SYNOPSIS OF PROJECT REPORT

ON
MERGER OF COMMERCIAL BANKS IN INDIA

SUBHASH KUMAR
MBF0928
APEEJAY INSTITUE OF TECHNOLOGY

UNDER GUIDANCE OF

DR. A SATYANARAYAN
FACULTY OF AIT
 INTRODUCTION

The Indian banking market is growing at an astonishing rate, with Assets expected to

reach US$1 trillion by 2010. An expanding economy, middle class, and technological

innovations are all contributing to this growth. The country’s middle class accounts for

over 320 million people. In correlation with the growth of the economy, rising income

levels, increased standard of living, and affordability of banking products are promising

factors for continued expansion. The Indian banking industry is the middle of an IT

revolution. Focusing on the expansion on retail and rural banking. Players are becoming

increasingly customer centric in their approach which has result in innovative method of

offering new banking product and services. Bank are now realizing the importance of

being a big player and are beginning to focus their attention on merger and acquisition

to take advantage of economies of scale and comply with Basel II regulation.

A merger is a combination of two companies into one larger company. Such actions are
commonly voluntary and involve stock swap or cash payment to the target. Stock swap
is often used as it allows the shareholders of the two companies to share the risk
involved in the deal. A merger results in a new company name (often combining the
names of the original companies) and in new branding. The outstanding organization
absorbs the properties of the other companies. There are several types of mergers that
organizations can engage in:

 Vertical merger consists of the combination of two or more companies that are at
different levels of the supply chain for one specific product or service
 Horizontal merger occurs when two or more businesses that produce the same
or similar products or services combine under one name.
 Extensional merger occurs when similar businesses combine to enter a new
product market separate from what they already specialize in.

Merger and corporate restructuring are a big part of the corporate finance world.
Everyday investment bankers arrange merger transactions, which bring separate
companies together to form larger ones. When they are not creating big companies
through spin-offs, carve outs or tracking stocks. Not surprisingly these actions often
make the news. Deals can be worth hundreds of millions, or even billions, of dollars or
rupees. They can dictate the fortunes of the companies involved for years to come. Next
time you flip open the newspaper’s business section, odds are good that at least one
headline will announce some kind of M&A transaction. Sure M&A deals grab headlines,
but what does this all mean to investors?. To answer this question, this report discusses
the forces that drive companies to buy or merge with others, or to split-off or sell parts of
their own businesses.

OBJECTIVE
 Gain an in depth knowledge about various corporate valuation techniques.
 Critically examine the rationale behind the merger of various bank
 Understand the advantage and disadvantage of merger
 Understand the need for growth through merger of banks
 Get insights into the consolidation trends in the Indian commercial bank

My objective of this research would be to study the above mentioned points

RESERCH METHODOLOGY
  As it is a secondary research, all the data is selected after rigorous analysis of
articles from newspapers, magazines and internet.
 All the research collected is done by professional analyst across the world and is
compiled in this project to understand the financial and business impact of
merger and acquisition more effectively.

LITRATURE REVIEW

Govt okays amalgamation of Gujarat local banks with BoB. Business line

Mumbai , June 24

THE Reserve Bank of India has said that the seven branches of the South Gujarat Local
Area Bank Ltd, will function as branches of Bank of Baroda from June 25, as per the
scheme of amalgamation, which will come into force from this date.

As per the scheme of amalgamation, after first evaluating the assets and liabilities of the
South Gujarat Local Area Bank Ltd, Bank of Baroda will takeover its assets and
liabilities and pay the depositors and creditors to the extent of their balances.

If any surplus remains after paying off the depositors and creditors, the shareholders of
the bank will be entitled for payment only of pro rata value of shares. The scheme of
amalgamation does not envisage allotment of shares of Bank of Baroda to the
shareholders of the South Gujarat Local Area Bank Ltd, the release said.

Earlier, on application from the Reserve Bank of India, the Central Government had
made an Order of Moratorium on the South Gujarat Local Area Bank Ltd. The
moratorium was made effective from the close of business on May 13, 2004 up to and
inclusive of August 12, 2004.

