Legal Provision Regarding Banking Mergers in Nepal

Nepal Rastra Bank enacted merger Bylaws in 2068 in order to put bank and financial institution merger policies into action and to bring financial consolidation policies to a logical conclusion. In the three years since merger policies were implemented in Nepal, 68 banks and financial institutions merged to form 25 banks and financial institutions. Nepal now has 27 commercial banks following the successful merger of Global IME Bank and Janata Bank.

Nepal Rastra Bank (NRB) encouraged all banks and financial institutions (BFIs) to merge by enacting Merger Bylaw 2068. (2011). Several commercial banks in Nepal have merged and consolidated in accordance with NRB guidelines. However, banks have had difficulty merging or acquiring one another.

What laws govern the merger of banking institutions in Nepal?

The Company Act

• After holding an AGM and passing resolutions, one of the public companies merged with another company in accordance with the provisions of the Company Act 2063.

• If an AGM approves a proposal to merge with another company, the decision must be recorded.

• The audit report and the most recent record of the company that will be merged, a photocopy of the written consent letter of the company owners who will be merged and are merging.

• Valuation of the merging and merged companies

• movable and immovable property,

•  a detailed report on property and liabilities, workers of the merging and merged companies

• The provision states that if the decision is about employees, a photocopy of the decision must be submitted with the application within 30 days for approval.

• There is also a prohibition on making decisions that are harmful to service conditions, workers, or employees.

• OCR must begin its investigation after receiving notice of the merger and,

• Notify its decisions within three months of receiving notice of the merger.

• Following approval, the merged company’s assets and liabilities are to be merged into the company that is merging it.

The Income Tax Act of 2058 (2002)

• To encourage merger, a new provision is added to the Income Tax Act 2058, which is detailed below.
• In the case of retirement from services in groups following the merging process, there is a provision for a 50% discount on the deduction of retirement pay for the additional one-time payment purpose.
• After the two-year merger process is completed, there is no capital gains tax on profits earned from the sale of a merged institution’s share.
• There is a provision for no taxation on profits distributed to its shareholders who remained shareholders before the merger process began, and the merger process has now lasted two years.
• Acts that govern banks and other financial institutions
• Banks and financial institutions may be merged or merged with one another under sections 68 and 69 of paragraph 10 of the Banks and Financial Institutions Act 2063.
• There is a provision for submitting a joint application to the Nepal Rastra Bank for approval after a special resolution is passed at the AGMs of the banks and financial institutions that wish to merge with the institution.
• Bylaws Pertaining to Mergers
• To ensure a smooth merger process, Nepal Rastra Bank has introduced the Implementation Act relating to the Merger of Banks and Financial Institutions 2068.
• The Bylaws outline the objectives for merger or merging.
• Increasing public trust and moving the banking and financial systems forward.
• To make the banking and financial system self-governing, secure, healthy, and competent, as well as to ensure the banking sector’s autonomy and customer protection.
• Increasing competitiveness by strengthening the capital base of the banking system.
• To enhance the banking, financial, human resource, and technical capabilities of banks and financial institutions.
• To provide the most up-to-date banking services to the general public.
• To protect the interests of investors.
• To make the banking and financial system self-governing, secure, healthy, and competent, as well as to ensure the banking sector’s autonomy and customer protection.
• Increasing the banking system’s capital base to boost competitiveness.
• To enhance banks’ and financial institutions’ banking, financial, human resource, and technical capabilities.
• To provide the general public with modern banking services.
• To safeguard the interests of investors.
• There is a provision in the law that requires Nepal Rastra Bank to notify applicants whether or not the merger process will be granted within 45 days of receiving the application from the institutions that will be merged. There is a provision for waiving some issues based on necessity and outlined issues to encourage and smooth the merger process. There is a provision to maintain the capital structure as outlined in current law for possible changes to the capital structure following the merger of the institutions.
• According to the Bi-regulations, banks and financial institutions must be of grade A, B, or C to begin the merger process. Furthermore, according to the bi-regulations, D-grade financial institutions can only be merged with other D-grade financial institutions.
• Following the calling of their AGMs, there is a provision for authorizing the promoters’ committee, as well as the proposed work plans, as well as the time frame for the merger process for institutions that wish to merge.
• A provision in Nepal Rastra Bank requires a discussion within 15 days of the joint application’s submission, as well as the decision of the board of promoters of banks and financial institutions and the proposal of merger of the participating banks and institutions.

The Securities Board of Nepal has the authority to halt the institutions’ share transactions once the merger process has begun. The merger of banks and financial institutions promotes the development of the banking and financial system, as well as healthy competition, and Nepal Rastra Bank has a provision granting principle mutual understanding to begin the merger process when it is discovered to have had a positive impact on the observance of current legislation.

