Documente Academic
Documente Profesional
Documente Cultură
On
BATCH: 2004-2006
Submitted by:
Mrs. ABCS
ABC
INDEX
SERIAL NO.
1.
PARTICULARS
Preface
2. Acknowledgement
3. Certificate
4. Introduction
5. Literature Review
6. Overview Of The Industry
Beginning of banking in the world
Beginning of banking in India
Reforms in banking
7. Basic framework
Objectives of the study
Research methodology
Source of data
Limitation
Scope of study
8. Conceptualization
16. Bibliography
DECLARATION
I ABC Roll No.
by declare that the project entitled Role of Merger & Acquisition in Banking Sector
For Better Corporate Governance is an original work and the same has not been
submitted to any other institute for the award of any degree. The interim report was
presented to the Supervisor on __________and the per-submission was made
on_____________. The flexible suggestions have been incorporated in consultation with
the supervisor.
Counter Signed
Forwarded By:
ACKNOWLEDGEMENT
In this present world of competition there is a race of existence in which those who are
having will to come forward will succeed. Project is a bridge between practical and
theoretical working , with this will I have joined the project . I really wish to express my
gratitude towards all those people who have helped me.
I really indebted to Mr. AB H.O.D. M.B.A. department ABC., City for this kind hearted
approach. His timely guidance, supervision & encouragement have helped me to get this
golden opportunity.
My project guide Mrs. ABCD lecturer of ABC., City, who provided me his expert advise,
inspiration & moral support in spite of her busy schedule & assignments, has mainly
provided my understanding of this project. I am very grateful to his kindhearted approach
& encouragement, which helped me immensely in completion of this project report.
Last , but not the least, I say only this much that all are not to be mentioned but none is
forgotten and I will like to extend my special thanks and gratitude to my parents who
always encourage me in pursuit of excellence.
(ABC)
In the wake of recent financial & corporate scandals corporate governance is the need of
hour. In spite of the growing knowledge, not much attention has been given to corporate
issues in bank.
3 CS OF BANKING ARE
Capital
Corporate governance
First , because banks are seen as the engines that drive the
economy towards growth in developing countries
Employees frauds
negative
Directors poor decisions and ineffective board processes are to pay the price. For
measuring the board performance4 against certain benchmarks set for good
governance,
Shareholders
Environment
Concentrated
ownership
INSTITUTIONAL
CONTEXT
Insider board
Reliance on
family, bank
and public
finance
Incentives
aligned with
core shareholder
Under
Developed
new issued
market
Inadequate
minority
protection
Limited
takeover
CORPORATE
CONTEXT
Limited
disclosure
Capital market
Liquidity
Transparency
Accountability
FIGURE:- 1
The goldsmiths, makers and sellers of plate and jewellery, flourished after the dissolution
of the monasteries in the 1530s increased the available supplies of gold. Many goldsmiths
developed strong connections with the crown and , from the 1940s, most began to take in
valuables for safe keeping in their vaults.
Thomas Smith , a cloth merchant in Nottingham, began operating the earliest known
provincial bank in the 1650s , by offering banking services to his customers. Most
countrys banks however, were established from the mid-eighteenth century onward.
Before 1750 there were only a handful of bankers in the country outside London . by
1784 this number had grown to 119 and by 1810 to a massive 650. similarly in Scotland,
by 1772 there were eight banking companies operating in Scotland outside Edinburgh &
Glasgow, a number that had increased to 21 by 1810.
From the 1770s a more sophisticated banking infrastructure began to emerge, with the
creation of a clearing house in London for settling inter-bank payments
HISTORICAL PERSPECTIVE OF
INDIAN BANKING
According to Indian banking history, The British East India Company established The
Hindustan Bank in Calcutta and Bombay in 1870, was the earliest Indian Bank banking
in India on modern lines started with the establishment of three presidency banks under
Presidency Banks act 1876 i.e. Bank of Calcutta, Bank of Bombay and Bank of Madras.
NATIONALIZATION OF BANKS
On 19 July 1969, the Government acquiring ownership and control of 14 major banks in
the country an Ordinance. This was done to bring commercial banks in to the mainstream
of economic development with definite social obligations and objectives. Later, on 5
April 1980, six more commercial banks were nationalized.
LIBERALIZATION
There is a growing need for banking facilities due to nationwide growth, international
trade and industrial liberalization which have all contributed to changes in the banking
environment.
Commercial banks too have joined the hub of capital market activities.
There has been a transformation in the services offered by banks and this has
led to considerable change in the type of manpower recruited.
In this scenario pay scales have gone up and the number of employees has
gone down.
Banks have set right their organizational structure for efficient services.
