In this article we discuss the impact of merger and acquisition in Indian banking industry. Mergers and acquisitions or M&A is a branch of corporate law dealing with companies that are purchasing or merging with other companies. M&A lawyers assist their clients with the appropriate financing for mergers and acquisitions and provide advice concerning the drafting, negotiation, and performance of contracts for the sale of portions of the business. M&A transactions are among the most complex and significant events in the life of a firm.
For the Indian corporations 2018 was a big year for merger and acquisition activity. India was active in the region, with a record of $129 billion of merger and acquisition deals in 2018. The inbound M&A activity reached $55 billion, a 77% increase over 2017. The number of M&A deals increased as well climbing 17.2% from 2017. In addition, India witnessed five deals of over $5 billion and an average M&A deal size of $127.8 million; an increase in deal size from 82.8 million in 2017. In 2017, India witnessed only one deal above $ 5 billion, the 11.6 billion Idea-Vodafone merger.
The industry with the largest 2018 M&A activity in India in terms of transaction value has been the retail sector – representing 33.1% of India’s inbound M&A for a total of $18.5 billion. Second most important industry by value is the materials sector which captured 17.2% of the M&A activity. The healthcare sector reached the third rank with 12.3% market share.
With respect to the banking sector, M&A have been on the rise both globally and in India. Similar to all other businesses and sectors, banks want to safeguard against risks and exploit available opportunities. As it stands today, the banking sector in India is mature in supply and product range, with banks having clean, strong and transparent balance sheets. The main growth drivers in the Indian banking industry are increased retail credit demand, expansion of ATMs and debit cards, improved macroeconomic conditions, diversification, interest rate spreads, and regulatory and policy changes, specifically the Banking Regulation Act.
Some of the motives behind consolidation in banking sector in India include growth, synergies, managerial efficiency, strategic motives, market entry, tax shields and financial safeguards, and regulatory interventions. On the other hand, the risks involved in bank mergers and acquisitions include the large size of a new organization, lag in profitability, lack of valuation system, difference in structure, systems and procedures between the banks, lack of professional management and others.
The impact of merger and acquisition in Indian banking industry includes creating a new large entity, providing massive scale economies and improved distribution in India. An example of this nature is the HDFC Bank acquiring Centurion Bank of Punjab in 2008. This merger created an entity with an asset size that was the 7th largest in India and distribution channels with 1,148 branches and 2,358 ATMs (the largest in terms of branches in the private sector). The drawbacks of merger and acquisition in Indian banking industry can include a cultural misfit between the merging banks, technological issues and misalignment and slower growth rate among others.
Contact us, your business attorney in Florida, to find out more about impact of merger and acquisition in Indian banking industry and help you with your merger and acquisition needs.
Malescu Law P.A. – Business & Corporate Lawyers