MERGER AND AMALGAMATION OF BANKING

COMPANIES

There is a reconstruction of a company when that company’s business and undertakings are
transferred to other company formed for that purpose, so that as regards the new company
substantially the same business is carried on and the same persons are interested in it as in the
case of old company.1 Reconstruction may be necessary either to incorporate radical change
in the objects of a business, or may be effected in order to cause material alterations of the
rights of the shareholders or creditors. Amalgamation is merely a mode of effecting
reconstruction or reorganization in a company and is synonymously used with the word
merger. So far as the change in object of business is concerned through reconstruction, it does
not, it is submitted that, has much relevance with the banking companies for the reason that
basic object of all the banking companies is the business of banking and altering the same
will result into disqualification of that company as a banking company. Therefore, the basic
purpose of behind reconstruction by a banking company is probably the object of keeping the
business of the company is good health that it earns more profit.

“Amalgamation is said to occur when two or more companies are joined together to form a
third entity or one is absorbed into or blended with another.” 2 According to the definition as
mentioned above two things can be understood, firstly when two entities lose their identities
to form a third one and this referred to as amalgamation, and secondly where one entity
merges into another whereby the other retains its identity, it is referred to as merger.
Therefore, merger and amalgamation as can be seen are interchangeably used. The new
company that comes into existence as a result of the merger or amalgamation has all the
rights and powers of the blended companies subject to the duties and liabilities thereof. In
case of companies other than banking companies the law relating to the merger and
amalgamation are dealt with it in the Companies Act 1956 under the provisions sec. 391-396.
The law relating to merger of banking companies is provided u/s. 44A-45 of the
Banking Regulation Act, 1949 and shall be taken up in the following section.

1
J.A. Hornby, An Introduction to Company Law, p. 174 (1957). [as cited in, Singh, Avatar, Company Law,
Eastern Book Company, 15th Edn. 2009, p.622)].
2
PMP Auto Industries Ltd Re. (1994) 80 Comp Case 289 Bom.
 VOLUNTARY AMALGAMATION
OF BANKING COMPANIES:

The provision of the Companies Act 1956 contained u/s. 391-395 do not apply to the
amalgamation of the banking companies. Section 44A of the Banking Regulation Act 1949 is
in itself a complete code providing for the procedure of amalgamation in the case of banking
companies. It becomes very clear that section 44A applies to the banking companies to the
exclusion of all other laws for the time being, as it is non-obstante3 clause.
Another important aspect of the section 44A is that the regulatory authority in this case for
sanctioning the scheme of amalgamation is the Reserve Bank of India in distinction to the
National Company Law Tribunal in case of Companies Act 1956. The Reserve Bank of India
being the central bank of the country has been empowered to exercise in this matter in
consultation with the Central Government.

RELEVANT PROVISION:

Section 44A: Procedure for amalgamation of banking companies:

“(1)  Notwithstanding anything contained in any law for the time being in force, no banking
company shall be amalgamated with another banking company, unless a scheme containing
the terms of such amalgamation has been placed in draft before the shareholders of each of
the banking companies concerned separately, and 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.

(2)  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 at least 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.

(3)  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
3
A non obstante clause is a legislative device which is usually employed to give overriding effect to certain
provisions that may be found either in the same enactment or some other enactment, that is to say to avoid the
operation and effect of all contrary provisions.” (Union of India v. G.M Kokil, 1984 Supp SCC 196)
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.

(4)  If the scheme of amalgamation is approved by the requisite majority of shareholders in

accordance with the provisions of this section, it shall be submitted to the Reserve Bank for
sanction and shall, if sanctioned by the Reserve Bank by an order in writing passed in this
behalf, be binding on the banking companies concerned and also on all the shareholders
thereof.

(6)  On the sanctioning of a scheme of amalgamation by the Reserve Bank, the property of the
amalgamated banking company shall, by virtue of the order of sanction, be transferred to
and vest in, and the liabilities of the said company shall, by virtue of the said order be
transferred to, and become the liabilities of, the banking company which under the scheme of
amalgamation is to acquire the business of the amalgamated banking company, subject in all
cases to 3[the provisions of the scheme as sanctioned].

