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Sunday, November 18, 2012

Merger of Banks

RBI, CCI to vet all banking mergers
CCI to examine competition part of deals, RBI prudential aspects
Sushmi Dey / New Delhi Nov 19, 2012, 00:24 IST

Mergers and acquisitions (M&As) in the banking space may require clearance from fair market watchdog, Competition Commission of India (CCI), as well as the sector regulator, Reserve Bank of India (RBI).

Earlier, the indications were that only involuntary mergers and acquisitions, the ones directed by the RBI, would go to the central bank along with the CCI. However, all Mergers and acquisitions may now come under both. While the CCI will look at the competition part of such deals, the RBI will see prudential aspects.

“For M&A activities, banks will have to seek Reserve Bank approval from a prudential point of view. The RBI is the sector regulator, so the health of banks is its concern. The health of banks is not the CCI’s concern. The CCI’s concern is their behaviour in the market and the consumers in the market,” a key CCI official told Business Standard.
  • Times Bank was acquired by HDFC Bank, ICICI Bank took over Bank of Madura and Lord Krishna Bank merged with Centurion Bank of Punjab in the post-1993 period
  • SBI merged its associate, State Bank of Saurashtra, with itself in 2008
  • State Bank of Indore merged with SBI and Bank of Rajasthan merged with ICICI Bank in 2010
  • In an involuntary merger, OBC amalgamated Global Trust Bank in 2004 after an RBI moratorium on the operations of the Ramesh Gelli-promoted bank

So, the banks concerned may have to go to the RBI for mergers, as they go for branches and other activities, and it will look at technical issues related to the sector, according to the official.

However, under the proposed provisions in the amendment to the Competition Act, they will also have to seek approval from the CCI for M&A activities.

The Cabinet recently approved the amendment to the CCI Act to clear the air over who would vet mergers and acquisitions. It brought all M&A activities under the CCI, except the amalgamation of a failed bank with another bank.

According to CUTS International Secretary General Pradeep S Mehta, it could be difficult for both regulators to co-exist and if the amendment to the Competition Act goes through, the government will likely make amendments to the banking law Bill to take out the provision on RBI approval for competition-related issues.

“The proposed amendment to the Competition Act would in any case make it mandatory for both regulators to consult each other in case there is any conflict. It also provides the CCI primacy to regulate M&As, so it will have a clear say in mergers and acquisitions across sectors, including banking,” Mehta said.

Earlier, the Banking Laws (Amendment) Bill, 2011 had proposed M&As in the banking sector be exempted from CCI purview. This proposed clause will now be removed or amended, say those in the know.


RBI must enter forex market to support rupee, curb inflation: Bank of America-Merrill Lynch

MUMBAI: Leading US brokerage Bank of America-Merrill Lynch (BofA-ML) has called upon theReserve Bank to enter the forex market and buy dollars to recoup the rupee and thus arrest the imported inflation, which is the main reason for the continued price spiral.

Stating that lending rate cuts and higher forex reserves hold keys to the market and growth recovery, a BoA-ML India report authored by its chief economist Indranil Sen Gupta said, "The rupee will remain volatile till RBI recoups the forex reserves of USD 65 billion, including the forwards which it had sold since the 2008 global credit crisis following the fall of Lehman Brothers."

On imported inflation, it said a 10 per cent fall in the rupee translates itself into a 100 bps rise in inflation. 

Stating that non-intervention is the reason for the rupee fall, it noted that RBI is not buying forex to comfort the market because it thinks that market may sell the rupee due to a forex shortage which will further fuel inflationary pressures.

The report notes that "in September-November 2011, the steep 13.4 per cent of the rupee depreciation was, after all, aggravated by payment of bunched up dues of about USD 5 billion to Iran for oil imports. A 10 per cent depreciation of the currency typically translates into 100 bps of inflation."

The rupee is the second worst performer among the BRICs currencies, after the Brazilian real, losing nearly 19 percent since September 2011, the report said.

Last Friday, the rupee hit a two-month low of 55.15 to the dollar. The life-time low of the local unit was in mid-June when it had plunged to 57.15 to the greenback. In the year-to November 2, the RBI had sold over USD 21 billion to prop-up the rupee. Between August and December 2011, the rupee had lost 17 percent.

"We do not expect the forex market to get bullish on the rupee until the RBI has recouped forex reserves. After all, the country's import cover has halved to just about seven months -- the least since 1996 -- from 14 months in 2008.

"The RBI will need to buy USD 90 billion if it is to replenish the import cover to even nine months. Just as importantly, the forex market will also fear that the rupee may see disproportionate losses in case the dollar shoots up," Sengupta said.

He further said to stabilise the rupee, "The best solution surely will be for RBI to accumulate forex and the forex market to buy the rupee.


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