Computers have taken over and recruitment pattern has been favorable to
more technical manpower.
To cater to the needs of a growing industry for marketing its shares and debentures,
public sector banks and financial institutions have started their own Merchant
Banking divisions. Many industrial houses too have started their own Merchant
Banking, companies, acting as lead managers for public issues of shares and
debentures, e.g. Times Guarantee, Tata Finance etc.
INVESTMENT BANKING:
Investment Banking activities are associated with financial activities such as
securities underwriting, markets and arranging mergers, acquisitions and
restructuring. Investment bankers work in retail banking and corporate clients and
institutional banking. These banks hold large financial assets as they manage dealer
activities and in trading and distribution of securities. The function is advisory and
the bank support financial activities through lending to customers using securities as
collateral or for repurchase agreements where in they use their own securities.
Investment banking is fund based and not only fee based while Merchant Banking,
on the other hand, is fee based.
The worlds top six investment banking houses manage the major portion of new
issue investment-grade securities and are referred to as special bracket firms; these
are Solomon Brothers, First Boston, Goodman Sachs, Morgan Stanley, Merrill
Lynch, and Shearson Lehman Brothers. In India, some of the top investment
Bankers is DSP Merrill Lynch, PNB Capital Services, GE Caps, IFCI Financial
Services, IDBI Capital Markets, SBI Capital & JM Financial and Investment.
The role of Investment Banks is to participate in direct markets by bringing
financial claims for sale. They operate to help businesses and governments sell their
new security issues. Once the securities are sold investment bankers make
secondary markets for securities as brokers and dealers. They are largely doing
underwriting business. Investment Banking can be carried on as part of the normal
range of business activities. In India ICICI Bank can be regarded as investment
banking.
against term deposits and on domestic deposits with maturity periods over two years.
Guidelines
issued
to
banks
to
ensure
qualitative
COMPETITION
Decades of non-commercial orientation, direct lending, loan waivers and
increasing non-performing assets had initially made banks difficult to adjust to a
market environment having strict prudential norms. However, the emerging
results suggest that banks are beginning to adapt to the competitive environment
and facing the challenge.
DECONTROL
Many steps were taken in 1995-96 to reduce controls and remove operational
constraints in the banking system. These include interest rate decontrol,
liberalization and selective removal of Cash Reserve Ratio (CRR) stipulation,
freedom to fix foreign exchange open position limit and enhanced refinance
facilities against government and other approved securities.
I.
The banks shall be governed by the provisions of the Reserve Bank of India Act,
1934 The Banking Regulation Act, and 1949 other relevant statuaries.
II.
III.
IV.
V.
VI.
VII.
The new bank would not be allowed to have as its director any person who is
already a director in a banking company.
VIII.
IX.
The banks will be free to open branches anywhere once they satisfy the capital
adequacy and prudential accounting norms.
X.
The banks would not be allowed to have investments in subsidiaries, mutual funds
and portfolio investments in other companies in excess of 20% of the banks own paid up
capital and reserves.
XI.
Public sector banks recovered Rs 12,860 cr in 200001 as compared with Rs.9,883 cr in the previous year and net NPAs as percentage of
net advances came down to 6.7% as on March 31, 2001 as compared to 7.4% in the
previous year.
Reforms in 1997-98. two of these banks namely UCO bank United bank of India have
turned around and have started making profits. Though the Indian Bank has also
shown improvement, its capital adequacy ratio remains deficient. A provision of Rs
1300 cr is proposed for re-capitalization support to this bank, on the basis of a
commitment to government for implementing monitor able reform measures.
The cooperative credit structure, which is critical for the agriculture sector, has low
capital adequacy and high NPAs, is of urgent need of reform. A committee under the then
Deputy Governor of RBI was appointed to examine its functioning closely. The
recommendations of this committee have been discussed widely by chief ministers and in
a joint committee of cooperation ministers under the chairmanship of Vikhe Patil reform
measures such as the adoption of a Model Cooperative Act, removal of dual control
between state governments and the RBI, regular conduct of elections, larger stake of the
members, and proffessionalisation of management etc. have been recommended.
The recapitalization formula suggested is 60:40 between the central and state government
along with increases in share capital of members. States will have to consider and accept
their funding share and implement the suggested measures for reform.
Even though this is a state subject the government of India will go out of its way to help
in the process. To start the process, Sinha said he is making a token provision of Rs 100
cr and depending on the pace of reform, provision of additional funds will be considered.
Foreign banks, however, are not required to open branches in rural areas, or to make
loans to the agricultural sector.
NEED TO PONDER
Debates on Indias slowdown focus on the manufacturing sector which is dangerously
misleading: one of the biggest areas of worry about Indias banking sector. Stories about
the real health of Indian banks get less publicized because banks are still overwhelmingly
owned, controlled and directed by the government, i.e. the ministry of finance(MOF).