(6A) Where a scheme of amalgamation is sanctioned by the Reserve Bank under the
provisions of this section, the Reserve Bank may, by a further order in writing, direct that on
such date as may be specified therein the banking company (hereinafter in this section
referred to as the amalgamated banking company) which by reason of the amalgamation will
cease to function, shall stand dissolved and any such direction shall take effect notwithstand-
ing anything to the contrary contained in any other law.

(6B)  Where the Reserve Bank directs a dissolution of the amalgamated banking company, it
shall transmit a copy of the order directing such dissolution to the Registrar before whom the
banking company has been registered and on receipt of such order the Registrar shall strike
off the name of the company.

(6C)  An order under sub-section (4) whether made before or after the commencement of
section 19 of the Banking Laws (Miscellaneous Provisions) Act, 1963 shall be conclusive
evidence that all the requirements of this section relating to amalgamation have been
complied with, and a copy of the said order certified in writing by an officer of the Reserve
Bank to be a true copy of such order and a copy of the scheme certified in the like manner to
be a true copy thereof shall, in all legal proceedings (whether in appeal or otherwise and
whether instituted before or after the commencement of the said section 19), be admitted as
evidence to the same extent as the original order and the original scheme.
Nothing in the foregoing provisions of this section shall affect the power of the Central
Government to provide for the amalgamation of two or more banking companies under sec-
tion 396 of the Companies Act, 1956 (1 of 1956): Provided that no such power shall be
exercised by the Central Government except after consultation with the Reserve Bank.”

Section 44B: Restriction on compromise or arrangement between banking company and

creditor
“(1) Notwithstanding anything contained in any law for the time being in force, no High
Court shall sanction a compromise or arrangement between a banking company and its
creditors or any class of them or between such company and its members or any class of
them or sanction any modification in any such compromise or arrangement unless the
compromise or arrangement or modification, as the case may be, is certified by the Reserve
Bank in writing as not being incapable of being worked and as not being detrimental to the
interests of the depositors of such banking company.
(2) Where an application under section 39 of the Companies Act, 1956 (1 of 1956), is made
in respect of a banking company, the High Court may direct the Reserve Bank to make an
inquiry in relation to the affairs of the banking company and the conduct of its directors and
when such direction is given, the Reserve Bank shall make such inquiry and submit its report
to the High Court.”

Voting
S.44A(1) requires specifically the draft scheme containing the terms of proposed
amalgamation to be approved and passed by majority being two third of shareholders present
and voting of each company separately in a meeting called for that purpose only. In any other
case, no amalgamation between banking companies shall be allowed.

Requirement of notice to shareholders

The notice of the meeting as required under sub-section (1) must be given to every
shareholder of each of the banking companies in accordance with the articles of association
thereof, thereby indicating the time, date and place of such meeting. Such a notice must be
published for consecutive three weeks for at least once a week in not less than two
newspapers in circulation in the locality or the localities where the registered office of the
concerned banking companies are situated. One of the aforesaid newspapers should be one
which is in the language commonly understood in the locality or localities where the
registered office is situated.4

Provision for the dissenting shareholders

There may arise a situation where a shareholder may not agree with the proposed scheme of
amalgamation. In such a case if that shareholder has:

a. voted against the scheme in the meeting, or

b. gives in writing a notice, before or at the time of meeting of the concerned company, or

c. gives in writing a notice to the presiding officer of that meeting of his dissent,
then if the scheme is sanctioned by the Reserve Bank of India, he shall be entitled to claim
from the banking company, in respect of the shares held by him in that company, their value
as determined by the Reserve Bank while sanctioning the scheme. The valuation of shares
made by the Reserve Bank will be paid to dissenting shareholder shall be final for all
purposes.5 Under this scheme the Reserve Bank is empowered to determine the market value
of shares of the objecting shareholder who voted against the scheme as well as to direct
payment of the value of the shares to the dissenting shareholder.6

Reserve Bank to sanction the scheme and Effect of the Sanction.

