## Report on Reserve Bank of India Amalgamation of Private Sector Banks Directions, 2016
**1. Executive Summary:**
This report analyzes the Reserve Bank of India (RBI) Master Direction DBR.PSBD.No. 9616.13.100201516, issued on April 21, 2016, concerning the amalgamation of private sector banks. This master direction outlines the procedures and guidelines for amalgamations involving private sector banks and Non-Banking Financial Companies (NBFCs) with banking companies. The key findings highlight the crucial role of the Boards of Directors, shareholder approval processes, valuation considerations, and the RBI's discretionary powers in approving such amalgamations. This report focuses on explaining the objectives, key provisions, affected parties, and expected outcomes of this policy, based solely on the provided text.
**2. Introduction:**
This report aims to provide a comprehensive overview of the Reserve Bank of India Amalgamation of Private Sector Banks Directions, 2016, as outlined in the provided policy document. The analysis will focus on the scope, key provisions, and implications of these directions, based solely on the information presented in the text.
**3. Policy Overview:**
* Core Objective(s): Based on the provided text, the core objectives of these directions are:
* To establish a framework for the amalgamation of private sector banks.
* To provide guidelines for the amalgamation of NBFCs with banking companies.
* To ensure that such amalgamations are conducted in a manner that is in the public interest and compliant with relevant regulations, particularly the Banking Regulation Act, 1949.
**4. Background and Rationale:**
This is a new policy direction. Based on the text, the policy addresses the need for clear regulatory guidelines concerning the amalgamation of private sector banks and NBFCs with banking companies. The reference to Section 35A and 44A of the Banking Regulation Act, 1949, suggests a need to exercise powers conferred by the Act to streamline the amalgamation process and to ensure stability and public interest in the banking sector. The directive outlines the process to follow, and by issuing it, it suggests a need for uniform and consistent practices in handling bank amalgamations.
**5. Key Provisions / Changes:**
This is a new policy, so the key provisions are the main components of the entire provided text. The key provisions of the Reserve Bank of India Amalgamation of Private Sector Banks Directions, 2016 include:
* **Applicability:** The directions apply to all private sector banks licensed to operate in India by the RBI and to NBFCs registered with the RBI. The principles are applicable, as appropriate, to public sector banks.
* **Scope:** The guidelines cover the amalgamation of two banking companies and the amalgamation of an NBFC with a banking company.
* **Approval by Board of Directors:** The Boards of the banks involved must approve the amalgamation proposal by a two-thirds majority of the total Board members. Deeds of Covenants from independent and non-executive directors are required.
* **Shareholder Approval:** The draft scheme of amalgamation must be approved by the shareholders of each banking company by a resolution passed by a majority in number representing two-thirds in value of the shareholders.
* **Valuation and Due Diligence:** The Boards must carefully consider the values of assets, liabilities, and reserves; conduct due diligence on the amalgamated company; determine the nature of consideration; and ensure that the swap ratio is fair and determined by independent valuers.
* **RBI Approval:** The scheme of amalgamation must be submitted to the Reserve Bank for sanction after approval by the shareholders.
* **Dissenting Shareholders:** Dissenting shareholders are entitled to claim the value of their shares as determined by the Reserve Bank.
* **Amalgamation of NBFC with a Banking Company:** The banking company must obtain RBI approval before submitting the scheme to the Tribunal for approval.
* **Procedure for Application:** Specific information and documents, as detailed in the Schedule, must be furnished along with the application for amalgamation.
* **Norms for Buying/Selling Shares:** SEBI regulations on Prohibition of Insider Trading must be strictly complied with.
**6. Target Audience and Stakeholders:**
Based on the text, the primary target audience and stakeholders are:
* Private sector banks licensed to operate in India by the RBI.
* Non-Banking Financial Companies (NBFCs) registered with the RBI.
* Shareholders of the banks and NBFCs involved in the amalgamation.
* Boards of Directors of the banks and NBFCs involved.
* Independent valuers appointed to determine the swap ratio.
* The Reserve Bank of India.
* Tribunal (National Company Law Tribunal).
**7. Implementation Aspects (Inferred):**
* **Responsible Agency/Bodies:** The Reserve Bank of India is the primary responsible agency for overseeing and approving the amalgamation process. The Boards of Directors of the involved entities and the National Company Law Tribunal (for NBFC amalgamations) also play crucial roles.