Banks have no effective mouthpiece either
GREY FUTURE
One more reason being the opacity of the RBI. This doesnt mean a forecast of doom for
the Indian banking sector the kind that has washed out South East Asia. And also not
because Indian banks are healthy. We still have no clue about the real non-performing
assets of financial institutions and banks. Many banks are now listed. That puts additional
responsibility of sharing information. It is now clear that it was the financial sector that
caused the sensational meltdown of some Asian nations. India is not Thailand, Indonesia
and Korea. Borrowed investment in property in India is low and property prices have
already fallen, letting out steam gently. Our micro-meltdown has already been happening.
CONCLUSION
Still, there are several other worries about the banking sector, mainly confusion over
ownership and control. Sometimes soon India will be forced to apply the norms of
developed countries and many banks (including some of the biggest) will show very poor
return ratios and dozens of banks will be bankrupt. When that happens the two popular
reasons to defend bad banks will disappear. These are:
Some banks are too big to be allowed to fail faring social upheaval.
Reduction in the interest cost and hence benefits the ultimate consumer
Enhancing the credit delivery mechanisms
Introduction of the rating processes at retail level
Creating level playing field when global players enter retail
Reversing the inverse relationship between the size of borrowing and the cost of
borrowing.
To study that how Merger & Acquisitions leads or helps in Corporate Governance.
To trace it out the related issues in both pre and post merger case.
To study why the banks are going towards Merger & Acquisitions.
To study the measures taken by the government to increase Merger & Acquisition
in Banking Sector.
RESEARCH METHODOLOGY
Research Methodology refers to the methods the researcher use in performing research
operations. The research methods which are going to be used are:
1) Explorative research
2) Case study (comparative analysis)
i. Whole case is divided into parts.
ii. Organizations position before merger & acquisition traced.
iii. Organizations position after merger & acquisition traced.
iv. Comparison of both.
v. Comparative evaluation of results is given.
In the explorative research, our objective is going to:
i.
ii.
problem.
iii.
Explorative phase begin with the literature search-a review of books as well as articles in
journals or professional literature that relates to our dilemma. A literature search requires
that use of library online catalog and one or more bibliographic databases or indexes. For
some topics it may be useful to consult a handbook or specialized encyclopedia first to
establish a list of key terms, people or events that have influenced our topic and also to
determine what the major publications are and who the foremost authors are. Other
reference materials should be incorporated into research strategy as needed.
SOURCE OF DATA
The various types of secondary data carry out the study.
Magazines
Business Today
Business World
India Today
Newspapers
Economic times
Business standard
Web sites
www.yahoo.com
www.google.com
www.SEBI.org
www.RBI.org
Study
will
be
useful
for
the
management students.
FINANCING M & A
Various methods of financing M&A deals exist :
In
some
cases,
DIFFICULTIES IN M&A
For achieving a greater extent of corporate governance, merger & acquisition is
one of the ways. But its not so easy; various types of problems are faced by the
organization in this type of procedure. There difficulties are:
1. SECRECY
Secrecy is maintained from bankers, suppliers, employees, customers &
others so that the negative reactions can be minimized.
2. SLOW, EXPENSIVE & DIFFICULT
A transaction generally requires six to nine months & many steps to meet
all the legal procedure.
3. HARD TO FIND BUYER
Its very difficult to find a potential buyer fir the multimillion dollar
corporations, so that adequate consideration can be measured.
4. NEGOTIATION & POTENTIAL OF THE COMPANY
More difficulty arises at the time of the negotiation & the measurement
of the net worth of the business.
5. EXPENSIVE SERVICES
Professional middleman (intermediaries, business brokers & investment
bankers) charge a high rate as their fees.
6. INEFFICIENCY
Middlemen operate inefficiently because of the slow & limiting nature of
having too much rely upon telephonic communication.
SYNERGY
Synergy is the magic force that allows for enhanced cost efficiencies of the
new business. Synergy takes form of revenue enhancement & cost saving.
STAFF REDUCTION
Merger tends to mean job losses from accounting, marketing & other
departments.
ECONOMIES OF SCALE
A bigger company places a bigger order of various items & can save more
cost & in better negotiation position.
IMPROVED
MARKET
REACH
&
INDUSTRY
VISIBILITY
A merge may extend two companies marketing & distribution
opportunities. Capital can raise easily in a bigger company than a smaller
company.
