CONSOLIDATION IN THE INDIAN BANKING SYSTEM-
Legal, Regulatory and other issues
SEPTEMBER 2004

Preface

The prevalence and success of consolidation in the banking sector all across the world and the compulsions imposed by globalization will make this dictum more visible in the Indian financial system in the near future. The financial sector reforms set in motion in 1991 have greatly changed the face of Indian banking. While the banking system in India has done fairly well in adjusting to the new market dynamics, it would not be clichéd to reiterate that greater challenges that lie ahead.

The financial sector would be open to international competition once the tone for the rules of the game are set under the WTO. Banks will have to gear up to meet stringent prudential capital adequacy norms under Basel-II as they compete with banks with greater financial strength.

In the past, mergers were initiated by regulators to protect the interest of depositors of weak banks. But it is now expected that market led mergers may gain momentum in the coming years. The smaller banks with firm financials as well as the large ones with weak income statements would be the obvious targets for the larger and better run banks. The pressures on capital structure in particular is expected to trigger a phase of consolidation in the banking industry and the pace would be swifter than we can conceive of today.

In the IBA document "Banking Industry: Vision 2010", it is visualized that mergers between the public sector banks, or public sector banks and private sector banks, could be the next logical thing to happen as market players tend to consolidate their position to remain in the competitive race. The system needs to be prepared for such a scenario and in this context it was felt that there is a need to revisit the regulatory, legal, accounting and HR related issues which may arise in the process of consolidation in Indian Banking System. The Chairman of IBA, therefore constituted a Working Group consisting of following members to assess the prevailing structures and suggest alternatives.

Background

The idea of consolidation in banking is not really a novel in the Indian context and the Narasimham Committee Report (1991) had quite a bit to say on this phenomenon in the context of financial sector reforms in the country. However, given the other imperatives confronting the system, it was necessary to address issues such as balance sheet management, liberalization, global compulsions etc. before taking on the issue of consolidation. Therefore, while this is the appropriate time to address the issue, it is instructive to look at what the Committee had to say at different points on time during the last decade as these would serve as guiding blocks for future policy frameworks.

Narasimham Committee Report (1991)
The first Report of the Narasimham Committee (November 1991) on the financial system had recommended a broad pattern 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 areas and whose business would be predominantly engaged in financing of agriculture and allied activities.

The Narasimham Committee was of the view that the move towards this revised system should be market driven and based on profitability considerations and brought about through a process of mergers and acquisitions.

Narasimham Committee Report (1998)
The second Report of the Narasimham Committee (April 1998) on Banking Sector Reforms 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 managements of banks with the Government as the common shareholder playing a supportive role. Such mergers, however, can be worthwhile if they lead to rationalization of work force and branch 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 by introducing a VRS with appropriate incentives. This would necessitate the co-operation and understanding of the employees and towards this direction, managements 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 the scope 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 the whole is greater than the sum of its parts and have a "force multiplier effect". (Chapter V, paras 5.13-5.15)".

It can hence be seen from the recommendations of the Narasimham Committee that mergers of the public sector banks were expected to emanate from the managements of the banks with the Government as common shareholder playing a supportive role. Although there may not have been any specific directive from the Government or the Reserve Bank of India to the banks to explore the possibility of such mergers, the banks could have initiated a dialogue for such merger and seek Government's nod for the same. Be that as it may, to facilitate the process of consolidation, Indian Banks' Association decided to list out the issues that may arise while undertaking actual mergers and also suggest solutions to any problems that may be encountered.

Scheme of the Paper
The structure of the paper is as follows. The existing legal framework is evaluated to begin with in Section 1 before weighing the options for the process of consolidation. Specifically, the focus is on corporatisation of the public sector banks and its implications in Section 2. The paper then looks at the options under the existing legal framework wherein the powers of the central government and the role of the RBI are explored in Section 3. The consolidation/mergers of various categories of banks are detailed in Section 4, while Section 5 debates the HR and Accounting issues that need to be evaluated. Finally, Section 6 summarizes the conclusions drawn by the Working Group.