When two third or more shareholders present in voting either in person or by proxy, of both
the banking companies approve the scheme by passing a resolution in that behalf in the
meeting so called for amalgamation purpose, then the scheme is submitted to the Reserve
Bank of India for the sanction to be granted by it. If the Reserve Bank sanctions the same by
an order in writing then the scheme becomes binding on concerned banking companies and
the shareholders thereof.7 On the sanctioning of a scheme of amalgamation by the Reserve
Bank, the property of the amalgamated banking company shall, by virtue of the order of
sanction, be transferred to and vest in, and the liabilities of the said company shall, by virtue
of the said order be transferred to, and become the liabilities of, the banking company which
under the scheme of amalgamation is to acquire the business of the amalgamated banking
company, subject in all cases to the provisions of the scheme as sanctioned.8 Where a scheme
of amalgamation is sanctioned by the Reserve Bank under the provisions of this section, the

4
Section 44A (2) of the Banking Regulation Act 1949
5
Section 44A (3) of the Banking Regulation Act 1949
6
Bank of Madura Shareholders Welfare Association v. Governor, Reserve Bank of India, (2001) 105 Comp Cas
633 Mad.
7
Section 44A (4) of the Banking Regulation Act 1949
8
Section 44A (6) of the Banking Regulation Act 1949.
Reserve Bank may, by a further order in writing, direct that on such date as may be specified
in the order the amalgamated banking company which by reason of the amalgamation will
cease to function, shall stand dissolved and any such direction shall be effective
notwithstanding anything to the contrary contained in any other law. 9 As soon as the order of
dissolution of the amalgamated company is made by the Reserve Bank of India, the same
shall be transmitted to the Registrar of Companies and on receipt of such order the name of
such company shall be struck off.10

Order of Sanction under section 44A (4) to be Conclusive evidence in all legal proceedings
Notwithstanding the fact that the order of sanction under ss.4 has been before or after the
commencement of section 1911 of the Banking Laws (Miscellaneous Provisions) Act 1963,
should be the conclusive evidence about the fact that all the requirements of section 44A for
amalgamation have been complied with. A copy of the said order certified in writing by an
officer of the Reserve Bank to be a true copy of such order and a copy of the scheme certified
in the like manner to be a true copy thereof shall, in all legal proceedings (whether in appeal
or otherwise and whether instituted before or after the commencement of the said section 19),
be admitted as evidence to the same extent as the original order and the original scheme.12

Power of the Central Government u/s. 396 of the Companies Act 1956 not affected
Nothing provided in Section 44A shall affect the powers of the Central Government to
provide for the amalgamation of two or more banking companies u/s. 396 of the Companies
Act 1956. However, this power of the Central Government shall not be exercised without
consultation to the Reserve Bank of India.13 Thus it can be clearly seen and concluded after
the perusal of all the provisions of s. 44A that the Reserve Bank of India is in a way the
primary controlling authority regarding the affairs of reconstruction of Banking Companies.
Section 396 of the Companies Act 1956 (at present- Section 237 of the Companies Act 2013)
gives power to the Central Government to order "forced amalgamation" of two companies if
it is satisfied that it is essential in the “public interest". 

Restriction on effecting a compromise or arrangement between the Banking Company and

