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PROJECT REPORT

On

ROLE OF MERGER & ACQUISITION IN BANKING


SECTOR FOR BETTER CORPORATE GOVERNANCE

Submitted To ABC University City, For the Partial Fulfillment Of The


Award of Degree Of

MASTER OF BUSINESS ADMINISTRATION

BATCH: 2004-2006

Under the guidance of

Submitted by:

Mrs. ABCS

ABC

ABC INSTITUTE OF MANAGEMENT & TECHNOLOGY


(Approved by AICTE, & Affiliated ABC.University, City)
Address

INDEX
SERIAL NO.
1.

PARTICULARS

Preface

2. Acknowledgement
3. Certificate
4. Introduction
5. Literature Review
6. Overview Of The Industry
Beginning of banking in the world
Beginning of banking in India
Reforms in banking
7. Basic framework
Objectives of the study
Research methodology
Source of data
Limitation
Scope of study

8. Conceptualization

Merger & Acquisition


Corporate Governance

9. Framework of Corporate Governance


10. Case Study (Global trust bank with Oriental bank of commerce)
11. Analysis
12. Conclusion
13. Appendix
14. Suggestions
15. Annexure

16. Bibliography

DECLARATION
I ABC Roll No.

Class MBA, student of Institute Of Management and Technology here

by declare that the project entitled Role of Merger & Acquisition in Banking Sector
For Better Corporate Governance is an original work and the same has not been
submitted to any other institute for the award of any degree. The interim report was
presented to the Supervisor on __________and the per-submission was made
on_____________. The flexible suggestions have been incorporated in consultation with
the supervisor.

Counter Signed

Signature of the Candidate


Signature of the Supervisor

Forwarded By:

Director/ Principal of the Institute

ACKNOWLEDGEMENT
In this present world of competition there is a race of existence in which those who are
having will to come forward will succeed. Project is a bridge between practical and
theoretical working , with this will I have joined the project . I really wish to express my
gratitude towards all those people who have helped me.

I really indebted to Mr. AB H.O.D. M.B.A. department ABC., City for this kind hearted
approach. His timely guidance, supervision & encouragement have helped me to get this
golden opportunity.

My project guide Mrs. ABCD lecturer of ABC., City, who provided me his expert advise,
inspiration & moral support in spite of her busy schedule & assignments, has mainly
provided my understanding of this project. I am very grateful to his kindhearted approach
& encouragement, which helped me immensely in completion of this project report.

Last , but not the least, I say only this much that all are not to be mentioned but none is
forgotten and I will like to extend my special thanks and gratitude to my parents who
always encourage me in pursuit of excellence.

(ABC)

In the wake of recent financial & corporate scandals corporate governance is the need of
hour. In spite of the growing knowledge, not much attention has been given to corporate
issues in bank.

3 CS OF BANKING ARE

Capital

Corporate governance

Consolidation (according to Business Today)

IMPORTANCE OF CORPORATE GOVERNANCE IN BANKS

First , because banks are seen as the engines that drive the
economy towards growth in developing countries

Second, due to under developed financial markets in developing


countries, banks are the major source of finance for many firms.

Third, bank acts as a repository for the economys savings, apart


from providing means of payment.

Fourth, after recent privatization & disinvestments of most of the


banks & the reduce role of economic regulations, bank today are open for
freedom in terms of how they are being run.

WHY THERE IS A NEED FOR CORPORATE GOVERNANCE IN


BANKING SECTOR
There are following issues:

The NPA syndrome

Employees frauds

Evolution of new business models

Branch banking vs. unit banking

Complicated financial structure

Scandals have become the trend of times

False picture of financial health and misleading investors.

Non-compliance with statutory requirement, negative net worth,

negative

capital adequacy & low morale.

ACCORDING TO CAPIRO & LEVINE,


There are two interrelated factors of the financial intermediaries that affect corporate
governance.

First, with banks being more non-transparent, there arises an


agency problem. The information difference between the insiders & outsiders in
banking lead to more difficulty for equity & debt holders in monitoring the
managers, and in turns, it become easier forth managers to use the benefit of
controls, rather the focusing on maximizing the value.

Second, heavy regulations imposed on the banks stand as an


obstacle for natural corporate governance mechanism.

Directors poor decisions and ineffective board processes are to pay the price. For
measuring the board performance4 against certain benchmarks set for good
governance,

ACCORDING TO SHLEIFER & VISHNY DEFINE CORPORATE


GOVERNANCE AS
Dealing with the ways that supplier of finance to corporations to assures themselves of
getting a return on their investment.
ACCORDING TO AGENCY THEORY, if managers operate independently, they
make financing, investment & payout decision that are determinately to shareholders.
To mitigate the conflict between managers and shareholders, the literature offers several
solutions, such as monitoring by the board of directors and the block holders,
compensation structure, and managerial equity investment.

Investors and depositors, regulators


have direct interest in the bank performance. On a more aggregate level, regulators
are concerned with the effect governance has on the performance of financial
institution because the health of the overall economy depends upon the board of
directors of the banking firm is placed in a crucial role in its governance structure.

One major area likely to be affected by


regulation is the structure of executive compensation. Stock-based compensation
motivates top management to undertake more value enhancing decision, but
regulators would also want to consider how to stock option affect risk taking.

Resolution of the financially distresses


is necessary because this usually leads to liquidation, and the incumbent is removed
from management.

Large grant to top executives have the


potential to impact banking firms capital by way of future share repurchase. Therefore
large grants of options in any given year have the potential to affect the capital base
adversely in later years.

ACC TO MC. KINSEY CONSULTANCY


THE CONTROL MODEL GOVERNANCE CHAIN

Shareholders
Environment

Concentrated
ownership

INSTITUTIONAL
CONTEXT

Insider board

Reliance on
family, bank
and public
finance

Incentives
aligned with
core shareholder

Under
Developed
new issued
market

Inadequate
minority
protection

Limited
takeover

CORPORATE
CONTEXT

Limited
disclosure

Capital market
Liquidity

Transparency
Accountability

FIGURE:- 1

BEGINNING OF BANKING IN THE WORLD


BEGINNING OF BANKING IN INDIA
REFORMS OF BANKING IN INDIA

BEGINNING OF BANKING IN THE WORLD


The word bank is derived from the word Bancus or Banque, that is bench. Jews, who
were considered to be the early bankers, transacted their business on benches in the
market. Some people trace the origin of the word bank from the German word Back
meaning a joint stock fund. This seems to be better.

EARLY HISTORY OF BANKING


According to history, Babylonians had developed as banking system. The great temples
were powerful of the Greek banking institutions. In ancient Greece & Rome, the practice
of granting was widely prevalent. People used cheque & drafts to settle their accounts.
Manu, the ancient Hindu lawgiver has written exhaustive regulations governing credit.
He talks about credit installments, interest on loans and commercial papers.
During the early periods, although banking business was mostly done by private
individuals, many countries established in Barcelona in 1941. During 1407, the bank of
Genoa was established. The bank of Amsterdam was established in 1609 to meet the
needs of the merchants of the city. It accepted deposits, which could be drawn on
demand.
English banking may correctly be attributed to the London gold smiths. The received
their valuables and fund for safe custody and issued receipts. These notes, in the course of
time, became payable to bearer of demand and hence enjoyed considerable circulation.
However, in the course of time, gold smiths were ruined. This lead to the growth of
private banking and establishment of Banking of England in 1694

A SHORT HISTORY OF BRITISH BANKING


The origin of modern banking in Britain can be traced back across four centuries and the
history of the Royal Bank of Scotland Groups past constituents perfectly illustrates the
story of the industrys development.

THE BIRTH OF BRITISH BANKING


In the 1660s London dominated Englands political and economic lie and , with a
population of 450,000 was the fourth largest city in the world. The established
importance of London in raising and servicing government finance and in international
trade had led to the development of a relatively sophisticated money market. It was
consequently here that the profession of banking emerged from the trade of goldsmith
during the course of the seventeenth century.

The goldsmiths, makers and sellers of plate and jewellery, flourished after the dissolution
of the monasteries in the 1530s increased the available supplies of gold. Many goldsmiths
developed strong connections with the crown and , from the 1940s, most began to take in
valuables for safe keeping in their vaults.

THE GROWTH OF PROVINCIAL BANKING


The number of banks in London grew during the eighteenth century, but their business
was restricted and provincial banks began to flourish outside London to serve
industrialists and merchants remote from the capital.

Thomas Smith , a cloth merchant in Nottingham, began operating the earliest known
provincial bank in the 1650s , by offering banking services to his customers. Most
countrys banks however, were established from the mid-eighteenth century onward.
Before 1750 there were only a handful of bankers in the country outside London . by
1784 this number had grown to 119 and by 1810 to a massive 650. similarly in Scotland,
by 1772 there were eight banking companies operating in Scotland outside Edinburgh &
Glasgow, a number that had increased to 21 by 1810.
From the 1770s a more sophisticated banking infrastructure began to emerge, with the
creation of a clearing house in London for settling inter-bank payments

THE ARRIVAL OF JOINT STOCK BANKING


Lancaster Banking Company , became the first British joint stock bank in 1826 , whilst
other important constituents of the Royal Bank of Scotland were established soon after.
These included Manchester & Liverpool District banking Company in 1829, National
Provincial Bank of England in 1833 and Manchester & Sal ford bank and Ulster Banking
Company in 1836.