Section 1: Existing Legal Framework
1.1 Banking institutions operating in India are governed by different statutory provisions depending upon their status as a body corporate established by an Act of Parliament or a banking company and such statutes are relevant for the purpose of consolidation of such banking institutions by acquisitions and mergers. It is necessary to take note of the existing legal environment under which the banks are operating in India before various aspects relating to mergers of entities and acquisition of banking institutions can be examined.
1.2 In commercial banking parlance banks are categorized as scheduled and non-scheduled banks, private sector and public sector banks, etc. For the purpose of assessment of performance of banks the Reserve Bank of India categorizes banks as public sector banks, old private sector banks, new private sector banks and foreign banks. But as far as the legal status of the banks is concerned the categorization is with reference to the statute under which they are constituted. They care classified as nationalized banks, banking companies, SBI and its subsidiaries, RRBs, Cooperatives and Multi-state cooperative banks. The detailed classification is provided in Appendix 1.
There are two sets of regulatory issues that need to be highlighted here which come under the purview of the RBI (as under the Banking Regulation Act) and SEBI.

1.3 Compliance with Regulations of the Banking Regulation Act

As the provisions of the Banking Regulation Act now stand, there is no provision for obtaining approval of the Reserve Bank of India for any acquisition or merger of any financial business by any banking institution. In other words, if a banking institution desires to acquire a non-banking finance company or a company doing credit card business there is no requirement of approval of the Reserve Bank of India. However, for a regulator, it is a matter of concern to ensure that such acquisitions or mergers do not adversely affect the concerned banking institutions or the depositors of such banking institutions. It may be further stated that in case of a merger of an all India financial institution with its own subsidiary bank, there was no express requirement of obtaining the approval of the Reserve Bank of India for such merger, under the provisions of the Banking Regulation Act or the Reserve Bank of India Act. Such approval of the Reserve Bank of India was required only in the context of relaxation of regulatory norms to be complied with by a bank.

It is desirable that an omnibus provision is made in the BR Act requiring any banking institution to obtain prior approval of the Reserve Bank of India before acquiring any other business or any merger or amalgamation of any other business of banking institution or non-banking financial institution, with absolute rights to Reserve Bank of India to finalise the swap ratio which should be made binding on all concerned.

1.4 Compliance with Regulations of the Securities and Exchange Board of India (SEBI)
The various regulations framed by the Securities and Exchange Board of India (SEBI) in relation to raising money from the investors are not necessarily related to the status of any entity seeking to raise funds from the public. The regulations apply to the companies registered under the Companies Act as well as to corporations established by Acts of Parliament by virtue of listing agreements. It is for this reason that corresponding new banks increasing capital by issue of shares to the public are required to comply with SEBI regulations in spite of the fact that the other provisions of the Companies Act in regard to issue of shares, etc. do not apply to the corresponding new banks. In view of this position in respect of acquisitions and mergers of any banking institutions whose shares are listed at the Stock Exchanges will be required to comply with all the relevant regulations of SEBI.

Section 2: Options for Consolidation: Corporatisation
2.1 As can be seen from the various statutory provisions listed out in the above paragraphs, the banking institutions are operating under different laws and any acquisition or merger of such banking institutions will be governed by the respective statutes under which they are constituted as well as any other general law such as the Companies Act which may be applicable if one of the institutions being acquired or merged is a banking company. Keeping in view the complexities involved in complying with various statutes the Working Group examined different options for facilitating consolidation in the banking system. Corporatisation of public sector banks was seen as a viable option, but this has to be seen as a long-term objective considering the fact that changing the statute would require political consensus to be evolved on the issue. Therefore, the group has also looked at short-term solutions which could be thought of under existing legal framework. The long term and short-term options considered by the group are discussed in the paragraphs below.

2.2 Corporatisation of Public Sector Banks (PSBs)
Corporatisation can be looked at from the point of view of the SBI. Its subsidiaries and other public sector banks as well as RRBs and financial institutions.

