ICICI Bank sets swap ratio at 25:118.

Bank of Rajasthan is to be merged with ICICI Bank. The boards of both banks, which met separately on Tuesday evening, granted in-principle approval for the merger.

In a statement, ICICI Bank said it has entered into an agreement with certain shareholders' of the BoR for amalgamation of the bank with itself with a share swap ratio of 25:118 (25 shares of ICICI for 118 shares of BoR).

Swap Ratio

The bank said the swap ratio is based on an internal analysis of the strategic value of the amalgamation, average market capitalisation per branch of old private sector banks and relevant precedent transactions. The board of BoR is scheduled to meet on May 23.

According to analysts, the swap ratio works out to a premium of 89.4 per cent over BoR's current market price. The merger is not likely to have any material impact on ICICI Bank's capital and the only advantage is a readymade branch network. With a Tier-I capital of above 13 per cent, the impact on ICICI Bank's capital would be less than 3 per cent.

Post-merger, ICICI Bank's branch network would go up to 2,463.This is the third merger for the bank, after it took over Bank of Madura and Sangli Bank.

Tayal Group's Stake

ICICI has negotiated the deal with the dominant shareholder group the Tayal family which holds a declared stake of 28.6 per cent. However, according to the SEBI ex-parte interim order on March 8, 2010, the Tayal group and related entities hold 55.01 per cent stake.

The Tayal group's stake in the bank came under the scrutiny by the Reserve Bank of India and SEBI.

In February, the RBI had levied a penalty of Rs 25 lakh on the BoR for violation of directions on acquisition of immovable property; deletion of records in the bank's IT systems; non-adherence to KYC (know-your-customer) and anti-monetary laundering guidelines, and irregularities in the conduct of accounts of a corporate group.

In March, SEBI had restrained the Tayal group entities from accessing the capital market or from dealing in securities. According to the SEBI order, an incorrect disclosure was made by BoR regarding the shareholding pattern of the promoter group.

The RBI had appointed Mr G. Padmanabhan, a former Chief General Manager of State Bank of India, as BoR's Managing Director and Chief Executive Officer, following the irregularities in the operations of BoR. The RBI had also appointed Deloitte Haskins and Sells as a special auditor to inspect the accounts.

Mr Vaibhav Agarwal, Vice-President, Banking Research, Angel Broking, said the only advantage for ICICI Bank is the 460-strong branch network of BoR. It is a small private bank which has presence in the northern and western regions of the country. That is a niche area as other private sector banks are mainly present in the South,'' Mr Agarwal said.

The negatives for ICICI Bank are the potential risks arising from BoR's non-performing loans and that BoR is trading at expensive valuations. As on FY-10 the net worth of BoR was approximately Rs 760 crore and that of ICICI Bank Rs 5,17,000 crore, he added. For the December 2009 quarter, BoR reported a loss of Rs 44 crore on an income of Rs 373 crore.

Share movement

Shares of BoR jumped close to 20 per cent on Tuesday to a 52-week high on the back of reports of the merger. The shares were locked in at the upper circuit at Rs 99.5 at around 2 p.m. Close to three crore shares of BoR were traded on BSE and NSE , making for a total turnover of Rs 27,431 lakh. ICICI Bank was down more than one per cent on both the exchanges. On the BSE, the scrip was down 1.45 per cent at Rs 889.35. The ICICI Bank ADR was trading at $38.61 down $0.86 or 2.18 per cent on the NYSE.