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Tax sop may spur bank M&As

K Ram Kumar in Mumbai

Mergers and acquisitions in banking is set to get a lift as the Centre is considering extending the benefits of Section 72A of the Income Tax Act to the entire services sector, including the financial sector.

At present, this section allows the benefit of carry forward losses and unabsorbed depreciation in cases of amalgamation of a company owning an industrial undertaking or a ship, with another company.

The government is considering this move to trigger a move by stronger banks to takeover loss-making banks. This is also significant in the light of the proposed merger of Nedungadi Bank with Punjab National Bank.

Once the definition of 'industrial undertaking' is enlarged to cover the entire services sector, including the financial sector, it may see the real consolidation as was recommended by the Narasimham committee on Banking Sector Reforms.

Narasimham pitched for consolidation among banks and suggested that there should be 3-4 Indian banks with global reach and 8-10 banks with a pan-Indian presence.

With the services sector accounting for more than 50 per cent of India's gross domestic product, it is but apt to extend benefits of Section 72A, which was extended in the last budget to industrial undertakings engaged in the business of providing telecommunication services related to infrastructure, to the services sector, according to highly placed sources.

They pointed out that benefit under Section 72A will be available to the amalgamated company (bank) if 75 per cent in value of the assets are retained by the amalgamated company for at least five years and further the amalgamated company carries on the business of the amalgamating company for at least five years from the date of amalgamation.

The motivation for bank mergers are : cost benefits (economies of scale, organisational efficiency, funding costs and risk diversification), revenue benefits, economic conditions (mergers after crises or after the upswing of the business cycle); and other motives (private managerial benefits, defence against takeovers etc).

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