Ex chairman of OBC, BD Narang says that United Western Bank would be a great buy for ICICI Bank and Canara Bank. He adds that the bank taking over UWB will not be obliged to shareholders and shareholders would be paid after 12 years.
Ashwin Parekh of Ernst and Young says that the value of the bid would not consider anything for the shareholders and deposit holders' interest will be the main focus area.
Excerpts from CNBC-TV18's exclusive interview with Ashwin Parekh of Ernst and Young and Ex Chairman of OBC, BD Narang:
For someone who has been through this whole process with GTB, Global Trust Bank, what do you see as synergies of taking on a sick bank like this?
Narang: This bank has almost 225 plus branches and all are in the sugar belt of Maharashtra. That is a very rich area. So any bank, which doesn't have a presence in that area; if it takes over this bank, there will be a great synergy for them. Given a good management, the bank can be turned around in a very short time and become a very profitable organisation.
How exactly will the modalities play out? How will it play out for depositors and for equity shareholders of UWB given with what you went through with Global Trust Bank?
Narang: Basically, it is an involuntary merger. RBI announces an involuntary merger only when it is satisfied that the entire networth of a bank has been wiped out and it is now in the interest of the bank to stay in business. This means they suspect that the depositors' interest is badly hurt.
In this particular case, UWB is a listed bank. Now if any other listed bank makes an offer for it, then most probably they don't have to pay anything to the shareholders. The shareholders will have to be paid after 12 years, only after the liabilities of the bank have been extinguished. But if some bank decides to put some value on the franchise, then there could be some swap ratio.
Mr Narang said that the bank, which is taking over, owes nothing to the shareholders of UWB, is that legally correct?
Parekh: That is the legal situation. After the first due diligence, there will be a certain period, in case of OBC-GTB one saw a period of 12 years, here one may see a different period. But only after that period, if there is a positive net worth and that gets established, only then there will be some amount of consideration flowing back to the shareholders.
In a process when there is no bidding and it is a fit, and a proper bank or several banks as the case is this time; does it matter in terms of the value of the bid that is put forward, or not quite?
Parekh: Actually to my mind at this point in time, I don't think the value of the bid will consider anything to the shareholder at all, to begin with. I think the consideration here is the ability, the geographical fit, the synergy and then what is the final benefit to the deposit holder. So I think that is the main consideration out here. The moratorium clearly says that it is basically for the deposit holders and public interest.
But to my mind, I think the bidding process will become a little more interesting now. There are three to four considerations with which the bidders are going into this. I don't think it is the shareholders interest, I think there are two things at the core.
At the core there is this branch licence, 230 branches are being made available to the acquiring bank. Therefore, the regulator will have to be very careful. It is not just the depositors' interest that we are talking about; we are talking about a bank, which in the normal course is eligible for 230 branches.
Will it be a bidding process or is it for the RBI to decide, which bank actually is in the best interest of depositors of UWB and then award the bank to that bidding banker and not necessarily based on any offered swap ratio or any offered real value of UWB?
Parekh: As the matter stands today there is a moratorium and quite clearly, it is now the regulator's decision. The regulator will have his own set of parameters and rightfully so, I don't think there will be any huge public announcement or debates on what those parameters are.
I think at the core there are only two to three considerations, that is the deposit holders interest on one side and the ability of the acquiring bank to really manage this bank, the deposit holders and the NPAs particularly, and the portfolio. But it is the regulators decision in the end.
When you were taking over GTB, did the value of the bid matter and would it matter at this point what the value of the bid might be and whether or not there were any trimmings added to that?
Narang: No, basically there will be no financial bids; it will be a synergy issue. One should understand that the whole networth is wiped off and NPAs will be more than the stated amount of NPAs. Plus there is a cost of providing Voluntary Retirement Service.
The RBI will have to judge which bank fits into the picture well so that the depositors' interest is taken care of, interest of the employees is taken care of and by and large the customers get the service that they deserve to get. I personally feel that it will not be the financial bid; it will be the synergy issue that will be the main criterion.
