The Economic Times: 17 December 2014

Mergers and Acquisitions in the Indian Banking sector is not a new concept. However, the recent acquisition of ING Vysya Bank by Kotak Mahindra Bank has opened new doors for the M & A in the banking sector. The mergers that the sector had seen in the past are very different from the type of merger between these two banking entities. There have been many cases in the past where various banks attempted to acquire stake in private banks; however, the Reserve Bank of India was always quick to respond to such situations and suppress the buyer to hold a stake of a mere 5% and nomore. Now, as we move into 2015, things related to the ownerships of the wide range of private sector banks can be entirely different. The incessant roils in the Stock Markets has led to a situation where  institutions have more say than communities in what actions the bank’s board should take, which is contrary to the existing myth that communities control most of the old private sector banks. The article cites an example of Karur Vysya Bank, where 4% was owned by the promoters in 2005, which is now down to a bare 2.22%. This shows that institutional investors own half of the bank, which was just around 1/3back in 2005. There are banks like South Indian Bank, which do not even have a promoter.

In the past, M & A in the Indian Banking Sector was nothing but shotgun marriages, wherein sinking private sector banks were dressed up and saved by banks that had the capital to invest. A few of the examples cited in the article are ICICI Bank’s acquisition of the Bank of Rajasthan, where the latter was facing a regulatory probe for possible violation of securities laws. Other examples include HDFC Bank’s acquisition of the Centurion Bank of Punjab; United Western Bank was thrust on IDBI Bank, and the scandal-hit Global Trust Bank was given away to Oriental Bank of Commerce.”The merger of ING Vysya Bank with Kotak opens the possibility of mergers among healthy banks,” says Romesh Sobti, managing director and chief executive officer at IndusInd Bank. “M&A transactions will happen when there are majority shareholders on both sides with the ability to make decisions.” This merger has come with a completely new and dynamic view of treating Mergers and Acquisitions by the RBI. Raghuram Rajan, the governor of RBI, holds a completely transformed point of view on this issue, which is entirely unlike the conventional approaches set by previous governors like Duvvuri Subbarao or Y. V. Reddy. This approach invites investors to invest into banks and opens up opportunities for both small and large banks; at the same time, holding the view that it does not harm competition in the Indian Banking Sector. Many banks, such as City Union Bank, Karnataka Bank, Lakshmi Vilas Bank, Dhanlaxmi Bank, Federal Bank, Karur Vysya Bank, and South Indian Bank may not be in play, but investment bankers have begun to pursue them.

These M&As, however, also pose certain hurdles, such as Union resentment, which is primarily due to cross cultural issues that inhibit proper functioning, as the employees find it difficult to suddenly transform their work culture. Another important fact that cannot be ignored is the step-motherly behaviour of the acquiring organisation towards the employees of the acquired organisation.In fact, some staff members at ING Vysya are threatening to throw sand in the wheel. They are demanding that they be treated differently than the Kotak staff. “The merger of ING Vysya Bank denotes the failure of the takeover of the ING Group of a traditional Indian bank,” says CH Venkatachalam, general secretary, All India Bank Employees Association (AIBEA). “We demand that all employees of ING Vysya Bank should be taken over by Kotak Bank. All the existing job security and conditions as covered by the bipartite settlement signed by the AIBEA should be maintained.” However, experience shows that the labour union hurdles might not be insurmountable.

The most significant inference that can be drawn out of the ground-breaking changes in M & A is that a new era has started in the Banking sector. There is the possibility of more changes in the near future – these changes have the potential of significantly transforming the visage of the Banking sector and its concepts and views regarding Mergers & Acquisitions.

-Victor Dhar, PGDM Class of 2015

Vignana Jyoti Institute of Management, Hyderabad