MERGER
A merger in business or economy refers to the combination of two companies into one
larger company. Such actions are commonly voluntary and often involves stock swap. In
many instances a merger resemble a takeover but results in a new company name. (often
combining the names of the original companies and in new branding)
CLASSIFICATION OF MERGERS
HORIZONTAL
MERGER
VERTICAL
MERGER
CONGLOMERATE
MERGER
MARKET
-EXTENSION
PURCHASE
MERGER
PRODUCTEXTENSION
CONSOLIDATION
MERGERS
Horizontal merger take place where two-merging companies both produce similar
product in the same industry.
Vertical merger occur when two firms, each working at different stages in the
production of the same goods, combine.
Market-extension
Product-extension
occurs when two companies that sell the different but related
Purchase mergers occurs when one company purchase other company. The purchase
is made either by cash or through the issue of some kind of debt instrument, and the sale
is taxable.
Consolidation
companies are bought & combined under the new entity. Tax terms are the same as those
of a purchase merger.
FAMOUS MERGERS
ACQUISITIONS
When a company takes over another one and clearly becomes the new owner, the
purchase is called as an acquisition
From a legal point of view, the target company ceases to exist and the buyer swallows
the business, and stock of the buyer continues to be traded.
WAYS OF ACQUISITION
CONSIDERATION
BY ASSETS
REVERSE MERGER
I.
Consideration- A company can buy another company with cash, with stock, or a
combination of two.
II.
By assets- In a smaller deal, a company can acquire all the assets of another company
III.
Reverse Merger-In this type of acquisition, a deal that enables a private company to
get publicly listed in a relatively short time period.
Description of the transfer and transferee company and the business of the transferor.
Protection of employment
Application u/s 391 and 394 of the companies act, 1956,to obtain high courts
approval.
Expenses of amalgamation.
amalgamation.
The basis of merger and acquisition in the scheme should be the reports of the valuers of
asset of both the merger partner companies.
CORPORATE GOVERNANCE
Corporate governance is about promoting corporate fairness, transparency and
accountability.
ACCORDING TO WELFENSON, PRESIDENT OF THE WORLD BANK
QUOTED BY FINANCIAL TIMES
Corporate governance deals with the way in which supplies of finance to corporations
assure themselves of getting a return on their investment.
Corporate governance is a system by which business corporations are directed and
controlled.
Bankruptcy
Its dealt a strong blow to those analysts who smugly claimed for something
It brought the role of auditors sharply into focus
It exposed the peculiarities of the Indian Banking Environment.
FOR BETTER CORPORATE GOVERNANCE THE
FOLLOWING INFORMATION AND REPORT
SHOULD PLACE BEFORE THE BOARD
Annual operating plans and budgets, together with updated long term plans
Capital budgets, manpower and overhead budgets
Quarterly results for the company as a whole and its operating division or business
segment
Internal audit report, including cases of theft and dishonesty of a material nature.
Show cause, demand and prosecution notices received from revenue authorities that
is considered to be materially important(material nature of any exposure that exceeds 1 %
of the companys net worth).
Reports to fatal and serious accidents, dangerous occurrences, any any affluent and
pollution problem.
Any issue which involves possible public or product liability claims of a substantial
nature, including any judgment or order which may have either passed structure on the
conduct of the company, or taken an adverse view regarding another enterprise that can
have negative implications for the company.
Recruitment and remuneration of senior officers just below the board level, including
appointment and removal of the chief financial officer and the company secretary.
STRUCTURE
PROCESSES
Impose a retirement age to maintain a mix Ensure that the management reports
of skill, energy, enthusiasm and regularly to the board of succession
commitment
planning
FIGURE-2
PROPER
RECRUITME
REPORTING
NT PROCESS
AND
INFORMATION
PROPER
MEETING
PROCEDURE
OF LENDING
All relevant decisions should place before the shareholders in the meetings
Less number of
directors to reduce
coalitions
Recruitment
should base
upon the skills
and
qualifications of
the candidate
All relevant
decisions
should place
before the
shareholders
in the
meetings
More outside
directors that more
transparency could
bring by more of
questioning about
remuneration,
expenses, etc.
Proper
information
about daily
working of the
firm
Qualification
should be decide
for the directors
Attendances
should be
compulsory
for the
directors
FIGURE-3
Requirement of
lending should
be complete, so
that claim can
be made
Various factors
should
considered
(credibility,
capacity, project
requirement,
profitability, etc
By raising more
queries about
remuneration,
dividends, nonperforming asset
etc.
PROPER
REPORTING RECRUITMENT
PROCESS
AND
INFORMATIO
N
Daily
information,
so that
defaults can be
traced at early
stage about
NPAs ,
expenses,
lending etc.
Well-qualified and
optimum number
of employees
should be taken to
avoid scams and
manipulations in
the records.