Creditors/Members
Section 44B of the Banking Regulation Act 1949 imposes certain restriction on effecting any
compromise or arrangement which has been arrived between the banking company and the
creditors. It has been provided therein notwithstanding anything contained in any law for the
time being in force, no High Court shall sanction a compromise or arrangement between a
9
Section 44A(6A) of the Banking Regulation Act 1949.
10
Section 44A(6B) of the Banking Regulation Act 1949.
11
Section 19 of the Banking Laws (Miscellaneous Provisions) Act [Act 55 of 1963, s.19(c) (w.e.f 1-2-1964)]
1963 inserted ss. 6C in s.44A.
12
Section 44A (6C) of the Banking Regulations Act1949
13
Section 44A (7) of the Banking Regulation Act 1949
banking company and its creditors or any class of them or between such company and its
members or any class of them or sanction any modification in any such compromise or
arrangement unless the compromise or arrangement or modification, as the case may be, is
certified by the Reserve Bank in writing as not being incapable of being worked and as not
being detrimental to the interests of the depositors of such banking company. 14 It has to be
emphasized that the Reserve Bank of India being the central bank regulating all the affairs
with relation to banking has been authorized to check the scheme and determine that whether
or not the scheme is contrary to the interest of the depositors. This is basically done to secure
the public interest and defeat the ulterior motive, if any, behind the agreement or
compromise.

Although s.44A at the outset rules out the applicability of s. 391-395 of the Companies Act
1956, but even then if any application is made under section 391 with relation to the Banking
Companies to a High Court in that case, the High Court may direct Reserve Bank to make an
inquiry in relation to the affairs of the banking company and the conduct of its directors and
when such direction is given, the Reserve Bank should make such inquiry and submit its
report to the High Court.15

COMPULSORY AMALGAMATION
OF BANKING COMPANIES

Relevant Provision:
Section 45 of the Banking Regulations Act 1949
“(1) Notwithstanding anything contained in the foregoing provisions of this Part or in any other law
or any agreement or other instrument, for the time being in force, where it appears to the Reserve
Bank that there is good reason so to do, the Reserve Bank may apply to the Central Government for
an order of moratorium in respect of a banking company.
(2) The Central Government, after considering the application made by the Reserve Bank under sub-
section (1), may make an order of moratorium staying the commencement or continuance of all
actions and proceedings against the company for a fixed period of time on such terms and conditions

14
Section 44B(1) of the Banking Regulation Act 1949
15
Section 44B (2) of the Bank regulation Act 1949
as it thinks fit and proper and may from time to time extend the period so however that the total
period of moratorium shall not exceed six months.”

Suspension of Business by Banking Company and Preparation of Scheme

of Reconstitution and Amalgamation
Section 45 of the Banking Regulation Act 1949 gives the power to the Reserve Bank to apply
to the Central Government to apply for suspension of business by a banking company to
prepare a scheme for reconstruction and amalgamation. The Reserve Bank of India in its own
discretion, where it appears to it that there is good reason to do so, can apply to the Central
Government to pass an order of moratorium in respect of a banking company. 16 The Central
Government, after considering the application made by the Reserve Bank of India, might
order moratorium staying the commencement or continuance of all actions and proceedings
against the company for a fixed period of time on such terms and conditions as it thinks fit
and proper and may extend the period from time to time. However, the total period of
moratorium cannot exceed six months.17

Circumstances attracting the preparation of a scheme of reconstruction by the RBI

Reserve Bank of India during the period of moratorium may prepare a scheme for:
i. the reconstruction of the banking company, or
ii. the amalgamation of the banking company with any other banking institution referred
to as "the transferee bank."
if it is satisfied that:
a. it is in the public interest; or
b. it is in the interest of the depositors; or
c. to secure the proper management of the banking company; or
d. in the interests of the banking system of the country as a whole.

SEC. 45(5):
“The scheme so formulated may contain the provisions for all or nay of the following
matters,
they are being:
a. the constitution, name and registered office, the capital, assets, powers, rights,
interests, authorities and privileges, the liabilities, duties and obligations of the
banking company on its reconstruction or as the case may be, of the transferee bank.
b. in the case of amalgamation of the banking company, the transfer to the transferee
bank of the business, properties, assets, and liabilities of the banking company on
such terms and conditions as may be specified in the scheme.