Section 3: Consolidation under existing Legal Framework

Consolidation under the existing framework could be looked in the context of the power of the SBI, powers of the central government, approvals from the RBI etc.
3.1 Power of State Bank of India
· Section 35 of the State Bank of India Act, 1955 confers power on State Bank of India to enter into negotiation for acquiring business including assets and liabilities of any banking institution with the sanction of the Central Government and if so directed by the Government in consultation with the Reserve Bank of India.
· The terms and conditions of acquisition as approved by the Central Board of the State Bank of India and the concerned banking institution and the Reserve Bank of India is required to be submitted to the Central Government for its sanction.
· The Central Government is empowered to sanction any scheme of acquisition and such scheme of acquisition becomes effective from the date specified in the order of sanction.
· There is a provision for payment of consideration for the acquisition of the business and the assets and liabilities of any banking institution, either in cash or by allotment of shares in the capital of State Bank of India.
· A specific provision is made that with such acquisition no employee of the acquired banking institution shall be entitled to any compensation under the Industrial Disputes Act or any other law if such employee accepts any offer of appointment by State Bank of India on such terms and conditions as may be proposed by State Bank of India.
· The Central Government is also given a power to appoint a suitable person to take over the management of a banking institution to be acquired for the purpose of winding up of its affairs and distributing its assets and any expenses in connection with such management shall be met out of the assets of the banking institution or by State Bank of India as the Central Government may direct.
· With the appointment of a suitable person the takeover of management of any banking institution the Central Government is also given the power to issue directions to be followed by such person and any provisions of the BR Act, 1949 or the Companies Act or any other law for the time being in force shall cease to apply to the extent they are inconsistent with the directions issued by the Central Government.
· The person appointed by the Central Government have to take over the management is also authorized to take such other steps as are necessary to wind up the banking institution and all persons holding office as a manager or director cease or deemed to have vacated such office on the issue of directions by the Central Government.
· On winding up affairs of the banking institution the Central Government can pass an order in writing declaring that such banking institution stands dissolved notwithstanding anything contained in any other law.
· For the purpose of the above provisions banking institution is defined by sub-section (13) of section 38 as under: "In this section "banking institution" includes any individual or any association of individuals (whether incorporated or not or whether a department of Government or a separate institution), carrying on the business of banking."
3.2 It may be noted from the powers of acquisition conferred on State Bank of India that there is no specific mention of a corresponding new bank or a banking company in the definition of banking institution. It is not clear whether under the provisions of section 35, State Bank of India can acquire a corresponding new bank or a RRB or its own subsidiary for that matter. Such a power may have to be presumed by interpreting the definition of banking institution in widest possible terms to include any person doing business of banking. It can also be argued that if the State Bank of India is given a power to acquire the business of any individual doing banking business it should be permissible to acquire any corporate doing banking business subject to compliance with the law which is applicable to such corporate. But in our view it is not advisable to rely on such interpretations in the matter of acquisition of business of banking being conducted by any company or other corporate. Any such acquisition affects right to property and rights of many other stakeholders in the organisation to be acquired. The powers for acquisition are therefore required to be very clearly and specifically provided by statute so that any possibility of challenge to the action of acquisition by any stake-holder are minimized and such stake holders are aware of their rights by virtue of clear statutory provisions.
3.3 Provisions on the lines of section 35 of the State Bank of India Act are also contained in section 38 of the State Bank of India (Subsidiary Banks) Act, 1959. The said provisions are on the same lines as section 35 of State Bank of India Act including the definition of banking institution. The observations made in the above paragraph therefore apply to the powers of acquisition of banking institution by any subsidiary bank of State Bank of India, also.
3.4 While the provisions contained in the two Acts governing the State Bank of India and its subsidiaries specifically provide for power to acquire business of other banks no such power is provided in the two Acts constituting corresponding new banks or in the RRB Act, 1976. As far as the banking companies are concerned section 44A of the BR Act makes a provision for amalgamation of banking companies but there is no specific provision for acquisition of banking business of any other bank by any existing banking company, on the lines of the provisions contained in SBI Act.
3.5 The Working Group also considered whether the provisions of Section 44A of the Banking Regulation Act, 1949 can be extended to all the banking institutions by adding the said provisions in Section 51 of the Banking Regulation Act, which specifies the various provisions of the Act that apply to State Bank of India, its Subsidiaries, corresponding new banks, regional rural banks and also co-operative banks. It was noted that addition of Section 44A of the Banking Regulation Act in Section 51 will require an amendment to the Banking Regulation Act and such an addition cannot be done by issuing a notification by the Central Government in the Official Gazette. In any event, extending the provisions of Section 44A to all the banking institutions will have to be done after reconciling provisions relating to amalgamation contained in the respective statutes by which such banking institutions are constituted. As a short-term measure, therefore, it is not possible to issue a notification for extending the provisions of Section 44A of the Banking Regulation Act to all the banking institutions.
3.6 Powers of Central Government to Reconstitute or Amalgamate Corresponding new banks
Section 9(2)(c) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 empowers the Central Government to frame a scheme in consultation with the Reserve Bank of India for the following purposes:
· the reconstitution of any corresponding new bank into two or more corporations
· the amalgamation of any corresponding new bank with any other corresponding new bank or with another banking institution
· the transfer of the whole or any part of the undertaking of a corresponding new bank to any other corresponding new bank or banking institution
or
· the transfer of the whole or any part of the undertaking of any other banking institution to a corresponding new bank
For the purposes of above section, a banking institution means a banking company and includes State Bank of India or a subsidiary bank, in terms of Explanation I below sub-section (5) of section 9. The provision contained in the Bank Nationalisation Acts empowers Central Government to amalgamate any two corresponding new banks or a corresponding new bank with the State Bank of India or any of its subsidiaries or any banking company, is, a very wide power but the Acts are silent in regard to the role of the Board of Directors of the banks in initiating the process of amalgamation. Any amalgamation will affect the rights of shareholders and in the case of corresponding new banks such shareholders being the Central Government any negotiations for amalgamation will have to be initiated with the approval of the shareholders.
3.7 It is also provided by sub-section (5) of section 9 that on formulation of the scheme under section 9(2)(c) the scheme shall be binding on the concerned corresponding new bank or corporation or banking institution and also on the members, if any, depositors, corporates and employees or any other persons having any right or liability in relation to any of them. The section further provides that all properties and assets of the transferor bank or institution shall stand transferred to and become liabilities of the transferee bank.
3.8 Any scheme framed under the Nationalization Act is required to be placed before the Parliament and is subject to the approval of the Parliament. If any changes or amendments are suggested by the Parliament, the scheme becomes effective with such changes or amendments. If both the houses of Parliament do not approve the scheme, it stands annulled. However, the validity of any action already taken under the scheme as framed is not affected and the changes and amendments suggested by the Parliament are effective from the date of such modification or annulment.
3.9 Under the provisions of section 9 it is permissible for the Central Government to merge a corresponding new bank with a banking company or vice versa. If a corresponding new bank becomes a transferor bank and is merged with a banking company being the transferee bank a question arises as to the applicability of the provisions of the Companies Act in respect of such merger. The provisions of section 9 do not specifically exclude the applicability of the Companies Act to any scheme of amalgamation of a corresponding new bank with the banking company. Further section 394(4)(b) of the Companies Act provides that a transferee company does not include any company other than a company within the meaning of Companies Act. But a transferor company includes any body corporate whether the company is within the meaning of Companies Act or not. The effect of this provision is that provisions contained in the Companies Act relating to amalgamation and mergers apply in cases where any corporation is to be merged with a company. Therefore, if any scheme under section 9(2)(c) of the Nationalization Act a corresponding new bank is to be merged with the banking company (transferee company) it will be necessary to comply with the provisions of the Companies Act. It will be necessary that shareholders of the transferee banking company 3/4th in value present and voting should approve the scheme of amalgamation. Section 44A of the BR Act which empowers Reserve Bank of India to approve amalgamation of any two banking companies requires approval of shareholders of each company 2/3rd in value. But since section 44A does not apply if a banking company is to be merged with a corresponding new bank, and hence approval of 3/4th in value of shareholders will apply to such merger in compliance with the Companies Act.