* **Timelines and Procedures:**
* The directions come into effect on the day it is placed on the RBI's official website.
* Dissenting shareholders have 3 months from the date of sanction to claim the value of their shares.
* The text outlines detailed procedures for application, including the submission of specific information and documents to the RBI.
* Amalgamation schemes have to be approved by the shareholders.
**8. Expected Outcomes / Impact of Changes:**
The likely intended outcomes of these directions are:
* A more structured and regulated process for the amalgamation of private sector banks and NBFCs with banking companies.
* Enhanced corporate governance and due diligence in amalgamation decisions.
* Protection of the interests of shareholders, particularly dissenting shareholders.
* Increased transparency and accountability in the valuation and swap ratio determination process.
* Promotion of stability and soundness in the banking sector.
**9. Conclusion:**
The Reserve Bank of India Amalgamation of Private Sector Banks Directions, 2016, represent a comprehensive framework for regulating the amalgamation of private sector banks and NBFCs with banking companies. The directions address various aspects of the amalgamation process, from Board approval and shareholder rights to valuation considerations and regulatory oversight. By providing clear guidelines and procedures, the RBI aims to promote stability, transparency, and public interest in the banking sector. The significance lies in its attempt to structure bank mergers and acquisitions in a way that reduces risk, protects shareholders, and maintains the financial health of the banking sector.
Key Entities Referenced
RBIDBR20151622: Reference number of the Master Direction.
DBR.PSBD.No. 9616.13.100201516: Reference number within the Reserve Bank of India's Department of Banking Regulation.
April 21, 2016: Date of the Master Direction.
Master Direction Amalgamation of Private Sector Banks, Directions, 2016: Title of the policy document.
Section 35A of the Banking Regulation Act, 1949: Legal basis for the directions, granting powers to the Reserve Bank of India.
Section 44A of the Banking Regulation Act, 1949: Legal basis for the directions related to voluntary amalgamation of banking companies.
Reserve Bank of India: The central bank of India, the issuing authority of this directive.
Private Sector Banks: Banks licensed to operate in India under Banking Regulation Act, 1949, other than Urban Cooperative Banks, Foreign Banks and banks licensed under specific Statutes.
Reserve Bank of India Amalgamation of Private Sector Banks Directions, 2016: Formal name of the directions outlined in the document.
RBI: Abbreviation for Reserve Bank of India.
NonBanking Financial Companies: Financial institutions that provide banking services without holding a banking license.
NBFC: Abbreviation for Non-Banking Financial Companies.
India: The country in which the private sector banks are licensed to operate.
Banking Regulation Act, 1949: Indian law regulating the banking industry.
Reserve Bank of India Act, 1934: The act under which the Reserve Bank of India was established and operates.
Amalgamated Company: The company which is proposed to transfer its business to another company under the scheme of amalgamation.
Amalgamating Company: The company which is to acquire the business of the amalgamated company under the scheme of amalgamation.
Companies Act, 2013: Indian law governing companies, specifically sections 232 to 234 related to amalgamation.
Tribunal: The National Company Law Tribunal constituted under section 408 as defined in Section 90 of Companies Act 2013.
National Company Law Tribunal: A quasi-judicial body in India that adjudicates issues relating to Indian companies.
Ganguly Working Group on Corporate Governance: A working group related to corporate governance, which recommended Deeds of Covenants.
DBOD.No.BC.11608.139.0012001 02: Circular number related to Deeds of Covenants as recommended by Ganguly Working Group on Corporate Governance.
June 20, 2002: Date of circular DBOD.No.BC.11608.139.0012001 02.
Section 122: Section related to Ceiling on voting rights in the context of section 44A of the Banking Regulation Act, 1949.
RBI SEBI: Refers to regulations from both the Reserve Bank of India and the Securities and Exchange Board of India.
SEBI: Securities and Exchange Board of India.
FIs: Financial Institutions
DBOD.No.PSBS.BC.8916.13.100200405: Circular number being repealed by these directions.
May 11, 2005: Date of the circular being repealed.
