India’s regulatory framework for bank mergers is governed primarily by the Banking Regulation Act, 1949, which provides distinct mechanisms for restructuring banking companies, including compulsory and voluntary amalgamations, acquisitions, and arrangements with creditors. The framework categorizes mergers based on the nature of the entities involved, such as public sector banks, private sector banks, cooperative banks, and regional rural banks. Section 44-A of the Act is pivotal in the voluntary merger of private sector banks, granting the Reserve Bank of India (RBI) significant authority, including the approval of amalgamation schemes and the determination of fair market value for dissenting shareholders. This regulatory environment aims to ensure that mergers are conducted transparently, protecting the interests of depositors and maintaining the stability of the banking system.
REGULATORY FRAMEWORK UNDER BANK MERGER REGIME IN INDIA
India’s Regulatory Framework For Merger Of Bank:
Based on how they were established and how they are owned, commercial banks may be divided into four groups, which together make up the majority of the organised banking system. These banks are located in
- Banks in the private sector,
- The public sector
- Regional rural banks.
- Foreign banks
There are 4 types in which Banking Companies can be restructured under the Banking Regulation Act,1949
(a) Compulsory Amalgamation[1]
(b) Voluntary Amalgamation[2]
(c) Acquisition of banking companies by the Central Government under Part II-C of the Banking Regulation Act,1949.[3]
d) Scheme of arrangement between banking company and its creditors[4]
The merger and acquisition regulations in the Banking industry in India can be categorised as per the nature of the entities involved and of the mergers in the following categories,
(a) Merger between public sector banks
(b) Merger among co-operative banks
(c) Compulsory/ Forced amalgamation of private-sector banks
(d) Acquisition of banking companies by the central government in Part II-C of the Banking Regulation Act,1949
(e) Voluntary amalgamation between private-sector banks
(f) Merger of a NBFC with a private sector bank
(g) Mergers of SBI (State Bank of India) and its associate.
(h) Merger between Regional Rural Bank
Jurisprudential basis for implementing of special provisions to restructure banking Companies under the BR Act, 1949:
The provisions to restructure the banking companies under the Banking Regulation Act, 1949:
Before 1960, bank mergers were only permissible under section 44-A of the BR Act, 1949, based on voluntary agreements. To expedite the integration process, amendments were made to the Act in 1960, introducing additional statutory and regulatory authorities for bank reconstruction or compulsory mergers. The Banking Companies (Second) Amendment Bill, 1960, sought to introduce Section 45 and amend Section 44A subsection 7 of the BR Act, 1949.
VOLUNTARY MERGER OF BANKING COMPANIES
The process of merger between two private sector banking entities falls under the purview of Section 44-A of the BR Act of 1949 governs the merger procedure between two private sector banks. A landmark decision in the case of Bank of Madura, Shareholders Welfare Association v. Governor, Reserve Bank of India and Others by the Madras High Court has confirmed that the Banking Regulation Act’s provisions provide a thorough framework for the combination of banking organisations.
According to Section 44A, no banking company can merge with another banking company, regardless of any other laws, unless a draft scheme for amalgamation is presented to the shareholders of both companies.
Approval of the scheme necessitates that a shareholder pass a resolution by a two-thirds majority present at the meeting to be convened specifically for amalgamation purpose.[5] Once the scheme is duly approved in accordance with Section 44A(2) of the Banking Regulation Act, 1949 requirements, it must be submitted to the Reserve Bank for its approval, and post the approval is received from the Reserve Bank, the scheme or the agreement shall become binding on all shareholders and the companies involved in the amalgamation.[6]
Section 44A sub-section (3) of the BR Act, on the other hand, protects the interests of shareholders who voted against the plan or issued a written dissent. The price of the shares that dissident shareholders will be paid with is decided by the Reserve Bank of India. The two main ways that Section 44A of the BR Act, 1949 differs from the CA, 1956’s requirements are:
First off, the RBI/ Reserve Bank, not the High Court, has the ability to approve the merger between the banking companies.
Second, the market value of shares held by shareholders who rejected the merger plan may be determined or as per the direction of RBI.
Dissident shareholders are entitled to the valuation of share by fair market value, as assessed by the RBI, under Section 44A sub-section 3 of the Banking Regulation Act. It was established that shareholders might request an assessment from the Reserve Bank of India if they were unhappy with the accurate assessment of market value for shares in both companies in the landmark judgment of Bank of Madura Shareholders Welfare Association v. Governor, Reserve Bank of India[7]. The fairness of the scheme’s share exchange ratio would not be examined by the court.
