Date:13/05/2005 URL: http://www.thehindubusinessline.com/2005/05/13/stories/2005051301470600.htm

Back Merger moves don't go far enough

P. Devarajan

Is it that the RBI will work today's guidelines by quietly nudging small private banks into mergers with the promoters kept out? Can two professional bank boards get together to become one?

THE guidelines on merger and amalgamation of private sector banks "will also be applicable as appropriate to public sector banks," says the Reserve Bank of India.

The detailed operative "Guidelines for merger/amalgamation of private sector banks" from the RBI specifies "that the decision of the merger should be approved by two-third majority of the total board members and not those present alone." Dissenting shareholders have been given a critical and decent say.

The RBI press note says: "A dissenting shareholder is entitled, in the event of the scheme being sanctioned by the RBI, to claim from the banking company concerned, in respect of the shares held by him in that company, their value as determined by the RBI when sanctioning the scheme and such determination by the RBI as to the value of the shares to be paid to the dissenting shareholders shall be final for all purposes." But the operative guidelines for voluntary mergers (at least in the case of private banks) can be operative only if the central bank allows promoters of private banks to freely buy into each other.

That cannot happen going by RBI's two important press notes dated July 2, 2004 (A comprehensive policy framework for ownership and governance in private sector banks) and February 28, 2005 (Guidelines on ownership and governance in private sector banks).

A private sector bank will be allowed to hold shares in any other private sector bank only up to 5 per cent of the paid-up capital of the investee bank, says the RBI. "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," the RBI stipulates.

The RBI is in talks with private sector banks to bring down promoters' stake to 10 per cent over a period of time. In the event can mergers or amalgamations take place? In addition, the RBI has told all private sector banks to raise the minimum paid-up capital to Rs 300 crore.

Diffused ownership of banks (something on which RBI is insisting) will make it hard for two private banks to think of coming together. Can for instance Lord Krishna Bank think of merging with South Indian Bank or with Catholic Syrian Bank? Today's operative guidelines on swap ratios and the rest can work only if private banks are allowed the space to buy stakes. Or is it that the RBI will work today's guidelines by quietly nudging small private banks into mergers with the promoters kept out? Can two professional bank boards get together to become one? That may be not easy.

Today's guidelines can help merger of public sector banks (the Government being the common owner) but that needs the okay of the Finance Ministry and Parliament. If two Government banks get together (Union Bank of India with Bank of India or Indian Bank with Indian Overseas Bank), the Finance Ministry and RBI will have to come up with a scheme under the Nationalised Banks (Management and Miscellaneous Provisions) Scheme, 1970, as provided for in Section 9 (2C) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970. A compulsory Parliament scrutiny allows legislators to insert modifications without scrapping the merger. The Leftists are against any banking reforms while the RBI, in its own inimitable style, has put them in the freezer. Not the best advertisement.