Merger & Acquisition of Banks/FIs in Bangladesh

Badrul Millat Ibne Hannan: For quite a few days, the news of banks and Financial Institutions merger has created a stir in banking industry entirely. It would be wrong to say banking industry. Just talk of the country. This merger & acquisition has proved the forecasting of Economists and Bank related experts once again.

The Economists and Experts have strongly opposed the banks approved on political grounds. Business conglomerates backed by politics have taken away these banks due to profit maximization within short time and for other reasons. Many experts assume that the banking sector is now on the brink of the trench. Because The banking sector’s total risky loans amounted to Tk 377,922 crore at the end of 2022, in a development that makes for a abstemious reading of the actual health of this vital sector of the economy. At the end of 2022, the banking sector’s NPL stood at Tk 120,649 crore, outstanding rescheduled loans Tk 212,780 crore and outstanding written-off loans Tk 44,493 crore.

In banking sector of our Country, people commemorate the last three M&A, Bangladesh Shilpa Bank and Bangladesh Shilpa Rin Shongstha had amalgamated renaming Bangladesh Developed Bank Ltd (BDBL). It is now suffering from bad loans which is 42.46 percent of its total loans. Here merger & acquisition has become successfully failed.

On the other hand, in 2000, Standard Chartered Bank and ANZ Grindlays had merged and named StanChat Grindlays Bank after that it had been renamed Standard Chartered Bangladesh.

Another milestone, in 2001, Bank Asia set a massive milestone by acquiring the business operations of the Bank of Nova Scotia (a renowned Canadian Bank) in Dhaka, first of its kind in the banking history of Bangladesh. It again repeated the performance by acquiring the Bangladesh operations of Muslim Commercial Bank Ltd (MCB), a renowned Pakistani bank. Although, Bank Asia launched its operations in 1999 but it acquired these two banks within two years and points to our eyes that if there is honesty, integrity and capability, it is possible in every sectors.
Recently Bangladesh Bank has issued a draft guideline for merger offering to the bidder banks (which will be also called transferee banks, to bid for the transferor bank which is placed under moratorium and decided to be merged with another bank) incentives including regulatory relaxation regarding Minimum Capital Requirement (MCR), provisioning, Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements, Liquidity Coverage Ratio (LCR), liquidity support, foreign exchange assistance, the option of Bangladesh Bank buying long-term bonds/debentures from the transferee bank at low rates, issuance of shares to raise capital, permission for subordinated bonds, tax incentives and goodwill as an asset.

As per regulatory duties of Central Bank, it has categorized the scheduled banks into three- sound banks, stable banks, distressed banks. Before going to sing with the agreement of merger & acquisition the following Cautions and Considerations are to be reconceived:
1. Non-Performing Loans (NPLs): Merging banks need to carefully assess the NPLs of the weaker bank and develop strategies to address them effectively. Failure to address NPLs can impact the financial health of the merged entity.
2. Financial Delinquency: Acquiring banks must evaluate the weaker bank’s history of financial misconduct and take appropriate measures to mitigate any potential risks associated with such issues.
3. Employee Homogenizing: Merging banks require to contemplate the amalgamation of employees from both entities, ensuring a smooth transition and minimizing any negative impact on the workforce.
4. Capital Adequacy Ratio: The capital adequacy ratio of the merged entity should be carefully assessed to secure compliance with regulatory requirements and maintain financial stability.
5. Dilution of Earnings: Shareholders of the acquiring bank may episode diluted earnings after the merger, which could conduct to possible legal issues.
6. Liquidity and Capital Management: Merging banks must carefully manage liquidity and capital to secure the smooth functioning of the merged entity and abstain from any adverse effects on customers and stakeholders.

Banking is the backbone of any country’s economy, and the pursuit of mergers and acquisitions within this sector is a common occurrence worldwide. In Bangladesh, the financial sector has experienced a surge in M&A activities in recent decade, reflecting the industry’s dynamic nature and the pursuit of growth and efficiency.

The terms ‘merger’, ‘amalgamation’ and ‘acquisition’ have not been defined under the Companies Act or Companies Rules. The term ‘amalgamation’, though not defined, is used in the Companies Act. 

