The Hindu Business Line : Bank mergers a pipedream

THE Union Finance Minister, Mr P. Chidambaram, wants the boards of public sector banks to push for mergers when these banks (hence the boards) are owned by the Government, with the minimum stake being 51 per cent in public sector banks and with the RBI holding 55 per cent in State Bank of India.

Excepting SBI which comes under the SBI Act, others come under the acts governing nationalised banks, which some believe do not provide for mergers. Banks have to be brought under the Companies Act to effect a coming together, say others, and could take time as the approval ofParliament will be necessary.

It is hard to see bank boards moving on their own as bank chairmen may not be enthusiastic for obvious reasons. At one time, the Government thought of setting up a committee to study the subject in detail, including the legal and operational tangles; currently, the Indian Banks' Association (IBA) is having a look in.

At around the same time, the Deputy Governor of RBI, Ms K.J. Udeshi, has favoured consolidation of old private banks, a ploy which an earlier RBI deputy governor, Mr. S.P. Talwar, worked on and met with resistance from the community-based banks in Kerala and Tamil Nadu.

She is proper in arguing for a move from a large number of small banks to a small number of large banks as most, if not all, old private sector banks do not have the financial stamina to last a long game. On their own it is hard to see Federal Bank, South Indian Bank, Lord Krishna Bank and Catholic Syrian Bank becoming a single entity.

Mergers of private banks could be a rare happening with the many RBI circulars on the subject. On January 22, 1993, the RBI issued guidelines on the entry of new private sector banks to be registered as public limited companies under the Companies Act, 1956. The three-page press note did not have a word on ownership.

On January 3, 2001, an RBI press note specifically barred large industrial houses from setting up a bank but allowed companies linked to a corporate house to hold a maximum of 10 per cent stake in the bank sans "controlling interest."

On February 16, 2002, a third RBI press note set a limit of 49 per cent on FDI under the automatic route in the banking sector without being sufficiently clear on the status of FII holding in private banks. However, it said FDI and portfolio investment in nationalised banks were subject to overall statutory limits of 20 per cent as provided under Section 3 (2D) of the Banking Companies (Acquisition & Transfer of Undertakings) Act, 1970/80. The same ceiling would apply to SBI and its associate banks, the press note added.

The point was also made that "transfer of shares of 5 per cent and more of the paid-up capital of a private banking company, requires prior acknowledgement of RBI."

On January 29, 2004, in a detailed note to clarify its position to potential domestic and foreign investors, the RBI said "as hitherto, the acknowledgement from RBI for acquisition/transfer of shares will be required, for all cases of acquisition of shares which will take the aggregate holding of an individual or group to equivalent of 5 per cent or more of the paid-up capital of the bank. RBI while granting acknowledgement may require such acknowledgement to be obtained for subsequent acquisition at any higher threshold as may be specified."

On March 5, 2004, the Department of Industrial Policy & Promotion, Ministry of Commerce (not RBI, a mystery indeed), came out with rules upping FDI stake in private sector banks to 74 per cent including FII. But this key circular shut out foreign banks from acquiring Indian private banks by stating a foreign bank may operate in India through only one of the three channels: a) branches; b) a wholly-owned subsidiary and c) a subsidiary with aggregate foreign investment up to a maximum of 74 per cent.

The RBI notification on July 2, 2004 implicitly ruled out any merger or acquisition of any colour among private banks by laying the 5 per cent and 10 per cent caps. Does this not conflict with the earlier norm of 74 per cent for FDI and FII?

RBI says it is going by international norms. Agreed. But from where will banks raise fresh capital? Dr Rakesh Mohan, Deputy Governor, RBI, contends funds are aplenty for banks to tap. Public sector banks have little scope to raise fresh capital, as Government stake cannot go below 51 per cent.

Private sector banks will have problems, as they will not be able to command huge premiums and also tackle various RBI circulars. The banking industry is stuck. Will bank boards have diversified or fragmented holdings? It looks it may be fragmented enough to hobble bank boards from performing.

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