3.10 Section 616(b) of the Companies Act provides that the provisions of the Companies Act shall apply to banking companies except in so far as such provisions are not inconsistent with the provisions of the Banking Regulation Act, 1949. Section 44A of the Banking Regulation Act, 1949 contains provisions for amalgamation of banking companies but is silent in regard to amalgamation of corresponding new bank with a banking company. In the circumstances, applicability of Companies Act to such merger is not excluded.
3.11 Reading the provisions of section 9(2)(c) of the Nationalization Acts and sections 394(4)(b) and sections 616(b) of the Companies Act together it appears that merger of a corresponding new bank with the banking company by framing a scheme under section 9(2)(c) will also be required to be in compliance with the provisions of the Companies Act, particularly in relation to the rights of the stake holders of the transferee banking company.
3.12 Requirement of approval of Reserve Bank of India
Under the provisions of section 9(2)(c) of the Nationalization Acts it is necessary for the Government to consult the Reserve Bank of India before preparing the scheme. Hence after a scheme is contemplated for merger of a corresponding bank with a banking company it will be necessary to consult the Reserve Bank of India on the proposed scheme. However, it needs to be noted that as far as the transferee banking company is concerned which proposes to acquire a corresponding new bank, there is no requirement in the Banking Regulation Act, 1949 for obtaining the approval of the Reserve Bank of India for such merger by the transferee bank.
3.13 Over and above the powers of the Central Government to frame scheme for mergers of corresponding new banks and other banking institutions under section 9(2)(c) of the Bank Nationalization Acts, the Reserve Bank of India has powers to sanction any scheme for amalgamation of banking companies under section 44A of the Banking Regulation Act, 1949. Unlike section 9(2)(c) of the Bank Nationalization Acts, the provisions contained in section 44A of the Banking Regulation Act, 1949 are restricted to amalgamation of banking companies and such powers of amalgamation are not available in respect of other banking institutions. When a scheme for amalgamation of banking companies is formulated under section 44A of the Banking Regulation Act, 1949 such amalgamations need the approval of the shareholders of the respective banking companies by a majority representing two-thirds in value of the shareholders of each of such companies either in person or by-proxy at a meeting called for the purpose. It needs to be noted that while in respect of amalgamation of companies registered under the Companies Act, the requisite majority for approval of an amalgamation is three-fourth in value of the shareholders, under the Banking Regulation Act, 1949 it is two-thirds in value of the shareholders.
3.14 Since the power of approval of amalgamation scheme of any two banking companies is with the Reserve Bank of India, the provisions contained in the Companies Act relating to amalgamation of companies are not applicable to amalgamation of banking companies.
3.15 Sub-section (7) of section 44A of the Banking Regulation Act, 1949 provides that nothing contained in section 44A shall affect the power of the Central Government to provide for amalgamation of two or more banking companies under section 396 of the Companies Act after consultation with the Reserve Bank of India. The power of the Central Government to amalgamate banking companies under section 396 is to be exercised in pubic interest.
3.16 It may further be noted that section 44A of the Banking Regulation Act, 1949 contemplates voluntary amalgamation of banking companies which would normally be after negotiations between the concerned banking companies and agreement reached on the terms and conditions of such amalgamation. On the other hand, section 45 of the Banking Regulation Act, 1949 empowers the Reserve Bank of India to apply to the Central Government for an order of moratorium in respect of a banking company and formulate a scheme for reconstitution or amalgamation of such banking company. Such scheme of amalgamation of a banking company can be with any other banking institution under section 45(4)(d)(ii) of the Banking Regulation Act, 1949. For the purposes of this section, banking institution is defined as any banking company including the State Bank of India or subsidiary bank of State Bank of India or a corresponding new bank. In view of the above provisions the Reserve Bank of India has powers under section 45 of the Banking Regulation Act, 1949 to amalgamate any banking company with State Bank of India or subsidiary bank of State Bank of India or a corresponding new bank.
3.17 Effect of Amalgamation on Foreign Branches in Indian Banks
The provision contained in section 44A of the Banking Regulation Act and Section 9 of the Bank Nationalization Acts do not specifically refer to the assets and liabilities of any banking institution in a foreign country. However, specific provisions have been made in the Bank Nationalization Acts and the Banking Regulation Act providing that on sanction of amalgamation scheme all the assets and liabilities of the transferor bank shall vest in the transferee bank. By operation of these provisions any assets held by a banking institution in a foreign branch will vest in the transferee banking institution. Subject to regulatory compliance and compliance with the law applicable in the place where the foreign branch is located the assets and liabilities of such foreign branch will vest in the transferee banking institution.
3.18 Powers of Acquisition or Takeover of Banking Institutions
Except the provisions stated in sections 35 and 38 of the State Bank of India Act and State Bank of India (Subsidiary Banks) Act referred to in paras 10 to 12 above, there are no specific provisions regulating acquisition of shares of a banking company or takeover of a banking company in the Banking Regulation Act, 1949. In the absence of such provisions the process of acquisition of shares or controlling interest in a banking company will be governed by the provisions of the Companies Act and Securities and Exchange Board of India (SEBI) regulations. However, any such acquisition of shares is also governed by the directives issued by the Reserve Bank of India under the Banking Regulation Act, 1949. In terms of such Reserve Bank of India directives any shareholding of 5% and above or any acquisition of shares of 5% and above in a banking company needs the approval of the Reserve Bank of India. Such approval is necessary in terms of policy framework for ownership and governance for private sector banks prescribed by the Reserve Bank of India (Please refer Annexure to RBI Notification dated 02/07/2004). Further in regard to voting rights of the shareholders section 12(2) of the Banking Regulation Act,1949 provides that no person holding shares in a banking company shall exercise voting rights in excess of 10% of the total voting rights of all the shareholders of the banking company. As a result of this provision, although the acquisition of shares may exceed 10% the voting rights are restricted only to 10%. This provision ensures that the ultimate ownership and control of a banking company is well diversified and shareholders holding 5% and above are fit and proper persons to the satisfaction of the Reserve Bank of India.
3.19 In terms of section 3 of the Bank Nationalization Acts it is permissible for a corresponding new bank to raise its capital by issue of shares to the public, subject to the condition that the Central Government shall at all times hold not less than 51% of the paid-up capital of such corresponding new bank. In regard to the voting rights section 3(2E) provides that no shareholder of corresponding new bank other than the Central Government shall be entitled to exercise voting rights in respect of any shares held by him in excess of 1% of the total voting rights of all the shareholders of the corresponding new bank. On account of such restrictions on voting rights it is not possible for any person to acquire controlling interest in a corresponding new bank which has issued shares to the public.
3.20 Powers to acquire banking institutions are also contained in section 36AE and section 45 of the Banking Regulation Act, 1949 and section 396 of the Companies Act. Power under section 36AE can be exercised by the Central Government to acquire undertakings of banking companies where the Central Government is satisfied that the banking company is not complying with the directions given by the Reserve Bank of India or the banking company is being managed in a manner detrimental to the interest of the depositors. The principles for payment of compensation to the shareholders of the acquired bank and the method of computation of such compensation is provided in the Fifth Schedule to the Banking Regulation Act, 1949.
There is also a provision for constitution of a Tribunal by the Central Government for the purpose of fixing the compensation if the compensation offered is not acceptable to the shareholder. The power under section 36AE to acquire banking companies is to be exercised after giving the banking company a reasonable opportunity of showing cause against the proposed action.
3.21 Similar power is given to the Reserve Bank of India for suspension of business of a banking company and preparation of a scheme for reconstitution or amalgamation under section 45 of the Banking Regulation Act, 1949. While exercising the power under 36AE the banking company may not be under stress but there is a need to change the management of the bank to ensure that there is proper compliance with the directives of the Reserve Bank of India and other regulatory requirements. On the other hand powers of the Reserve Bank of India under section 45 of the Banking Regulation Act, 1949 are intended to be exercised in cases where a baking company is under stress and immediate steps are required to be taken to protect the interest of the depositors and the banking company itself. As far as compensation to the shareholders is concerned section 45 is providing for payment of such compensation either by allotment of shares in the transferee banking company or in cash. Any scheme notified pursuant to the provisions of section 45 is binding on all concerned parties and no appeal is provided against the decision of the Reserve Bank of India fixing the amount of compensation.