Tier I Capital: One of the components of regulatory capital of a bank
Tier II Capital: One of the components of regulatory capital of a bank
Risk Weighted Assets: A bank's assets, weighted according to risk.
Gross and Net NPAs: Gross and Net Non-Performing Assets
WACC: Weighted Average Cost of Capital
RBI/DBR/2015-16/22
Master Direction DBR.PSBD.No. 96/16.13.100/2015-16 April 21, 2016
Master Direction – Amalgamation of Private Sector Banks, Directions, 2016
In exercise of the powers conferred by Section 35A of the Banking Regulation Act, 1949
and pursuant to the Section 44A of the Banking Regulation Act, 1949, the Reserve
Bank of India being satisfied that it is necessary and expedient in the public interest so
to do, hereby, issues the Directions hereinafter specified.
CHAPTER – I
PRELIMINARY
1. Short Title and Commencement.
(a) These Directions shall be called the Reserve Bank of India (Amalgamation of
Private Sector Banks) Directions, 2016
(b) These directions shall come into effect on the day it is placed on the official
website of the Reserve Bank of India(RBI).
2. Applicability
(a) The provisions of these Directions shall apply to all private sector banks licensed
to operate in India by the RBI and to the Non-Banking Financial Companies
(NBFC) registered with the RBI.
(b) The principles underlying these Directions would be applicable, as appropriate, to
public sector banks.3. Definitions
(i) In these Directions, unless the context otherwise requires, the terms herein shall bear
the meanings assigned to them below -
(a) “Private Sector Banks” means banks licensed to operate in India under Banking
Regulation Act, 1949, other than Urban Co-operative Banks, Foreign Banks and
banks licensed under specific Statutes.
(b) “Amalgamated Company” means the company which is proposed to transfer its
business to another company under the scheme of amalgamation.
(c) “Amalgamating Company” means the company which is to acquire the business
of the amalgamated company under the scheme of amalgamation.
(ii) All other expressions unless defined herein shall have the same meaning as have
been assigned to them under the Banking Regulation Act, 1949 or the Reserve Bank of
India Act, 1934 or as used in commercial parlance, as the case may be.
4. Scope
These guidelines shall cover the undernoted situations
(a) An amalgamation of two banking companies.
(b) An amalgamation of an NBFC with a banking company.
5. Statutory Provisions
(a) The Reserve Bank has discretionary powers to approve the voluntary
amalgamation of two banking companies under the provisions of Section 44A of
the Banking Regulation Act, 1949.
(b) Voluntary amalgamation of a NBFC with a banking company is governed by
sections 232 to 234 of the Companies Act, 2013 in terms of which, the scheme of
amalgamation has to be approved by the Tribunal1.
1 “Tribunal” means the National Company Law Tribunal constituted under section 408 as defined in Section 90 of
Companies Act 2013.
2CHAPTER - II
APPROVAL BY BOARD OF DIRECTORS
6. Boards of the banks concerned shall play a crucial role in the process, while dealing
with the amalgamation proposals between two banking companies or between a
banking company and a NBFC. The decision of amalgamation shall be approved by
two-third majority of the total Board members and not just of those present and voting.
Further, in view of the importance of the responsibility implicit in such merger decisions,
it shall be ensured that the Deeds of Covenants as recommended by Ganguly Working
Group on Corporate Governance, as per circular DBOD.No.BC.116/08.139.001/2001-
02 dated June 20, 2002 have been obtained from all independent and non-executive
directors who participate in the said meetings.
CHAPTER – III
AMALGAMATION BETWEEN TWO BANKING COMPANIES
7. In terms of Section 44A of the Banking Regulation Act, 1949, the draft scheme of
amalgamation shall be approved by the shareholders of each banking company by a
resolution passed by a majority in number representing two-thirds in value of the
shareholders, present in person or by proxy at a meeting called for the purpose. Ceiling
on voting rights under section 12(2) would apply in the context of section 44A, when
there is a poll, to determine whether the resolution has been passed by required
majority.
8. Before convening the meeting for the purposes of obtaining the shareholders'
approval, the draft scheme of amalgamation shall be approved by the Boards of
Directors of the two banking companies seperately.
9. While according this approval, the Boards of the banks shall 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
3company 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 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 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 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.
