Reverse Meger In Indian Banking Industry

Reverse Merger in Indian Banking Industry By Vineet Saraff (82) FN3 08/02/09

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DEFINITION A technique used by private companies to go public without registering an initial public offering (IPO). A reverse merger occurs when a private company acquires or merges with a public company that is little more than a shell. That is, although the public company is listed on a stock exchange, such as the NASDAQ, or trades in the over-the-counter (OTC) market, its primary business has failed and it has sold off most of its assets and discontinued operations. Reverse mergers became popular after the stock market bubble burst in 2000 and the initial public offering market virtually shut down. Also called a back-door listing. 08/02/09 2

What happens shareholders of the private company purchase control of the public shell company and then merge it with the private company. The publicly traded corporation is called a "shell" since all that exists of the original company is its organizational structure. The private company shareholders receive a substantial majority of the shares of the public company and control of its board of directors

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Cont… 1. The transaction involves the private and shell company exchanging information on each other, negotiating the merger terms, and signing a share exchange agreement 2. the shell company issues a substantial majority of its shares and board control to the shareholders of the private company

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Benefit 1. Public trading status include the possibility of commanding a higher price for a later offering of the company's securities. 2. Reverse takeover allows a privately held company to become publicly held at a lesser cost 3. Lesser stock dilution than through an initial public offering (IPO) 4. A reverse takeover is less susceptible to market conditions

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Drawbacks 1. A reverse takeover is less susceptible to market conditions 2. These shells may sometimes come with angry or deceitful shareholders who are anxious to "dump" their stock at the first chance they get 3. Possibly the biggest caveat is that most ceo's are naive and inexperienced in the world of publicly traded companies 4. Such transactions only introduce liquidity to a previously private stock if there is bona fide public interest in the company 08/02/09

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Reverse Merger of ICICI bank With ICICI Limited 08/02/09

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On Jan. 26 2002 THE shareholders of ICICI Bank Ltd have approved the scheme for amalgamation of the bank with ICICI Ltd, ICICI Capital Services Ltd and ICICI Personal Financial Services Ltd. The scheme was approved "by an overwhelming majority" with 99 per cent of votes being cast in favour

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On October 26, 2001, the boards of ICICI and ICICI Bank approved a share swap ratio of one equity share of ICICI Bank for two equity shares of ICICI, for the proposed reverse-merger. ADS holders of ICICI were to get five ADS of ICICI Bank in exchange for four ADS of ICICI.

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After that merger, ICICI's holding in the bank was diluted to 55.6 per cent from the pre-merger level of 62.6 per cent. As reported after the board approvals for reverse-merger, ICICI had 46 per cent equity in ICICI Bank, the stake assigned to be held in a trust for the benefit of the merged entity and divested through appropriate placement in fiscal 2003.

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Alternatives with ICICI to raise funds ICICI Limited could have a game plan for the scenario where it has to maintain the statutory reserves in the first year itself. In that case it would require to raise an estimated sum of Rs 18000 crs before March ’02. For this is has following options available: 4. Reduction of loan portfolio - ICICI could reduce its loan porfolio. This could be done by withholding the proceeds from loan repayment or by way of securitisation of loans. ICICI could offload some of its good loans at discount to other players. 08/02/09

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Alternatives with ICICI to raise funds cont… 2. Through retail deposits of ICICI Bank – ICICI Bank could raise part of the funds requirement through retail deposits. This would bring down the burden on ICICI Ltd and retail deposits could be a good low cost option. 3. ICICI Ltd itself could go in for additional borrowing for the funds requirement. This would of course be in addition to the fund requirement in the normal course of the business.

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Negative impact post merger Average cost of borrowing for ICICI ltd for FY01 was 11.71 per cent. Its Gross yield was 13.54 per cent for the same period. By bringing down its loan portfolio and diverting these funds for the reserve requirement it would have to forego some of the interest spread. CRR would gat a return of 6.5 per cent and amount in SLR would generate a return of about 9.5 per cent. Even in the case of fresh funds the cost of borrowing would be higher and the return on those funds would be less.

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The Flip side for Icici The assets quality of ICICI Bank, which has been its biggest strength would be affected post merger. ICICI Ltd has NPAs of 5.2 per cent for FY01 as against ICICI Bank’s NPAs of 1.4 per cent. At present ICICI Ltd can claim a deduction of upto 40 per cent of its profits from its long term lending by transferring the amount to special reserve. Post merger, this benefit would stand withdrawn in the case of incremental loans. 08/02/09

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