Pre and Post Merger Performance of Commercial Banks in India

(A Comparative Study among Indian Public Sector, Private Sector and Foreign
Banks)

Synopsis

Submitted For the Registration of

Degree of Doctor of Philosophy

In Accountancy and Law

(Commerce)

UNDER THE SUPERVISION OF SUBMITTED BY-

Prof.L.N.Koli Abhay Kant
Department of Accountancy & Law Research Scholar
Faculty of commerce

DAYALBAGH EDUCATIONAL INSTITUTE

DAYALBAGH, AGRA
 1

Introduction

Merger is also defined as amalgamation. Merger simply refers to mix of two or more

companies and form a new company The parent company acquires all the assets as well as

liabilities of the merged company or companies. Generally, the parent company is the buyer,

which retains its identity, and the holding company is the seller. All assets, liabilities and the

stock of one company are transferred to Transferee Company and made payment in the form of

purchase consideration:

A. Equity shares in the transferee company

B. Debentures in the transferee company

C. Cash

Merger

It is a financial tool that is applied for enhancing long-term profitability by expanding their

business operations. Mergers occur when the merging companies have their mutual consent as

different from acquisitions, which can take the form of a hostile takeover. Managers are

concerned with improving operations of the company, managing the affairs of the company

effectively for all round gains and growth of the company which will provide them better deals

in raising their status, perks and fringe benefits.

Acquisition

It is kind of situation in which target company is acquired by any other company. Acquirer

Company can continue as separate entity .Main aim behind this is to gain controlling interest in

acquired company. Assets of the target are then integrated into the buying company.

Merger and acquisition in global scenario

Cross-border M &As are one mode of entry for foreign direct investors to host economies. The

ownership advantage, location advantage and internalization advantage, factors such as the

search for market power, efficiency gains through synergies, size, diversification, and financial

motivations affect the decision of firms to undertake cross-border M &As. Organizations which

aspire to expand across geographies are funding their cross-border acquisitions through a mix of
2

local and foreign financing. Theoretically, consolidation can be with two basic motives. One, a

motive to maximize value for stakeholders and two, non-value maximizing motives. In a perfect

capital market all activities of any company will be to maximize shareholder value. In reality,

value maximization comes from cost reduction or revenue growth.

Introduction to Indian Banking Sector

The Indian banking sector is one of the important sector which has a vital role in national

development of any economy. It has a unique or very special place in Indian economy.

Economic development of the country depends on the soundness of the banking system of any

country. Indian banks are the dominant financial institutions and have made better progress

during the global financial crisis. It can be seen from its annual credit growth, profitability and

trends in Non- performing assets NPAs.

Mergers and Acquisition in Indian Banking Sector

The Banking system of India started in 1770 and the first Bank was the Indian Bank known as

the Bank of Hindustan. Later on, some more banks like the Bank of Bombay-1840, the Bank of

Madras-1843 and the Bank of Calcutta-1840 were established under the charter of British East

India Company. These Banks were merged in 1921 and took the form of a new bank known as

the Imperial Bank of India. For the development of banking facilities in the rural areas the

Imperial Bank of India partially nationalized on 1 July 1955, and named as the State Bank of

India along with its 8 associate banks (at present 7). Later on, the State Bank of Bikaner and the

State Bank of Jaipur merged and formed the State Bank of Bikaner and Jaipur. The Indian

Banking Industry shows a sign of improvement in performance and efficiency after the global

crisis in 2008-09. The Indian Banking Industry is having far better position than it was at the

time of crisis. Government has taken various initiatives to strengthen the financial system. The

economic recovery gained strength on the back of various monetary policy initiatives taken by

the Reserve Bank of India.

The Regulatory Framework for M&A in Banking

The legal framework for amalgamation or merger between two banks, without considering

business and its capital adequacy is the end result of sequential work groups that are operated
 3

under R.B.I.The legal framework for M&As in the banking sector is laid down in the Indian

Banking Regulation (BR) Act, 1949.

The Act provides for two kinds of amalgamations which are as follows

(i) Voluntary Amalgamation

(ii) Compulsory Amalgamation

(1) Voluntary amalgamation (Section 44A of the BR Act)

States that the systematic plan of amalgamation of a banking company with another banking

company which is approved by the majority of voting rights of board of directors of both the

banking companies and also subsequently by the two-thirds shareholders (in value) of both the

banking companies. Then the plan can be submitted to the Reserve Bank for sanction. However,

the Reserve Bank has the discretionary powers to approve the voluntary amalgamation of two

banking companies under section 44A of the BR Act.

2). Compulsory Amalgamation

Compulsory amalgamations are concerned from induced or forceful merger by the Reserve

Bank under Section 45 of the BR Act, in public interest, or in the interest of the depositors of a

distressed bank/ unsound bank, or to secure proper management of a banking company, or in the

interest of the banking system. In the case of a banking company in financial distress or

financial unsound, The Reserve Bank under Section 45(2) of the BR Act may apply to the

Central Government for an order of temporary stopping in respect of a banking company and

during the period of such moratorium, may prepare a systematic plan for amalgamation of the

banking company with any other banking institution. BR Act requiring any banking institution

to obtain prior approval of the Reserve Bank before acquiring any other business or any merger

or amalgamation of any other business of banking institution or non-banking financial

institution, with absolute right to the Reserve Bank to finalize the swap ratio which should be

made binding on all concerned.

