The Reserve Bank of India, on April 21, 2016, issued the master direction on Amalgamation of Private Sector Banks, Directions, 2016. The master direction is applicable to: (i) all private sector banks licensed to operate in India by the RBI; (ii) RBI-registered non-banking financial companies (NBFCs), and (iii) to the extent appropriate, to public sector banks. The master direction prescribes conditions for merger of private sector banking companies and amalgamation between banks and NBFCs.

A voluntary amalgamation of two banking companies has to be approved by the RBI, while an amalgamation between an NBFC and a bank has to be approved by the National Company Law Tribunal. The decision of amalgamation is required to be approved by two-third majority of the total board members, and not merely of those present and voting. Further, the draft scheme of amalgamation needs to have approval of two-thirds shareholders of each banking company, present (in person or by proxy) at the meeting. The draft scheme has to be approved by the board of directors of the respective banks, before the shareholders' meeting is convened. The board, while granting approval has to consider a number of factors, especially whether the amalgamated company has been subject to due diligence, the nature of the consideration which the amalgamating company would pay to the shareholders of the amalgamated company, etc. Furthermore, in case RBI approves a scheme, a dissenting shareholder may claim within 3 months, from the concerned banking company, the value of the shares held by him, as determined by the RBI while sanctioning the scheme.

When an NBFC is amalgamated with a bank, the latter needs RBI's approval, post approval by the respective boards and before seeking the Tribunal's approval. Further, the board of the banking company has to examine whether all accounts of the NBFC are Know Your Customer (KYC) compliant. This is to avoid financial risks as the NBFC accounts would eventually become accounts of the bank post amalgamation. The directions specify that SEBI's regulations on insider trading will be strictly applicable in case of listed banks/NBFCs and applicable in spirit and to the extent possible in case of unlisted banks/companies.

The master direction is in line with RBI's earlier directions. In 2009, RBI had passed directions mandating only deposit taking NBFCs to take prior permission of RBI in case of their merger/amalgamation. Later in 2014, RBI prescribed such requirement even for non-deposit accepting NBFCs, to ensure that the fit and proper character of the management of NBFCs is maintained. The master direction envisages a significant role of the board of directors of private sector banks. Further, promoters of the banks/NBFC have to exercise caution while buying/purchasing shares directly or indirectly, during and after the discussion period, lest they be hit by the SEBI insider trading norms.