THE EMERGENCE OF LARGE NATIONAL BANKS


Despite the success of Scotlands banks, London still dominated the nations financial
system. The volume of transactions settled through London was also increasing. In 1864
National Bank of Scotland became the first Scottish bank to open a London office.

THE EMERGENCE OF LARGE NATIONAL BANKS


Despite the success of Scotlands banks, London still dominated the nations financial
system. The volume of transactions settled through London was also increasing. In 1864
National Bank of Scotland became the first Scottish bank to open a London office.
The end of the nineteenth century may have seen a slower pace of change in the banking
sector, but nonetheless the lending and share underwriting activities of banks had made
possible vigorous industrial and commercial growth in Britain and her empire. in
addition, bankers were held in high regard in their local communities as men of influence
and importance.

THE BIG FIVE


In 1900 there were around 250 private and joint stock banks in Britain and London was
undoubtedly the worlds largest and busiest banking center.
The outbreak of the First World War heralded a period of rapid change in the banking
industry. Overall the volume of banking business grew during the war and many of the
private banks responded by opening additional branches, developing businesses abroad
and embarking on a series of major amalgamations.
Big Five-Westminster, National Provincial, Barclays, Lloyds and Midland. The smaller
banks, like then Royal Bank of Scotland, were little affected by these controls.

SHORT HISTORY OF BRITISH BANKING


The origin of modern banking in Britain can be traced back across four centuries and the
history of The Royal Bank of Scotland Groups past constituents perfectly illustrates the
story of the industrys development.

WAR AND CHANGE


During the Second World War, all the banks experienced similar problems as in 1914 to
1918, with controls over foreign exchange and lending priorities, and responsibility for
the marketing and distribution of savings certificates and defense bonds. Meanwhile, the
government signaled the softening of its hard-line opposition to bank mergers resulting in
the amalgamation, announced in 1968, of the biggest High Street banks National
Provincial Bank and Westminster bank. Likewise, in Scotland, in 1969 the Royal Bank of
Scotland merged with National Commercial Bank of Scotland.

EXPANSION, CONSOLIDATION AND INNOVATION


In 1971, a government white paper published a scheme of monetary control, which
encouraged the banks to compete more actively with one another and with other financial
institutions. As a result many of the banks began to provide additional services and to
sharpen their public image.
During the late 1980s and early 1990s many banks developed their overseas
representation, but there was also widespread retrenchment due to the impact of both the
deep recession in the UK economy and the fierce competition bred by deregulation

HISTORICAL PERSPECTIVE OF
INDIAN BANKING
According to Indian banking history, The British East India Company established The
Hindustan Bank in Calcutta and Bombay in 1870, was the earliest Indian Bank banking
in India on modern lines started with the establishment of three presidency banks under
Presidency Banks act 1876 i.e. Bank of Calcutta, Bank of Bombay and Bank of Madras.

IMPERIAL BANK OF INDIA


The first major event in the history of banking in India took place in 1919 when the
presidency banks were amalgamated and Imperial bank of India was set up. Banking
companies Inspection ordinance was passed in January, 1946 and in February, 1946 the
Banking Companys restriction of Branches Act was passed. In 1949, the Banking
companies Act was passed which was later amended to read as Banking Regulation Act.

RESERVE BANK OF INDIA


Reserve Bank of India Act was passed in 1934 & Reserve Bank of India (RBI) was
constituted as an apex bank without major government ownership. Banking Regulations
Act was passed in 1949. This regulation brought Reserve Bank of India under
government control. Under the act, RBI got wide ranging powers for supervision
&control of banks. The Act also vested licensing powers & the authority to conduct
inspections in RBI

NATIONALIZATION OF BANKS
On 19 July 1969, the Government acquiring ownership and control of 14 major banks in
the country an Ordinance. This was done to bring commercial banks in to the mainstream
of economic development with definite social obligations and objectives. Later, on 5
April 1980, six more commercial banks were nationalized.

REFORMS OF EARLY 1990S


After submissions of recommendations of the committee headed by Chairman Shri M.
Narasimham, a comprehensive reform of the banking system was introduced in 1992-93.
the main aim of the reform measures was to ensure that the balance sheets of banks
reflected their actual financial health.
Companies or have lent money to people who needed it for business or personal
purposes. Banks now also offer a wide range of other services such as exchanging foreign
currency, advising on investments and insurance and acting as executors and trustees.

AUTOMATION IN BANKING SECTOR


In recent years there has also been considerable change in the functioning of banks. There
has been an increase in the amount of technology used by these institutions e.g. some
banks use cash dispensers and offer twenty four hours cash withdrawal facility, instant
account details and money transfer through computer network.
Because of much more competition in the banking sector, services have to be sold in
ways never done earlier.

Today, customers do all their banking transactions while sitting at home.

Banks are introducing Automatic Teller Machine (ATM) cards.

Debit and credit cards are used as well.

This promises to change the face of banking forever.

LIBERALIZATION
There is a growing need for banking facilities due to nationwide growth, international
trade and industrial liberalization which have all contributed to changes in the banking
environment.

DIVERSIFYING THE PRIORITIES OF BANKS


From the regular banking operation, termed as House Keeping, balancing of books and
reconciliation of inter-branch and intra-branch entries of simple money transaction,
commercial banks are diversifying their priorities.

New financial institutions like merchant banks, leasing companies, mutual


funds and venture capital companies have come into existence.

Commercial banks too have joined the hub of capital market activities.

There has been a transformation in the services offered by banks and this has
led to considerable change in the type of manpower recruited.

With demand of profit, in the banking industry, particularly in the


international banking sector the total concept of seniority and promotion has
been changed.

In this scenario pay scales have gone up and the number of employees has
gone down.

Banks have set right their organizational structure for efficient services.

Computers have taken over and recruitment pattern has been favorable to
more technical manpower.

Management graduates, Chartered Accountants, Chartered Financial Analysts


are hence in greater demand in the banking sector. Presently, emphasis is on
specialization and diversification.

To cater to the needs of a growing industry for marketing its shares and debentures,
public sector banks and financial institutions have started their own Merchant
Banking divisions. Many industrial houses too have started their own Merchant
Banking, companies, acting as lead managers for public issues of shares and
debentures, e.g. Times Guarantee, Tata Finance etc.

CORPORATE AND MERCHANT BANKING:


Corporate and Merchant Banking are business related activities. Corporate Banking
incorporates corporate finance i.e. credit risk assessment and technical aspects such
as raising capital, business mergers and acquisitions as well as all banking activities
related to large organizations.
While Merchant Banking implies investment management e.g. management
of trusts, securities, mutual and pension funds, public issue management and
international funds. Merchant Banking involves offering advisory services to
corporate clients on capital structure decisions, public issue management,
underwriting, raising funds through public issue from overseas markets, project
appraisals besides mergers and acquisitions. With merger and acquisitions as well as
joint ventures and alliances being formalized by corporate for the sake of
expansion, opportunities for merchant bankers have grown.

INVESTMENT BANKING:
Investment Banking activities are associated with financial activities such as
securities underwriting, markets and arranging mergers, acquisitions and
restructuring. Investment bankers work in retail banking and corporate clients and
institutional banking. These banks hold large financial assets as they manage dealer
activities and in trading and distribution of securities. The function is advisory and
the bank support financial activities through lending to customers using securities as
collateral or for repurchase agreements where in they use their own securities.

Investment banking is fund based and not only fee based while Merchant Banking,
on the other hand, is fee based.
The worlds top six investment banking houses manage the major portion of new
issue investment-grade securities and are referred to as special bracket firms; these
are Solomon Brothers, First Boston, Goodman Sachs, Morgan Stanley, Merrill
Lynch, and Shearson Lehman Brothers. In India, some of the top investment
Bankers is DSP Merrill Lynch, PNB Capital Services, GE Caps, IFCI Financial
Services, IDBI Capital Markets, SBI Capital & JM Financial and Investment.
The role of Investment Banks is to participate in direct markets by bringing
financial claims for sale. They operate to help businesses and governments sell their
new security issues. Once the securities are sold investment bankers make
secondary markets for securities as brokers and dealers. They are largely doing
underwriting business. Investment Banking can be carried on as part of the normal
range of business activities. In India ICICI Bank can be regarded as investment
banking.

TREASURY AND FOREX FUNCTION


With the increase in forex (foreign exchange) flow in the country and reliance of
corporate on the international market in sourcing their fund requirements, the
treasury and forex functions are becoming increasingly important.
Since fund management is an important determinant of success of any business,
treasury management has become a very important finance function. Knowledge of
global money markets and financial instruments such as deposit certificates,

treasury bills, forecasting, financial management and manipulation, source


evaluation and domestic and foreign currency funds has become critical for
managing the treasury profit center. Treasury and risk management ensures cost
effectiveness in planning strategies in this era of deregulation.
Forex marketing technically is an inter banking activity. The job entails two major
responsibilities assessing various markets e.g. Stock or money markets on behalf of
the bank and customer desk to advise corporate or other banks that require foreign
currency. The job entails checking on current prices, keeping abreast with policies
of the regulatory bodies, analyzing past trends for making predictions and bids for
forex trading. The task is affected by the high volatility of the markets and involves
taking risks.