In general, the following statutes are applicable in M&A transactions in Bangladesh
1. Companies Act 1994 section no 228 & 229
2. Securities and Exchange Ordinance 1969
3. Securities and Exchange Commission Act 1993, amendment May 01, 2021 section (3). For more information about price sensitive information, an Order passed by BSEC sustaining no. BSEC/CMRRCD/2021-396/70, dated-11.12.2023. Corporate Governance Code-June 03, 2018 vide no. BSEC/CMRRCD/2006-158/207/Admin/80. Among 9 (nine) conditions, condition no .05 & 07 (clause-02) are mostly applicable.
4. Bangladesh Bank Order 1972
5. Bank Companies Act 1991 section 49 subsection 1 (Ga), 76 (1), 77 (Ka), 77 (1), 77 (2), 77 (4), 77 (5) & 77 (16)
6. Financial Institutions Act 1993, amendment 2023 section 50
7. Contract Act 1872
8. Competition Act 2012, amendment 2020 Parties to an M&A deal must provide due regard to the competition laws of Bangladesh and ensure due diligence in connection thereto. The Competition Act refers to various anticompetition agreements, including tie-in arrangements
9. Labor Act 2006 amendment 2022, there are no provisions in the Labor Act 2006 or concerned rules that apply specifically to M&A transactions. However, as far as intra-group M&A transactions are concerned, there has not been much concern that would necessitate legislative intervention. During the Robi merger case, the High Court plays a pivotal role in ensuring the rights and interests of employees in M&A transactions that may potentially have an adverse impact on employee rights.
10. The Foreign Exchange Regulation Act. 1947 The Foreign Exchange Regulation Act 1947 requires foreign investors to obtain prior permission before taking over a Bangladeshi company owned by Bangladeshi residents. The Bangladesh Bank, the country’s central bank, and its Banking Regulations and Policy Department play a pivotal role in regulating financial transactions associated with M&As, including the granting of general or specific exemptions.
11. Income Tax Ordinance, 1984 (ITO) Acquisition involves the purchase of shares. Stamp duty at a rate of 1.5 per cent of the agreed purchase consideration is payable on the share transfer. A lower tax rate of 10 per cent applies on capital gains made by firms and companies from transferring public company shares listed on stock exchanges, and 5 per cent for sponsor shareholders and directors of banks, financial institutions, insurance companies, merchant banks, leasing companies, portfolio management companies, stock dealers or stockbrokers.

Chronological Steps for M&A completion:
01. Proposal for Merger
02. Negotiations/Bargaining
03. Due-Diligence for the Merger
04. Disclosure and Confidentiality
05. Due diligence report submission
06. Shareholders’ and creditors’ consent
07. Scheme Submission to Bangladesh Bank
08. Draft Scheme Examination
09. Assets and liabilities valuation
10. Transaction Price in Mergers and Acquisitions in Bangladesh
11. Bangladesh Bank approval in Mergers and Acquisitions
12. High court petition in regards to Mergers and Acquisitions in Bangladesh
13. File for certified copy of High court order to RJSC.

Here are some International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) to be required. Since, International Rating Agencies (Moody’s, Fitch Group, S&P Global) consider these standards from balance sheet/financial position which reflects the overall scenario of the country.

International Financial Reporting Standard (IFRS) 03: Business Combination in which states merger and acquisition. IRFS 02: Share-Based Payment, IFRS 05: Non-Current Asset Held for Sale & Discontinued Operations, IFRS 07: Financial Instruments: Disclosure, IRFS 13: Fair Value Measurement, IAS 07: Statement of Cash Flows for Cash Generating Unit from Goodwill valuation. IAS 08: Accounting Policies, Changes in Accounting Estimates & Errors, IAS 10: Enevts after the Reporting Period, IAS 12: Income Taxes, IAS 16: Property, Plant and Equipment, IAS 32: Financial Instrument: Presentation, IAS 36: Impairment of Assets, IAS 38: Intangible Assets, IAS 40: Investment Property and other related IFRS and IAS (if required).

Except International Financial Reporting Standards (IFRS) and International Accounting Standard (IAS), M&A will not convey mutual benefits to shareholders, depositors as well as to public trusts.

The IFRS & IAS are a set of accounting rules for public companies with the goal of making company financial statements consistent, transparent, and easily comparable around the world. This helps for auditing, tax purposes, and investing.

As per Financial Statement of some Banks & FIs, the CenBank is not fully following the IFRS & IAS .Resultant, the commercial banks in merger and acquisition are not bound to follow these global standards in asset revaluation.

The undergoing M&A stronger banks are to suck up weaker banks/NBFIs with high Non-Performing Loans (NPLs).So it is an enormously sensitive in asset revaluation.

In this regard, the Central Bank can dictate the banks to follow the depicted IFRS and IAS. Asset revaluation in current market prices for M&A would fabricate a catastrophic situation. If the current market price is higher than the original cost, there is a revaluation gain and this means the assets value has appreciated.

So to circumvent cataclysm and to ensure the shareholders and depositors rights the Bangladesh Bank should fully embrace the international standards in financial reporting.

Nevertheless, M & A devoid IFRS & IAS can steer to difficulty in understanding financial stability when a strong bank proceeds a weak banks colossal NPL hardship. Likewise, rejecting following IFRS and IAS, investors and regulators may be in the dark about banks true health.

In M&A there are matters of buying and selling so every asset should be reevaluated under international standards which are dissimilar general Profit & Loss Accounts by banks.

Analyst: Md. Badrul Millat Ibne Hannan, CPA (UK), CFC (IFC, Canada)- Currently working at Islami Bank Bangladesh PLC.