Banking Related Mergers and Acquisitions (M&As) in India

In this special column, Mr. B.S.Dalal, Senior Partner at Perry4Law and a Techno Legal Banking and Financial Expert, is discussing the current position of mergers and acquisitions in the banking sector of India.

Mergers and acquisitions (M&A) in India are governed by the various laws. The anti competitive nature of such mergers and acquisition is regulated by the competition commission of India under the competition act, 2002.

Till now all mergers and acquisitions related anti competition issues of banks are governed by the competition commission of India. However, Banking Laws (Amendment) Bill, 2011 has proposed a new section 2A that provides that “Notwithstanding anything contrary contained in Section 2 of the Banking Regulation Act, 1949, nothing contained in Competition Act, 2002, shall apply to any banking company, the State Bank of India, any subsidiary bank, any corresponding new bank or any regional rural bank or cooperative bank or multi-state cooperative bank in respect of the matters relating to amalgamation, merger, reconstruction, transfer, reconstitution or acquisition under respective Acts.”

Through this amendment, the Reserve Bank of India (RBI) is trying to remove the scrutiny of competition commission of India over banking related mergers and acquisitions and keeping the same within its own jurisdiction and powers.

The Banking Laws (Amendment) Bill, 2011 was introduced in Lok Sabha on 22 March, 2011 and referred to Standing Committee on Finance for examination and report on 24 March, 2011. The Parliamentary Standing Committee on Finance of India has given a conditional nod for introduction of Banking Laws Amendment Bill 2011.

Before the Parliamentary Standing Committee on Finance, it has been suggested that the exemption of bank mergers etc. from the scrutiny of the competition commission of India (CCI) would allow RBI to approve bank mergers in public /depositors’ interest, in the interest of the banking system in India and to secure the proper management of the banking company in a timely manner without waiting for approval of the CCI.

The Committee, while supporting the Government’s proposal to keep bank mergers etc., outside the purview of Competition Commission of India for the time being, recommended that this exemption should be considered as a special case and an expedient measure to be revisited in due course in the light of experience gained by both the regulators in question, namely the RBI and the Competition Commission of India. This however does not in any manner convey the Committee’s views on mergers or acquisition policy in banking sector as such, which is an issue meriting a separate discourse.

As Reserve Bank of India has been entrusted with the mandate to grant approval for acquisitions, transfer, mergers etc. in the banking sector, the Committee expect that the Reserve Bank of India would conduct due diligence of “fit and proper” persons/entities and take sufficient safeguards while stipulating conditions as to credentials, source of funds, track record, financial inclusion etc. before granting approvals under this clause.

The Committee also recommended that the Government can consider the merits of issuing non-voting shares as an avenue to expand the capital base of banks without allowing concentration of management control in a few hands and which would also enable them to grow faster.

The Committee also felt that as amendments are being proposed by Government frequently in banking law covering different aspects at different points of time, the Committee would recommend that the Government, instead of bringing piecemeal amendments, should consider formulating an integrated modern banking law for India, which will be comprehensive and will consolidate all related provisions and aspects of banking presently dispersed in different statutes. It may include such other fresh and forward-looking proposals reflecting emerging realities as may be considered necessary by the Government for inclusion in the integrated banking law.

Clearly, once the proposed amendments are passed, the mergers and acquisitions of banks will now come under the purview of the Banking Regulation Act. This means M&A in banking sector would no more require the approval of the Competition Commission of India.

Other banking related reforms are also in pipeline. The Government of India has recently passed a resolution for the constitution of Financial Sector Legislative Reforms Commission (FSLRC) of India. The main objective of constitution of FSLRC is to rewrite and harmonise financial sector legislations, rules and regulations. This had become necessary as the institutional framework governing India’s financial sector was built over a century and the same has become redundant for the contemporary requirements.

Some of the areas that FSLRC can analyse and consider pertain to merger and acquisition norms, non banking financial companies regulation, wealth management regulations, cyber security for banking and financial institutions, due diligence by banks and financial sectors of India, etc.

Non banking finance companies (NBFC) laws in India have also been streamlined by Supreme Court of India. A Bench consisting of Justice Markandey Katju and Justice Gyan Sudha Misra upheld the “constitutional validity” of such State laws and termed such laws as salutary measures which were long overdue to deal with scamsters.

Banking related mergers and acquisitions in India are heading for a big change and all those interested in the same must keep a close watch upon it.