BANKING FINANCIAL SECTOR & REFORMS


FINANCIAL SECTOR REFORMS
1992-94 TO 1995-96

Bank norms liberalized And banks given the freedom to

decide levels of holding of individual items of inventories and receivables.

Ceiling on term loans rose to Rs 10,000 million for projects

involving expansion/ modernization of power generation capacities.

Banks allowed setting their own interest rate on post-

shipment export credit (in Rupees) for over 90 days.

Deregulation of interest rates on loans over Rs. 200,000

against term deposits and on domestic deposits with maturity periods over two years.

Bank freed to fix their own forex open position limit

subject to RBI approval.

Guidelines

issued

to

banks

to

ensure

qualitative

improvement in their customer service.

Loan system introduced for delivery of bank credit. Banks required to


bifurcate the maximum permissible bank finance of Rs 200 million and above into
loan component of 40% (short term working capital loan) and cash credit component
of 60%.

COMPETITION
Decades of non-commercial orientation, direct lending, loan waivers and
increasing non-performing assets had initially made banks difficult to adjust to a
market environment having strict prudential norms. However, the emerging
results suggest that banks are beginning to adapt to the competitive environment
and facing the challenge.

DECONTROL
Many steps were taken in 1995-96 to reduce controls and remove operational
constraints in the banking system. These include interest rate decontrol,
liberalization and selective removal of Cash Reserve Ratio (CRR) stipulation,
freedom to fix foreign exchange open position limit and enhanced refinance
facilities against government and other approved securities.

THE RBI ISSUED GUIDELINES REGARDING THE


FORMATION AND FUNCTIONING OF
PRIVATE SECTOR BANKS
(IN JANUARY 1993)

I.

The banks shall be governed by the provisions of the Reserve Bank of India Act,
1934 The Banking Regulation Act, and 1949 other relevant statuaries.

II.

Private sector banks are required to be registered as public limited companies in


India.

III.

The authority to grant a license lies with the RBI.

IV.

The shares of banks are required to be listed on stock exchanges.

V.

Preference will be given to those banks whose headquarters are proposed to be

located in a centre which does not have headquarters of any bank.

VI.

Maximum voting rights of an individual shareholder would be limited to 1% of


total voting rights.

VII.

The new bank would not be allowed to have as its director any person who is
already a director in a banking company.

VIII.

The bank will be subject to prudential norms in respect of banking operations,


accounting policies and other policies, as laid down by RBI. The bank will be required
to adhere to the following:

Minimum paid up share capital of Rs. 1 bn

Promoters contribution as determined by the RBI capital adequate of 8% of the risk


weighted assets Single borrower and Group borrower exposure limits in force Priority
sector lending Export Credit Loan Policy within overall policy guidelines laid down
by the RBI.

IX.

The banks will be free to open branches anywhere once they satisfy the capital
adequacy and prudential accounting norms.

X.

The banks would not be allowed to have investments in subsidiaries, mutual funds

and portfolio investments in other companies in excess of 20% of the banks own paid up
capital and reserves.

XI.

The banks would be required to use modern infrastructural facilities in office


equipment, computer, telecommunications etc.

POLICY FOR INVESTMENT MADE IN PRIVATE BANKS


New private sector banks have not been allowed to set up in India since 1969. with a view
to increasing competition in the banking industry and in line with the recommendations of
then Narsimhan Committee, the government has now allowed the entry of such banks.

CLOSE MONITORING BY RBI


However, the freedom of the entry into the banking sector will be carefully managed by the
RBI. The RBI will grant approvals for entry of private sector banks provided such banks
offer competitive, efficient and low cost financial intermediation services, result in up
gradation of technology in the banking sector, are financially viable and do not resort to

unfair means like preemption and concentration of credit, monopolization of economic


power, cross holding with industrial groups etc.

FOREIGN INVESTMENT IN BANKING SECTOR


Under the scheme, Non Resident Indians are allowed to have primary equity in a new
banking company to the extent of 40%. In the case of a foreign banking company or a
finance company acting as a technical collaboration or a co-promoter, equity participation
is restricted to 20%.

REFORMS IN BANKING SECTOR TO CONTINUE


A new bill on banking sector reforms is to be introduced in Parliament to strengthen
creditor rights through foreclosure and enforcement of securities by banks and financial
institutions.
Union Finance Minister Yashwant Sinha today stressed in parliament that reforms in the
banking sector will be continued to enhance the efficiency and competitiveness of the
sector.

THE FOLLOWING MEASURES HAVE EITHER BEEN


TAKEN OR ARE BEING TAKEN

Public sector banks recovered Rs 12,860 cr in 200001 as compared with Rs.9,883 cr in the previous year and net NPAs as percentage of
net advances came down to 6.7% as on March 31, 2001 as compared to 7.4% in the
previous year.

To help banks and financial institutions to make


provisions for NPAs as required by the RBI, additional fiscal relief is being offered,
details of which will be given in part B of my speech. This will enable banks to
review their lending rates.

A new bill on banking sector reforms is proposed to


be introduced in parliament to strengthen creditor rights through foreclosure and
enforcement of securities by banks and financial institutions. This bill will also enable
securitization for money locked up in long-term loans.

A Pilot Asset Reconstruction Company will be set


up by 30 June 2002 with the participation of public and private sector banks, financial
institutions and multilateral agencies. This company will initiate measures for taking
over non-performing assets in the banking sector and also0 develop a market for
securitized banks.

The Deposit Insurance Credit and Guarantee


Corporation (DICGC) will be converted into the Bank Deposits Insurance
Corporation (BDIC) to make it an effective instrument for dealing with depositors
risks and for dealing with distressed banks .Appropriate legislative changes will be
proposed for this purpose.

Reforms in the financial sector have posed new


challenges for the Development Finance Institutions (DFIs) like IDBI. It is proposed
to make legislative changes to corporatism IDBI within the coming year to provide it
appropriate flexibility. Meanwhile IDBIs tier one capital is being strengthened by
conversion of existing IBRD and NIC (LTO) loans in to appropriate long-term
instruments.

Consequent to certain amendments made in the year


2000, in the Companies Act 1956, directors incur disqualification for election in the
case of certain defaults by the company. It is proposed to exempt nominee directors
financial institutions and banks from this provision.

Three public sector banks had been classified as


weak banks on the basis of criteria suggested by the committee on Banking Sector

Reforms in 1997-98. two of these banks namely UCO bank United bank of India have
turned around and have started making profits. Though the Indian Bank has also
shown improvement, its capital adequacy ratio remains deficient. A provision of Rs
1300 cr is proposed for re-capitalization support to this bank, on the basis of a
commitment to government for implementing monitor able reform measures.

In the Banking Sector, foreign banks are permitted


to operate in India as fully owned branches with specific permission of the Reserve
Bank of India. As recommended by the Committee on Banking Sector Reforms, it has
now been decided to give an option to foreign banks to either operate as branches of
their parent banks or to set up subsidiaries. Such subsidiaries will have to adhere to all
banking regulations, including priority sector lending norms, applicable to other
domestic banks. Necessary amendments will be proposed in the Banking Regulation
Act 1949 to relax the maximum ceiling of voting rights of 10% for such subsidiaries.

The cooperative credit structure, which is critical for the agriculture sector, has low
capital adequacy and high NPAs, is of urgent need of reform. A committee under the then
Deputy Governor of RBI was appointed to examine its functioning closely. The
recommendations of this committee have been discussed widely by chief ministers and in
a joint committee of cooperation ministers under the chairmanship of Vikhe Patil reform
measures such as the adoption of a Model Cooperative Act, removal of dual control
between state governments and the RBI, regular conduct of elections, larger stake of the
members, and proffessionalisation of management etc. have been recommended.

The recapitalization formula suggested is 60:40 between the central and state government
along with increases in share capital of members. States will have to consider and accept
their funding share and implement the suggested measures for reform.
Even though this is a state subject the government of India will go out of its way to help
in the process. To start the process, Sinha said he is making a token provision of Rs 100
cr and depending on the pace of reform, provision of additional funds will be considered.

ISSUES IN INDIAN BANKING


[V LEELADHAR, DEPUTY GOVERNOR OF RBI]
Banking scenario has changed rapidly since 1990s. The decade of 90s has witnessed a sea
change in the way banking is done in India.
Anywhere banking and Anytime banking have become a reality. The financial
sector now operates in a more competitive environment than before and intermediates
relatively large volume of international financial flows.
ECONOMIC OUTLOOK AND BANKING SECTORS PERFORMANCE
During the last couple of years, global growth has been above the forecast in almost
every region stimulated by strong monetary and fiscal measures. Inflation rate has been
under control, barring some hiccup for a short period.
HIGH CAPITAL INFLOWS: AN OPPORTUNITY AS WELL AS A CHALLENGE
Liquidity position in the financial sector has been quite comfortable in the recent times.
TECHNOLOGY IS THE KEY
Technology has thrown new challenges in the banking sector and new issues have started
cropping up which is going to pose certain problems in the near future. The new entrants
in the banking are with computer background. Foreign banks and the new private sector
banks have embraced technology right from the inception of their operations
GLOBALISATION OF FINANCIAL SERVICES
The surge in globalization of finance has also gained momentum with the technological
advancements which have effectively overcome the national borders in the financial
services business.

