Section 44A Banking Regulation Act: Voluntary Amalgamation of Banks

Not every change of ownership in banking is a rescue. Banks merge voluntarily to gain scale, settle with their creditors when they are in difficulty, and, in a rare and drastic case, may have their whole undertaking taken over by the Central Government. Each route has its own section, its own procedure and its own safeguards, and the distinctions between them are a favourite examination subject because they are easily confused.

Figure 1: Four routes by which a bank may change hands

1. Voluntary Amalgamation

Figure 2: The procedure under Section 44A

• The scheme (Section 44A(1)): no banking company may be amalgamated with another banking company unless a scheme containing the terms of such amalgamation has been placed in draft before the shareholders of each of the banking companies concerned separately, and approved by a resolution passed at a meeting called for the purpose.
• Notice (Section 44A(2)): notice of the meeting, stating the time, place and object, must be given to every shareholder in accordance with the articles, and must also be published at least once a week for three consecutive weeks in at least two newspapers circulating where the registered offices are situated, one of them in a language commonly understood there.
• The majority: the resolution must be passed by a majority in number representing two thirds in value of the shareholders of each company, present in person or by proxy. Both limbs must be satisfied, so a few very large holders cannot carry the scheme against the numbers, nor many small holders against the value.
• Dissenting shareholders (Section 44A(3)): a shareholder who has voted against the scheme, or has given notice in writing of his dissent at or before the meeting, is entitled, if the scheme is sanctioned, to claim from the banking company the value of his shares, as determined by the Reserve Bank when sanctioning the scheme, and that determination is final.
• Sanction (Section 44A(4)): the scheme, when approved, is submitted to the Reserve Bank for sanction, and on being sanctioned by order in writing it is binding on the companies and on all their shareholders.
• Effect (Section 44A(5), (6) and (6A)): by virtue of the order of sanction, the property and liabilities of the amalgamated company pass to the transferee bank, and the Reserve Bank may by a further order direct that the amalgamated company shall stand dissolved on a specified date, whereupon the Registrar strikes its name off the register.
• Conclusive evidence (Section 44A(6B)): the sanction order is conclusive evidence that all the requirements relating to the amalgamation have been complied with, and a copy certified by an officer of the Reserve Bank is admissible in evidence.
• Central Government power preserved (Section 44A(7)): nothing in the section affects the power of the Central Government to provide for the amalgamation of two or more banking companies under Section 396 of the Companies Act, 1956, but that power may be exercised only after consultation with the Reserve Bank.

2. Compromise and Arrangement

• The restriction (Section 44B): notwithstanding anything in the company law, no High Court shall sanction a compromise or arrangement between a banking company and its creditors, or any class of them, or between the company and its members or any class of them, unless the compromise or arrangement is certified in writing by the Reserve Bank as not being incapable of being worked and as not being detrimental to the interests of the depositors.
• Modification: a compromise or arrangement already sanctioned may not be modified except with the like certificate.
• Why: a composition with creditors is an alternative to winding up, and in an ordinary company the court may judge its fairness for itself. In a bank the persons chiefly affected are depositors, who are numerous, dispersed and unlikely to appear, so the Act substitutes the regulator's certificate for their participation.
• Consequence of failure: where the Reserve Bank is of opinion that a sanctioned compromise or arrangement cannot be worked satisfactorily, with or without modifications, that is itself a ground on which it may apply for the winding up of the company under Section 38(3)(b)(i).

3. Acquisition by the Central Government

• The power (Section 36AE(1)): where the Central Government is satisfied, on a report of the Reserve Bank, that a banking company has, on more than one occasion, failed to comply with written directions given to it under Section 21 or Section 35A so far as they relate to banking policy, or is being managed in a manner detrimental to the interests of its depositors, and that it is necessary in the interest of the depositors, in the interest of banking policy or for the better provision of credit generally or of credit to any particular section of the community or in any particular area, it may, after such consultation with the Reserve Bank as it thinks fit, acquire the undertaking of the company.
• Procedure: the Central Government must first give the company a reasonable opportunity of showing cause against the proposed action, and the acquisition is effected by a notified order in the Official Gazette.
• Vesting: on the appointed day the undertaking, assets and liabilities vest in the Central Government, or in a transferee bank or company if the Government so directs, and contracts and pending proceedings continue by or against the transferee.
• Scheme (Section 36AF): the Central Government may, after consultation with the Reserve Bank, make a scheme for carrying out the purposes of the acquisition, dealing with the corporation or company to which the undertaking is transferred, its capital, constitution and management, the continuance of employees and the transfer of pending proceedings.
• Compensation (Section 36AG): every person entitled to compensation is given the amount determined in accordance with the principles set out in the Fifth Schedule, and any dispute is determined by a Tribunal constituted under Section 36AH, consisting of a chairman qualified to be a judge of a High Court and two other members.
• Use: the power is not known to have been used. It is the most drastic option in the Act, and the rise of resolution by scheme under Section 45 has made it largely obsolete, because a scheme achieves the same result faster and without the question of compensation.

