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Exempt bank M&As from Competition Act: RBI
September, 21st 2009

The Reserve Bank of India (RBI) has sought exemption for bank mergers and acquisition (M&As) from the Competition Act of 2002.

In a note sent to the Ministry of Finance, the RBI has stated that the exemption should be granted following the urgency and unique nature of bank mergers, especially forced mergers.

Since the RBI is well-versed in the functioning of the banks, it has the due expertise and is better placed to be the final authority to decide bank M&As, the note said.

Sources close to the development said control by the Competition Act on the crucial issue of bank mergers goes against the spirit of the regulatory powers given to RBI under the Constitution.

The Competition Commission, RBI stated, is a general body that monitors M&As across industries and sectors and it may not have the necessary technical expertise to decide bank M&As. Any delay or fault in decision-making could have a direct impact on the public who deposit money in these banks.

In order to address concerns of cartelisation or market dominance by any bank merger, the RBI suggested that the commission could send its views to the RBI.

Bank M&As were exempt from the erstwhile Monopoly and Restrictive Trade Practices Act (MRTPC) which was replaced by the new Competition Act.

Under the Competition Act, any bank merger has to get final approval from the Competition Commission, although the RBIs views will be duly noted. However, the Act has restricted the control of the Competition Commission to mergers of two entities for which the combined asset value is more than Rs 1,000 crore or $500 million or a turnover of Rs 3,000 crore or $1.5 billion.

Under the statutory provisions of section 44 A of the Banking Regulation Act, the RBI has freedom to decide bank M&As. In the case of forced mergers, sources said, the central bank was bound by public interest so those decisions wereoften taken in a short-time frame (sometimes overnight) to protect depositors.

Sources argued that the process would be delayed and confidentiality compromised if every bank merger had to be first vetted by the Competition Commission.

These officials suggested that sectoral regulators in banking, insurance, telecom and so on should be final decision-making authorities in M&As in their sectors because they understand the issues best.

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