This research paper aims to analyze the behavior of various mergers and
acquisitions that have taken place in the Indian Banking sector. Several
International and Domestic banks are engaged in the process of mergers and
acquisitions. The principle objective to engage in this activity is to acquire
the benefits of economies of scale. It is one method of ensuring that a
competitive force is set up to reckon with in the International economy. Merging
of the Indian banking sector through mergers and acquisitions on commercial
considerations and business strategies is a vital pre-requisite. In the
present times, the banking sector is a rapidly growing industry in India.
A comparatively new development in the Indian banking sector is enhanced through
mergers and acquisitions. It will permit banks to achieve a world class position
and throw superior value to the stakeholders. This paper will focus on the
impact of merger on a company's stock and the effect on the equity share of the
shareholder's capital. It will also focus on the main factors affecting the
performance of the bank pre- and post-merger. The findings state that to a
certain extent M&A's have been successful in Indian banking sector. The paper
also studies the State Bank of India and its Associates merger with the pros and
cons of the banks and the employees of the banks. The required data are
collected from secondary source.
In today's fast-growing world mergers and acquisitions is an approach used by
corporations for their growth, extending their business to other dominions and
to overcome financial struggle. The procedure of mergers and acquisitions has
received a substantial position in today's corporate world.
It can be observed
that there are various recognized laws accessible in India on numerous modes of
corporate restructuring namely the Companies Act, 2013, the Securities Contract
Regulation Act, 1956, the SEBI Act, 1992, the Industries (Development &
Regulation) Act, 1951, the Securitization and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002, State Bank of India Act, 1955
and the Banking Regulation Act, 1949.
In the recent times, the trends of mergers and acquisitions in India have been
altered. In several segments of the economy, effects of the mergers and
acquisitions have been diverse. Banking is the central pillar of the economy. A
main part of the banking sector in India is government-owned, though there are
also private minority shareholders in some of these banks. Banks are stimulated
to gain global reach and better synergy through bank mergers and also allow
greater banks to obtain the stressed assets of smaller banks.
Abolition of competition between the banks is another aspect for bank mergers.
By doing this considerable amount of funds used for supporting competition can
be used for the growth banking business. Sometimes, a bank with a big bad debt
portfolio and poor revenue will merge itself with another bank to seek backing
for survival. Merger in India between unviable banks should grow quicker so that
the weak banks could be reformed providing continuity of employment with the
working force, operation of the assets blocked up in the unviable banks and
adding beneficially to the prosperity of the nation through increased flow of
In the banking sector, important mergers and acquisitions in India in recent
years include the merger between IDBI (Industrial Development bank of India) and
its own subsidiary IDBI Bank in 2004. The deal was worth $ 174.6 million (Rs.
7.6 billion in Indian currency). Another important merger was that between
Centurion Bank and Bank of Punjab in 2005. Worth $82.1 million (Rs. 3.6
billion in Indian currency), this merger led to the creation of the Centurion
Bank of Punjab with 235 branches indifferent regions of India, another was
acquisition of Centurion Bank of Punjab by HDFC Bank in 2008.
The economic environment is full of problem for the small and medium sized
banks, due to superseded technology, insufficiencies of resources, faltering
marketing efforts and weak financial structure. Their existence becomes a
question of doubt without new techniques and innovations and they have a threat
from the larger banks. Their restructuring through merger could offer a relief
and help them to revive.
So far bank mergers have provided a protection to weak
banks from closing down and failure. Smaller banks fearing aggressive
acquisition by a large bank sometimes enter into a merger to increase their
market share and protect themselves from the possible acquisition. Even RBI has
taken initiative for the same and the primary objective behind this move is to
attain growth at the strategic level in terms of size and customer base.
in turn, upsurges the credit-creation capacity of the merged bank tremendously.
Bank mergers make the bank vigorous to survive in the changing business
environment. Through mergers the weaker banks find it easier to adapt themselves
quickly and grow in the domestic and international financial markets.
Objectives / Hypothesis Of The Study
The primary objectives or research questions of the paper are:
Need For This Study
- To find out the impact of bank mergers on the shares.
- To understand the reforms of Indian banking sector.
- To study the performance of the banks in the pre and post stages of M&A.
- To understand the merger of SBI and its associates.
