09-08-2014, 12:49 PM
Merger and Acquisition in Banking Industry: A Case Study of ICICI Bank Ltd
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Abstract
To keep the head high in globalized economy one has to follow the path of growth, which
contains various challenges and issues; one has to overpower these challenges and issues to
become a success story. We consider a case of ICICI Bank Ltd., the largest private sector
bank in India, which has acquired nine financial firms to make the steps of the ladder of
success. Therefore, the aim of this article is to study the growth of ICICI Bank Ltd. through
mergers, acquisitions, and amalgamation. This article is divided into four parts. The first part
includes introduction and conceptual framework of mergers and acquisition. The second part
discusses the historical background of ICICI Bank Ltd. and followed by review of literature.
The third part discusses all the mergers, acquisitions, and amalgamations in detail. Finally,
the article concludes that a firm must devise a strategy in three phases i.e. Pre-merger phase,
acquisition phase and post-merger phase. The article will be helpful for policy makers,
strategy makers, HR people, bankers, researchers, and scholars.
Introduction
The pressures on the employees of banks around the world have been manifold across financial
system deregulation, entry of new players and products with advanced technology, globalisation of
financial markets, changing demographics of customer behaviour, consumer pressure for wider choice
and cheaper service, shareholder wealth demands, shrinking margins.
In this scenario, Mergers and acquisitions (M&As) are most widely used strategy by firms to
strengthen and maintain their position in the market place. M&As are considered as a relatively fast
and efficient way to expand into new markets and incorporate new technologies. Still, we can find
many evidences that their success is by no means assured. On the contrary, a majority of M&As fall
short of their stated aims and objectives. Some failure can be explained and justified by financial and
market factors. On the contrary a considerable number can be traced, which has neglected those
factors, which are related to human resources issues and activities.
There are numerous studies, which confirm the need for firms to systematically address a variety of
human resource issues, activities, and challenges in their merger and acquisition activities. In the
present article, a thought was provoked by a press release (May 20, 2010) that the Bank of
Rajasthan’s employees launched an agitation to protest against the then proposed merger with ICICI
Bank Ltd. It is a very serious matter as far as employees and the bank is concerned. It is quite natural
phenomena that a dissatisfied employee cannot bring efficiency and effectiveness in rendering services.
Mergers and Acquisitions: Conceptual Framework
Consolidation of business entities is a world-wide phenomenon. One of the tools for consolidation is
mergers and acquisitions. The quest for growth is a major driving force behind mergers and acquisitions. The mergers and acquisitions in financial sector of India appear to be driven by the
objective of leveraging the synergies arising out of the consequences of M&A process. However, such
structural changes in the financial system can have some public policy implications. It is evident from
various mergers and amalgamations done by the ICICI Bank Ltd. after its inception in 1994. Still, it is
quite clear by their action that it is a path of growth for them. With this statement in mind, we would
like to present the conceptual framework for mergers and acquisitions in India’s context.
Procedures for merger, acquisition, and amalgamation of banking companies are clearly defined in
section 44(A) of the Banking Regulation Act 1949. According to the Act, a banking company will
have to place a draft before its shareholders and the draft will have to be approved by a resolution
passed by a majority in number, representing two-thirds in value of the shareholders of each of the
said companies, present either in person or by proxy at a meeting called for the purpose.
Notice of every such meeting as is referred to in sub-section (1) shall be given to every shareholder of
each of the banking companies concerned in accordance with the relevant articles of association
indicating the time, place and object of the meeting, and shall also be published atleast once a week
for three consecutive weeks in not less than two newspapers which circulate in the locality or
localities where the registered offices of the banking companies concerned are situated, one of such
newspapers being in a language commonly understood in the locality or localities.
If there is any shareholder, who has voted against the scheme of amalgamation at the meeting or has
given notice in writing at or prior to the meeting of the company concerned or to the presiding officer
of the meeting that he dissents from the scheme of amalgamation, shall be entitled, in the event of the
scheme being sanctioned by the Reserve Bank, to claim 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 shareholder shall be final for all purposes). If the scheme is
sanctioned by the Reserve Bank, by an order in writing, it becomes binding not only on the banking
companies concerned, but also on all their shareholders to abide by the law.
There is provision
Historical Background of ICICI Bank
The history of Industrial Credit & Investment Corporation of India (ICICI) shows that it was formed
in 1955 by the initiative of the World Bank, the Government of India and representatives of Indian
industry. The principal objective of ICICI was to create a development financial institution for
providing medium-term and long-term project financing to Indian businesses. In the 1990s, ICICI
transformed its business from a development financial institution offering only project finance to a
diversified financial services group offering a wide variety of products and services, both directly and
through a number of subsidiaries and affiliates like ICICI Bank. In 1999, ICICI became the first
Indian company and the first bank or financial institution from non-Japan Asia to be listed on the
NYSE.