Section 4: Consolidation between different types of banks
In view of the position stated in the earlier paragraphs the mergers of various types of banking institutions will involve formulating a scheme for merger under the various statutory provisions. Since compliance with statutory provisions depends on the category of merging banks, the Group considered possibilities of mergers in different categories and the statutory requirements for each case. The statutory compliance and other requirements are stated in following paragraphs:
4.1 Merger of a corresponding new bank with another corresponding new bank
The following steps will need to be undertaken:
· CMD's of the two Banks approach GOI and obtain clearance to proceed to evaluate proposal.
· The Central Government may then ask the Two CMD's to conduct a strategic due diligence to be able to further evaluate the logic of the merger.
· The CMD's would go back to GOI with the results of the strategic due diligence.
· If the proposal finds favour 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.
· 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.
· The Government scheme so fine-tuned would be placed before the Boards of both Banks just prior to (g) below. At this stage it would be necessary for listed entities to ensure that compliance with SEBI guidelines are ensured.
· 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 does 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 fair and objective manner.
· The treatment of transferee bank employees will need to be indicated by the GOI. It will need to provide an option to workmen staff to continue in service on same terms and conditions or accept retrenchment compensation and other terminal benefits as may be payable under the rules, as governed by the Industrial Disputes Act 1947. As far as non-workmen employees are concerned it may offer continuation initially for a specified period on same terms and conditions and from the date to be specified on terms that are applicable to such employees in the transferee bank. Those who do not accept the offer to be paid terminal benefits as per the rules applicable.
· After all the suggestions that are received from minority shareholders are considered then the Central Government could proceed to notify the scheme. The effective date will need to be indicated in the notification.
· Thereafter the scheme would have to be placed before the Houses of Parliament as provided in Section 9(6).