Scope of Section 44 A of the BR, 1949
Only when both the transferor and the transferee firms satisfy the requirements to be considered banking corporations as specified by the BR Act of 1949 does Section 44A of that act come into effect[8]. The Companies Act and the BR Act do not apply to nationalised banks, State Banks of India, regional rural banks, or cooperative banks since they are governed by other laws. The central question in the case of IndusInd Enterprises and Finance Ltd v. IndusInd Bank Ltd. concerned whether the Reserve Bank of India’s prior approval was necessary for the merging of a scheme in accordance with the BR Act, 1949. The merger of a banking Company with a NBFC was the subject of this lawsuit. The High Court of Bombay ruled that obtaining prior approval from the RBI was not necessary for the merger of a NBFC with a banking entity.
VALUATION OF SHARE DURING MERGER UNDER SECTION 44A:
The challenges encountered in determining the valuation of share were extensively provided in the case of In the case of Re: ICICI Ltd.[9] This case involved the formulation of a merger scheme between ICICI Personal Financial Services Ltd. and ICICI Capital Services Ltd. with ICICI Bank Ltd., with the latter being the transferee company. The petitioners, representing the transferor companies, raised two main objections:
- The absence of RBI approval for the amalgamation scheme due to the transferee being a banking company.
- Concerns regarding the proper valuation of shares.
Regarding the first objection, the court ruled that it lacked substance since Section 44A of the Banking Regulation Act is applicable only when both the transferor and transferee companies are banking entities. In this instance, while the transferee company was a bank, none of the transferor companies fell under this category, thus rendering the objection invalid.
Addressing the second objection, the court referenced the Piramal Spg&Wvg. Mills Ltd.[10] case, emphasizing that share valuation is a complex matter requiring specialized skills. Differences in opinion regarding the valuation method are inevitable. However, the court maintained that as long as the valuation is unanimously accepted by all shareholders of both companies, based on assessments by auditors of both the transferor and transferee entities, the fairness of the valuation cannot be questioned. Consequently, the court rejected the application on the basis that the share valuation was unfair to the transferor-company shareholders.
The Presidency Industrial Bank Ltd., Pune was merged with an entity in the May 24, 1962, case of L.M.Devare, Liquidator of Bank of Presidency Industrial Bank Ltd. v. Commissioner of Income-Tax[11]. The RBI authorized a plan under Section 44-A of the BR Act, 1949, which led to this merger. It was decided that all of the bank’s assets—both immovable and movable—as well as its liabilities were transferred as of the merger date.
Under the Banking Regulation Act, there’s a provision that any compromise or arrangement between a banking company and its members, creditors, or any modification thereof, requires certification by the RBI to ensure it’s feasible and doesn’t harm depositors’ interests. Such schemes can only be sanctioned by the High Court if certified by the RBI as workable and not detrimental to depositors’ interests.
“The validity of Section 2(g)(iv) of the Stamp Act, which includes orders made by the RBI under Section 44A of the Banking Regulation Act, 1949 and by the High Court under Section 394 of the Companies Act, 1956, regarding the reconstruction or amalgamation of banking companies and the inter vivos transfer of property, was upheld in the case of Hindustan Lever &Anr v. State Of Maharashtra &Anr[12] by the High Court.”
In the case of Chhatrapati Sambhaji Maharaj SahakariPatsansthaMaryadit v. Assistant Registrar of Co-operative Societies, Satara and Another[13], a similar stand was adopted.
If the RBI finds a solution approved by the Court to be inadequate, it might ask for the banking company to be wound up. The financial institution is required to adhere to the processes outlined in Sections 230 and 231 of the 2013 Companies Act. In accordance with those sections, the Court must get the necessary certificate before authorising such a plan.
When a plan is approved under Section 230 of the Companies Act of 2013—which treats it as an order for winding up—the requirements of Section 340 of the CA 2013 and Section 45H of the Banking Regulation Act apply, protecting the interests of depositors. By application under Section 230 of the CA 2013, the High Court may order the RBI to look into the affairs and behavior of directors of a banking firm, even in cases where the merger is not involved. In response to this directive, the RBI carries out investigations and provides the High Court with findings.
When a compromise or agreement that the court has allowed for a banking firm cannot be implemented properly, either with or without changes, the Reserve Bank of India has the right to present an application for winding-up of the banking company. Sections 230 and 231 of the Companies Act, 2013 require the banking business to follow certain processes. However, the banking business must receive the required certification in accordance with those parts before the Court accepts such a plan.
