shares that aren’t owned by the central government have to be freely transferable.
As per Section 3(2D) provides that no person or entity may own more than 20% of the company’s entire paid up share capital at any one time.
AMALGAMATION OF NBFCS WITH BANKING COMPANIES:
As per Chapter III B of RBI Act, 1934, gives the RBI the authority to supervise the NBFC’ and financial institutions’ deposit-taking activities. The RBI has also issued a number of guidelines to control the operations of non-banking financial companies (NBFCs), the most recent of which is the Revised Regulatory Guidelines for NBFCs, which was released on November 10, 2014.[5] In India, the Companies Act, 2013 Sections 232-234 authorise mergers between banks and non-banking companies, with the High Court presiding over these agreements.
Nothing in the Banking Regulation Act requires banks to apply for court orders without first obtaining RBI approval. However, in the event of a merger or acquisition between a bank and NBFC, banking companies must abide by guidelines and directions issued by the RBI. The RBI must also give prior written approval before requesting an order for mergers[6] or amalgamations[7] with other businesses or NBFCs under Section 230-233 of the CA, 2013 or Sections 391-394 of the CA, 1956, as per the RBI’s guidelines on the acquisition of NBFCs.
POLICY OF RBI IN COMPULSORY MERGER OF BANKING COMPANIES
The courts have acknowledged the Reserve Bank of India (RBI) as an expert authority in regulating banking sector within India, as evidenced by way of various legal rulings, directions, circulars etc. The Supreme Court in the case of Peerless General Finance and Investment Co. Ltd v. RBI[8], affirmed the pivotal role of the Reserve Bank in the nation’s economy and financial landscape, emphasizing its primary function of overseeing the banking industry. The supervisory responsibilities entrusted to the RBI have significantly contributed to enhancing the quality of banking services in India, fostering their development along robust lines, and refining operational methodologies.
As previously mentioned, the BR Act of 1949 delineates two categories of mergers: Voluntary and Forced mergers.
Compulsory /Forced merger are instigated by the Reserve Bank with the primary aim of safeguarding the interests of depositors in financially weak banks. When a bank displays signs of financial distress, such as substantial non-performing assets (NPAs) and significant depletion of net worth, the RBI intervenes to merge the struggling bank with a stronger counterpart. It’s important to note that the procedures governing both compulsory under section 45 of the BR Act, 1949and voluntary mergers under section 44-A of the BR Act, 1949are applicable solely to Private Sector Banking Companies.
However, different regulations apply to the merging of PSB, which includes Nationalised Bank and the SBI and its affiliates. Moreover, the Regional Rural Banks Act of 1976 governs the consolidation and merger of Regional Rural Banks.
The RBI’s Function in Private Sector Banking Companies’ Compulsory Mergers:
The RBI is permitted to ask the central-government to halt a banking companys operations and develop a reconstruction or merger scheme in accordance with Section 45 of the BR Act, 1949.
The aforementioned provision makes it possible for two banking companies to merge forcibly without the approval of creditors or members. The RBI must impose a moratorium before the central government can create a plan. The RBI may prepare a merger or amalgamation plan during this moratorium time to protect the interests of different parties and guarantee the banking firm is managed properly. The banking firm, the transferee bank, and any other pertinent banking company participating in the merger process are then given access to the draft scheme created by the RBI. The RBI’s finalised scheme is then sent for the Central Government’s approval, and the Central Government has an option to approve it with or without modifications.
JURISDICTION OF HIGH COURT IN BANK MERGER
A very interesting case came before the High Court of Allahabad[9] concerning the opposition to a moratorium ordered by the Central Government under section 45(2) of the BR Act, 1949, and a plan developed by the RBI under section 45(4). Based on a previous High Court ruling under Section 153 of the CA, 2013, which had authorised a plan by the bank’s creditors and shareholders for its continuance and debt settlement, the petitioner challenged these proceedings. The petitioner contended that the decisions rendered by the High Court, which has jurisdiction over it due to the Companies Act, cannot be superseded by Section 45.
The court dismissed the appeal after rejecting this interpretation and highlighting the fact that Section 45 expressly functions in notwithstanding all other laws. There are many key limitations on the High Court’s jurisdiction and judicial review authority with respect to RBI rulings on merger schemes. In the Himalayan Bank Ltd. v. Roshan Brothers[10] decision, the Supreme Court elucidated the contrast between the jurisdiction of the RBI and the High Court under the BR Act, 1949.