Without getting into specifics though for a medium sized bank, PSU bank, or private bank as it might be to swallow something like UWB, how viable is it?
Narang: It will be a great buy for a bank like ICICI Bank or Canara Bank; those who don't have a large presence in the hinterland of Maharashtra. It is a sugar belt, the farmers are rich, it is an entirely irrigated belt and any bank, which provides good leadership, can turn it around in the shortest possible time. It is the management, which is the key in this particular bank.
When you were taking over GTB, did at any point the RBI lean on you, or persuade you, or request you to offer any kind of swap ratio to GTB shareholders?
Narang: Not at all, my main reason for approaching them was that our's was a north based bank and GTB was a south based bank. It had one million customers and I knew that the NPAs could be a little more than what was stated to be in the balance sheet. That is why we went for income tax rebate, which was not provided earlier. For the rest, we realised that we could really recover that money because property prices were going up. So the only issue was Ketan Parekh's money and so we took care of that portion and the rest we did, but we never made any financial offer.
If you were watching UWB today, looking at the precedent and the legality of it, would you expect any swap ratio offer from the bank, which is taking over UWB for shareholders of UWB today?
Parekh: Fortunately at Ernst and Young we had the opportunity of looking at this bank for another investor about a year ago. Looking at the current situation and at the fact that their entire networth is now lost, I don't think there is any money consideration left for the shareholders.
What is now critical, as Mr Narang has said is the kind of synergy? The bank, which is acquiring will have to convince the regulator that they would really be able to take care of the major stake holders- depositors, of course, to begin with and then employees perhaps, then the creditors and then the others.
So I think it will be more of a synergy and more of a convincing proposal to say that we can manage this bank, the portfolio, the deposit holders and we can give out proper treatment to deposit holders.
If that is the case, this bank trades today at Rs 17 in the market, you are saying that there will be a suitor who will not make a financial bid, but depositors' interest will be protected, so this Rs 17 has no value right now post this merger or whichever restructuring the RBI finally arrives at?
Parekh: What may now happen is that the regulator may come out with a period, whatever it believes is a good period for which the shareholders must wait. In case of GTB-OBC it was a 12-year period.
The regulator may come out with a period and say that after five years, anybody who is really acquiring this bank or amalgamating this bank, if he finds that there was a positive value, that there was some amount of value that perhaps came from real estate, or from any part of the portfolio or there was a good recovery on NPA accounts, then in that case the value can go back to the shareholders. So the shareholders will have to observe that waiting period now.
In your opinion, is this a policy loophole that needs to be filled, or is the RBI not duty bound to any shareholder to find some sort of alternative for them because they probably walked in with their eyes open?
Parekh: At the core, I suppose it's not just this transaction. At the core, we have the reform issue. I mean periodically, we have seen that we are bringing banks, let's say closer to a point where moratoriums have to be declared. Once they are declared, then the regulator steps in.
I suppose in the larger interest of the industry, a proper framework has to be made so that it's conducive to have commercial transactions, rather than transactions driven out of moratorium.
I personally believe that even the regulator would be convinced that once a bank is brought to this point, it becomes extremely difficult. Today the regulator's role will be even more difficult than it was earlier because now one knows that the State Government has started coming in. There will be so many other kinds of bids, which will come in. Now the regulator's task becomes even more difficult.
If it had a proper reform programme for the consolidation that we are talking about, then we wouldn't have come to this point.
There is a slight red herring out here, there is an individual, a stockbroker who has picked up 7 per cent and wants to acquire more than 15 per cent in that bank by the name of Pradeep Bhavnani, what is the regulation exactly on that. I presume that one cannot just mount a takeover bid on a bank. Right?
Parekh: That is true, anything more than 5 per cent, to begin with, must get reported to the regulator. But these days, banks are watchful and if there is anybody, who gets even more than a per cent or 1.5 per cent, then at least the first level reporting begins.
In a situation such as this, for anybody, who will get more than the statutory limit, there must be some mechanism, which must stop all this in the market place.
For more on markets & business, log on to www.moneycontrol.com
More from rediff