INDIAN BANKS AT THE GLOBAL STAGE: A REALITY CHECK


As per Indian Banks' Association report Banking Industry Vision 2010, there would be
greater presence of international players in Indian financial system and some of the
Indian banks would become global players in the coming years.
WHAT IS BEING DONE TO PREPARE INDIAN BANKS TO MEET GLOBAL
CHALLENGE?
Indian banking sector has already implemented internationally followed prudential
accounting norms for classification of assets, income recognition and loan loss
provisioning.
SUPPORTING REGULATORY FRAMEWORK
RBI has suitably changed the countrys regulatory framework from time to time to
support Indian financial institutions to withstand the competitive pressures placed on
them by increasing globalization.
CONSOLIDATION AND MOVE TOWARDS UNIVERSAL BANKING
We are slowly but surely moving from a regime of large number of small banks to
small number of large banks.

GOVERNMENT AND RBI REGULATIONS


All commercial banks face stiff restrictions on the use of both their assets and
liabilities.40% of loans must be directed to Priority Sectors and the high liquidity ratio
and cash reserve requirements severely limit the availability of deposits for lending. The
RBI requires that domestic Indian banks make 40% of their loans at concessional rates to
priority sectors selected by the government. These sectors consist largely of agriculture,
exporters, and small businesses. Since July 1993, foreign banks have been required to
make 32% of their loans to these priority sectors. Within the target of 32%, two subtargets for loans to the small-scale sector (minimum of 10%) and exports (minimum of
12%) have been fixed.

Foreign banks, however, are not required to open branches in rural areas, or to make
loans to the agricultural sector.

(SOURCE: GOVERNMENT OF INDIA ECONOMIC SURVEY)

NEED TO PONDER
Debates on Indias slowdown focus on the manufacturing sector which is dangerously
misleading: one of the biggest areas of worry about Indias banking sector. Stories about
the real health of Indian banks get less publicized because banks are still overwhelmingly
owned, controlled and directed by the government, i.e. the ministry of finance(MOF).
Banks have no effective mouthpiece either

GREY FUTURE
One more reason being the opacity of the RBI. This doesnt mean a forecast of doom for
the Indian banking sector the kind that has washed out South East Asia. And also not
because Indian banks are healthy. We still have no clue about the real non-performing
assets of financial institutions and banks. Many banks are now listed. That puts additional
responsibility of sharing information. It is now clear that it was the financial sector that
caused the sensational meltdown of some Asian nations. India is not Thailand, Indonesia
and Korea. Borrowed investment in property in India is low and property prices have
already fallen, letting out steam gently. Our micro-meltdown has already been happening.

CONCLUSION
Still, there are several other worries about the banking sector, mainly confusion over
ownership and control. Sometimes soon India will be forced to apply the norms of
developed countries and many banks (including some of the biggest) will show very poor
return ratios and dozens of banks will be bankrupt. When that happens the two popular
reasons to defend bad banks will disappear. These are:

To save face in the remote hope of that fortunes will revive

Some banks are too big to be allowed to fail faring social upheaval.

FINANCIAL SECTOR REFORMS


THROUGH CONSOLIDATION
There has been a tectonic change in some component of the financial sector in the last
decade or so. The capital markets have seen phenomenal changes in technology,
regulations, instruments and institutions. The banking sector also has witnessed important
changes in terms of regulations and instruments. From the period of segmentation in the
1960s and 1970s, capital markets and banking sector entered the period of consolidation
in the period of 1990s

INTEGRATING THE MARKET WILL FACILITATES

Reduction in the interest cost and hence benefits the ultimate consumer
Enhancing the credit delivery mechanisms
Introduction of the rating processes at retail level
Creating level playing field when global players enter retail
Reversing the inverse relationship between the size of borrowing and the cost of
borrowing.

OBJECTIVE OF THE STUDY


RESEARCH METHODOLOGY
SOURCE OF THE DATA
SCOPE OF STUDY
LIMITATION OF STUDY

OBJECTIVE OF THE STUDY


Each study is carried out with some objectives and the objectives of this report are:

To study that how Merger & Acquisitions leads or helps in Corporate Governance.

Encouraging factors for the said merger.

Analyze parameters for evaluation of both the companies.

To find it out the basis of merger and acquisition.

To trace it out the related issues in both pre and post merger case.

To study why the banks are going towards Merger & Acquisitions.

To study the measures taken by the government to increase Merger & Acquisition
in Banking Sector.

RESEARCH METHODOLOGY
Research Methodology refers to the methods the researcher use in performing research
operations. The research methods which are going to be used are:

1) Explorative research
2) Case study (comparative analysis)
i. Whole case is divided into parts.
ii. Organizations position before merger & acquisition traced.
iii. Organizations position after merger & acquisition traced.
iv. Comparison of both.
v. Comparative evaluation of results is given.
In the explorative research, our objective is going to:

i.

Expand understanding of the dilemma or problem.

ii.

Gather background information on topic to refine the research

problem.

iii.

Identify sources for and actual questions that might be used as


Measurement questions.

Explorative phase begin with the literature search-a review of books as well as articles in
journals or professional literature that relates to our dilemma. A literature search requires
that use of library online catalog and one or more bibliographic databases or indexes. For
some topics it may be useful to consult a handbook or specialized encyclopedia first to
establish a list of key terms, people or events that have influenced our topic and also to

determine what the major publications are and who the foremost authors are. Other
reference materials should be incorporated into research strategy as needed.

SOURCE OF DATA
The various types of secondary data carry out the study.

Magazines

Business Today

Business World

India Today

Newspapers

Economic times

Business standard

Web sites

www.yahoo.com

www.google.com

www.SEBI.org

www.RBI.org

SCOPE OF THE STUDY


As in the era of consolidation in the banking sector this study will surely be
very helpful to various concerned individuals.

Study

will

be

useful

for

the

management students.

Researchers and scholars can carry

on the further study.

No study is really complete in itself

similarly this study is open for


the students who are interested in further study.

LIMITATIONS OF THE STUDY


Every study has some limitations. This project has also some problems such as:

Lack of comprehensiveness due to time constraints.

All the data available in Secondary form.

Only quantitative aspects of corporate governance are taken into


consideration due to time consideration.

There is a subjective judgment in analysis.

MERGER & ACQUISITION


The phase merger &acquisition (M & A ) refer to the aspect of business strategy
& management dealing with the merging and/ or acquiring of different
companies.
Usually these occur in a friendly setting where officers I each company involved
come together to go through due diligence process to ensure a successful merge
between all the parties involved.
On other occasions, acquisition can happen through hostile takeover via absorbing
the majority of outstanding shares in the open stock market.

FINANCING M & A
Various methods of financing M&A deals exist :

A Stock swap involves


issuing stock to exchange for the shares of the other company.

A Cash deal involves


buying a target company with cash.

In

some

cases,

company may acquire another company by issuing junk bonds to raise


funds.

DIFFICULTIES IN M&A
For achieving a greater extent of corporate governance, merger & acquisition is
one of the ways. But its not so easy; various types of problems are faced by the
organization in this type of procedure. There difficulties are:
1. SECRECY
Secrecy is maintained from bankers, suppliers, employees, customers &
others so that the negative reactions can be minimized.
2. SLOW, EXPENSIVE & DIFFICULT
A transaction generally requires six to nine months & many steps to meet
all the legal procedure.
3. HARD TO FIND BUYER
Its very difficult to find a potential buyer fir the multimillion dollar
corporations, so that adequate consideration can be measured.
4. NEGOTIATION & POTENTIAL OF THE COMPANY
More difficulty arises at the time of the negotiation & the measurement
of the net worth of the business.
5. EXPENSIVE SERVICES
Professional middleman (intermediaries, business brokers & investment
bankers) charge a high rate as their fees.
6. INEFFICIENCY
Middlemen operate inefficiently because of the slow & limiting nature of
having too much rely upon telephonic communication.

WHY DOES ORGANIZATIONS GOES FOR


MERGER & ACQUISITION

SYNERGY

Synergy is the magic force that allows for enhanced cost efficiencies of the
new business. Synergy takes form of revenue enhancement & cost saving.

STAFF REDUCTION
Merger tends to mean job losses from accounting, marketing & other
departments.

ECONOMIES OF SCALE
A bigger company places a bigger order of various items & can save more
cost & in better negotiation position.

ACQUIRING NEW TECHNOLOGY


To stay competitive , companies need to stay on top of technological
development. By buying a smaller company with unique technology, a
larger company can develop a competitive edge.

IMPROVED

MARKET

REACH

&

INDUSTRY

VISIBILITY
A merge may extend two companies marketing & distribution
opportunities. Capital can raise easily in a bigger company than a smaller
company.