16
Section 45(1) of the Banking Regulation Act 1949.
17
Section 45 (2) of the Banking regulation Act 1949
c. any change in the Board of directors, or the appointment of a new Board of directors,
of the banking company on its reconstruction or of the transferee bank and the
authority by whom, the way, and the other terms and conditions on which, such
change or appointment shall be made and in the case of appointment of a new Board
of directors or of any director the period for which such appointment shall be made.
d. the alteration of the memorandum and articles of association of the banking company
on its reconstruction or of the transferee bank for the purpose of altering the capital
thereof or for such other purposes as may be necessary to give effect to the
reconstruction or amalgamation.
e. subject to the provisions of the scheme, the continuation by or against the banking
company on its reconstruction or the transferee bank, of any actions or proceedings
pending against the banking company immediately before the date of the order of
moratorium.
f. the reduction of the interest or rights which the members, depositors and other
creditors have in or against the banking company before its reconstruction or
amalgamation to such extent as the Reserve Bank considers necessary in the public
interest or in the interest of the members, depositors, and other creditors or for the
maintenance of the business of the banking company.
g. the payment in cash or otherwise to depositors and other creditors in full satisfaction
of their claim:
a. in respect of their interest or rights in or against the banking company before its
reconstruction or amalgamation; or
b. where their interest or rights aforesaid in or against the banking company has or
have been reduced under clause (f), in respect of such interest or rights as so
reduced.
 h. the allotment to the members of the banking company for shares held by them therein
before its reconstruction or amalgamation [whether their interest in such shares has
been reduced under clause (f) or not], of shares in the banking company on its
reconstruction or, as the case may be, in the transferee bank and where any members
claim payment in cash and not allotment of shares, or where it is not possible to allot
shares to any members, the payment in cash to those members in full satisfaction of
their claim;
a. in respect of their interest in shares in the banking company before its
reconstruction or amalgamation; or
b. where such interest has been reduced under clause (f) in respect of their interest
in shares as so reduced.”

Further the clauses (i) and (j) deal with the matters related to the continuance of the service of
the employees and the remuneration in the new company arising out of amalgamation.

NATURE OF THE SCHEME MAKING POWER OF RBI

It is significant to note here that the framing of scheme of amalgamation and giving a
direction under the clause (f) of sub-section (5) cannot be treated as insolvency.18
In the case of K.I Shephard and Ors v. Union of India and Ors 19 the question arose as to
what is the nature of scheme making power of RBI conferred by Section 45 of the Banking
Regulation Act 1949. The Supreme Court observed:

“A scheme for the purposes contemplated has to be framed by RBI and placed
before the Central Government for sanction. Power has been vested in the
Central Government in terms of what is ordinarily known as a Henery-8 clause
for making orders for removal of difficulties. Section 45(11) requires that copies
of the schemes as also such orders made by the Central Government are to be
placed before both Houses of Parliament. We do not think this requirement
makes the exercise in regard to schemes a legislative process.”
So far as the matters in relation to which provisions can be made by the RBI in the scheme of
amalgamation under the sub-clause (4) is concerned, the Supreme Court in the case of The
Chairman, Canara Bank, Bangalore v. M.S. Jasra and others20 held that:
18
Simon Thomas v. State Bank 1976 KLT 554 (FB)
19
AIR 1988 SC 686
20
AIR 1992 SC 1341; See also Bank of Baroda v. Rajinder Pal Soni AIR 1996 SC 3077
 “It is clear that the scheme so framed under Sub-section (4) may contain
provisions for all or any of the matter specified in Sub-section (5) so that it
enables all or any of the specified matter to be provided in the scheme prepared
under Sub-section (4) and the matters specified in the several clauses in Sub-
section (5) do not automatically get incorporated in such scheme unless the
scheme specifically includes any such matter. In other words, it is not necessary
that every scheme of amalgamation framed under Sub-section (4) must provide
for continuance of services of all the employees of the banking company in the
transferee bank; but where such a provision is made, it must contain a provision
as required by the provisos in Clause (i). This is clear from the use of the word
'may' in the opening word of Sub-section (5) and the word 'shall' in the proviso.”

Thus, this is to be emphasized that merely laying down the matters in sub-clause (5), in
relation to which the scheme may be framed, does not mean that the provisions with relation
to those are incorporated unless expressly included. Therefore, the list may be taken as a
guidance to prepare a scheme and must be considered as a model of references.