From the early 1990s, the structure of the Indian banking sector has
meaningfully changed due to the deregulation and liberalization, coupled with
divestment of public sector banks, admission of foreign banks and merger of many
banks in India and globally. In the post reform period, close to 25 bank mergers
took place in India. These mergers have a significant implication on the
performance and profitability in the banking system.
Therefore, from the view
point of both managerial and policy interests, it is very important to know the
impact of these merges on the efficiency levels of banks and their temporal
conduct so as to understand how the banking industry has been reacting to these
emerging challenges and which banks are performing better than others in this
period of transition.
For the purpose of this paper, the author reviewed several research papers to
form an understanding of the functioning of mergers and acquisitions. These
papers discussed heavily about the various impacts of mergers on the companies.
A corporation can ensure growth internally and externally. Internal growth may
be attained by increasing its operation or by creating new units, and external
growth may be in the form of Merger and Acquisitions, takeover, Joint venture,
Amalgamation etc. Many studies have investigated the various reasons for Merger
and Acquisitions to take place, to focus on the effects of Merger and
Acquisitions on Indian financial services sector.
Sinha Pankaj & Gupta Sushant (2011) studied a pre and post analysis of firms and
stated that it had positive effect as their profitability, in most of the cases,
deteriorated liquidity. After a few years of Merger and Acquisitions it came to
the point that corporations may have been able to leverage the synergies arising
out of the merger and Acquisition that have not been able to manage their
liquidity. Study showed the comparison of pre and post analysis of the firms. It
also indicated the positive effects on the basis of some financial parameter
like Earnings before Interest and Tax (EBIT), Return on shareholder funds,
Profit margin, Interest Coverage, Current Ratio and Cost Efficiency etc.
Kuriakose Sony & Gireesh Kumar G. S (2010), assessed the strategic and
financial similarities of merged Banks, and the relevant financial variables of
respective Banks were considered to assess their relativity. The result of the
study found that only private sector banks are in favor of the voluntary merger
wave in the Indian Banking Sector and public sector Bank are unwilling towards
their type of restructuring. Target Banks are more leverage than bidder Banks,
so the merger helps in attaining optimum capital Structure for the bidders and
the asset quality of target firms is very poor.
Anand Manoj & Singh Jagandeep (2008) studied the impact of merger
declarations of five banks in the Indian Banking Sector on the shareholders bank. These mergers were the Times Bank merged with the HDFC Bank, the Bank of
Madurai with the ICICI Bank, the ICICI Ltd with the ICICI Bank, the Global Trust
Bank merged with the Oriental Bank of commerce and the Bank of Punjab merged
with the centurion Bank. The announcement of merger of Bank had positive and
significant impact on shareholder's wealth.
Secondary data: E-Journals, Manuals, articles and online resources.
This section of the research paper will deal with the detailed analysis of the
concept of mergers and acquisitions in the banking sector.
Merger And Acquisitions - General Meaning
Merger is the amalgamation of two or more corporations into a single corporation
where one subsists and the others lose their corporate existence. The survivor
obtains all the assets and the liabilities of the merged corporations. All
assets, liabilities and the stock of one corporation stand transferred to
transferee Corporation in consideration of payment in the form of:
- Equity shares in the transferee corporation,
- Debentures in the transferee corporation,
An Acquisition refers to the procurement of a smaller corporation by a larger
corporation. Acquisition is also known as a takeover. It occurs between the
bidding and the target corporation. There may be either hostile or friendly
acquisitions. In business combinations, an acquisition is the purchase by one
corporation of a controlling interest in the share capital of another existing
Recent Mergers Of Banks In India
In August 2019, the Finance Minister of India MS. Nirmala Sitharaman announced
the merger of 10 Public Sector Banks into four entities. The logic behind this
merger is to increase the global competitiveness of the Indian banks. Presently,
the total Public Sector Banks reduced to 12 from 27 in 2017 in India.
In this section of the paper we will be discussing the four mergers in detail
- Merger Number 1: PNB+OBC+UBI
Oriental Bank of Commerce (OBC) and United Bank of India (UBI) were merged with
the Punjab National Bank (PNB). After this merger, PNB will be the
second-largest Public Sector Banks of India after the State Bank of India in
terms of the branch network. Its total branches would be 11,437 and the total
Business of the PNB would be Rs. 17.95 lac crore.
- Merger Number 2: Syndicate Bank+ Canara Bank
Syndicate Bank is merged with the Canara Bank. After this merger, Canara bank
would be the fourth largest Public Sector of India. The total business of Canara
would be 15.20 lac crore with a branch strength of 10,342.