MERGER
A merger in business or economy refers to the combination of two companies into one
larger company. Such actions are commonly voluntary and often involves stock swap. In
many instances a merger resemble a takeover but results in a new company name. (often
combining the names of the original companies and in new branding)

CLASSIFICATION OF MERGERS

HORIZONTAL
MERGER

VERTICAL
MERGER

CONGLOMERATE
MERGER

MARKET
-EXTENSION

PURCHASE
MERGER

PRODUCTEXTENSION

CONSOLIDATION
MERGERS

Horizontal merger take place where two-merging companies both produce similar
product in the same industry.
Vertical merger occur when two firms, each working at different stages in the
production of the same goods, combine.

Market-extension

occurs when two companies that sell the same products in

different markets merge.

Product-extension

occurs when two companies that sell the different but related

products in the same market merge.


Conglomerate merger take place when the two firms operate in different industry &
have no common area. There are two types of merger:

Purchase mergers occurs when one company purchase other company. The purchase
is made either by cash or through the issue of some kind of debt instrument, and the sale
is taxable.

Consolidation

mergers occur when a brand new company is formed and both

companies are bought & combined under the new entity. Tax terms are the same as those
of a purchase merger.

FAMOUS MERGERS

Bank of America/ Fleet Boston


Global Trust Bank/ Oriental Bank of Commerce
Nedungadi Bank/ Punjab National Bank
Bank of Madura/ ICICI Bank

ACQUISITIONS
When a company takes over another one and clearly becomes the new owner, the
purchase is called as an acquisition
From a legal point of view, the target company ceases to exist and the buyer swallows
the business, and stock of the buyer continues to be traded.

WAYS OF ACQUISITION

CONSIDERATION

BY ASSETS

REVERSE MERGER

I.

Consideration- A company can buy another company with cash, with stock, or a
combination of two.

II.

By assets- In a smaller deal, a company can acquire all the assets of another company

III.

Reverse Merger-In this type of acquisition, a deal that enables a private company to
get publicly listed in a relatively short time period.

SCHEME OF MERGER & ACQUISITION


Whenever two or more companies agree to merge with each other, they have to prepare a
scheme of amalgamation. The main content of model scheme:

Description of the transfer and transferee company and the business of the transferor.

Their authorized, issued and subscribed/ paid up capital.

Change of name, object clause and accounting year.

Protection of employment

Dividend position and prospectus

Management , board of directors, their number and participation of Transferee

companys director on the board.

Application u/s 391 and 394 of the companies act, 1956,to obtain high courts

approval.

Expenses of amalgamation.

Conditions of the schemes to become effective and operstive , effective date of

amalgamation.

The basis of merger and acquisition in the scheme should be the reports of the valuers of
asset of both the merger partner companies.

CORPORATE GOVERNANCE
Corporate governance is about promoting corporate fairness, transparency and
accountability.
ACCORDING TO WELFENSON, PRESIDENT OF THE WORLD BANK
QUOTED BY FINANCIAL TIMES
Corporate governance deals with the way in which supplies of finance to corporations
assure themselves of getting a return on their investment.
Corporate governance is a system by which business corporations are directed and
controlled.

CORPORATE GOVERNANCE IN BANKING SECTOR


In the wake of recent corporate scandals, corporate governance practices have received
heightened attention. Shareholder, creditors, regulators and academic are examining the
decision-making process in corporations and other organizations, and are posing changes
in governance structure to enhance accountability and efficiency.

Therefore in order to evaluate reforms of the governance structure of banking firms, it is


important to understand the current government practices.

BAD CORPORATE GOVERNANCE


PRACTICE IN THE FOAM OF
Fraudulent and false accounting (in case of GTB)
Complicated financial systems
To create a false picture of financial health and misleading investors.
Hide its real financial position (in case of GTB)
Scandals have become the trend of times (Ketan Parekh scam in GTB)
Inflated profits and high debts
Complicated financial structure (Enron, worldcom)
Masking true financial position (in case of GTB)
Very high NPA
The morale of the work force was very low
The continuous losses had totally eroded into net worth
The bank: losses, week governance, non compliance with statutory requirement,
negative net worth, negative capital adequacy and low morale

HRD was tremendously neglected.


ISSUED RAISED FROM BAD CORPORATE GOVERNANCE

Bankruptcy
Its dealt a strong blow to those analysts who smugly claimed for something
It brought the role of auditors sharply into focus
It exposed the peculiarities of the Indian Banking Environment.
FOR BETTER CORPORATE GOVERNANCE THE
FOLLOWING INFORMATION AND REPORT
SHOULD PLACE BEFORE THE BOARD
Annual operating plans and budgets, together with updated long term plans
Capital budgets, manpower and overhead budgets
Quarterly results for the company as a whole and its operating division or business
segment

Internal audit report, including cases of theft and dishonesty of a material nature.
Show cause, demand and prosecution notices received from revenue authorities that
is considered to be materially important(material nature of any exposure that exceeds 1 %
of the companys net worth).

Reports to fatal and serious accidents, dangerous occurrences, any any affluent and
pollution problem.

Default in payment of interest or non-payment of the principal on any public deposit,


and / or any secured creditor or financial institutions.

Any issue which involves possible public or product liability claims of a substantial
nature, including any judgment or order which may have either passed structure on the

conduct of the company, or taken an adverse view regarding another enterprise that can
have negative implications for the company.

Detail of any joint venture or collaboration agreement.


Transactions that involve substantial payment for achieving goodwill, improving
brand equity, and for acquiring intellectual property.

Recruitment and remuneration of senior officers just below the board level, including
appointment and removal of the chief financial officer and the company secretary.

Labor problems and their proposed solutions.


Quarterly details of foreign exchange exposure and the steps taken by management to
limit the risks of adverse exchange rate movement.

ACCORDING TO BUSINESS TODAY, NOVEMBER 1999


BOARD STRUCTURE AND PROCESSES FOR GOOD GOVERNANCE

STRUCTURE

Limit the size of board so that each


director can contribute, and avoid
coalitions

PROCESSES

Develop guidelines for the use of


committees to ensures the basic task
fulfilled and complex topics are explored
in sufficient depth

Separate the role of CEO and chairman


to avoid potential conflict of interests

Rotate directors through the various


committees to ensure the mix of
views

Avoid inside directors on the


committees so that executives do not
audit, evaluate, and reward themselves

Ensures the outside directors, as a group,


meet alone on a specific number of
occasions every year

Ensure the majority of outside directors so


that tough questions are asked

Choose a lead director to prevent


insiders from dominating the agenda

Require directors to redesign upon


retirement, or upon changes in
employment and responsibilities
Limit the number of other board of
directors on which directors can serve

Impose term limits to introduce fresh


and potentially critical viewpoints while
avoiding groupthinks
Establish a set of qualification for
directors, and use them to screen new
candidate

Ensure unrestricted access for board to


management so that information is not
filtered
Establish additional models of
information flow to ensure
sufficient information

Establish an orientation program so that


new directors can contribute quickly

Develop effective recruitment and


evaluation process for the board

Impose a retirement age to maintain a mix Ensure that the management reports
of skill, energy, enthusiasm and regularly to the board of succession
commitment
planning

SOURCES: BUSINESS TODAY, NOVEMBER 7, 1999

FIGURE-2

FRAMEWORK OF CORPORATE GOVERNANCE


On the basis of the above recommendations of the various institutions and prediction, the
following framework is prepared.
HOW MERGER AND ACQUISITION LEADS TO
CORPORATE GOVERNANCE
Merger and acquisition leads to total change in every aspect of the new organization and
these changes leads to more transparency by the following ways:
HOW MERGER AND ACQUISITION LEADS TO
CORPORATE GOVERNANCE
STRUCTURE
OF BOARD OF
DIRECTORS

PROPER
RECRUITME
REPORTING
NT PROCESS
AND
INFORMATION

PROPER
MEETING

PROCEDURE
OF LENDING

All relevant decisions should place before the shareholders in the meetings
Less number of
directors to reduce
coalitions

New scope and


sources for the
various type of
information is
developed

Recruitment
should base
upon the skills
and
qualifications of
the candidate

All relevant
decisions
should place
before the
shareholders
in the
meetings

More outside
directors that more
transparency could
bring by more of
questioning about
remuneration,
expenses, etc.

Proper
information
about daily
working of the
firm

Qualification
should be decide
for the directors

Attendances
should be
compulsory
for the
directors

FIGURE-3

Requirement of
lending should
be complete, so
that claim can
be made

Various factors
should
considered
(credibility,
capacity, project
requirement,
profitability, etc

HOW THESE PROCEDURE LEADS TO


CORPORATE GOVERNANCE
All these amendments leads to corporate governance in the banking sector by the
following ways:
STRUCTURE
OF BOARD OF
DIRECTORS

By raising more
queries about
remuneration,
dividends, nonperforming asset
etc.

PROPER
REPORTING RECRUITMENT
PROCESS
AND
INFORMATIO
N

Daily
information,
so that
defaults can be
traced at early
stage about
NPAs ,
expenses,
lending etc.