4

Review of Literature

International Reviews

S.No Year Author Title of Paper Objectives Findings

Name
1 2015 Daniel W. Financial To know the firms Study reveals that
. Collins and Statement financial comparability when
Richard Comparability statements exhibit acquirers’ ex-ante
Mergenthaler and the greater information
Efficiency of comparability with asymmetry is higher,
Acquisition industry peer acquirers operate in
Decisions firms. volatile operating
environments, and
management knows
relatively less about
the target
2 2014 Qamar Analysis of Pre To assess the Study reveals that pre
. Abbas, and Post Merger impact of M&A and post merger
Ahmed and and Acquisition on the financial performance of
Rashid Financial performance of selected banks in
Saeed, Performance of banks in Pakistan. Pakistan indicates
Banks in Pakistan indirect variations
3 2014 Sana Tauseef Wealth Effect of To know the The cumulative
. And Mergers & impact abnormal returns
Mohammed Acquisitions in announcement of (CARs) range from
Nishat an Emerging (M&As) in the significant positive to
Market(A Case banking sector of significant negative.
Study of Pakistan
Pakistan’s
Banking Sector)
4. 2013 Dr. Aamir Impact of Merger To catch the effect The study indicates
Rafique and Acquisitions of mergers and that in long run and
and on Stock Returns: acquisitions on short run period
Muhammad A Case of stock returns for shows decline effect
Usman Financial Sector the immediate on return to
Firms of Pakistan time after the shareholder in case of
event occurred merger and
acquisitions.

National Reviews on Literature

S.No Year Author Name Title of Paper Objectives Findings

1. 2015 Dr.Deepa Study On The To compare and It drives the

Joshi, and Impact Of analyze the pre organization to create
Garima Joshi, Mergers And merger and post synergy and value
Acquisitions merger financial creation by way of
On Efficiency statements of the diversification and
Of acquirer banks improved management
Performance for different
Of Indian years
Banks
 5

2. 2015 Neha Duggal Mergers and Analyzing The Overall study shows
acquisitions in Change In The that merger shows the
India: A case Financial positive impact on the
Study on Performance basis of net profit and
Indian Banking Post Merger return on capital
Sector Activity In employed but there is
Indian Banking least change occurs in
Sector earning per share and
return to total assets
ratio during post merge
3 2014 Prof. Ritesh Pre-Merger and To check that Study has revealed that
Patel Post-Merger whether is any overall impact of
Financial & improvement in merger and acquisition
Stock Return financial & is positive on the
Analysis: A stock return in Indian banking sector.
Study with banks in post-
reference to merger period.
selected Indian
Banks
4. 2013 Dr.S.Nirmala Financial To evaluate the The study found that
Performance pre and post the shareholders of the
Of Mergers merger financial acquirer companies
And performance of increased their
Acquisitions Of the acquirer and financial performance
Select Banks In target after the merger
India Event.
5. 2012 M.C. Sharma Post merger To identified the The study concluded
and Mahima performance of objectives of that there was positive
Rai Indian banks mergers and effect of mergers
acquisition in although it takes some
the Indian time to show
Banking sector.
To analyzed the
financial
performance of
the merged
banks through
the model of
EVA.
6. 2011 Akhil Bhan Mergers In To study the The mergers in the
Indian efficiencies or banking sector in the
Banking benefits post reform period
Sector – achieved due possessed
Motives And to the merger. considerable gains
Benefits which was justified
by the EVA of the
banks in the post
Merger period
6

Need of the study

Banking sector is key area for the development of Indian economy. Researcher has seen that,

most of the studies were based on financial performance, profitability, trend analysis have not

due importance. This study emphasis on pre and post merger performance of selected Indian

commercial banks. It is affected the productivity, profitability & efficiency of the banks to a

large extent. The impact of mergers resulted in change in profitability i.e. ROCE (Return on

Capital Employed), RONW (Return on Net Worth), PM (Profit Margin) & other financial ratio

is compared the performance of pre-merger & post-mergers period.

Objective of the Study

1. To study and analyze the concept, trends and legal framework of M&A’s of the selected

Commercial Banks in India.

2. To find out and analyze the Performance of the selected Commercial Banks in India before

(pre merger) and after (post merger) merger.

3. To make a comparative study of the Financial Performance of the selected Commercial Banks

in India before (pre merger) and after (post merger) Merger.

4. To know the impact of merger and acquisition on the Financial Performance of the selected

Commercial Banks in India.

Hypotheses

The Proposed Research Study is based on four Null Hypotheses. These are as follows

HO1: There is no significant impact of merger and acquisition on Profitability of selected

Commercial Banks in India

Ho2: There is no significant impact of merger and acquisition on Liquidity of selected

Commercial Banks in India

HO3: There is no significant impact of merger and acquisition on Capital Adequacy of selected
Commercial Banks in India

Ho4: There is no significant impact of merger and acquisition on Operating Performance of

selected Commercial Banks in India
 7

Research Methodology

1. Research Design

The study will be descriptive as well as analytical in order to achieve specific objectives.