The procedure articulated above is a fully transparent process and allows the Government to adhere to the highest standards of corporate governance. It will address the genuine concerns of minority shareholders in adherence to the principles of natural justice and at the same time conform to the legal requirements prescribed under Section 9 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980.
4.2 A Corresponding New Bank with State Bank of India
· In a corresponding new bank the controlling shares are held by the Central Government and in respect of State bank of India, the controlling shares are held by the Reserve Bank of India. Initiation of any proposal for merger of a corresponding new bank with State Bank of India would therefore need approval of the Central Government as well as the Reserve Bank of India.
· Since the provisions 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 to formulate a scheme under section 9(2)(c) for the purpose of amalgamation of a corresponding new bank with State Bank of India.
· If the corresponding new bank has raised capital by issue of shares to public it will be necessary to make a valuation of the shares and decide the swap ratio for the shares of the State Bank of India. Provision will have to be made for payment of compensation in cash to the dissenting shareholders of the corresponding new bank, who do not accept the shares of the State Bank of India as per the swap ratio. In addition to the requirements stated above, the other requirements in the matter of formulation of a scheme under section 9(2)(c) as stated in 4.1 above will apply in respect of merger of a corresponding new bank with State Bank of India.
4.3 A corresponding new bank with subsidiary bank of State Bank of India

