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Industry structure: M&A in Indian Banking

Industry structure: M&A in Indian Banking. Ashvin Parekh, Partner & National leader – Global Financial Services 3 December 2010. Regulatory Framework. Banking companies (Acquisition & Transfer of Undertakings) act 1970

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Industry structure: M&A in Indian Banking

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  1. Industry structure: M&A in Indian Banking Ashvin Parekh, Partner & National leader – Global Financial Services 3 December 2010

  2. Regulatory Framework • Banking companies (Acquisition & Transfer of Undertakings) act 1970 • Section 9 empowers the govt. to make the scheme to carry out the following: • Capital structure of corresponding new bank • Constitute the board of directors • Reconstitution of a new bank into two or more corporations or amalgamation of any new bank with any other new bank • Companies Act 1956 • Approval of the board of directors of individual companies for the draft proposal • Application in High Court • Approval of shareholders by 75% majority • Sanction by the High Court • Filing of the court order with the Registrar of Companies • RBI – Guidelines for merger/ amalgamation of private sector banks • Decision of merger has to be approved by 2/3rd of the total Board of the respective companies. Applicable to PSU banks also. • Amalgamation between two banking companies • Approval by shareholders with 2/3 majority • After approval the scheme should be submitted to RBI

  3. Acquisitions over the last decade Need to let M&As be business driven within broad regulatory framework

  4. Global comparison (1/2) Source: The Banker – Top 1000 World Banks 2010

  5. Global comparison (1/2) Source: FDIC (USA), Bank of England, Financial Service Authority, RBI *As on 31 October 2010; **As on 30 September 2010 # All scheduled banks (77 SCB, 86 RRBs, 69 Co-operative) ## Only SCB branches • Indian banks lack size with only 1 featuring in the top 100 and 3 in top 200 globally • Two different approaches • USA large number of banks for large coverage • UK smaller number of banks (153 incorporated in UK, 328 deposit taking) • Population/ branch very high

  6. Projected growth over next 5 years Estimated Capital Requirement in 2015 Source: Ernst & Young Research estimates • Strong projected economic growth • Banks advances to grow at a CAGR of 20%, to become 2.4 times the current size by 2015 • Estimates do not factor in requirements on account of financial inclusion thrust Need for “Mega Banks” to bring in capital and scale

  7. Mega banks Medium sized banks Smaller banks Industry structure • M&As essential for creation of Mega banks • M&As among mid and smaller sized banks will drive efficiency and growth • Mega banks will be able to support industry in global expansion • Regulatory framework should allow for inorganic growth especially among private and foreign banks Industry structure will help alignment of customer segments and services

  8. M&As in banking – lacking regulatory and legal framework • Public sector • Natural regulatory path not available • Who will initiate the process? Banks themselves or the govt. • Labour/ human resource concern; unions opposed to the move • Private sector • Regulator driven • Foreign banks • Regulatory restrictions Reforms needed in M&A regulatory structure

  9. Thank you

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