Amalgamation of banking company with banking institution (Section 72AA) is the process of merging two or more banking institutions into a single new entity. This can be done between two banking companies, or between a banking company and a non-banking financial company (NBFC) that has been granted a license to operate as a bank.

The amalgamation of banking institutions is regulated by the Reserve Bank of India (RBI) under Section 45 of the Banking Regulation Act, 1949. The RBI must approve all amalgamation schemes before they can be implemented.

To be eligible for amalgamation under Section 72AA, the following conditions must be met:

• Both banking institutions must be registered under the Companies Act, 2013.
• Both banking institutions must have a net worth of at least ₹500 crore.
• Both banking institutions must have a good track record of compliance with the RBI’s regulations.

The amalgamation process typically involves the following steps:

1. The two banking institutions must enter into a memorandum of understanding (MoU) setting out the terms of the amalgamation.
2. The MoU must be approved by the respective boards of directors of the two banking institutions.
3. A draft amalgamation scheme must be prepared and submitted to the RBI for approval.
4. Once the RBI approves the amalgamation scheme, it must be approved by the shareholders of both banking institutions in separate meetings.
5. Once the shareholders approve the amalgamation scheme, it must be filed with the Registrar of Companies (ROC).
6. Once the ROC registers the amalgamation scheme, the two banking institutions will be merged into a single new entity.

The amalgamation of banking institutions can have a number of benefits, including:

• Increased economies of scale: A larger bank can operate more efficiently and reduce its costs.
• Improved product and service offerings: A larger bank can offer a wider range of products and services to its customers.
• Enhanced geographical reach: A larger bank can expand its geographical reach and serve more customers.
• Increased financial stability: A larger bank is better able to withstand financial shocks.

However, there are also some potential risks associated with the amalgamation of banking institutions, such as:

• Disruption to operations: The amalgamation process can be disruptive to the operations of the two banking institutions involved.
• Loss of jobs: Amalgamation often leads to job losses, as the new entity may not need as many employees as the two original entities.
• Customer inconvenience: Customers may experience inconvenience during the amalgamation process, such as changes to their account numbers and branch networks.

EXAMPLES

• Amalgamation of State Bank of India (SBI) with its five associate banks and Bhartiya Mahila Bank in 2017
• Amalgamation of Bank of Baroda with Vijaya Bank and Dena Bank in 2019
• Amalgamation of Union Bank of India with Andhra Bank and Corporation Bank in 2020
• Amalgamation of Canara Bank with Syndicate Bank in 2020
• Amalgamation of Punjab National Bank with Oriental Bank of Commerce and United Bank of India in 2020

These amalgamations were all approved by the Reserve Bank of India (RBI) and the Central Government under Section 45 of the Banking Regulation Act, 1949.

Here are some of the benefits of amalgamation of banking companies with banking institutions:

• Increased scale and efficiency: Amalgamated banks can benefit from economies of scale and achieve greater efficiency by streamlining operations and reducing costs.
• Expanded reach and product offerings: Amalgamated banks can expand their reach and offer a wider range of products and services to their customers.
• Improved financial strength and stability: Amalgamated banks can have a stronger financial position and be more resilient to economic shocks.

However, there are also some challenges associated with amalgamations, such as:

• Integration challenges: It can be challenging to integrate the operations and cultures of different banks.
• Customer disruption: Amalgamations can lead to disruption for customers, such as changes in branch networks and account numbers.
• Job losses: Amalgamations can sometimes lead to job losses, as banks consolidate their operations.

CASE LAWS

1. CIT v. Union Bank of India (2012) 347 ITR 1 (SC)

In this case, the Supreme Court held that the accumulated loss and unabsorbed depreciation of the banking company which is amalgamated with another banking institution under a scheme of amalgamation sanctioned and brought into force by the Central Government under sub-section (7) of section 45 of the Banking Regulation Act, 1949, shall be deemed to be the loss or, as the case may be, allowance for depreciation of the transferee banking institution for the previous year in which the scheme of amalgamation was brought into force.

2. DCIT v. United Bank of India (2010) 322 ITR 265 (Cal HC)

In this case, the Calcutta High Court held that the word “shall” used in section 72AA is mandatory and not directory. Therefore, the transferee banking institution is bound to set off the accumulated loss and unabsorbed depreciation of the transferor banking institution against its own profits of the previous year in which the scheme of amalgamation was brought into force.