The position as stated earlier, in respect of merger of a corresponding new bank with State Bank of India shall apply in respect of merger of corresponding new bank with a subsidiary of State Bank of India also. The only modification that may be required is that approval of State Bank of India in addition to the Reserve Bank of India and the Central Government would be necessary for initiation of negotiations for merger, since the entire shareholding of a subsidiary bank vests in State Bank of India except the above modification, rest of the steps and applicable law will be the same as stated in 4.1 above.
4.4 Merger of State Bank of India or subsidiary bank of State Bank of India with a corresponding new bank

In terms of the provisions of section 9(2)(c) read with definition of 'Banking Institution' contained in the explanation I to section 9(5) of the Bank Nationalisation Act, it is permissible for the Central Government to frame a scheme for merger of State Bank of India or subsidiary bank of State Bank of India with a corresponding new bank. Although strictly in law such a merger scheme can be formulated by the Central Government such a merger is not probable because it will involve repeal of State Bank of India Act, 1955 or State Bank of India (Subsidiary Banks) Act, 1959 and withdrawal of their special status as Government Banks.
4.5 A banking company with banking company
The Reserve Bank of India has the power to sanction the scheme of merger of banking companies under section 44A of the Banking Regulation Act. Various steps for such a scheme will be as under:
· Draft scheme of merger has to be placed before shareholders of each banking
· Company and approved by the majority representing 2/3rd in value of shareholders of each banking company present and voting (including proxies).
· Notice of meeting to be given to shareholders of each banking company and notice of meeting to be published in two newspapers of the locality at least once in a week for three consecutive weeks.
· Any dissenting shareholder to be paid value of shares held by him as fixed by Reserve Bank of India while approving the draft scheme.
· On obtaining shareholders approval scheme to be submitted to Reserve Bank of India for approval/sanction.
· Reserve Bank of India to issue an order sanctioning the scheme. Consequences of such amalgamation scheme such as vesting of assets and liabilities in the transferee bank, etc. ensue as provided in sub-sections (6), (6A), (6B) & (6C) of section 44A.
· Except the variations on account of requirements of section 44A other requirements for actual framing of the scheme will apply as stated in section on powers of Acquisition or Takeover of Banking Institutions (Section 4.1).
4.6 A banking company with corresponding new bank
· Since the definition of 'banking institution' under section 9 of the Bank Nationalisation Act includes a banking company a scheme under section 9(2)(c) can be framed by the Central Government for the purpose of merger of a banking company with corresponding new bank. All the requirements stated section on powers of Acquisition or Takeover of Banking Institutions (Section 4.1) would apply in respect of such a scheme.
· If such a banking company to be merged with corresponding new bank is a listed company it would be necessary to comply with the requirements of the Listing Agreement.
· To protect the rights 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 payment for the shareholding. Since the merger scheme is to be framed under section 9(2)(c) of the Nationalisation Act, there is no express statutory requirement for the purpose of obtaining the consent of the shareholders of the banking company for the merger. The past mergers of the Nedungadi Bank Ltd. with Punjab National Bank and Global Trust Bank Ltd. with Oriental Bank of Commerce were effected by the Reserve Bank of India under section 45 of the Banking Regulation Act and are therefore not providing an answer as to the statutory requirements to be complied with. But the applicability of the Companies Act is not specifically excluded and therefore the rights of the shareholders under the Companies Act will continue to be available to such shareholders and it will be necessary to obtain the approval of the shareholders 3/4th in value present and voting for such merger.
4.7 A Corresponding new bank with banking company
The provisions of Section 9(2)(c) of the Nationalisation Acts are wide enough to empower the Central Government to frame a scheme for the purpose of such merger. In view of the express provisions contained in section 616(b) of the Companies Act, it will be necessary to follow the procedure of the Companies Act in regard to the proposed merger except the final approval of the scheme by the High Court which will not be required in view of the powers of the Central Government.
The other requirements in respect of such mergers will be as stated the section on Powers of Acquisition or Takeover of Banking Institutions (Section 4.1).
4.8 Banking company with State Bank of India or Subsidiary Bank of State Bank of India
A scheme for such a merger can be framed by the Central Government under section 9(2)(c). Although the State Bank of India has the power to acquire any banking institution under section 35 of the State Bank of India Act, 1955 the definition 'Banking Institution' does not expressly include a banking company. It is therefore doubtful whether powers under section 35 of the State Bank of India Act, 1955 or under section 38 of the State Bank of India (Subsidiary Banks) Act, 1959 can be exercised for the purpose of such merger. As far as the power of the Central Government is concerned a scheme under section 9(2)(c) can be framed for the purpose of merger of a banking company with State Bank of India or subsidiary bank.
As stated in section on Merger of SBI or subsidiary bank of SBI with a corresponding new bank, the rights of the shareholders of the banking company will have to be protected and in the absence of any clear provision excluding the applicability of the Companies Act, it will be necessary to obtain the approval of the shareholders of the banking company, 3/4th in value present and voting for such merger.
Subject to above modifications all the other requirements of a merger scheme would be as stated in section on powers of Acquisition or Takeover of Banking Institutions (Section 4.3).