4. Comparing the Routes

• Who initiates: the shareholders under Section 44A; the Reserve Bank under Section 45; the Central Government on the Reserve Bank's report under Section 36AE.
• Whose consent is needed: a majority in number and two thirds in value of shareholders under Section 44A; none under Section 45; none under Section 36AE, though the company must be heard.
• Who sanctions: the Reserve Bank under Section 44A; the Central Government under Section 45 and Section 36AF.
• What the owners get: dissenters are valued out by the Reserve Bank under Section 44A; rights may be reduced or extinguished under Section 45; compensation under the Fifth Schedule, with a Tribunal to resolve disputes, under Sections 36AG and 36AH.
• When each is used: Section 44A for commercial consolidation; Section 45 for a failing bank; Section 36AE has not been used in practice.
• Public sector banks: their amalgamation is effected not under these sections at all but by schemes framed under the Acquisition and Transfer Acts and the State Bank of India Act, approved by the Central Government, which is how the mergers of 2017, 2019 and 2020 were carried out.

5. Questions Arising

Why is a dissenter bought out under Section 44A but not under Section 45?

Because the two provisions address different situations. A Section 44A amalgamation is a commercial transaction between solvent banks, in which a shareholder who did not agree is entitled to the value of what he had. A Section 45 scheme concerns a bank whose capital has usually already been lost, so there is no value to pay out, and insisting on compensation would simply transfer the loss from the shareholders, who bore the risk, to the acquirer or the public.

Does the amalgamation of a bank require approval under competition law?

A combination above the thresholds of the Competition Act, 2002 ordinarily needs the approval of the Competition Commission, but the Central Government has by notification exempted certain bank combinations, on the footing that the Reserve Bank and the Government have already considered the public interest. Notifications have covered banking companies under a moratorium (2013), the amalgamation of regional rural banks (2017) and, for ten years from August 2017, the reconstitution and amalgamation of nationalised banks. Whether a particular voluntary amalgamation under Section 44A needs approval therefore depends on the thresholds and the notifications in force at the time.

6. Quick Revision

7. Frequently Asked Questions

What majority is needed to amalgamate two banking companies voluntarily?

Under Section 44A, a resolution passed by a majority in number representing two thirds in value of the shareholders of each banking company, present in person or by proxy at a meeting called for the purpose. The scheme must then be sanctioned by the Reserve Bank before it has any effect.

What happens to a shareholder who votes against an amalgamation?

He may claim the value of his shares from the banking company, provided he voted against the scheme or gave written notice of dissent at or before the meeting. The value is determined by the Reserve Bank, and that determination is final.

What is the difference between Section 44A and Section 45?

Section 44A is a voluntary amalgamation begun by the shareholders, needing a majority in number and two thirds in value, sanctioned by the Reserve Bank, with dissenters bought out. Section 45 is a compulsory scheme prepared by the Reserve Bank for a failing bank, requiring no shareholder approval, sanctioned by the Central Government, and capable of reducing or extinguishing the rights of members, depositors and creditors.

Can a bank settle with its creditors through a court sanctioned compromise?

Only with the Reserve Bank's certificate. Section 44B forbids a High Court to sanction a compromise or arrangement between a banking company and its creditors or members unless the Reserve Bank certifies in writing that it is not incapable of being worked and not detrimental to the interests of the depositors. The same certificate is needed for any later modification.

Has the Central Government ever acquired a bank under Section 36AE?

Not so far as is known. The power exists but has not been exercised. Resolution in practice proceeds by a scheme under Section 45, which achieves the transfer faster and without the compensation and Tribunal machinery that an acquisition under Sections 36AG and 36AH would involve. Nationalisation in 1969 and 1980 was carried out by separate Acts of Parliament, not under this section.

8. Related Topics and Provisions

• Moratorium and reconstruction under Section 45
• Winding up of banking companies
• Nationalisation and the Acquisition and Transfer Acts
• Structure of the Indian banking system
• Inspection, directions and penalties