Global Trust, UTI Bank merger deal in doubt

The fate of the controversial merger between UTI Bank and Global Trust Bank (GTB), which is in the eye of a storm following allegations of share price manipulation, hangs in balance. While the market regulator, the Securities and Exchanges Board of India (SEBI), has initiated a detailed enquiry into the allegations, UTI Bank has threatened to pull out of the proposed merger.

The reason for this is stated to be the sharp differences on the issue of going in for a fresh valuation, to review the share swap ratio decided for the merger. The demand for a fresh valuation came from UTI Bank on the basis of a perception that the earlier exercise, done by SBI Capital Markets, did not adequately take into account the quality of GTB's assets and, more particularly, its capital market exposure.

UTI Bank has appointed Deloitte, Haskins & Sells, who are required to conduct the fresh valuation within a week and submit the report to the Reserve Bank of India. While initially resisting the revaluation, it is now understood that GTB has agreed to the second valuation, though they have not stated what their reaction to the second report will be. GTB had first stated that the two sides should await SEBI's report on the alleged price-rigging in the GTB scrip prior to the merger, before taking a decision in this regard.

The original report had put the share swap ratio for the merger at 9:4, almost entirely loaded in favour of GTB shareholders. At that point in time, UTI Bank had not made an issue about the adverse ratio since it wanted the merger to go through smoothly and, more importantly, it saw the slight unfavourable ration as the price it had to pay for a control over the merged entity. UTI Bank's concern about the original valuation arises from the fact that the swap ratio was arrived at on the basis of the average values of the shares of the two entities, which in the case of GTB, as is now being alleged, had been manipulated for several months before the merger deal was finalised.

UTI Bank has also been very unsure about GTB's exposure to capital market funding. Further, the case for going in for a fresh valuation has gained ground, as UTI Bank shareholders feel that the prevailing fall in GTB's share price will further erode the value of their holdings. According to allegations, brokers and non-banking financial companies (NBFCs) borrowed money from GTB and used it to buy its shares in the market.

As a result, there was an upward spiral in the share price of GTB, which helped it achieve a better swap ratio in the merger. However, GTB officials deny that the share price movement had anything to do with the swap ration, since the swap ratio was not purely based on the market price of GTB and UTIB shares.