“In bank mergers, it is essential to guarantee the interests of depositors are protected. The terms of Section 340 of the Companies Act, 2013 and Section 45H of the Banking Regulation Act take effect when a scheme approved for a banking company under Section 230 of the Companies Act, 2013 is approved. The order approving the compromise or arrangement is treated as an order for the winding up of the banking company. A banking firm may request that the RBI look into its affairs and the directors’ behaviour by filing an application under Section 230 of the Companies Act, 2013, which gives the High Court the jurisdiction to order the RBI to do so. Even in cases where there’s no amalgamation involved, the Court can instruct the RBI to conduct inquiries and submit reports. Upon such direction from the High Court, the Reserve Bank is obligated to conduct the inquiries and provide the report to the High Court.”
The Chennai High Court observed in the Bank of Madura Shareholders Welfare Association v. Governor, Reserve Bank of India and Others case that Section 44 A of the BR Act functions as a stand-alone clause and provides a thorough framework for the amalgamation of banking firms. The proposed merger between two banking institutions must provide all relevant information in its amalgamation scheme. After a thorough analysis, it is clear that Section 44A deviates from the Companies Act’s provisions in two key ways:
First off, the RBI has the ability to approve banking company merger schemes; the High Court does not.
Second, the Reserve Bank has the authority to determine the valuation of share in accordance with the market value, of which these shares are held by those shareholders who have expressed disapproval of the plan or who have submitted complaints prior to the banking company’s meeting.
The RBI has approved private-sector bank merging plans in a favourable manner in the recent past. There have been few voluntary mergers of private sector banks thus far, one of which was instigated by the RBI on behalf of the depositors of the previous bank and included the merger of the Federal Bank and Ganesh Bank of Kurundwad.
The First Narasimham Committee said that banks with strong financial standing were involved in the majority of these voluntary mergers. The committee promoted mergers and acquisitions as a way of achieving this restructuring and emphasised profitability considerations in support of a market-driven approach to banking system restructuring.[14]
It was contended in the case of Bombay Gas Company Ltd. v. Hindustan Mercantile Bank Ltd.[15] that the amalgamation scheme is legally binding on all parties, forbidding any modification to the memorandum, in accordance with Section 44A(4) of the Banking Regulation Act. The Court maintained this stance, stating that because the scheme is governed by Section 44-A of the BR Act and involves the transfer of the banking business of merged bank to the resulting bank, together with all it’s asset’s and liabilitie’s, to a nationalised bank, it cannot be deemed applicable under Sub-section (1).
GUIDELINES FOR VOLUNTARY MERGERS BY RBI
The Reserve Bank of India is empowered to consolidate two or more banking companies under Section 44A. These authorities do not apply to voluntary mergers of banking and NBFC, which are regulated under Sections 230 to 232 of the CA, 2013, which need the approval of the merger plan by the High Court or Tribunal.
A non-banking financial company is the transferor in Re: Scheme of Amalgamation of Indusland Enterprises and Finance Ltd. with IndusInd Bank Ltd.[16], whereas a banking company is the transferee. The Court decided that prior clearance from the RBI is still required for the merger in circumstances where one of the firms is not a banking entity.
Based on the Joint Parliamentary Committee’s (2002) recommendations, the Reserve Bank created a Working Group for development of criteria for voluntary mergers between banking organisations. RBI is involved in mergers between banking businesses as well as those between banking companies and non-banking companies.
The RBI released guidelines in May 2005 based on the Group’s recommendations, “outlining various requirements for the process of merger proposals, disclosures, determination of swap ratios, stages at which Boards will participate in the merger process, and finalized norms for promoters’ buying and selling of shares before and during the merger process.” The Reserve Bank’s policy goal is to make sure that factors like a good reason for the merger, systemic advantages, and benefits to the remaining business are carefully assessed. The RBI to consider the financial stability of the two banking firms when approving the scheme of Amalgamation in order to guarantee, among other things, that the combined company would be a significantly stronger bank. [17]
On 11th May, 2005, the Reserve Bank of India released new rules for the merger of private sector banks. These recommendations were accompanied by reference number DBOD. No. PSBS.BC. 89/16.13.100/2004-05. In general, the following elements are covered by the guidelines:
• An amalgamation between two banking companies;
• An amalgamation of banking company with a NBFC;
• An amalgamation of a NBFC with a banking company.[18]
According to Section 44A, “the RBI has the authority to approve banking company’s merger plans; the High Court is not granted with this authority. Furthermore, the market value of shares held by minority shareholders who voted against the merger plan[19] may be ascertained by the RBI. The provisions of section 44A on voluntary amalgamation do not apply in the event of a merger of a nationalised bank or SBI with a banking company, or vice versa, because nationalised banks are not banking companies and SBI is governed by a different statute.”