FIGURE-4
PROPER
MEETING
PROCEDURE
OF LENDING
Problems
should place
in the meeting
so that
effective
decisions
could be
taken, and no
body can take
advantage of
weaknesses
Lending should
be done to
worthwhile
persons and
projects, so that
the rate of non
performing
assets can be
reduced.
MORE
LOANS AND
ADVANCES
SOUND
FINANCIAL
POSITION
3TG
IMPROVEMENT IN
THE NET PROFIT
CORPORATE
GOVERNANCE
MEETING SOCIAL
NEEDS EFFECTIVELY
FIGURE-5
REDUCTION IN
NON
PERFORMING
ASSET
INCREASE IN
DEPOSITS AND
CUSTOMERS/
INCREASE IN
CREDIBILITY
FULFILLING
STATUTORY
REQUIREMENT
Approval for the consolidation of banks is given after the full fledge consideration of
Providing tax benefits to the bank, which acquires the weak bank.
The restructuring and consolidation that are under way in international banking
systems have been motivated by a number of developments in the past decade or so,
among which four stand out:
A growing recognition of the costs and distortions associated with official support for
banking institutions.
These mutually reinforcing developments have both provided the impetus for banking
restructuring. Changes in the supervisory and regulatory framework have been an
important source of pressure for industry consolidation and restructuring . such changes
include the
Liberalization of domestic
PRE-MERGER
- PART-1
COUNT DOWN TO
COLLAPSE OF
GLOBAL TRUST
PART-IV
CLARIFICATIONS ISSUED
BY RESERVE BANK OF
INDIA
PART-V
WHY DID THE RBI WAIT
THIS LONG
PART-VIII
THE MERGED
BALANCE SHEET
PART-IX
COST OF MERGING
GLOBAL TRUST
BANK
PART-II
RBIs SCHEME OF
AMALGAMATION
OF GTB WITH OBC
PART-III
GTB PLACED
UNDER
MORATORIUMNOTIFICATION OF
RBI
PART-VI
DOUBTS OF
STAKEHOLDERS
PART-VII
GLOBAL TRUST
BANK IS NOW
ORIENTAL BANK
OF COMMERCE
PART-I
COUNTDOWN TO COLLAPSE OF GLOBAL TRUST BANK
This was a crisis in the making for the last three years.
KETAN PAREKH SECURITIES SCAM OF 2001
The genesis of the GTB collapses lies in now ousted promoter Ramesh Gellis
involvement in the Ketan Parekh securities scam of 2001, when he gave huge unsecured
loans to the stock broker and group companies of Zee Telefilms.
UNDESIRABLE ACTIVITIES
GTB was placed under directions relating to certain types of advances, certain premature
withdrawl of deposits, declaration of dividend and its capital market exposure. RBI also
started monitoring GTB on monthly basis.
Chart1: Price movements of UTBK, GTB and BSE Sensex over the last 4 months
Source: Indiainfoline
ON MARCH 31, 2005,
ITEMS
BALANCES (CR.)
Deposits
7342
Advances
3528
Gross NPA
1032
298
RBIs INSPECTION
But RBIs inspection showed that banks net worth has further eroded and capital
adequacy ratio (CAR) was negative.
Thereafter, government on the 24th July placed GTB under moratorium for three months
on application from RBI.
Therefore sudden decision of RBI and government of India to place GTB under
moratorium caught more than 8.5 lakh customers of the bank unaware and shocked.
The moratorium is aimed at freezing the assets and liabilities of the bank in order to
protect the banks health from further deterioration.
PART-II
RESERVE BANK OF INDIAS SCHEME OF AMALGAMATION OF
GLOBAL TRUST BANK WITH ORIENTAL
BANK OF COMMERCE
Global Trust Bank Ltd., (GTB) was placed under of Moratorium on July 24, 2004.
The option available with Reserve Bank was to compulsory merger under section 45
of the Banking Regulation Act, 1949.
The government of India has sanctioned the scheme for amalgamation of the
global trust bank ltd. With the oriental bank of commerce. The amalgamation
came into force on August 14, 2004.
Before the wide interest of the different parties had considered i.e.
Strategic advantages
Evaluated the bank;s strengths and weaknesses, the RBI prepared draft
scheme of amalgamation of GTB with OBC.
PART-III
GLOBALTRUST BANK PLACED UNDER MORATORIUMNOTIFICATION OF RESERVE BANK OF INDIA
On an application by the Reserve Bank of India, the Central Government has today
issued an Order of Moratorium in respect of the Global Trust Bank Ltd. The Order of
Moratorium has been passed by the Central Government in public interest, in the interest
of depositors and the banking system.
