IFCI, PNB merger hits block

Merger under Sections 391,394 of Companies Act not possible: Experts

The merger of IFCI with Punjab National Bank (PNB) has run into rough weather with legal experts saying the proposal cannot go through under the current legislative framework. The development means that Finance Minister Jaswant Singh's April 1 deadline for completing the merger is set to be missed.

In their recommendations to the finance ministry, legal experts have said the merger can only take place if the government puts in place a fresh statute or merges PNB with IFCI.

The government could have promulgated an ordinance but with the Union Cabinet recommending the dissolution of the Lok Sabha the Centre can no longer exercise that option.

While nationalised banks, like PNB, are statutory corporations set up under the Banking Companies (Acquisition and Transfer of Undertaking) Acts of 1970 and 1980, IFCI is registered under the Companies Act, 1956.

Though the two entities were regulated by the Reserve Bank of India (RBI), IFCI was regulated as a non-banking financial institution making the merger legally untenable, an official said.

IFCI and PNB boards had last month decided to go for the merger with the details to be worked out in due course. Before the merger, IFCI was to transfer its sticky assets of over Rs 6,000 crore from an asset base of Rs 21,000 crore to an asset reconstruction company.

The merger could, however, take place under Section 6 of the Banking Regulation Act, 1949, subject to the shareholder approval, sources said. But with PNB and IFCI being listed entities, the cost of merger would spiral making the process useless, they added.

Senior finance ministry officials said even without the legal spanner, the merger could not have been effected by April 1 since PNB and IFCI were yet to decide on the merchant banker to carry out the due diligence and work out details like the swap ratio.

Approval from the RBI and other regulatory agencies like the Employees Provident Fund Organisation will be required to provide certain exemptions to the merged entity. Besides, PNB and IFCI shareholder have also not cleared the merger as yet.

Legal experts said as per Sections 391 and 394 of the Companies Act, the merger was not possible because both the entities were not registered under the statute. "The only option is to merge PNB with IFCI if the government opted for to make use of the Companies Act," a source pointed out.