Well-qualified and
optimum number
of employees
should be taken to
avoid scams and
manipulations in
the records.

FIGURE-4

PROPER
MEETING

PROCEDURE
OF LENDING

Problems
should place
in the meeting
so that
effective
decisions
could be
taken, and no
body can take
advantage of
weaknesses

Lending should
be done to
worthwhile
persons and
projects, so that
the rate of non
performing
assets can be
reduced.

CORPORATE GOVERNANCE CAN BE


SEEN IN THE FORM OF
A large number of criteria can be used for measuring the corporate governance in the
banking firm.
MORE
SATISFIED
EMPLOYEES

MORE
LOANS AND
ADVANCES

SOUND
FINANCIAL
POSITION

3TG
IMPROVEMENT IN
THE NET PROFIT

CORPORATE
GOVERNANCE

MEETING SOCIAL
NEEDS EFFECTIVELY

FIGURE-5

REDUCTION IN
NON
PERFORMING
ASSET

INCREASE IN
DEPOSITS AND
CUSTOMERS/
INCREASE IN
CREDIBILITY

FULFILLING
STATUTORY
REQUIREMENT

GOVERNMENT FRAMEWORK FOR MERGER AND


ACQUISITION IN BANKING SECTOR
Government is providing various types of incentives and as a whole framework for the
merger and acquisition in the banking sector, for the purpose of increasing the rate of
growth in the economy because financial sector shows the real position of a country.

Approval for the consolidation of banks is given after the full fledge consideration of

the various stakeholders. That is :


Shareholders
Employees
General Public Etc.

Providing tax benefits to the bank, which acquires the weak bank.

Regulatory practices-supervision and regulation on a legal entity basis to align the

reporting requirements and inspection systems with.

Framework regarding risk management and internal controls.

The restructuring and consolidation that are under way in international banking
systems have been motivated by a number of developments in the past decade or so,
among which four stand out:

The deregulation of international and domestic financial markets.

Improvements in communications and computational technology.

Significant asset-quality-driven problems in many banking systems, and

A growing recognition of the costs and distortions associated with official support for

banking institutions.
These mutually reinforcing developments have both provided the impetus for banking
restructuring. Changes in the supervisory and regulatory framework have been an
important source of pressure for industry consolidation and restructuring . such changes
include the

Liberalization of domestic

Cross-border banking activities

Easing of segmentation barriers within national financial systems.

PRE-MERGER

- PART-1
COUNT DOWN TO
COLLAPSE OF
GLOBAL TRUST

PART-IV
CLARIFICATIONS ISSUED
BY RESERVE BANK OF
INDIA

PART-V
WHY DID THE RBI WAIT
THIS LONG

PART-VIII
THE MERGED
BALANCE SHEET

PART-IX
COST OF MERGING
GLOBAL TRUST
BANK

PART-II
RBIs SCHEME OF
AMALGAMATION
OF GTB WITH OBC

PART-III
GTB PLACED
UNDER
MORATORIUMNOTIFICATION OF
RBI

PART-VI
DOUBTS OF
STAKEHOLDERS

PART-VII
GLOBAL TRUST
BANK IS NOW
ORIENTAL BANK
OF COMMERCE

PART-I
COUNTDOWN TO COLLAPSE OF GLOBAL TRUST BANK
This was a crisis in the making for the last three years.
KETAN PAREKH SECURITIES SCAM OF 2001
The genesis of the GTB collapses lies in now ousted promoter Ramesh Gellis
involvement in the Ketan Parekh securities scam of 2001, when he gave huge unsecured
loans to the stock broker and group companies of Zee Telefilms.

March 31, 2002


GTBs audited balance sheet for march 31,2002, showed net worth of Rs.400.4 cr. & a
profit of Rs. 40 cr. However, RBIs inspection revealed that net worth is negative.

LARGE VARIANCE IN GTBS FINANCIAL POSITION AS


REPORTED BY AUDITORS
In view of very large variance in the assessment of GTBs financial position as reported
by auditors and by RBIs inspectors, an independent chartered accountant was appointed
to reconcile the position.

UNDESIRABLE ACTIVITIES
GTB was placed under directions relating to certain types of advances, certain premature
withdrawl of deposits, declaration of dividend and its capital market exposure. RBI also
started monitoring GTB on monthly basis.

LOSSES IN ANNUAL ACCOUNTS


For statutory audit, RBI permitted GTB, time up to September 30, 2003 to publish the
annual accounts.
STOCK PERFORMANCE
The two possible scenarios discussed above are calling off the merger and revision in the
swap ratio. Both the cases seem to be positive for the stock of UTBK, which has already
been hammered by over 40% since the merger announcement. All the negatives seem to
be more or less factored in the current price levels. We are still positive on the
fundamentals of UTI bank and expect the bank to achieve our projected growth rates.
However, given the uncertainty over the ongoing developments, any fresh exposure to the
stock shall be avoided. If the concerned issues relating to the merger are not solved soon,
the stock could also turn out to be an underperformer.

Chart1: Price movements of UTBK, GTB and BSE Sensex over the last 4 months

Source: Indiainfoline
ON MARCH 31, 2005,

ITEMS

BALANCES (CR.)

Deposits

7342

Advances

3528

Gross NPA

1032

Provision (against bad


loan)

298

RBI ISSUED PRESS RELEASE, WHICH SAID:


Even though the financial statements show an overall loss, the bank has made an
operating profit for the year 2002-03. The RBI welcomes the decision taken by the GTB
and its board to clean up the balance sheet.

RBIs INSPECTION
But RBIs inspection showed that banks net worth has further eroded and capital
adequacy ratio (CAR) was negative.
Thereafter, government on the 24th July placed GTB under moratorium for three months
on application from RBI.
Therefore sudden decision of RBI and government of India to place GTB under
moratorium caught more than 8.5 lakh customers of the bank unaware and shocked.
The moratorium is aimed at freezing the assets and liabilities of the bank in order to
protect the banks health from further deterioration.

PART-II
RESERVE BANK OF INDIAS SCHEME OF AMALGAMATION OF
GLOBAL TRUST BANK WITH ORIENTAL
BANK OF COMMERCE
Global Trust Bank Ltd., (GTB) was placed under of Moratorium on July 24, 2004.
The option available with Reserve Bank was to compulsory merger under section 45
of the Banking Regulation Act, 1949.
The government of India has sanctioned the scheme for amalgamation of the
global trust bank ltd. With the oriental bank of commerce. The amalgamation
came into force on August 14, 2004.
Before the wide interest of the different parties had considered i.e.

Oriental bank of Commerce (OBC) interest was examined by the RBI


keeping in view its financial parameters.

Its retail network and its synergies

Strategic advantages

Considered the interests of the millions of depositors of GTB

Evaluated the bank;s strengths and weaknesses, the RBI prepared draft
scheme of amalgamation of GTB with OBC.

PART-III
GLOBALTRUST BANK PLACED UNDER MORATORIUMNOTIFICATION OF RESERVE BANK OF INDIA
On an application by the Reserve Bank of India, the Central Government has today
issued an Order of Moratorium in respect of the Global Trust Bank Ltd. The Order of
Moratorium has been passed by the Central Government in public interest, in the interest
of depositors and the banking system.

PROVISIONS FOLLOWED DURING THE PERIOD OF MERGER:The moratorium will be effective from the close of business on Saturday, July 24,2004 up
to and inclusive of October 23, 2004 or an earlier date.

During the period, the Reserve Bank of India will consider the various options,
including amalgamation of the Global Trust Bank Ltd.

Finalize the plans in public interest and with a view to ensuring that the public
deposits are protected.

During the period of moratorium, the bank will be permitted to make only those
payments that have been specified in the Order of Moratorium and the
depositors of the Global Bank Ltd.

Depositors were permitted to withdraw up to Rs.10000 (Rs.ten thousand only)


from their savings bank account or current account or any other deposit account
through any other of the branches of the bank.

For the present, withdrawals through ATMs of the bank/ATMs shared with other
banks will not be permitted so as to give effect to the monetory ceiling
prescribed in the moratorium, but the customers can make withdrawals upto the
limit specified at any of the banks branches.

Any requirement of cash at the branches of the bank for making permitted
payments will be ensured in full by the Reserve Bank of India since cash
balances are maintained with it by the Global Trust Bank Ltd.

WHAT IS IN STORE FOR CUSTOMERS?


The decision of the government to impose a moratorium on Global Trust Bank is not
Liquidation of the bank. In a moratorium, government imposes a freeze on the banks
liabilities so that bank is not able to grant any loan or advances, incur any liability, make
any investment or disburse any amount. In the present case, the government has allowed
the depositors of GTB to withdraw only up to Rs. 10000.

RBI has clarified that during the period of moratorium it will consider various
options to protect depositors and their money, including amalgamation of
GTB with another bank.

RBI has appointed three directors on the board of GTB. It has also given an
assurance that any requirement of cash at the branches of the bank for making
permitted payments will be met in full by the RBI, since cash balances are
maintained with it by the GTB.