This merger will reduce the cost of operations owing to network overlaps. These
two banks have a similar work culture that is why it would lead to facilitate a
- Merger Number 3: Andhra Bank+ Corporation Bank+ Union Bank of India
Andhra Bank and Corporation Bank are merged with Union Bank of India. This
merger would make Union Bank of India 5th largest Public Sector Bank. This
merger would have the potential to increase the post-merger bank's business by
2-4.5 times. After this merger, the total business of Union Bank of India would
be Rs. 14.59 lac crore while total branches would be 9,609.
- Merger Number 4: Allahabad Bank + Indian Bank
In the fourth merger, Indian bank was merged with the Allahabad Bank. After this
merger, Allahabad bank will be the 7th largest Public Sector Bank of India.
After the merger, the total business of Allahabad bank would be Rs. 8.08 lac
crore and the number of branches would be 6,104. After the merger of these two
banks the size of business would get doubled which would increase their global
Impact Of These Mergers On Shares
The shares of the public sector banks closed after the mega merger of the PSU
banks came into force. The Shares of Punjab National Bank dropped by 5.72%,
while Canara Bank fell marginally
by 0.17% on the BSE. On the other hand, Indian Bank gained 1.86% and Union Bank
of India rose marginally by 0.17%.
The wider market portrayed a weaker trend, with the 30 share BSE barometer
tanking 1,203.18 points or 4.08% to close at 28,265.31. This consolidation of
banks maintains certain significance as it took place at a time when the entire
country is under the garb of the COVID-19 outbreak, which had triggered a long
and continuous lockdown in the country.
Indian Banking Sector - Reforms
The Narasimhan Committee, was set up in 1997, to file a report regarding the
reforms in the Indian Banking Sector.
It submitted a report in 1998 with the
Raghuram Rajan Committee:
- It focused on the use of merger of banks, to improve the size as well as
operational strength for each of the banks.
- It made a recommendation for the merger of the large banks in India,
with an effort to make them stronger, so they stand strong in international
- It recommended speeding up of automation in the Public Sector Banks.
- It recognized that the legal framework must be reinforced, in order to
aim for credit recovery.
- It recommended that there be 2 - 3 banks in India that be oriented
globally, 8-10 national banks and a massive grid of local banks to help the
system reach the remote areas of India.
- It laid stress on the fact that bank mergers must take place among units
of similar size. This suggests that weak banks merge with the weak ones
while big banks with the bigger and competitive ones.
- It also suggested the confinement of local banking network to the limits
of states or a few districts.
- It also suggested the review of the RBI Act, the Nationalization Act,
Banking Regulation Act, as well as the SBI Act.
Raghuram Rajan, a noted economist, recommended a regulatory system, which may
reduce fluctuating financial cycles.
His suggestions for the banking sector in
- India is a vast nation in itself, hence, it is nearly impossible to
control the flow of capital and therefore, the economy will always be
indeterminate and instable.
- In order to progress into large banks, it is required that an entry
point be accessible in the system, which can be used by the bodies.
- Technological advances may help in developing small banks and reduce the
costs of operation.
- Reassurance must be provided to the professional markets.
- Underachieving PSUs were recommended to be sold.
- The regulation of trade to be brought under the control of SEBI.
- He also recommended an open-minded outlook towards merger of banks and
Reasons For Mergers And Acquisitions In Banks
Mergers and acquisitions have molded the Indian Banking sector in a perfect
manner. Though there seem to be diverse opinions on this particular material,
yet there is always hope for an improvement in the current condition after bank
mergers. The following are the reasons for the mergers to take place in banks.
- Merger of weaker banks:
The exercise of merger of weaker banks with stronger banks was encouraged in
order to provide stability to weak banks but Narasimhan committee conflicted with this practice. They said that mergers can
diversify risk management.
- Rise in market competition:
Invention of new financial products and
merging of regional financial system are the reasons for merger. Markets
industrialized and became more competitive and because of this, market share of
all individual firm condensed and hence, mergers and acquisition started.
- Economies of scale:
Ability of producing economies of scale when firms are
- Skill & Talent:
Allocation of skill takes place between two organization
which helps them to progress and become more competitive.
- Technology and Products:
Introduction of e- banking and some monetary
instruments / Derivatives. Removal of admission barrier opened the gates for new
banks with high technology and old banks can't compete with them and hence they
decide to merge.