PROVISIONS FOLLOWED DURING THE PERIOD OF MERGER:The moratorium will be effective from the close of business on Saturday, July 24,2004 up
to and inclusive of October 23, 2004 or an earlier date.
During the period, the Reserve Bank of India will consider the various options,
including amalgamation of the Global Trust Bank Ltd.
Finalize the plans in public interest and with a view to ensuring that the public
deposits are protected.
During the period of moratorium, the bank will be permitted to make only those
payments that have been specified in the Order of Moratorium and the
depositors of the Global Bank Ltd.
For the present, withdrawals through ATMs of the bank/ATMs shared with other
banks will not be permitted so as to give effect to the monetory ceiling
prescribed in the moratorium, but the customers can make withdrawals upto the
limit specified at any of the banks branches.
Any requirement of cash at the branches of the bank for making permitted
payments will be ensured in full by the Reserve Bank of India since cash
balances are maintained with it by the Global Trust Bank Ltd.
RBI has clarified that during the period of moratorium it will consider various
options to protect depositors and their money, including amalgamation of
GTB with another bank.
RBI has appointed three directors on the board of GTB. It has also given an
assurance that any requirement of cash at the branches of the bank for making
permitted payments will be met in full by the RBI, since cash balances are
maintained with it by the GTB.
PART-IV
CLARIFICATIONS ISSUED BY RESERVE BANK OF INDIA:RBI reiterates that the objective of the moratorium is to protect the interests and safety
of funds of all depositors. Necessary actions are being initiated to ensure the return of
normalcy.
All the branches of Global Trust Bank Ltd. will continue to remain open as per
their normal working hours to help their customers and enable them to make the
permitted withdrawals.
RBI stands by its assurance to meet any requirement of cash at the branches of the
bank for making permitted payments under the Order of moratorium.
It is also clarified that the D-mat accounts and Safe Deposit Lockers of customers
will be allowed to be operated as usual.
The Reserve Bank of India has set up help lines to assist the members of public at
Mumbai and Hyderabad.
RBIs INSPECTION
But RBIs inspection showed that banks net worth has further eroded and capital
adequacy ratio ( CAR ) was negative.
Thereafter, government on the 24th July placed GTB under moratorium for three months
on application from RBI.
Therefore sudden decision of RBI and Government of India to place GTB under
Moratorium caught more than 8.5 lakh customers of the bank unaware and shocked.
The moratorium is aimed at freezing the assets and liabilities of the bank in order to
protect the banks health from further deterioration.
PART-V
WHY DID THE RBI WAIT THIS LONG
GTBs, and Gellis links to Ketan Parekh were apparent way back in 2001. in late 2002,
RBI inspections had already discovered serious problems in the way the bank accounted
for non-performing loans made to Ketan Parekh. In fact, the RBI wrote a letter of
complaint to the Institute of Chartered Accountants of India about Lovelock & Lewes,
GTBs auditors for 2001-02. For 2002-03, GTBs new auditors, Price water house
Coopers, heavily qualified the balance sheet. (PWC and Lovelock & Lewes have a
strategic tie-up and are practically the same.)
By end-2003 or early 2004, an RBI inspection team had discovered the facts that were to
be trotted out six months later to justify the OBC-GTB merger negative net worth and
capital adequacy ratio, and vastly understated volume of bad loans. This is despite
GTB managing to make some recoveries of its bad loans (around Rs 150 crore).
The RBI clearly dilly-dallied. It new about the serious problems in GTB for the last 2-3
years as pointed out in its inspection report. It also had nominees on the board. The
central bank would have like to justify itself by saying that after it came to know the facts
in January 2004 , it gave the promoters time to find a white knight before moving in.
however, the real reason may lie with the ballot box. It was one of the financial sectors
worst kept secrets that Gelli was thick with to the Andhra Pradesh chief minister
Chandrababu Naidu. Right from the Ketan Parekh days of 2001 and through the Joint
Parliamentary Committee inquires in to the scam, Naidu had backed him to the hilt. With
such a powerful backer, there was little the RBI could do, even if it had wanted to. Once
Naidu went out of power in May, it was clear that the RBI felt far more comfortable in
taking Gelli on.
PART-VI
DOUBTS OF STAKEHOLDERS
Did the auditors of Global Trust Bank, Price water house Coopers (PwC), fail to blow
the whistle?
No, PwC submitted a heavily qualified report on 30 September 2003
The audit report points out that accounts are prepared on a going concern basis even
though the net worth of the bank has been substantially eroded after considering the
loss for the year on account substantial provision against non-performing assets, taking
into account managements assessment of growth of business, infusion of capital.
These accounts do not include adjustments aforesaid in case the managements business
plans do not materialize
But why did PwC give a qualified report instead of giving a disclaimer?
