Guidelines for NBFC mergers soon

ANNUAL POLICY 2005-06/ STRUCTURAL ISSUES & CREDIT DELIVERY

Merger of Ashok Leyland Finance with IndusInd Bank without prior RBI approval triggers move.

The Reserve Bank of India (RBI) will issue guidelines for merger of non banking finance companies (NBFCs) with private sector banks. This is a fall out of the merger of Ashok Leyland Finance (ALF) with IndusInd Bank without prior approval of the RBI.

IndusInd Bank had followed the procedure laid down under the Companies act and got the merger approved from the high court and sought a post-facto nod from RBI.

Following this, the RBI in July 2004 had issued a circular making central bank's prior approval mandatory for merger of an NBFC with a bank.

The proposed guidelines to be issued by the RBI would cover the process of merger proposal, determination of swap ratios, disclosures, norms for buying and selling of shares by promoters before and during the process of merger, and the Board's involvement in the merger process.

These guidelines would also be applicable to public sector banks subject to relevant legislation, said the RBI.

The Reserve Bank has decided to enter into bank-wise dialogues to ensure a time-bound framework for compliance with the guidelines. Earlier, in order to ensure prudent governance practices in private sector banks, the RBI had issued detailed guidelines on ownership and governance.

According to the guidelines, the RBI had directed banks to increase their networth to around Rs 300 crore over a period of three years. The guidelines also stated that no single entity should hold more than 10 per cent stake in a bank. The RBI had asked banks to submit a roadmap to adhere to the RBI guideline.

Old private sector banks such as Catholic Syrian Bank, Sangli Bank, Lord Krishna Bank, Lakhmi Vilas Bank and Dhanlakhmi Bank are affected by this directive. According to banking sources old private sector banks like Lord Krishna Bank and the Lakshmi Vilas Bank are planning to submit a roadmap shortly.

Lord Krishna Bank board is planning to raise capital through a public offering or issuance of preference shares, said banking sources, while Lakhmi Vilas Bank is planning to raise capital through a rights issue.

After issuance of the guidelines Centurion Bank raised around $ 300 million through global depository receipts which enabled the bank boost its capital to over Rs 300 crore.

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Marriage manual

• The proposed guidelines to be issued by the RBI would cover the process of merger proposal, determination of swap ratios, disclosures, norms for buying and selling of shares by promoters before and during the process of merger, and the Board's involvement in the merger process.
• These guidelines would also be applicable to public sector banks