During the period of moratorium, the Reserve Bank of India prepared a draft scheme of
amalgamation of the South Gujarat Local Area Bank Ltd with Bank of Baroda.

Bank of Madura Merger with ICICI Bank. The Hindu 27 july 2004.

The Reserve Bank of India has, under Section 44A of the Banking Regulation Act,
1949, approved the merger of Bank of Madura Limited with ICICI Bank Limited effective
March 10, 2001. With this merger ICICI Bank Limited will become one of the largest
private sector banks in India with combined assets of Rs. 17,327 crores and total
deposits of Rs. 13,460 crores as at December 31, 2000. The merged entity will have a
large customer base of over 3 million and a network of more than 350 branches and
450 ATM centres spread across about 100 cities in India.

"This merger would lead to considerable synergies in the operations of the merged
entity and would benefit the customers and other stakeholders" said Shri H. N. Sinor,
Managing Director and CEO, ICICI Bank Limited on receipt of the Reserve Bank of
India's approval.

ICICI Bank Limited has fixed Wednesday, April 11, 2001 as the 'Record Date' to
determine the shareholders of Bank of Madura Limited who would be entitled to receive
the equity shares of ICICI Bank. The swap ratio has been fixed at two equity shares of
face value of Rs.10/- each of ICICI Bank Limited for every equity share of face value of
Rs.10/- each of Bank of Madura Limited.

BoM to merge with ICICI Bank. Indian Express Newspapers Saturday,

December 9, 2000

Mumbai, Dec 8: In yet another mega merger in the banking sector, ICICI Bank -- a new
generation private bank -- on Friday said that its board of directors will meet on
December 11 to consider the merger of Bank of Madura (BoM) with itself. The scheme
of merger, if approved by the boards of both banks, will then require the clearance from
the Reserve Bank of India and other regulators. CICI Bank, promoted by ICICI, has total
assets of Rs 12,063 crore with deposits of Rs 9,728 crore as on September 30, 2000.
The bank's capital adequacy stood at 17.59 per cent. Its branch network and extension
counters stand at 106. At end-September 2000, ICICI Bank's capital base stood at Rs
196.82 crore and networth stood at Rs 1,219 crore. EPS stood at Rs 7.7 with book
value at Rs 233. The merger will create an entity that will have over 16,000 crore in
assets and over Rs 13,000 crore in deposits. It will pitchfork ICICI Bank to the league of
Corporation Bank, and can easily rival HDFC Bank after its merger with Times Bank
some time back.

Said ICICI senior general manager, Kalpana Morparia: "This merger will increase the
pace of consolidation in the banking sector." The merged entity will have 2.6 million
customer accounts and a 375-strong branch network. It will employ 4,000 out which
2,800 is accounted for by ICICI Bank and 180 or so by Bank of Madura. It will also give
ICICI Bank a huge presence in South India, which is an important market given the
higher rate of economic development, and activity.

RBI clears merger of Bank of Rajasthan with ICICI Bank. The Economics
Times (July 2010).
"All branches of Bank of Rajasthan will function as branches of ICICI Bank with effect
from August 13, 2010," the Reserve Bank of India (RBI) said in a statement, while
approving the merger scheme. The integration of BoR would help ICICI Bank increase
its branch network by 25 per cent to about 2,500 across the country. It will give greater
visibility to ICICI Bank in western and northern parts of the country.

ICICI Bank has about 2,000 branches while BoR has 463 spread across the country.
With the merger, the balance sheet of ICICI Bank would cross Rs four lakh crore. BoR
has a total business of over Rs 23,000 crore, against nearly Rs 3,84,000 crore of ICICI
Bank.