Notice of the scheme to the concerned banking companies

The Reserve Bank of India must send a draft of the scheme so prepared to the banking
company and the transferee company and any other banking company concerned with the
amalgamation for suggestions and objections within such period as may be specified in that
behalf by the Reserve Bank of India. 21 Having received suggestions and objections from the
entities aforesaid or from the members and creditors thereof, the Reserve Bank of India may
make modifications in the scheme as it may consider necessary.22

Sanction of the Central Government

Thereafter the scheme shall be placed before the central government for its sanction and the
same might be granted by the Central Government without or with modifications as it might
consider necessary and should come into force on the date as may be specified in the order
passed. It is to be emphasized that different dates may be accorded for coming into force for
different provisions.23 The sanctioning order of the Central Government will act as a
21
Section 45(6)(a) of the Banking Regulation Act 1949.
22
Section 45(6)(b) of the Banking Regulation Act 1949.
23
Section 45(7) of the Banking Regulation Act 1949.
conclusive evidence that all the requirements of s. 45 either related to reconstitution or
amalgamation have been fulfilled24

Effect of the sanction of the scheme

As soon as the scheme or the provisions of the scheme comes into operation, on and from
that date the scheme or the specific provison becomes binding on:25

 Banking company

 Transferee company
 Other banking company or companies concerned with amalgamation.
 All the members, depositors, other creditors and employees of the aforesaid entities
 Any person having any right or liability in respect of the aforesaid entities.
 Trustees, persons managing or in any manner connected with
a. Provident fund; or
b. Any other fund maintained by the banking companies or the transferee company,
and the properties and assets of the banking company shall, by virtue of and to
the extent provided in the scheme, stand transferred to, and vest in, and the
liabilities of the banking company shall, by virtue of and to the extent provided in
the scheme, stand transferred to, and become the liabilities of the transferee
bank.26

The copies of scheme as soon as they have been sanctioned by the Central Government will
be laid before both the Houses of Parliament. 27 Where the scheme is a scheme for
amalgamation of the banking company, the business acquired by the transferee bank under
the scheme or under any provision of the scheme thereof, after the coming into operation of

24
Section 45(7A) of the Banking Regulation Act 1949.
25
Section 45(8) of the Banking Regulation Act 1949.
26
Section 45(9) of the Banking Regulation Act 1949.
27
Section 45(11) of the Banking Regulation Act 1949.
the scheme or such provision, will be carried on by the transferee bank in accordance with the
rules and law governing the transferee bank. Though the Central Government on the
recommendation of RBI can grant exemptions from certain rules and provisions of governing
law by publishing a notification in the Official Gazette for the purpose of complete
implementation of the amalgamation scheme. Further it should be noted that any such
modification and exemption will not operate beyond a period of more than 7 years from the
date of acquisition of the business.28

Also, the amalgamation of a banking institution with several banking companies against
which an order of moratorium has been made is permitted. Banking institutions means any
banking company and includes the State Bank of India or a subsidiary bank or a
corresponding new bank.29 This provision and any scheme made under provision have been
given the overriding effect with respect to any other law for the time being in force or
agreement or award.

MERGER OR AMALGAMATION OF BANKING COMPANIES WITH NBFCS

So far as the merger between two banking companies is concerned, it is regulated by the
Banking Regulation Act 1949. However, where one banking company is to merge with a
NBFC, in that case also a prior permission from the Reserve Bank of India needs to be
obtained. To ensure that the post-merger banks continue to be following the legal provisions
contained in the Banking Regulation Act, 1949 and other relevant statutes and also the
regulatory prescriptions of RBI, banks should obtain prior approval of Reserve Bank of India
before initiating steps for amalgamation/merger of a NBFC with the bank.30

28
Section 45(12) of the Banking Regulation Act 1949
29
Section 45(15) of the Banking Regulation Act 1949
30
RBI Circular No: DBOD.BP. BC 89/21.02.043/2003-04