During the audit of the Weak Bank (W), RBI suggested that the Bank should either merge with another bank or may close down. Strong Bank (S) has…

CA Final · Advanced Financial Management · MTP · November 2024
During the audit of the Weak Bank (W), RBI suggested that the Bank should either merge with another bank or may close down. Strong Bank (S) has submitted a proposal for the merger of Weak Bank with itself. The relevant information and Balance Sheets of both the companies are as follows: Particulars Weak Bank (W) Strong Bank (S) Assigned Weights (%) Gross NPA (%) 8 1 30% Capital Adequacy Ratio (CAR) 5 16 28% Market price per Share (MPS) (₹) 12 96 32% Particulars Weak Bank (W) Strong Bank (S) Paid-up Share Capital (₹ 10/share) 300 1000 Reserves & Surplus 160 11000 Deposits 8000 88000 Other Liabilities 1780 5000 Total Liabilities 10240 105000 Cash in Hand & with RBI 800 5000 Balance with Other Banks 4000 Investments 2200 38000 Advances 7000 54000 Other Assets 140 4000 Preliminary Expenses 100 Total Assets 10240 105000 You are required to prepare the Balance Sheet after the merger duly supported by adequate workings.

Suggested Answer and Working Notes:

Working Notes: To prepare Revised Balance Sheet we need to calculate swap ratio, number of shares to be issued to Weak Bank and Capital Reserve or Goodwill on merger as follows: (1) Calculation of Book Value per Share Particulars Weak Bank (W) Strong Bank (S) Share Capital (₹ Lakhs) 300 1,000 Reserves & Surplus (₹ Lakhs) 160 11,000 460 12,000 Less: Preliminary Expenses (₹ Lakhs) 100 — Net Worth or Book Value (₹ Lakhs) 360 12,000 No. of Outstanding Shares (Lakhs) 30 100 Book Value Per Share (₹) 12 120 (2) Swap Ratio Gross NPA 1:8 1/8 x 30% 0.0375 CAR 5:16 5/16 x 28% 0.0875 Market Price 12:96 12/96 x 32% 0.0400 Book Value Per Share 12:120 12/120x 10% 0.0100 0.1750 Thus, for every share of Weak Bank, 0.1750 share of Strong Bank shall be issued. (3) No. of equity shares to be issued: (300/10) × 0.1750 = 5.25 lakh shares (4) Calculation of Capital Reserve Book Value of Shares - 360.00 lac Less: Value of Shares issued - 52.50 lac Capital Reserve - 307.50 lac Balance Sheet after Merger Liabilities ₹ lac Assets ₹ lac Paid up Share Capital 1052.50 Cash in Hand & RBI 5800.00 Reserves & Surplus 11000.00 Balance with other banks 4000.00 Capital Reserve 307.50 Investment 40200.00 Deposits 96000.00 Advances 61000.00 Other Liabilities 6780.00 Other Assets 4140.00 115140.00 115140.00

Topics: Mergers, Acquisitions and Corporate Restructuring

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