Due to the changing business environment and after the adoption of liberalization, ICICI considered
various corporate restructuring alternatives in the context of the emerging competitive scenario in the
Indian banking industry, and the move towards universal banking. The managements of ICICI and
ICICI Bank formed the view that the merger of ICICI with ICICI Bank would be the optimal strategic
alternative for both the entities, and would create the optimal legal structure for the ICICI group's
universal banking strategy. Further, the merger would enhance value for ICICI shareholders through
the merged entity by low-cost deposits, greater opportunities for earning fee-based income and the
ability to participate in the payments system and provide transaction-banking services.
Consequently, ICICI Bank was promoted in 1994 by ICICI Limited, an Indian financial institution,
and was its wholly-owned subsidiary. In October 2001, the Board of Directors of ICICI and ICICI
Bank approved the merger of ICICI and two of its wholly-owned retail finance subsidiaries, ICICI
Personal Financial Services Limited and ICICI Capital Services Limited, with ICICI Bank.
Shareholders of ICICI and ICICI Bank approved the merger in January 2002, by the High Court of
Gujarat at Ahmedabad in March 2002, and by the High Court of Judicature at Mumbai and the
Reserve Bank of India in April 2002. The below mentioned table gives details of all the mergers and
amalgamations done by ICICI Bank.
Amalgamation of ITC Classic Finance Ltd.
It was one of the first-of-its-kind mergers in the country's financial sector, ITC Classic Finance Ltd,
the beleaguered non-banking financial arm of ITC Ltd, and country's premier development financial
institution, Industrial Credit Investment Corporation of India (ICICI) to merge their operations and
share swap ratio for ITC Classic-ICICI merger was 15:1.
Tobacco major, ITC was desperately scouting a buyer for ITC Classic, which had accumulated losses
of over Rs. 300 crore.
ITC Classic Finance Ltd was named after ITC’s premium cigarette brand ‘Classic.’ It was
incorporated in 1986. ITC Classic was a non-banking finance company (NBFC). Largely, it was
engaged in hire, purchase, and leasing operations. In addition, the company undertook investment
operations on a substantial scale. The company did very well in the initial years and developed a
strong network to mobilize retail deposits. Its fund-based activities such as corporate leasing, bill
discounting, and equities trading also grew substantially over the years. At a compounded annual
growth rate of 78% during 1991-96, ITC Classic’s annual turnover increased from Rs. 17.3 crore to
Amalgamation of Bank of Madura
For over 57 years, Bank of Madura (MoM) operated as a profitable entity in Indian Banking Industry.
It had a significant coverage in the southern states of India. It had extensive network of 263 branches
across India. According to Murthy (2007), the bank had total assets of Rs. 39.88 billion and deposits
of Rs. 33.95 billion as on September 30, 2000. It had a capital adequacy ratio of 15.8% as on March
31, 2000. With a view to expanding its assets, client base and geographical coverage, ICICI Bank was
scouting for private banks for merger. In addition to that, its technological up gradation was inching
upwards at snail’s pace. In contrast, BoM had an attractive business per employee figure of Rs. 202
lakh, a better technological edge, and a vast base in southern India as compared to Federal Bank.
While all these factors sound good, a tough and challenging task in terms of cultural integration and
human resources issues lay ahead for ICICI Bank.
With these considerations, ICICI Bank announced amalgamation with the 57 year BoM, with 263
branches, out of which 82 were operating in rural areas; the majority of them were located in southern
India. As on December 9, 2000, on the day of announcement of the merger, the Kotak Mahindra
group was holding about 12% stake on BoM, the Chairman of BoM, Mr. K. M. Thaigarajan, along
with his associated, was holding about 26% stake, Spic group had about 4.7%, while LIC and UTI
were having marginal holdings. This merger was supposed to increase ICICI bank’s hold on the South
Indian market. The swap ratio was approved to be at 1
Conclusion
Thus, as per the above discussion we can say that Mergers and acquisitions (M&As) are considered as
corporate events which helps an organization to create synergy and provide sustainable competitive
advantage, but, simultaneous these sorts of corporate events have the potential to create severe
personal trauma and stress which can result in psychological, behavioural, health, performance, and
survival problems for both the individuals and companies, whether it is a bank or a non banking
financial corporation, involved in it. It is evident from the case of ICICI Bank Ltd. that how an
organization can become market leader by adopting some strategic tools like mergers and
acquisitions.