IBA pitches for bank corporatisation

The Indian Banks' Association, the premier bankers' body in the country, has made a strong puch for corporatisation of all commercial banks (excluding regional rural banks) to facilitate mergers and acquisitions on the banking turf.

The IBA report on M&A in banking, submitted to the finance ministry last week, has suggested that corporatisation would make all banks come under the Companies Act, 1956 and, therefore, ensure a common legal framework.

Corporatisation of public sector banks is found to be a long-term objective considering the fact that changing the statute would require political consensus, said the report.

If such corporatisation is done, all public sector banks would become banking companies and would be governed by the provisions of the Companies Act and the Banking Regulation Act.

Currently, banking institutions operating in India are governed by different statutory provisions making consolidation a formidable task.

Such corporatisations have a precendence with the IFCI and more recently with Industrial Development Bank of India (IDBI). The Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003 was enacted to transfer and vest the undertaking of IDBI to and in the company to be formed and registered as a company under the Companies Act, 1956 for the purpose of carrying on banking business and also to repeal Industrial Development Bank of India Act, 1964.

Once banks are corporatised, mergers will need approval of RBI under Section 44A of the Banking Regulation Act and it will not be necessary to obtain approval of the High Court.

The IBA report also recommended amendment of Section 72 A of the Income Tax Act to extend the available benefits of set-off of accumulated losses and unabsorbed depreciation to all amalgamations. As of now only companies enjoy the benefit of setting off losses against profits between two merged entities to avail of a tax exemption.

The report also recommended an omnibus provision be made in the Banking Regulation Act requiring any banking institution to obtain prior approval of RBI before acquiring any other business or any merger or amalgamation of any other business of banking institution or non-banking financial institution, with absolute rights to RBI to finalise the swap ratio.

As the provisions of the Banking Regulation Act now stand, if a banking institution desires to acquire a non-banking finance company or a company doing credit card business RBI nod is not mandatory.

Under the existing legal framework a merger between two nationalised banks can be carried forward as follows: CMD's of the two banks approach Government of India and obtain clearance to evaluate merger proposal.

A due dilligence follow, the result of which is taken to the Government. The government then prepares a draft scheme and requires valuation to be conducted by experts to work out the swap ratios. This would then have to submitted in a sealed cover directly to the Central Government.

All material would then be placed before RBI and before the boards of both banks. At this stage, Sebi guidelines would have to be complied with.

The next step would be to publish the draft scheme in its final form in various newspapers across the country for the information of the investing shareholders. Any scheme framed under the Nationalization Act would require the Parliament's nod.