10. In terms of Section 44A of the Banking Regulation Act, 1949, after the scheme of
amalgamation is approved by the requisite majority of shareholders in accordance with
the provisions of the Section, it shall be submitted to the Reserve Bank for sanction.
CHAPTER – III A
PROCEDURE FOR APPLICATION FOR AMALGAMATION OF TWO BANKING
COMPANIES
11. To enable the Reserve Bank to consider the application for sanction, the
amalgamating and the amalgamated banking companies shall submit to the Reserve
Bank the information and documents specified in the Schedule to these Directions.
4CHAPTER III B
ENTITLEMENT OF DISSENTING SHAREHOLDERS
12. In terms of Section 44A (3), a dissenting shareholder is entitled, in the event of the
scheme being sanctioned by the Reserve Bank, to claim within 3 months from the date
of sanction, from the banking company concerned, in respect of the shares held by him
in that company, their value as determined by the Reserve Bank when sanctioning the
scheme and such determination by the Reserve Bank as to the value of the shares to
be paid to the dissenting shareholders shall be final for all purposes.
13. To enable the Reserve Bank to determine such value, the amalgamating /
amalgamated banking company shall submit the following: -
(a) A report on the valuation of the shares of the amalgamating / amalgamated
company made for this purpose by the valuers appointed for the determination of
the swap ratio.
(b) Detailed computation of such valuation.
(c) Where the shares of the amalgamating / amalgamated company are quoted on
the stock exchange:-
i) Details of the monthly high and low of the quotes on the exchange where
the shares are most widely traded together with number of shares traded during
the six months immediately preceding the date on which the scheme of
amalgamation is approved by the Boards.
ii) The quoted price of the share at close on each of the fourteen days
immediately preceding the date on which the scheme of amalgamation is
approved by the Boards.
(d) Such other information and documents as the Reserve Bank may require.
CHAPTER - IV
AMALGAMATION OF AN NBFC WITH A BANKING COMPANY
14. Where a NBFC is proposed to be amalgamated with a banking company, the
banking company shall obtain the approval of the Reserve Bank of India after the
scheme of amalgamation is approved by its Board and the Board of NBFC, but before it
is submitted to the Tribunal for approval.
515. When according its approval to the scheme, the Board of the banking company
shall give consideration to the matters listed in paragraph 9, Chapter III above.
16. In addition, the Board shall examine whether: -
(a) The NBFC has violated / is likely to violate any of the RBI / SEBI norms and if so,
shall ensure that these norms are complied with before the scheme of
amalgamation is approved.
(b) The NBFC has complied with the "Know Your Customer" norms for all the
accounts, which will become accounts of the banking company after
amalgamation.
(c) If the NBFC has availed of credit facilities from banks / FIs, whether the loan
agreements mandate the NBFC to seek consent of the bank / FI concerned for
the proposed merger / amalgamation.
CHAPTER - IV A
PROCEDURE FOR APPLICATION FOR AMALGAMATION OF AN NBFC WITH A
BANKING COMPANY
17. To enable the Reserve Bank of India to consider the application for approval, the
banking company shall furnish to Reserve Bank of India information as specified in the
Schedule to these Directions (excluding item 4) and also the information and documents
listed in paragraph 13 at Chapter III B above.
CHAPTER – V
AMALGAMATION OF A BANKING COMPANY WITH AN NBFC
18. The provisions of Chapter IV / IVA above will also apply mutatis mutandis in the
cases where a banking company is amalgamated with an NBFC.
6CHAPTER – VI
NORMS FOR BUYING/ SELLING OF SHARES BY PROMOTERS
19. Norms for promoter buying or selling shares directly / indirectly, before,
during and after discussion period
SEBI regulations on Prohibition of Insider Trading shall strictly be complied with, as the
information relating to takeover / merger and transfer of shares of listed banks / NBFCs
are price sensitive. Even in cases of amalgamation of unlisted banks / companies, the
SEBI guidelines should be followed in spirit and to the extent applicable.
CHAPTER – VII
REPEAL AND OTHER PROVISIONS
20. With the issue of these Directions, the instructions / guidelines contained in the
following circular issued by the Reserve Bank stand repealed:
DBOD.No.PSBS.BC.89/16.13.100/2004-05 dated May 11, 2005 on Guidelines for
Merger / Amalgamation of Private Sector Banks.