In case the principle of going concern does not hold or it is not possible to arrive at an
opinion, the auditor is supposed to give a disclaimer and not express his opinion. In
GTBs case there were many ifs and buts. For example,
Accounts were prepared on going concern basis even though the net worth
had been substantially eroded
Advances worth Rs 311.61 crore were considered good though the loans were
not fully secured;
No provision was made for assets valued at Rs 181.75 crore as the bank can
hold the property for seven years;
The accounts give a fair view subject to points (relating to Rs 311.61 crore
and Rs 181.75 crore). The impact of which is indeterminate.
PwC had submitted its eligibility for reappointment for 2003-04. it was not reappointed by
GTB, but neither did the latter complain to the Institute of Chartered Accountant of India.
The new auditor Bhasker Rao & Company took up the audit.
The results for the quarter ended December 2003 continued to be prepared on a going
concern basis, though net worth was negative. ICAI sees it sufficient to act on the basis of
complaints as ithas now shot off letters to the firms after RBI pointed out the deficiencies
of the banks auditors PwC and Lovelock & Lewes.
Such crisis raises serious questions on the transparency in the private sector banks
and the credibility of their financial statements.
PART-VII
GLOBAL TRUST BANK IS NOW ORIENTAL
BANK OF COMMERCE
The Government of India has sanctioned the scheme for amalgamation of the Global Trust
Bank Ltd. With the Oriental Bank of Commerce. The amalgamation will come in to force
on August 14, 2004. All the branches of Global Trust Bank Ltd with function as branches
of Oriental Bank of Commerce with effect from this date.
Customers/Depositors of GTB
Customers, including depositors of the Global Trust bank Ltd. Will be able to operate their
accounts as customers of Oriental Bank of Commerce with effect from August 14, 2004.
Oriental Bank of Commerce is making necessary arrangements to ensure that service, as
usual, is provided to the customers of the Global Trust bank Ltd.
PART-VIII
THE MERGED BALANCE SHEET:Post write-offs, OBCs books will be stronger.
OBC GTB
192.54
Total
OBC GTB
Capital
c
Reserve
/surpluses
121.36 192.54
Cash/Bank
2524.22
Investments
14780.54 2645.29
Deposits
804.84
3276.11
Total
3329.06
17425.83
18953.35
Loans
1166.02 302.06
1468.08
Deferred tax
N.A.
38.62
38.62
93.36
(Rs crore)
632 (approx.)
Receivables 833.18
465.68
226
406
Current
914.42
168.20
1082.62
Net Fixed
145.29
Net cost
N.A.
153.83
300.80
1299.56
446.09
Assets
of accumulated losses**
Provisions
98.36
95
153.83
Intangible/
32.71
DRE not
N.A.
311
32.71
459
Written off
33998.18
7586.08
41584.96
PART-IX
COST OF MERGING GLOBAL TRUST BANK
FIGURE:- 9
BENEFITS OF OBC
Since the GTB is a south-based bank, it would give OBC the much-needed edge in the
southern part of the country.
Both the banks have a common core banking solution Finale, which will help in the
consolidation.
GTBs 275 ATms multiplied its strength of 72 by a factor of almost five folds &
make it the 3rd largest ATM operator in PSU banks.
103 branches are added to exixting 1013 branches
Larger customer base
After accounting for the tax gains the merger of GTB, the total losses come to Rs.
704.6 cr.
FIGURE:- 10
ANALYSIS
GLOBAL TRUST BANK/ ORIENTAL BANK OF COMMERCE
REASONS BEHIND THE MERGER
BRANCHES
ATM
PRE-
SURPLUS
LIABILITY/
192
1919
36730
1468
PROVISION
1270
192
2480
42590
1400
1700
NIL
+29%
+16%
-5%
+39%
MERGER
POSTMERGER
%
CHANGE
FIGURE:- 12
ASSET SIDE
CASH/
INVES
ADVAN- DEFE-
RECEI-
NET
INTAN-
BANK
TMEN
CE/
RRED
VABLES FIXED
GIBLE
TS
LOAN
TAX
ASSET
ASSET
LIAB.
PRE-
3329
17426
18953
99
1300
446
32
4400
19300
22957
24
1220
445
16
+32%
+11%
+21%
-76%
-6%
-0.3%
-50%
MERGER
POSTMERGER
%
CHANGE
After studying various cases of mergers in the banking sector a large number of benefits
can be seen which are as follows:
Reduction in NPA.
CONCLUSION
After merger of the Global Trust Bank and Oriental Bank of Commerce following
changes has been take place:
Change in management
After analyzing the whole case of merger of the Global Trust Bank with Oriental
Bank of Commerce following conclusions can be drawned.
