RBI Clears ICICI-ICICI Bank Merger With Conditions

Mumbai, April 26: | Updated: Apr 27 2002, 05:30am hrs
Reserve Bank of India on Friday gave its formal approval for the reverse merger of ICICI Ltd with its banking arm ICICI Bank, but imposed several important conditions to be followed by the merged entity, particularly in respect of priority sector advances.

RBI also cleared the merger of two ICICI subsidiaries, ICICI Personal Financial Services and ICICI Capital Services with ICICI Bank.

The clearance gives birth to a Rs 1 lakh crore asset base bank, second only to State Bank of India, which is well over Rs 3 lakh crore in size. The merger is effective from the appointed dated of March 30, 02, and the swap ratio has been fixed at two ICICI shares for one ICICI Bank share.

While clearing the merger, which was cleared by the Bombay High Court on April 11 and the Gujarat High Court on March 7, RBI said, considering that the advances of ICICI are not subject to the requirement applicable to banks in respect of priority sector lending, the bank will post-merger, have to maintain an additional 10 per cent over and above the requirement of 40 per cent, that is a total of 50 per cent of the net bank credit on the residual portion of its advances.

“This additional 10 per cent by way of priority sector advances will apply until such time as the aggregate priority sector advances reach a level of 40 per cent of the total net bank credit of the bank,” RBI said, adding its existing instructions on sub-targets under priority sector lending and eligibility of certain types of investments/funds for reckoning as priority sector advances will apply to the bank.

Reacting to the RBI clearance, ICICI Bank managing director and chief executive officer-designate KV Kamath said, “we are delighted that we have been able to obtain the regulatory and statutory approvals for the merger within six months and would like to thank the authorities for their support.”

Ms Kalpana Morparia, who will be the executive director in the merged entity, said the net worth of the bank post-merger, taking into account the provisioning, will dip to some extent. The capital adequacy ratio is likely to be around 10.5 per cent.

Ms Morparia also said the final picture will emerge on May 3, when the ICICI Bank board takes into account the balancesheet of ICICI. Deloitte Haskins and Sells has already undertaken a fair valuation of ICICI’s assets.

On the priority sector lending conditions imposed by RBI, Ms Morparia said, “though we cannot specify when we will fulfill the 40 per cent aggregate norm, we will certainly comply with the 50 per cent norm set by RBI.”

The merger application was submitted to RBI on October 25 last. RBI examined the request under the Banking Regulation Act of 1949.

On reserve requirements, RBI said ICICI Bank should comply with the CRR requirements (under section 42 of the RBI Act, 1934) and the SLR requirements (under section 24 of the Banking Regulation Act of 1949) as applicable to banks on the net demand and time liabilities of the bank, inclusive of the liabilities pertaining to ICICI from the date of merger. Consequently, ICICI Bank will have to comply with the CRR/SLR computed accordingly and with reference to the position of net demand and time liabilities (NDTL) as required under existing norms.

ICICI has already mopped up a whopping Rs 23,000 crore of SLR and a CRR of Rs 5,500 crore to conform to this norm.

ICICI Bank will continue to comply with all prudential requirements, guidelines and other norms as applicable to banks concerning capital adequacy, asset classification, income recognition and provisioning, issued by RBI from time to time on its entire portfolio of assets and liabilities post-merger, the central bank said.

The central bank also said as the merger is between a banking company and an FI, all matters connected with shareholding, including the swap ratio, will be governed by the provisions of Companies Act of 1956. In case of any disputes, provisions in the Companies Act and the decision of the courts will apply, it added.

The bank should also ensure compliance with section 20 of the Banking Regulation Act concerning granting of loans to companies in which directors of such companies are also directors. In respect of loans granted by ICICI to companies having common directors, while it will not be legally necessary for ICICI Bank to recall the loans already granted to such companies after the merger, it will not be open to the bank to grant any fresh loans and advances to such companies post-merger. The bar also includes any renewal or enhancement of the existing loans. The restriction contained in section 20 of the Act does not make any distinction between professional directors and other directors and will apply to all directors.

The investments of ICICI acquired by way of project finance, as on the date of merger, will be kept outside the exposure ceiling of 5 per cent for advances towards exposure to equity and equity-linked instruments for five years, since these investments need to be continued to avoid any adverse effect on the viability/expansion of the project. The bank should, however, market the above instruments and provide for any loss in their value in the manner prescribed for the investments of the bank. Any incremental accretion to the above project-finance category of equity investment will be reckoned within the 5-per cent ceiling for equity exposure for the bank, RBI said.

The bank will also have to ensure that its investments in any of the companies in which ICICI had investments pre-merger are in compliance with section 19 (2) of the BR Act, which prohibits holding over 30 per cent equity in the form of paid-up share capital of the concerned company, or 30 per cent of its own paid-up share capital and reserves, whichever is less.

While taking over the subsidiaries of ICICI after merger, the bank has also been asked to ensure that the activities of the subsidiaries comply with the requirements of permissible activities to be undertaken by a bank under sections 6 and section 19(1) of the BR Act. The takeover of certain subsidiaries, presently owned by ICICI, by ICICI Bank will be subject to approval, if necessary, by other regulatory agencies like Irda, Sebi, National Housing Bank etc.

Section 12 of the BR Act requires that capital of a banking company shall consist of ordinary shares only (except preference share issued before 1944). The inclusion of preference share capital of Rs 350 crore (350 shares of Rs 1 crore each issued by ICICI prior to merger), in the capital structure of the bank post-merger is, therefore, exemptible from the above provision, granted by the government under section 53 of the Act for five years.