- Positive Synergies:
When two companies merge their sole motive is to
create a positive result which is higher than the shared effect of two
individual companies working alone. Two features of it are cost synergy and
- Ill performing banks survived after merger and enhanced branch network
- Larger customer base i.e., through rural reach and increased market
- Achievement of infrastructure & restrict competition and prevent
congestion of banks & utilize underutilized resources so that the banks can
contest with the foreign banks in a global era.
Merger Of SBI And Its Associates
The Union cabinet on June 15, 2016 accepted the merger of the five subsidiaries
of State Bank of India with the holding bank, as the Indian banking system moves
into a phase of alliance. The cabinet approved the merger of the subsidiaries
namely State Bank of Mysore, State bank of Travancore, State Bank of Hyderabad,
State Bank of Patiala, State Bank of Bikaner and Jaipur and Bhartiya Mahila Bank
Ltd with SBI.
SBIs merger with subsidiaries noticed the combined entity's balance sheet at an
enormous Rs.37 trillion, making it one of the top 50 banks in the world. The
merger of five subordinate banks of the State Bank of India (SBI) with the
parent is a major merger in recent times. It made SBI which was already the
nation's major commercial lender by assets and deposits, even larger. The move
came at a time when SBI like numerous other state-run banks was struggling to
cope with increasing bad loans. Its net profit for the 3 months ended March 31,
2016 dropped by 66% from the year-ago, due to larger provisioning for bad
Three of the associate banks, SBBJ, SBT and SBM, were listed on the
stock exchanges and investors praised the merger move. Stocks of the associate
banks moved up sharply when the cabinet clearance for the move came in June.
SBI merger helped the bank to be recognized as one of the top 50 banks in the
world. None of the Indian banks had held this position prior to the SBI merger.
The visibility at a global level increased due to this merger. The merger also
benefitted in getting economies of scale and decrease in the cost of doing
After the amalgamation SBI could withstand the robust competition from private
sector banks and could amass more resources to channelize trained manpower
across its branches. The merger of SBI and its subordinate banks resulted in the
network increase of SBI and its reach multiplied. The shares of SBI and its
associates posted marvelous earnings in the stock exchange thereby benefiting
Findings And Suggestions
The study disregards the impact of possible variations in the accounting methods
adopted by different corporations. The factors which effect the M&A performance
may not be same for all corporations. The price of acquisition for mergers is
not taken into consideration in the methodology.
The push should be on refining risk management abilities, corporate governance
and strategic business planning. In short run, effort options like outsourcing,
strategic alliances, etc. can be considered.
Banks need to take benefit of this fast altering environment, where product life
cycles are quick. The Government should not opt for M&As as a means of bailing
out of weaker banks. The larger banks should not be merged with weaker banks, as
it will have adverse effect upon the asset quality of the stronger banks. The
strong banks should be merged with stronger banks to compete with foreign banks
and to enter in the global financial market.
The banking industry has been experiencing major Mergers and Acquisitions in the
recent years, with a number of global players emerging through successive
Mergers and Acquisitions in the banking sector. The current study indicates that
the pre- and post- Mergers and Acquisitions of selected banks in India have no
greater changes in profitability ratio; a few banks are satisfactory during the
But in future, there are robust projections of improvements in
profitability. However, results specify that mergers led to higher level of cost
efficiencies for the merging banks. Merger between distraught and strong banks
did not produce any significant efficiency gains to participating banks.
However, the forced merger among these banks prospered in shielding the interest
of depositors of frail banks but stakeholders of these banks have not revealed
any gains from mergers.
The findings also establish that M&As impact on the shareholder value. The
findings assert that the structural factors such as relative sizes of merging
partners, technique of financing M&As and the number of bidders in M&As have the
ability to influence the realization of a M&As success.
The findings indicate the importance of considering the size of a potential
target, the method to be used in funding M&As. The findings note that the
structural factors acting autonomously have the potential to influence the
shareholder value. This infers that the administration of banks and other
organizations intending to undertake M&As should seek to evaluate and consider
how these structural factors are likely to impact on the achievement of the
The Indian financial system requires very huge banks to absorb several risks
that have appeared from operating in local and international market. The prime
aspects for future mergers in Indian banking industry included the challenges of
free convertibility and requirement of large investment banks. Therefore, the
Government and policy makers should be more thoughtful in endorsing merger as a
way to gain economies of scale and scope.
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