Amalgamation and mergers of banks

Amalgamation and mergers of banks

A banking company may be amalgamated with another banking company as per BR Act. The banking companies
have to prepare a scheme of amalgamation, the draft copy of the scheme of amalgamation covering terms and conditions needs to be placed separately by the companies to their shareholders. Each shareholder needs to be
given notice, The scheme of amalgamation should be approved by a resolution passed by majority of members representing two-thirds in value of the shareholders of each company present in person or by proxy. A shareholder, who votes against the scheme of amalgamation and gives necessary notice, may claim the value of his shares from the banking company, in case the scheme is sanctioned by the Reserve Bank. Once the scheme is sanctioned by the Reserve Bank then the assets and liabilities of the amalgamated company pass on to the other company with which it is to be amalgamated. The order of the sanction of amalgamation by Reserve Bank will be the
conclusive proof of amalgamation.

 
In case the Central Government orders amalgamation of two companies, such amalgamation would take place
after consultation with the Reserve Bank Under Sec 45 of the Banking Regulation Act the Reserve Bank can apply to the Central Government for an order of moratorium in respect of any company, on account of certain valid reasons. After considering various aspects, the Central Government may think it fit and proper to impose the moratorium. The period of moratorium can be extended from time to time for a maximum period of six months. During the period of moratorium, the banking company would not be allowed to make any payments to the depositors or discharge any liabilities or obligations to any other creditors unless otherwise directed by the Central Government in the order of moratorium or at any time thereafter.

Scheme of Amalgamation

During the period of moratorium, the Reserve Bank may prepare a scheme of reconstruction or amalgamation.
Such a scheme may be prepared by the Reserve Bank due to any one or more of the following aspects: 1. In the
public interest 2. In the interests of the depositors 3. To secure proper management of the banking company 4. In
the interest of the banking system of the country. As per the various provisions, the scheme of amalgamation
would be worked out and implemented. A copy of the draft of the scheme should be sent to the government and also to the banking company (transferee bank) and others concerned with the amalgamation. The Government
may sanction with modifications as it may consider necessary, after that the scheme should come into effect from
the date of the sanction.

 
Once the scheme is sanctioned by the Central Government, it would be binding on the banking company, transferee
bank and the members, depositor and other creditors and others as per the sanction. The sanction by the Central
Government is the conclusive proof that the amalgamation or reconstruction has been carried out with the
accordance with the provisions of the relevant sections of the Act. Consequent to amalgamation, the transferee
bank should carry on the business as required by the law.

 
The Central Government may order moratorium on the banking companies on the application of the Reserve
Bank. The Reserve Bank may also apply to High Court for winding up of a banking company when the banking
company is not able to pay its debts and also in certain other circumstances. The High Court would decide the
case based on the merits of the case a moratorium order would be passed. After passing the order the court may
appoint a special officer to take over the custody and control of the assets, books, etc of the banking company in
the interests of the depositors and customers. During the period of moratorium, the Reserve Bank is not satisfied
with the functioning of the bank, and in its opinion the affairs of the banking company is being conducted not in the
interests of the depositors and customers, Reserve Bank may apply to the High Court for winding up of the
company.

Winding up by High Court

The High Court may order winding up of a banking company on account of (a) The banking company is unable to
pay its debts (b) An application of winding up had been made by the Reserve Bank under the provisions of the
Banking Regulation Act (Sec37 and 38) The RBI is to make an application for winding up (under Sec 38 of BR Act) and under Sec 35 (4) if directed by the Central Government. Central Government may give such direction, based on the report of inspection or scrutiny made by the Reserve Bank, and on account of the situation that the affairs of the bank are being conducted to the detriment of the interests of the depositors. However before giving such direction, the banking company would be given an opportunity to make a representation in connection with the inspection/scrutiny report.

 
In the following circumstances, the Reserve Bank of India can apply for winding up of a banking company.
– Non- compliance with the requirements of Sec 11 regarding minimum paid up capital and reserves.
– Prohibition to accept fresh deposits under Sec 35(4) of the Banking Regulation Act or Sec 42 (3A)(b) of
the Reserve Bank of India Act
– Failure to comply with the requirements of the applicable provisions of the Banking Regulation Act and
the Reserve Bank of India Act

 
Official Liquidator:
Sec 38A of the Banking Regulation Act provides for appointment of an official liquidator attached to the High
Court by the Central Government, to conduct the winding up proceedings of a banking company.

Reserve Bank as Liquidator

If Reserve Bank of India applies to the High Court, the Reserve Bank, State Bank or any other bank as notified by
the Central Government or an individual may also be appointed as the official liquidator. Within the stipulated
time, the liquidator is required to make a preliminary report regarding the availability of the assets to make
preferential payments as per the provisions of the Companies Act and for discharging liabilities to depositors and
other creditors. Within the stipulated time, the liquidator is required to give notice calling for claims for preferential
payment and other claims from every secured and unsecured creditors. However, depositors need not make
claims. The claims of every depositor of a banking company is deemed to have been filed for the amount as reflected in the books of the banking standing in his/her credit.

 
Voluntary Winding Up:
Voluntary winding up would be permitted only when the Reserve Bank has certified that the banking company will
not be able to pay in full all its debts as they accrue.

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