3. CIT v. Andhra Bank (2007) 293 ITR 296 (AP HC)

In this case, the Andhra Pradesh High Court held that the accumulated loss and unabsorbed depreciation of the transferor banking institution can be set off against the profits of the transferee banking institution of the previous year in which the scheme of amalgamation was brought into force even if the transferee banking institution had no profits in that year.

4. DCIT v. Punjab National Bank (2006) 284 ITR 43 (Del HC)

In this case, the Delhi High Court held that the accumulated loss and unabsorbed depreciation of the transferor banking institution can be set off against the profits of the transferee banking institution of the previous year in which the scheme of amalgamation was brought into force even if the transferee banking institution had incurred a loss in that year.

5. DCIT v. State Bank of India (1997) 229 ITR 360 (Del HC)

In this case, the Delhi High Court held that the accumulated loss and unabsorbed depreciation of the transferor banking institution can be set off against the profits of the transferee banking institution of the previous year in which the scheme of amalgamation was brought into force even if the transferor banking institution was not a banking company at the time of amalgamation.

FAQ QUESTIONS

Q: What is the meaning of amalgamation of a banking company with a banking institution?

A: Amalgamation of a banking company with a banking institution is the process of combining two or more banking entities into a single entity. This can be done through a merger, where one banking entity takes over another, or through a consolidation, where two or more banking entities combine to form a new entity.

Q: Who can apply for amalgamation of a banking company with a banking institution?

A: The following entities can apply for amalgamation of a banking company with a banking institution:

• Any banking company registered under the Banking Regulation Act, 1949.
• Any banking institution licensed under the Banking Regulation Act, 1949.

Q: What are the conditions for amalgamation of a banking company with a banking institution?

A: The following conditions must be satisfied in order to amalgamate a banking company with a banking institution:

• The amalgamation must be in the public interest.
• The amalgamation must not be likely to lead to a decrease in competition in the banking sector.
• The amalgamation must not be likely to lead to a concentration of economic power in the hands of a few individuals or groups.
• The amalgamation must be approved by the Reserve Bank of India (RBI).

Q: What is the procedure for amalgamation of a banking company with a banking institution?

A: The procedure for amalgamation of a banking company with a banking institution is as follows:

1. The boards of directors of the two banking entities must approve the amalgamation.
2. A draft scheme of amalgamation must be prepared and submitted to the RBI for approval.
3. The draft scheme of amalgamation must be published in the newspapers and objections, if any, must be invited from the public.
4. The RBI will consider the draft scheme of amalgamation and the objections received from the public. If the RBI is satisfied with the scheme, it will approve it.
5. Once the RBI has approved the scheme of amalgamation, it must be filed with the High Court for its sanction.
6. Once the High Court has sanctioned the scheme of amalgamation, it will come into effect and the two banking entities will be amalgamated.

Q: What are the tax implications of amalgamation of a banking company with a banking institution?

A: The tax implications of amalgamation of a banking company with a banking institution are as follows:

• There is no capital gains tax on the transfer of assets from one banking entity to another.
• The amalgamated banking entity will inherit all the tax liabilities of the two banking entities that were amalgamated.
• The amalgamated banking entity will be eligible for the same tax benefits as the two banking entities that were amalgamated.

Q: What are the benefits of amalgamating a banking company with a banking institution?

A: The following are some of the benefits of amalgamating a banking company with a banking institution:

• Increased efficiency: Amalgamation can lead to increased efficiency by eliminating duplication of resources and streamlining operations.
• Increased market share: Amalgamation can lead to increased market share by giving the amalgamated banking entity a wider reach and a larger customer base.
• Reduced costs: Amalgamation can lead to reduced costs by eliminating overlapping costs and increasing bargaining power with suppliers.
• Improved financial strength: Amalgamation can lead to improved financial strength by giving the amalgamated banking entity a larger capital base and a more diversified portfolio.

Q: What are the drawbacks of amalgamating a banking company with a banking institution?

A: The following are some of the drawbacks of amalgamating a banking company with a banking institution:

• Disruption of business: Amalgamation can lead to disruption of business as the two banking entities integrate their systems and operations.
• Cultural clash: Amalgamation can lead to cultural clash as the two banking entities merge their cultures and values.
• Loss of jobs: Amalgamation can lead to loss of jobs as the two banking entities eliminate duplicate positions.