2. Merger period: - 2010-2011 to 2015-2016.

3. Sample Size

For achieving different objectives, One Public Sector bank, Two Private Sector banks and Three

Foreign Banks in India will be taken in this research study:

Indian Public Sector Bank

S.No Acquirer Target Year of Merger

1. State Bank of India State Bank of Indore 2010

(Public sector) (Public sector)

Indian Private Sector Banks

S.No Acquirer Target Year of merger

1. ICICI Bank Ltd The Bank of Rajasthan 2010
(Private Sector) (Public Sector)
2. Kotak Mahindra bank ING Vysya bank 2014
(Private Sector) (Private Sector )

Foreign Banks (Operating in India)

S.No Acquirer Target Year of

merger
1. Banco Sabadell TSB Bank 2015
2. BNP Paribas BGZ bank 2014
3. Deutsche Bank Deutsche Post Bank 2010

3. Duration of the Study

3 years of pre merger data and 3years of post merger data will be taken my research work.

4. Data Collection

Secondary data will be collected through various publications of Ministry of Finance, Reserve

Bank of India (RBI), and Annual Reports of the selected commercial Banks from their websites.
8

5. Statistical Tools

The following statistical tools will be applied in this research study:

(a).Ratio analysis,

(b).Trend analysis

(c).t-test

Objective Wise Research Methodology

S.No Objectives Research Methodology

1. To study and analyze the concept, trends This objective will be attain by
and legal framework of M&A’s of the using trend analysis.
selected Commercial Banks in India.
2. To find out and analyze the performance This objective will be achieve by
of the selected Commercial Banks in computation of financial ratios of
India before (pre merger) and after (post pre and post merger data of
merger) merger. selected banks

3. To make a comparative study of the This objective will be achieve by

financial performance of the selected comparing the financial ratios of
Commercial Banks before (pre merger) pre and post merger data of
and after (post merger) merger. selected banks
4. To know the impact of merger and This objective is attain with the
acquisition on the financial performance help of above objectives
of the selected Commercial Banks

Proposed Plan of Study

Chapter-1 Introduction
Review of Literature
Profile of selected Commercial Banks in India
Research Methodology
Chapter-2 Concept of M&A’s
Trends of M&A’s
Legal Framework of M&A’s of the selected Commercial Banks in India.

Chapter-3 Analyze the Performance of the selected Commercial Banks in India

before (pre merger) and after (post merger) merger.
Chapter-4 Comparative study of the Financial Performance of the selected
Commercial Banks before (pre merger) and after (post merger) merger.
Chapter-5 Impact of merger and acquisition on the financial performance of the
selected Commercial Banks.
Chapter -6 Findings, Conclusion and Suggestions
 9

References:-

1. Ahmed, A.Q. & Saeed, R. (2014). Analysis of Pre and Post Merger and Acquisition

Financial Performance of Banks In Pakistan. Information Management and Business Review

Vol. 6, No. 4, pp. 177-190.

2. Bhan, A. (2011), Merger in Indian Banking Sector – Motives and Benefits.

3. Duggal, Neha (2015), Mergers and Acquisitions in India: A case Study on Indian Banking

Sector. International Journal of Research and Development - A Management Review (IJRDMR)

Volume-4, Issue–2.pp.78-83.

4. Joshi, D. & Joshi, G. (2015). Study On The Impact Of Mergers And Acquisitions On

Efficiency Of Performance Of Indian Banks. Altus Shodh Journal of Management &

Commerce.volume-5, pp.1-31.

5. Mergenthaler, D. W. (2015). Financial Statement Comparability and The Efficiency of

Acquisition Decisions.SSRN Electronic Journal.pp.1-55.

6. Nishat,M.& Tauseef, S. (2014). Wealth Effect of Merger and Acquisitions in An Emeging

Market . IBA Business Review. Vol. 9 Issue 2, p24-39.

7. Nirmala, S. & Aruna.G (2013) Financial Performance of Merger and Acquisition of Selected

Banks in India. International Research Journal of Business and Management (IRJBM). Volume

No – 1.pp.90-103.

8. Patel, P. (2014). Pre-Merger and Post-Merger Financial & Stock Return Analysis: A Study

with reference to selected Indian Banks. Asian Journal of Research in Banking and Finance,

Vol. 4, No. 12, December 2014, pp. 1-9.

10

9. Rafique, A. & Usman, M. (2013). Impact of Merger and Acquisitions on Stock Exchanges -

A Case of Financial Sector Firms in Pakistan.International journal of Business and social

science.volume No-3.pp.1-53.

10. Sharma, M. C. & Rai, M.(2012). Post merger performance of Indian banks . Indian Journal

Of Commerce.volume No-65.pp.78-90.

Abhay Kant
Research Scholar

Prof.L.N.Koli Head Prof.S.P.Kaushik.

Supervisor Dept.of Accountancy & Law Dean
Dept.of Accountancy & Law Faculty of Commerce Faculty of Commerce