Following the principle of mutual understanding, the merged institutions should conduct a due diligence audit (DDA) of their property, liabilities, and previous transactions, as well as a detailed analysis of the impacts of the merged institutions’ stipulated subjects and recommendations.
There is no capital gains tax on profits earned from the sale of a merged institution’s share after the two-year merger process is completed.

There is a provision for no taxation on profits distributed to its shareholders who remained shareholders prior to the merger process, which has now lasted two years.

If the promoters’ shareholdings exceed the maximum limit after the merger, they have five years to bring them back into compliance. The regular loan money that was flowed prior to the merger process and if it is possible of going against the Nepal Rastra Bank’s directions and whichever comes first the dates; the payment date or the three years time period until that period a time is granted.

If the total domestic loan component of resource mobilization (domestic deposits and primary capital) exceeds 80% after the merger, there is a provision for reducing it to 80% within three years.

The promoter who owns more than 1% of the promoter’s share or the shareholders of the promoters group can put their promoter’s share on collateral and take loan then there is a provision of bringing within the limit of 50% of total shares and it has extended the time period in such provision by 3 years.

If the disadvantaged groups are unable to comply with the loan-related provisions as a result of the merger, they are given a three-year grace period.

There is a provision for a rebate in the mandatory establishment of branches in the outlined districts where financial institutions have a minimal presence, based on an extensive review of the situation in accordance with the policies provision relating to the establishment of the merger division.

Following the merger process, if an investment in any of the organized institutions’ shares or debentures exceeds the 10% limit, a two-year period is provided to bring such investments within the limit.

If the upper groups want to become working sector institutions after the merger and submit a quality upgrade application, a priority for the expansion of working areas is granted based on the infrastructure in place and the necessary processes completed.

There is a provision for implementing the necessary plans relating to current employees or for removing the impediments that arise as a result of the merger work in the provisions relating to the Executives’ wages and the institution’s employee benefits.

For the penalty levied on the liquidity benefits after merger approval for a three-year period, there is a 50% discount along with the benefits of using permanent liquidity for the first 30 days.

General loans are offered a 1% discount off the current interest rate for the three years of the merger process. Both voluntary and involuntary mergers have been incorporated into the bi-regulations. If unfavorable financial relations persist as a result of investments from the same groups,

For three consecutive years, the total non- performing assets ratio is greater than 5%, when there is rapid improvement, demotion of bank and financial institution grades, if the banks and financial institutions are unable to pay their liabilities due to systematic risks.

When it is determined that the current operation of any institution is having a negative impact on the overall financial system, and when one or more institutions of systematic importance are merged, the overall financial system improves, relevant directions or recommendations are provided for the merger process in accordance with Section 12.

What is the Swap Ratio?

The term “swap ratio” is frequently used in the context of bank mergers. Himalayan Bank and Nepal Investment Bank, for example, were set to merge to form a large commercial bank, but a dispute over the Swap Ratio arose, and the merger was halted due to who would hold what percentage of the shares. The Swap Ratio is calculated using the Due Diligence Audit of the transactions of the institutions to be merged, as well as the liabilities of the properties. To make Due Diligence Audit (DDA) more effective and practical, as well as to hold the evaluator accountable, and then to calculate the Swap Ratio.

During a merger or acquisition, a swap ratio is the ratio at which an acquiring company offers its own shares in exchange for the target company’s shares. When two companies merge or one company buys another, the transaction does not have to be a cash purchase of the target company’s stock. It may entail a stock conversion, which is essentially an exchange rate described by the swap ratio.
A target company shareholder will end up with more shares than before, but their new shares will be for the acquiring company and will be priced accordingly. The stock of the target company may cease to exist. Companies determine the appropriate swap ratio using a variety of financial and strategic metrics, such as book value, earnings per share (EPS), margins, dividends, and debt levels.Other factors, such as each entity’s growth and the reasons for the merger or acquisition, also have an impact on the swap ratio. The swap ratio is a financial metric, but it is not solely based on financial analysis; negotiations and other strategic considerations all factor into the final figure.
The target and acquiring companies’ stock prices, as well as their respective financial situations, are compared. The shareholders of the target company are then given a ratio indicating the rate at which they will receive the acquiring company’s shares of stock for each share of target company stock they currently own.
Swap ratios are important because they aim to ensure that the shareholders of the companies are not impacted by the merger or acquisition and that the shareholders retain the same value as before, with the hope of further growth through merged company synergies.

Particular Considerations

A debt/equity swap can also be described using a swap ratio. When a company wants to exchange bonds issued by the target company for shares of stock issued by the acquiring company, it engages in a debt/equity swap. The same procedure is followed, and a swap ratio is provided, indicating how many shares of acquiring company stock bond investors will receive for each bond traded in.

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