RBI releases norms for pvt bank/NBFC mergers

The Reserve Bank of India (RBI) today released the guidelines for merger/amalgamation of private sector banks or a private sector bank taking over a non-banking finance company (NBFC).

According to a release issued by RBI today, boards of the banks have to play a crucial role in the process. "It may be ensured that the decision of merger should be approved by two-third majority of the total board members and not those present. However, in view of the importance of the responsibility implicit in such merger decisions, it will be necessary that the directors who participate in such meetings are signatories to the deeds of covenants as recommended by the Ganguly Working Group on Corporate Governance," the release added.

The guidelines cover two situations namely, an amalgamation of two banking companies, and amalgamation of a non-banking finance company (NBFC) with a banking company, the release said.

"Before convening the meeting for the purposes of obtaining the shareholders' approval, the draft scheme of amalgamation needs to be approved individually by the boards of directors of the two banking companies. When according this approval, the boards need to give particular consideration to the following matters :-

(a) The values at which the assets, liabilities and the reserves of the amalgamated company are proposed to be incorporated into the books of the amalgamating banking company, and whether such incorporation will result in a revaluation of assets upwards or credit being taken for unrealized gains;

(b) Whether due diligence exercise has been undertaken in respect of the amalgamated company;

(c) The nature of the consideration, which, the amalgamating banking company will pay to the shareholders of the amalgamated company;

(d) Whether the swap ratio has been determined by independent valuers having required competence and experience and whether in the opinion of the board such swap ratio is fair and proper;

(e) The shareholding pattern in the two banking companies and whether as a result of the amalgamation and the swap ratio the shareholding of any individual, entity or group in the amalgamating banking company will be violative of the Reserve Bank guidelines or require its specific approval;

(f) The impact of the amalgamation on the profitability and the capital adequacy ratio of the amalgamating banking company;

(g) The changes which are proposed to be made in the composition of the board of directors of the amalgamating banking company, consequent upon the amalgamation and whether the resultant composition of the Board will be in conformity with the Reserve Bank guidelines in that behalf.

"Where an NBFC is proposed to be amalgamated into a banking company, the banking company should obtain the approval of the Reserve Bank of India after the scheme of amalgamation is approved by its board but before it is submitted to the High Court for approval," the release said.