21. All approvals given under the above circular shall be deemed as given under these
Directions.
7SCHEDULE
Information and Documents to be furnished along with the Application of Scheme
of Amalgamation
1. Draft scheme of amalgamation as placed before the shareholders of the respective
companies for approval.
2. Copies of the notices of every meeting of the shareholders called for such approval
together with newspaper cuttings evidencing that notices of the meetings were
published in newspapers at least once a week for three consecutive weeks in two
newspapers circulating in the locality or localities in which the registered offices of the
companies are situated and that one of the newspapers was in a language commonly
understood in the locality or localities.
3. Certificates signed by each of the officers presiding at the meeting of shareholders
certifying the following:
(a) A copy of the resolution passed at the meeting;
(b) The number of shareholders present at the meeting in person or by proxy;
(c) The number of shareholders who voted in favour of the resolution and the
aggregate number of shares held by them;
(d) The number of shareholders who voted against the resolution and the
aggregate number of shares held by them;
(e) The number of shareholders whose votes were declared as invalid and
the aggregate number of shares held by them;
(f) The names and ledger folios of the shareholders who voted against the
resolution and the number of shares held by each such shareholder;
(g) The names and designations of the scrutineers appointed for counting the
votes at the meeting together with certificates from such scrutineers
confirming the information given in items (c) to (f) above;
8(h) The name of shareholders who have given notice in writing to the
Presiding Officer that they dissented from the scheme of amalgamation
together with the number of shares held by each of them.
4. Certificates from the concerned officers of the companies giving names of
shareholders who have given notice in writing at or prior to the meeting to the banking
company that they dissented from the scheme of amalgamation together with the
number of shares held by each of them.
5. The names, addresses and occupations of the Directors of the amalgamating
company as proposed to be reconstituted after the amalgamation and indicating how
the composition will be in compliance with Reserve Bank regulations.
6. The details of the proposed Chief Executive Officer of the amalgamating company
after the amalgamation.
7. Copies of the reports of the valuers appointed for the determination of the swap
ratios.
8. All relevant information for consideration of the scheme of amalgamation including
the following particulars:
(a) annual reports of each of the banking companies for each of the three
completed financial years immediately preceding the Appointed Date for
amalgamation;
(b) financial results, if any, published by each of the banking companies for
any period subsequent to the financial statements prepared for the
financial year immediately preceding the Appointed Date;
(c) pro-forma combined balance sheet of the amalgamating company as it will
appear as of the Appointed Date consequent on the amalgamation;
(d) computation based on such pro-forma balance sheet of the following :
(i) Tier I Capital
(ii) Tier II Capital
(iii) Risk - Weighted Assets
9(iv) Gross and Net NPAs
(v) Ratio of Tier I Capital to Risk-Weighted Assets
(vi) Ratio of Tier II Capital to Risk Weighted Assets
(vii) Ratio of Total Capital to Risk Weighted Assets
(viii) Tier I Capital to Total Assets
(ix) Ratio of Gross and Net NPAs to Advances
9. Information certified by the valuers as is considered relevant to understand the
proposed swap ratio including the following particulars:
(a) the methods of valuation used by the valuers;
(b) the information and documents on which the valuers have relied and the
extent of the verification, if any, made by the valuers to test the accuracy
of such information;
(c) if the valuers have relied upon projected information, the names and
designations of the persons who have provided such information and the
extent of verification, if any, made by the valuers in relation to such
information;
(d) details of the projected information on which the valuers have relied;
(e) detailed computations of the swap ratios containing explanations for
adjustments made to the published financial information for the purposes
of the valuation;
(f) if these adjustments are made based on valuations made by third parties,
details regarding the persons who have made such valuations;
(g) capitalization factor and weighted average cost of capital (WACC) used for
the purposes of the valuation and justification for the same;
(h) if market values of shares have been considered in the computation of the
swap ratio, the market values considered and the source from which such
values have been derived;
10(i) if there are more than one valuer, whether each of the valuers have
recommended a different swap ratio and if so, the above details should be
given separately in respect of each valuer and it may be indicated how the
final swap ratio is arrived at.
10. Such other information and explanations as the Reserve Bank may require.
11