These mergers must be sought in accordance with the provisions of the relevant law that gave rise to their formation. Furthermore, the provision does not include RBI clearance for a voluntary merger of any other financial business, such a Non-Banking Finance Company, with a banking firm. This results in, only section 44A of the Banking Regulation Act permits a banking company to merge with another banking business. When the RBI is convinced that an amalgamating bank’s plan is beneficial to its depositors, it will often support such a move.
It should be highlighted that the RBI alone has the last word over whether or not to approve the scheme, regardless of the authority of the High Court to negotiate or make arrangements related to the merger between banking organisations. The provisions of the CA, 2013 will apply in the event that any such amalgamation or merger does not involve banking companies, that is, if neither the transferor nor the transferee are banking companies. In this case, the Tribunal—rather than the RBI—will have authority over the issue. Because of the BR Act, bank mergers are specifically excluded from the associated regulatory obligations under the Companies Act.
When a party to the merger is not a bank, there are also exits at the same time. These mergers need court approval in accordance with the applicable sections of the Companies Act, followed by further RBI approval.
Only the transferee company in ICICI Ltd.[20], In re was a banking company, and one of the criticisms made was that the clearance of Reserve Bank’shas not been obtained as needed by the Banking Regulation Act. The High Court of Gujarat held that a cursory examination of Section 44A of BR Act, on the other hand, demonstrates that such objections lack merit since the provisions of that section apply only where both the transferor and the transferee are banking companies. Bank mergers occur in accordance with the BR Act and are not covered by the Companies Act, 2013. Bank mergers occur in accordance with the BR Act and are not covered by the Companies Act, 2013. Nonetheless, the High Court of the State where the companys registered office is situated must first approve any scheme of merger that have been planned between a bank and a company as defined by the CA, 2013 that is not in the banking industry. Subsequently, the plan can only be implemented with RBI clearance.
Conclusion
In conclusion, the regulatory framework governing bank mergers in India is intricate and tailored to the specific nature of the entities involved. The Banking Regulation Act, 1949, provides a comprehensive legal structure, particularly under Section 44A, for voluntary mergers between banking companies, emphasizing the role of the Reserve Bank of India (RBI) as the key authority in approving these mergers. The distinction between banking companies and other entities, such as non-banking financial companies (NBFCs), dictates the applicable legal provisions, with the Companies Act, 2013 coming into play for mergers involving non-banking entities.
The jurisprudential evolution, as seen in landmark cases like the Bank of Madura and ICICI Ltd., reinforces the RBI’s pivotal role in ensuring the stability and fairness of mergers, especially in safeguarding shareholder and depositor interests. Additionally, the RBI’s guidelines, shaped by recommendations from various committees, underscore the importance of financial stability and systemic benefits in the approval process.
The regulatory framework thus seeks to balance the need for consolidation and growth in the banking sector with the imperative to protect stakeholders, particularly depositors, ensuring that mergers contribute to a stronger, more resilient banking system.
[1] Sec 45 of the BR Act, 1949
[2] Sec 44A of the BR Act, 1949
[3] Sec 36AE to 36AJ of the BR Act,1949
[4] Sec 44B of the BR Act,1949
[5] Sec 44A( 2) of the BR, 1949
[6] Sec 44 A( 3 ) of the BR, 1949
[7]2002(4)Bom CR450
[8] Sec. 5(c ) of BR Act, 1949 “Banking company means any company which transacts the business of banking in India”
[9] 2002(4)Bom CR450
[10] [1980] 50 Comp Cas.514
[11] 1998 234 ITR 813 Bom
[12] 1961 AIR 689 1961 SCR (2) 590
[13] Writ Petition No. 1883 OF 2011
[14] Joshi Vijay & Goyal Dr. K.A. (2011), “Mergers in Banking Industry of India: Some Emerging Issues”, Asian Journal of Business and Management Sciences, Issn: 2047-2528, Vol. 1 No. 2, pp.157- 165
[15] [1980]50CompCas202(Cal)
[16] [2004]120CompCas457(Bom)
[17] Sampath, K.R., “Law and Procedure on Corporate Restructure leading to Mergers/Amalgamation, Takeovers, Joint Ventures LLPs and Corporate Restructure”, Snow white, 7th Edn. (2011), pp.1311- 1312
[18] RBI Notification- http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=2247&Mode=0
[19] N V Narasimham, Kuriakose Sony & Raju M.S. Senam. (2009), “Voluntary Amalgamations in Indian Banking Sector: Valuation Practices and Adequacy of Swap Ratios”,- http://Papers.Ssrn.Com/Sol3/Papers.Cfm?Abstract_Id=1653698
[20] 119 Com Cases 941
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