It was decided that the High Court retained jurisdiction to issue orders under section 392 in conjunction with section 391 of the Companies Act, so a petition filed with the court by a bank subject to an approved amalgamation scheme under Sections 45-M and 45-B of the BR Act could be entertained. The court emphasised that in these kinds of situations, the amalgamation scheme functioned as a substitute for liquidation, not as a mechanism of liquidation in its place.
Bank Mergers: CCI vs. RBI: With the Banking Laws (Amendment) Bill, 2011, the RBI (Reserve Bank of India) sought to prevent the CCI (Competition Commission of India) from investigating bank mergers. “The Competition Act, 2002 shall not be applicable to any banking company, the State Bank of India, any subsidiary bank, any corresponding new bank, or any regional rural bank, cooperative bank, or multi-state cooperative bank concerning matters related to amalgamation, merger, reconstruction, transfer, reconstitution, or acquisition under respective Acts,” stated Section 2A of the Bill, “despite any provisions to the contrary in Section 2 of the Banking Regulation Act, 1949[11].” Through this modification, the RBI sought but failed to remove the CCI’s supervision over bank mergers. The Competition Act of 2002’s sections 5 and 6 are not applicable to compulsory mergers under section 45 of the BR Act of 1949 for a period of 5 years, as per a notification released by the Ministry of Corporate Affairs on January 8, 2013. But voluntary mergers in the banking sector still require CCI permission in advance.
Conclusion
The Reserve Bank of India (RBI) holds significant authority under Section 45 of the Banking Regulation Act, 1949, to mandate the merger of weaker private sector banks with stronger entities in the interest of public welfare, depositor protection, and overall financial stability. This authority allows the RBI to formulate and submit a merger scheme to the central government for approval when a bank is under financial distress. The process involves the input of relevant stakeholders, including depositors and shareholders, and culminates in the government’s final approval and publication of the scheme.
Judicial oversight of such compulsory mergers is limited, as demonstrated by various legal precedents, including the Davis Kuriape v. Union of India case. The courts have generally recognized the RBI as the expert authority in banking matters, with limited scope for judicial review unless there is clear evidence of unreasonableness or arbitrariness. This deference to the RBI’s expertise underscores the regulator’s pivotal role in maintaining the stability of India’s banking sector.
The RBI’s role in compulsory amalgamations, particularly in the post-nationalization era, has been crucial in consolidating weaker banks with more robust institutions, thereby safeguarding the interests of depositors and ensuring the continuity of banking services. While the RBI’s decisions in these matters are generally upheld by the courts, the Competition Commission of India (CCI) also plays a role in overseeing voluntary bank mergers, highlighting the interplay between regulatory authorities in managing the complexities of bank mergers in India.
[1] AIR 1966 Mad 26: 78 Mad LW 569
[2] Mukherjee, Arunava, “Analysing the Role of the Central Bank in Bank Merger Regulation in India: A Scrutiny from the US and the EU Perspectives”, World Competition, Vol. 36, Issue 1 (March 2013), pp. 165-184, 36 World Competition 165 (2013)
[3] http://cga.nic.in/writereaddata/CompendiumofAccountingStandards.pdf
[5] RBI Notification- http://rbidocs.rbi.org.in/rdocs/notification/PDFs/RRFNC101114F.pdf
[6] RBI Notification- http://rbidocs.rbi.org.in/rdocs/notification/PDFs/62947.pdf
[7] RBI Notification- http://rbidocs.rbi.org.in/rdocs/notification/PDFs/CM376260514F.pdf
[8]( 1999) 2 SCC 343
[9] Chawla Bank Ltd v.Reserve Bank of India and Ors. (1970) 40ComCas 15(All)
[10] (1961)31ComCas 33
[11]http://www.prsindia.org/administrator/uploads/media/Banking%20Laws/Banking%20Laws%20_A_%20Bill%20-%20SCR%20Summary.pdf
Please Find the Link to Part 1 of the article on Merger & Acquisitions in Banking Sector- Part 1
Please Find the Link to Part 2 of the article on Merger & Acquisitions in Banking Sector- Voluntary Merger- Part 2
Please Find the Link to Part 3 of the article on Merger & Acquisitions in Banking Sector- Compulsory Merger- Part 3 – Vakalat Today
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