PART-IV
CLARIFICATIONS ISSUED BY RESERVE BANK OF INDIA:RBI reiterates that the objective of the moratorium is to protect the interests and safety
of funds of all depositors. Necessary actions are being initiated to ensure the return of
normalcy.

All the branches of Global Trust Bank Ltd. will continue to remain open as per
their normal working hours to help their customers and enable them to make the
permitted withdrawals.

RBI stands by its assurance to meet any requirement of cash at the branches of the
bank for making permitted payments under the Order of moratorium.

It is also clarified that the D-mat accounts and Safe Deposit Lockers of customers
will be allowed to be operated as usual.

The Reserve Bank of India has set up help lines to assist the members of public at
Mumbai and Hyderabad.

RBIs INSPECTION
But RBIs inspection showed that banks net worth has further eroded and capital
adequacy ratio ( CAR ) was negative.
Thereafter, government on the 24th July placed GTB under moratorium for three months
on application from RBI.
Therefore sudden decision of RBI and Government of India to place GTB under
Moratorium caught more than 8.5 lakh customers of the bank unaware and shocked.
The moratorium is aimed at freezing the assets and liabilities of the bank in order to
protect the banks health from further deterioration.

PART-V
WHY DID THE RBI WAIT THIS LONG

GTBs, and Gellis links to Ketan Parekh were apparent way back in 2001. in late 2002,
RBI inspections had already discovered serious problems in the way the bank accounted
for non-performing loans made to Ketan Parekh. In fact, the RBI wrote a letter of
complaint to the Institute of Chartered Accountants of India about Lovelock & Lewes,
GTBs auditors for 2001-02. For 2002-03, GTBs new auditors, Price water house
Coopers, heavily qualified the balance sheet. (PWC and Lovelock & Lewes have a
strategic tie-up and are practically the same.)

By end-2003 or early 2004, an RBI inspection team had discovered the facts that were to
be trotted out six months later to justify the OBC-GTB merger negative net worth and
capital adequacy ratio, and vastly understated volume of bad loans. This is despite
GTB managing to make some recoveries of its bad loans (around Rs 150 crore).

The RBI clearly dilly-dallied. It new about the serious problems in GTB for the last 2-3
years as pointed out in its inspection report. It also had nominees on the board. The
central bank would have like to justify itself by saying that after it came to know the facts
in January 2004 , it gave the promoters time to find a white knight before moving in.
however, the real reason may lie with the ballot box. It was one of the financial sectors
worst kept secrets that Gelli was thick with to the Andhra Pradesh chief minister
Chandrababu Naidu. Right from the Ketan Parekh days of 2001 and through the Joint

Parliamentary Committee inquires in to the scam, Naidu had backed him to the hilt. With
such a powerful backer, there was little the RBI could do, even if it had wanted to. Once
Naidu went out of power in May, it was clear that the RBI felt far more comfortable in
taking Gelli on.

PART-VI
DOUBTS OF STAKEHOLDERS
Did the auditors of Global Trust Bank, Price water house Coopers (PwC), fail to blow
the whistle?
No, PwC submitted a heavily qualified report on 30 September 2003
The audit report points out that accounts are prepared on a going concern basis even
though the net worth of the bank has been substantially eroded after considering the
loss for the year on account substantial provision against non-performing assets, taking
into account managements assessment of growth of business, infusion of capital.
These accounts do not include adjustments aforesaid in case the managements business
plans do not materialize
But why did PwC give a qualified report instead of giving a disclaimer?
In case the principle of going concern does not hold or it is not possible to arrive at an
opinion, the auditor is supposed to give a disclaimer and not express his opinion. In
GTBs case there were many ifs and buts. For example,

Accounts were prepared on going concern basis even though the net worth
had been substantially eroded

Advances worth Rs 311.61 crore were considered good though the loans were
not fully secured;

No provision was made for assets valued at Rs 181.75 crore as the bank can
hold the property for seven years;

Accounting method is consistent except in case of the additional provision


through statutory reserve permitted by the RBI; and

The accounts give a fair view subject to points (relating to Rs 311.61 crore
and Rs 181.75 crore). The impact of which is indeterminate.

WHY DOES IT APPEAR THAT ICAI HAS NOT BEEN PROACTIVE?

PwC had submitted its eligibility for reappointment for 2003-04. it was not reappointed by
GTB, but neither did the latter complain to the Institute of Chartered Accountant of India.
The new auditor Bhasker Rao & Company took up the audit.

The results for the quarter ended December 2003 continued to be prepared on a going
concern basis, though net worth was negative. ICAI sees it sufficient to act on the basis of
complaints as ithas now shot off letters to the firms after RBI pointed out the deficiencies
of the banks auditors PwC and Lovelock & Lewes.

Such crisis raises serious questions on the transparency in the private sector banks
and the credibility of their financial statements.

PART-VII
GLOBAL TRUST BANK IS NOW ORIENTAL
BANK OF COMMERCE
The Government of India has sanctioned the scheme for amalgamation of the Global Trust
Bank Ltd. With the Oriental Bank of Commerce. The amalgamation will come in to force
on August 14, 2004. All the branches of Global Trust Bank Ltd with function as branches
of Oriental Bank of Commerce with effect from this date.

Customers/Depositors of GTB
Customers, including depositors of the Global Trust bank Ltd. Will be able to operate their
accounts as customers of Oriental Bank of Commerce with effect from August 14, 2004.
Oriental Bank of Commerce is making necessary arrangements to ensure that service, as
usual, is provided to the customers of the Global Trust bank Ltd.

PRO-DATA PAYMENT .IF ANY SURPLUS REMAINS


If any surplus remains after meeting all the liabilities out of the realization of the assets of
the Global Trust bank Ltd., the shareholders may receive pro-data payment.

INCOME TAX EXEMPTIONS


As part of the merger proposal, the OBC would get income tax exemptions in transferring
the assets of GTB in its book during the merger process, while all the bad debts of the
merged entity would be adjusted against the cash balances and reserves of the Hyderabadbased bank.

PART-VIII
THE MERGED BALANCE SHEET:Post write-offs, OBCs books will be stronger.
OBC GTB
192.54

Total

OBC GTB

Capital
c
Reserve
/surpluses

121.36 192.54

Cash/Bank

2524.22

1916.10 -118.91 1919.25

Investments

14780.54 2645.29

Deposits

29809.10 6920.92 36730.02 Advances & 15677.24

COST OF MERGING GLOBAL TRUST BANK

804.84

3276.11

Total
3329.06
17425.83
18953.35

Loans

HOW MUCH WILL GTB COST OBC?


Borrowings

1166.02 302.06

1468.08

Deferred tax 5.00


Assets

Possible write off* ( Net NPA- Recoverable)

Deferred tax

N.A.

38.62

38.62

93.36

(Rs crore)
632 (approx.)

Receivables 833.18

465.68

(-) Tax benefit on write off


Liabilities

226

Cost after write off

406

Current

914.42

168.20

1082.62

(-) Tax benefit on write off


Liabilities

Net Fixed

145.29

Net cost

N.A.

153.83

300.80

1299.56

446.09

Assets

of accumulated losses**
Provisions

98.36

95
153.83

Intangible/

32.71

DRE not

OBCs tax provision for 03-04

N.A.

311

32.71

459

Written off

Possible tax benefit as above


Total

33998.1 7586.08 41584.96 Total


8

33998.18

7586.08

41584.96

PART-IX
COST OF MERGING GLOBAL TRUST BANK

FIGURE:- 9

POSITION AFTER THE MERGER


ACCORDING TO BUSINESS TODAY JANUARY 2006
Experts and analyst had an opinion that OBC was a 58,000 cr company, one of the
countrys most successful public sector banks, had been sold a lemon , but this argument
cut no ice
OBC is confident of turning around the GTB within one year. According to OBC
chairman B.D. Narang, Gtb suited it because of synergies. While weaknesses of GTB
has been bad assets, strength of OBC is recovery.

BENEFITS OF OBC
Since the GTB is a south-based bank, it would give OBC the much-needed edge in the
southern part of the country.
Both the banks have a common core banking solution Finale, which will help in the
consolidation.
GTBs 275 ATms multiplied its strength of 72 by a factor of almost five folds &
make it the 3rd largest ATM operator in PSU banks.
103 branches are added to exixting 1013 branches
Larger customer base
After accounting for the tax gains the merger of GTB, the total losses come to Rs.
704.6 cr.

POST MERGER BALANCE SHEET

FIGURE:- 10

ANALYSIS
GLOBAL TRUST BANK/ ORIENTAL BANK OF COMMERCE
REASONS BEHIND THE MERGER

ketan Parekh Scam


Huge NPA
Negative Net Worth
Inappropriate Audit
INCREASE IN NETWORK

BRANCHES

ATM

COMPARISON OF BALANCE SHEET


LIABILITY SIDE

CAPITAL RESERVE/ DEPOSITS BORROWING CURRENT

PRE-

SURPLUS

LIABILITY/

192

1919

36730

1468

PROVISION
1270

192

2480

42590

1400

1700

NIL

+29%

+16%

-5%

+39%

MERGER
POSTMERGER
%
CHANGE

FIGURE:- 12

ASSET SIDE

CASH/

INVES

ADVAN- DEFE-

RECEI-

NET

INTAN-

BANK

TMEN

CE/

RRED

VABLES FIXED

GIBLE

TS

LOAN

TAX

ASSET

ASSET

LIAB.

