Laws need changing to ease bank M and As

(Note: This article was originally published in Business Standard dated November 2000.)

It is necessary to take a fresh look at various provisions of the Regulation Act and other related laws in the wake of the radical changes in the economic environment of the country. Laws must be properly in place to facilitate mergers and acquisitions in the banking sector so that it can reorganise and survive.

What is the past record? About 75 banks have been merged under section 45 of the Act since 1960, out of which 16 banks were acquired by SBI and its associate banks. Recent examples are Bank of Cochin and Kashinath Seth Bank merged with SBI, Punjab Co-operative Bank and Bari Doab Bank with Oriental Bank of Commerce, Bareily
Corporation Bank with Bank of Baroda and Sikkim Bank with the Union Bank of India.

The decision to merge a weak bank with a strong bank under the Act has not so far been based on commercial considerations. It was imposed more or less as an administrative fiat, facing the acquiring bank with a Hobson's choice. Instead of such compulsory mergers, acquisition of ailing banks by large corporates should make good business sense. RBI had contemplated allowing top corporate houses to take over weak banks and infuse sufficient capital to revive and rehabilitate them. Before asking SBI to take over Kashi Nath Seth Bank in 1996, RBI made efforts to motivate private sector corporates to take over the bank. In fact, a business house had carried out a detailed due diligence exercise on the bank but the proposal did not eventually bear fruit.

The RBI governor recently held that while corporate houses may not be permitted to float private banks, they are welcome to invest in sick banks. This may be a beginning in the right direction, but would require rationalisation of laws and takeover norms, including tax incentives. Under section 72 of the Income Tax Act, exemptions are allowed on accumulated losses and unabsorbed depreciation of industrial concerns. The losses incurred by banks should also be brought within the purview of section 72. At the time of merger of Bank of Cochin and Lakshmi Commercial Bank with State Bank of India and Canara Bank respectively, the Indian Banks' Association had represented to the government to make income tax concessions on losses incurred due to bank mergers but the proposal was reportedly turned down by the Central Board of Direct Taxes.

The merged banks are generally overstaffed. One of the essential conditions in any scheme of amalgamation in India is continuation of the services of the employees of all categories after the merger without any break in service, irrespective of their suitability or eligibility. In the context of merger of Hindustan Commercial Bank with Punjab National Bank, the Supreme Court has held, in the Shepherd case, that no employee can be dismissed ab initio under any scheme of amalgamation or otherwise without opportunity of being heard as the same is against the principles of natural justice and equity.

The cost of surplus staff and unremunerative branches of the merged bank make a severe dent in the profitability of the amalgamated bank. As per existing policy, closure of rural branches is almost impossible. The merger causes parking of superfluous staff at various centers where branches of both the banks may be working. A conscious policy should be formulated to facilitate merger of branches and redeployment of staff at centres where deficiency of staff may be felt

Due to consolidation of operations of two banks, mergers invariably result in making a large number of employees superfluous. While services of all the employees are required to be continued in the acquiring bank as per existing laws, it may be advisable to distribute the additional staff acquired on account of the merger to other banks through the Banking Services Recruitment Board or any other agency.

The Narasimhan Committee has recommended evolvement of policies aimed at 'right-sizing' and redeployment of surplus staff either by way of retraining them and giving them alternative employment or by introducing compensation package/VRS with appropriate incentives. Dr I. G. Patel has stated in his book Economic Reforms and Global Change that "the actual substantive or real restructuring by way of merger or closing of branches or reduction in staff that should go with the initial financial rescue, must also be set in motion without delay".

Indian laws do not cast upon promoters of banks specific duties and responsibilities to fulfill their role, which is largely to look after corporate governance and augment shareholders' wealth. In case full time directors fail to perform the role assigned to them, hardly any punitive measures can be taken except their removal from the board and imposition of penalties for non-compliance with certain provisions of the law. To set this right, deterrent provisions need to be included not only in the Companies Act but also in the Banking Regulation Act Shareholders can apply to the court for winding up/liquidation of a company. But these measures are usually taken at a very late stage when the affairs are sufficiently rotten and out of hand.

With the dilution of government/RBI shareholding, banks are becoming increasingly accountable to shareholders. With the advent of FIls and the new breed of investment analysts, banks' balance sheets are under constant surveillance; any adverse features in. the operations of a bank are highlighted quickly. This not only adversely affects bank share prices but also the rating and reputation of banks.

The existing laws should specifically include a clause whereby any proposal of merger or acquisition should be passed as a special resolution in a general body meeting of the bank. And most importantly merger should not be imposed on banks without detailed viability studies and consent of the acquiring banking company.

(The author is with State Bank of India. These are his personal views.)