This is the third acquisition by ICICI Bank. It had earlier acquired Bank of Madurai way
back in 2001 and Maharashtra-based Sangli Bank in 2007.Shares of ICICI Bank
closed at Rs 963.95, down 0.74 per cent, while that of Bank of Rajasthan slipped 0.03
per cent to Rs 190.15 on the Bombay Stock Exchange today. In May, boards of both
the banks approved a share-swap deal that valued the Udaipur-based BOR at over Rs
3,000-crore.The share swap ratio was fixed at one ICICI Bank share for every 4.72
shares of BoR.Post approval by the shareholders, the banks moved RBI on June 25
for regulatory clearance.

HDFC Bank Acquires Centurion Bank of Punjab (May '08)

For HDFC Bank, this merger provided an opportunity to add scale, geography
(northern and southern states) and management bandwidth. In addition, there was a
potential of business synergy and cultural fit between the two organizations.
For CBoP, HDFC bank would exploit its underutilized branch network that had the
requisite expertise in retail liabilities, transaction banking and third party distribution.
The combined entity would improve productivity levels of CBoP branches by
leveraging HDFC Bank's brand name.
The deal created an entity with an asset size of Rs 1,09,718 crore (7th largest in
India), providing massive scale economies and improved distribution with 1,148
branches and 2,358 ATMs (the largest in terms of branches in the private sector).
CBoP's strong SME relationships complemented HDFC Bank's bias towards high-
rated corporate entities.
There were significant cross-selling opportunities in the short-term. CBoP management
had relevant experience with larger banks (as evident in the Centurion Bank and BoP
integration earlier) managing business of the size commensurate with HDFC Bank
Oriental Bank of Commerce Acquires Global Trust Bank Ltd (August '04)
For Oriental Bank of Commerce there was an apparent synergy post merger as the
weakness of Global Trust Bank had been bad assets and the strength of OBC lay in
recovery.10 In addition, GTB being a south-based bank would give OBC the much-
needed edge in the region apart from tax relief because of the merger. GTB had no
choice as the merger was forced on it, by an RBI ruling, following its bankruptcy.
Benefits
OBC gained from the 104 branches and 276 ATMs of GTB, a workforce of 1400
employees and one million customers. Both banks also had a common IT platform.
 The merger also filled up OBC's lacunae - computerisation and high-end technology.
OBC's presence in southern states increased along with the modern infrastructure of
GTB.

SIGNIFICANCE
The dominant rationale used to explain M&A activity is that acquiring firms seek
improved financial performance. The following motives are considered to improve
financial performance

 Synergy: This refers to the fact that the combined company can often reduce its
fixed costs by removing duplicate department or operations, lowering the costs of
the company relative to the same revenue stream, thus increasing profit margins.
 Increased revenue or market share: this assumes that the buyer will be
absorbing a major competitor and thus increase its market power to set prices.
 Cross-selling: for examples, a bank buying a stock broker could then sell its
banking products to the stock broker’s customers, while the broker can sign up
the bank’s customers for brokerage accounts, or a manufacturer can acquire and
sell complementary products.
 Economy of scale: for example, managerial economies such as the increased
opportunity of managerial specialization. Another example are purchasing
economies due to increased order size and associated bulk buying discounts.
 Taxation: a profitable company can buy a loss maker to use the target’s loss as
their advantage by reducing their tax liability. In the United States and many
other countries, rules are in place to limit the ability of profitable companies to
“shop” for loss making companies, limiting the tax motive of an acquiring
company.
 Geographical or other diversification: this is designed to smooth the earnings
results of a company which over the long term smoothens the stock price of a
company, giving conservative investors more confidence in investing in the
company. However, this does not always deliver value to shareholders.
 Resource transfer: resources are unevenly distributed across firms and the
interaction of target and acquiring firm resources can create value through either
overcoming information asymmetry or by combining scarce resources.
 Vertical integration: vertical integration occurs when an upstream and
downstream firm merges. There are several reasons for this to occur. One
reason is to internalize an externality problem. A common example is of such an
externality is double marginalization. Double marginalization occurs when both
the upstream and downstream firms have monopoly power; each firm reduces
output from the competitive level to the monopoly level, creating two deadweight
losses.