PRE-

3329

17426

18953

99

1300

446

32

4400

19300

22957

24

1220

445

16

+32%

+11%

+21%

-76%

-6%

-0.3%

-50%

MERGER

POSTMERGER

%
CHANGE

BENEFITS DERIVED FROM MERGER AND ACQUISITION

After studying various cases of mergers in the banking sector a large number of benefits
can be seen which are as follows:

Better corporate governance.

( Global Trust Bank / Oriental Bank Of Commerce)

Increase in the network / branches.

( Bank Of madura / ICICI)

Increase in customer base.

( Bank Of America / Fleet Boston)

Reduction in NPA.

( Nedungadi Bank / Punjab National Bank)

Compliance with statutory requirement.

(Global Trust Bank / Oriental Bank Of Commerce)

Fulfilling more responsibility towards society.

(Bank Of madura / ICICI)

Improve in financial position.

(Global Trust Bank / Oriental Bank Of Commerce)

CONCLUSION
After merger of the Global Trust Bank and Oriental Bank of Commerce following
changes has been take place:

Change in management

New ways of providing services to customers. (e-payment-railway tickets )

Change in debt recovery policy.

After analyzing the whole case of merger of the Global Trust Bank with Oriental
Bank of Commerce following conclusions can be drawned.

The quantitative factors thatare taken as the criteria for measuring the corporate
governance after the consolidations can be achieved in a better manner, like:

Net profits

ALL OF THESE
SHOWN

Increase in deposits / credibility

Increase in customer base / network

More loans and advances

IMPROVEMENT
AFTER MERGER
DUE TO BETTER
PRACTICE OF

Fulfilling statutory requirement

Sound financial position

Reduction in Non Performing Assets

CORPORATE
GOVERNANCE

SHOWN A GREAT
DECLINE IN NPA

(ANNOUNCED AS A 0% NPA BANKORIENTAL BANK OF COMMERCE


ACC. TO BUSINESS STANDARD)

THERE IS ANOTHER EXAMPLE


TO SUPPORT THE STUDY
BANK OF AMERICA BUYS FLEETBOSTON

FleetBoston's headquarters (AP)

(CBS/AP) Bank of America Corp. announced an agreement Monday to buy FleetBoston


Financial Corp., a deal initially valued at $47 billion that would swallow up the last of the
big Boston banks that made the city a financial center from the earliest days of the
Republic. The agreement, if approved by shareholders and regulators, would create the

nation's second-biggest banking company. Bank of America, currently No. 3, would have
about 33 million customers and 2.5 million business clients in 35 countries.
The deal would also bring Bank of America into New England and eliminate the Fleet
name. The combined bank will have about 5,200 branches; Bank of America already has
more branches than any other U.S. bank. No. 2 Wells Fargo has about 3,000.
"It's going to be one of the dominant banks in the U.S. banking industry over the next 25
years," said Gerard Cassidy, an industry analyst with RBC Capital Markets.
"It's going to have branches in cities that it didn't have them before, primarily places in
the Northeast New York, Boston, along the northeast coast and New England," said
CBS

MarketWatch

editor

Greg

Morcroft.

Bank of America, based in Charlotte, N.C., will pay $45 a share for Fleet, or about $13
more than FleetBoston's closing price on Friday. In trading Monday on the New York
Stock Exchange, FleetBoston shares climbed to $39.20, while Bank of America shares
fell to $73.57, down $8.29, or 10 percent. That reduced the value of the offer to $42.9
billion. Lewis will be chief executive of the merged company, to be headquartered in
Charlotte. Gifford will be chairman of the board. The deal, already approved by both
boards of directors, is expected to be completed in the first half of 2004. Bank of America
said

it

expects

the

merger

to

save

$1.1

billion.

Analyst John McCune of SNL Financial Corp. said the deal could also signal a new
round of bank mergers with large regional banks joining forces with big financial services
as

the

only

way

to

compete.

TOP 10 BANKS
(ACC.TO BUSINESS TODAY JANUARY 2006)
I.

HDFC BANK

II.

CITI BANK

III.

ABN AMRO BANK

IV.

STATE BANK OF PATIALA

V.

ORIENTAL BANK OF COMMERCE

VI.

CORPORATION BANK

VII.

HONGKONG & SHANGAI BANKING CORP.

VIII.

KOTAK MAHINDRA BANK

IX.

STANDARD CHARTERED BANK

X.

JAMMU & KASHMIR BANK

SIMILAR EXAMPLES OF MORATORIUMS


ON WEAK BANKS
Following is the list of similar moratoriums on weak banks, which finally resulted in their
mergers with major public sector banks:

1) Nedungadi bank in 2002, which was later, merged with Punjab National Bank.
2) Banaras State Bank in UP in 2000. To protect the interest of depositors, the bank
was merged with bank of baroda (BOB).

3) In 1993, the government had imposed a moratorium on the depositors of new


Bank of India. The bank was later merged with PNB.

4) United Commercial Bank in early 1990s was later merged with United Bank of
India.

5) In the early 1990s , Lakshmi Commercial Bank also faced moratoriums and was
merged with Canara Bank.

6) Early 1990s , Karur Central Bank in Kerala was merged with Bank of India.
7) Hindustan Commercial Bank faced the moratorium in 1988 and was merged with
PNB.

8) Bank of Thanjavur in Tamil Nadu in the late 1980s was later merged with Indian
Bank.

9) In 1980s, Bank of Cochin in Kerala was put under moratorium before merging it
with State Bank of India.

10) In 1969, Indo Commercial Bank was merged with PNB.

SUGGESTIONS

EXISTING GOVERNANCE AND SCOPE FOR IMPROVEMENT


CORPORATE

In developing country like

Scope

GOVERNANCE

India

intervention

for

policy

MECHANISM
LARGE BLOCK

Likely to be the most Strengthen

HOLDERS

important

rules

governance protecting

mechanism

&

minority

investors interest

MARKET FOR

Important when ownership Remove some managerial

CORPORATE

is

CONTROL

can still take place through ownership and control

strongly

concentrated; defenses;

disclosure

of

debt contracts
EXECUTIVE

Less

COMPENSATION

controlling owner can hire schemes,

important

when Disclosure of compensation

and fire and has private interest rules


benefits

conflicts

of

PROXY FIGHTS

Effective when ownership Technology


is strongly concentrated

improvement

for communicating with and


among

shareholders;

disclosure of ownership and


control

BOARD ACTIVITY

Influential when controlling Introduce

element

of

owner can hire and fire independence of directors;


board members

training
disclosure

of

directors;
of

voting;

cumulative voting possibly

SHAREHOLDER

Potentially important,

Encourage interaction

ACTIVISM

particularly in large firms

among shareholders.

with dispersed

Strengthen minority

shareholders.

rotection. Enhance
governance of institutional
investors.

EMPLOYEE

Potentially

MONITORING

particularly

LITIGATION

important, Disclosure of information to


in

smaller employees ; possibly

companies with high skilled

require board

human capital where threat

representation; assure

of leaving is high

flexible labor markets.

Depends

critically

quality

of

on Facilitate

communication

general among

shareholders;

enforcement environment , encourage class-action suits


but can sometimes work.

with

safeguards

against

excessive litigation
MEDIA AND SOCIAL

Potentially important, but Encourage competition in

CONTROL

depends

on

competition and

diverse

among and independence of media;


media.

campaign
public.

control

active
can

of

public
empower

REPUTATION AND

Important

SELF ENFORCEMENT

enforcement is weak, but opportunity and scope for

when

general Depends

stronger when environment rent


is stronger

on

seeking.

competition

growth

Encourage
in

factor

markets.

BILATERAL PRIVATE

Important, as they are more Requiring functioning civil/

ENFORCEMENT

specific, but do not benefit commercial courts

MECHANISM

outsiders
downsides.

and

can

have

ARBITRATION,

Potentially important, often Facilitate the formation of

AUDITORS, AND

the origin of public law ; private

OTHER

but

MULTILATERAL

problem often remains ; avoid

AGREEMENT

audits sometimes abused; alternatives);

the

third

enforcement mechanism

watch conflicts of interest

party

(sometimes

forming
deal

public
with

conflicts of interests; ensure


competition.

COMPETITION

Determines

scope

for Open up all factor markets

potential mistreatment of to competition , including


factors

of

production, from abroad.

including financing.

ANNEXURE

S. NO.

TOPIC

I.

Control Model of Governance chain- Mc.

II.

Table of board structure and processes of good governance

III.

Table of how merger & acquisition leads to corporate governance

IV.

Table of how these procedure leads to corporate governance

V.

Table of corporate governance can be seen in the form of

VI.

Pre-merger Scenario

VII.

Merged balance Sheet

VIII.

Cost of Merging Global Trust Bank

IX.

Post Merger balance Sheet

X.

Reasons behind Merger

XI.

Comparison of Balance Sheet


Liability Side
Asset Side