The quantitative factors thatare taken as the criteria for measuring the corporate
governance after the consolidations can be achieved in a better manner, like:
Net profits
ALL OF THESE
SHOWN
IMPROVEMENT
AFTER MERGER
DUE TO BETTER
PRACTICE OF
CORPORATE
GOVERNANCE
SHOWN A GREAT
DECLINE IN NPA
nation's second-biggest banking company. Bank of America, currently No. 3, would have
about 33 million customers and 2.5 million business clients in 35 countries.
The deal would also bring Bank of America into New England and eliminate the Fleet
name. The combined bank will have about 5,200 branches; Bank of America already has
more branches than any other U.S. bank. No. 2 Wells Fargo has about 3,000.
"It's going to be one of the dominant banks in the U.S. banking industry over the next 25
years," said Gerard Cassidy, an industry analyst with RBC Capital Markets.
"It's going to have branches in cities that it didn't have them before, primarily places in
the Northeast New York, Boston, along the northeast coast and New England," said
CBS
MarketWatch
editor
Greg
Morcroft.
Bank of America, based in Charlotte, N.C., will pay $45 a share for Fleet, or about $13
more than FleetBoston's closing price on Friday. In trading Monday on the New York
Stock Exchange, FleetBoston shares climbed to $39.20, while Bank of America shares
fell to $73.57, down $8.29, or 10 percent. That reduced the value of the offer to $42.9
billion. Lewis will be chief executive of the merged company, to be headquartered in
Charlotte. Gifford will be chairman of the board. The deal, already approved by both
boards of directors, is expected to be completed in the first half of 2004. Bank of America
said
it
expects
the
merger
to
save
$1.1
billion.
Analyst John McCune of SNL Financial Corp. said the deal could also signal a new
round of bank mergers with large regional banks joining forces with big financial services
as
the
only
way
to
compete.
TOP 10 BANKS
(ACC.TO BUSINESS TODAY JANUARY 2006)
I.
HDFC BANK
II.
CITI BANK
III.
IV.
V.
VI.
CORPORATION BANK
VII.
VIII.
IX.
X.
1) Nedungadi bank in 2002, which was later, merged with Punjab National Bank.
2) Banaras State Bank in UP in 2000. To protect the interest of depositors, the bank
was merged with bank of baroda (BOB).
4) United Commercial Bank in early 1990s was later merged with United Bank of
India.
5) In the early 1990s , Lakshmi Commercial Bank also faced moratoriums and was
merged with Canara Bank.
6) Early 1990s , Karur Central Bank in Kerala was merged with Bank of India.
7) Hindustan Commercial Bank faced the moratorium in 1988 and was merged with
PNB.
8) Bank of Thanjavur in Tamil Nadu in the late 1980s was later merged with Indian
Bank.
9) In 1980s, Bank of Cochin in Kerala was put under moratorium before merging it
with State Bank of India.
SUGGESTIONS
Scope
GOVERNANCE
India
intervention
for
policy
MECHANISM
LARGE BLOCK
HOLDERS
important
rules
governance protecting
mechanism
&
minority
investors interest
MARKET FOR
CORPORATE
is
CONTROL
strongly
concentrated; defenses;
disclosure
of
debt contracts
EXECUTIVE
Less
COMPENSATION
important
conflicts
of
PROXY FIGHTS
improvement
shareholders;
BOARD ACTIVITY
element
of
training
disclosure
of
directors;
of
voting;
SHAREHOLDER
Potentially important,
Encourage interaction
ACTIVISM
among shareholders.
with dispersed
Strengthen minority
shareholders.
rotection. Enhance
governance of institutional
investors.
EMPLOYEE
Potentially
MONITORING
particularly
LITIGATION
require board
representation; assure
of leaving is high
Depends
critically
quality
of
on Facilitate
communication
general among
shareholders;
with
safeguards
against
excessive litigation
MEDIA AND SOCIAL
CONTROL
depends
on
competition and
diverse
campaign
public.
control
active
can
of
public
empower
REPUTATION AND
Important
SELF ENFORCEMENT
when
general Depends
on
seeking.
competition
growth
Encourage
in
factor
markets.
BILATERAL PRIVATE
ENFORCEMENT
MECHANISM
outsiders
downsides.
and
can
have
ARBITRATION,
AUDITORS, AND
OTHER
but
MULTILATERAL
AGREEMENT
the
third
enforcement mechanism
party
(sometimes
forming
deal
public
with
COMPETITION
Determines
scope
of
including financing.
ANNEXURE
S. NO.
TOPIC
I.
II.
III.
IV.
V.
VI.
Pre-merger Scenario
VII.
VIII.
IX.
X.
XI.