4.9 State Bank of India or Subsidiary Bank of State Bank of India with a banking company
Powers of the Central Government under section 9(2)(c) can be utilized for the purpose of merger of State Bank of India or a subsidiary bank of State Bank of India with a banking company. However, as stated in 4.4 above, such a merger is not probable because it will involve repeal of the State Bank of India Act, 1955 or the State Bank of India (Subsidiary Banks) Act, 1959 and withdrawal of the special status of State Bank of India and its subsidiary banks as Government Banks.
4.10 Any scheme framed by the Central Government under section 9(2)(c) is required to be placed before the Parliament. Under section 9(6) of the Nationalisation Acts, both the Houses of the Parliament have the power to modify the scheme or decide that the scheme should not be made and the scheme shall thereafter have effected only in such modified form or be of no effect as the case may be, so however that any such modification or annulment shall be without prejudice to the validity of anything previously done under that scheme. The power of the Parliament is very wide and the effect of the provision is that unless the scheme is approved by the Parliament the merger would not be complete in all respects.

Section 5: Select Issues
5.1 Human Resources
In the context of consolidation, one of the major issues, which need to be handled, is in regard to the treatment of the employees of the transferor bank consequent upon the merger or acquisition. Various laws under which the banking institutions are constituted contain provisions about mergers as also continuation of the existing employees of the transferor bank. The details of such provisions are given in following paragraphs:
· Section 9(5)(a) of the Banking Companies (Acquisition and Transfer of Undertakings) Acts, 1970 & 1980 provide that any scheme framed for amalgamation of corresponding new banks or banking institutions shall be binding on the employees of each of them. Except this provision, there are no other provisions contained in the Nationalization Acts about the rights of the employees of the transferor bank. Pursuant to section 9(2)(c) of the Nationalization Acts, the Central Government had framed a scheme for amalgamation of New Bank of India with Punjab National Bank. As far as the employees of the New Bank of India were concerned, the Central Government also framed the New Bank of India {Determination of Placement of Employees (Officers & Workmen) of the New Bank of India in Punjab National Bank} Scheme, 1993. This scheme was challenged by the employees of the New Bank of India contending that it was beyond the powers of the Central government to frame such a scheme. In the case of New Bank of India Vs. Union of India (1996 (8) SCC 407) the Supreme Court held that the Central Government had the powers to frame such a scheme and the Court would be entitled