After negotiating for almost two-and-a-half years, Hongkong and Shanghai Banking Corporation (HSBC) has decided to scrap its plan of buying retail and commercial banking businesses of Royal Bank of Scotland (RBS) in India.
In a statement, RBS said its agreement with HSBC expired on November 30, 2012 and the banks will no longer proceed with the transaction.
This is the second instance of RBS failing to close a deal involving sale of its assets in India. Earlier this year, the foreign lender announced its plan to sell cash equities, mergers and acquisitions, and equity capital market businesses in the country to Malaysian bank CIMB. Later, CIMB said it will not buy these assets because of an "unexpected legal issue".
The transaction with HSBC, announced on July 2, 2010, also ran into regulatory hurdles almost from the moment it was announced.
Initially, it was decided that the deal would be completed in the first half of 2011.
HSBC agreed to a consideration that comprised of a premium of up to $90 million over the tangible net asset value of the business being acquired less an adjustment equal to 90 per cent of any credit losses incurred on the unsecured lending portfolio in the two years subsequent to deal completion. The value of retail and commercial banking assets of RBS in India was estimated around $1.8 billion at the end of March, 2010.
However, the Reserve Bank of India (RBI) was not comfortable with the structure and directed the banks to re-work the deal.
It is learnt that the banking regulator was of the view that RBS cannot sell its India branches to HSBC as part of the transaction. RBI follows a restrictive policy of offering branch licences to foreign banks. In a year, the RBI typically offers foreign banks around 12 branch licences in total.
As per the revised structure of the deal, RBS was supposed to surrender its branches to RBI while the banking regulator will finally decide the distribution of these licences among foreign banks in India.
While sources indicated that RBI had permitted the transaction as per the re-worked structure and has allowed transfer of some RBS branches to HSBC, the deal was called off as the banks failed to reach an agreement on certain parameters.
The Competition Commission of India had also approved the deal in April this year.
In an interview to Business Standard in August, 2011, HSBC's India country head Naina Lal Kidwai had said the unprecedented nature of the deal was causing delay in getting regulatory approvals.
HSBC had always maintained that it "continue to engage positively" with the regulator.
HSBC said in a statement that the deal did not materialise as the long-stop date (November 30, 2012) was reached "without all conditions required to be closed". It added that it was committed to pursuing growth in India, which remains a key strategic market for the group.
RBS said its India retail and commercial operations now comprise less than 0.5 per cent of its remaining non-core assets and the failure to close the deal will not impact its other businesses – markets, international banking and private banking – in India.
"RBS will continue to wind down the retail and commercial business in India in an orderly way and is exploring options for this. It will also reduce the loan portfolios in line with the state group policy of running down non-core assets. There will be no immediate change for customers who will continue to be served as they are today and will be notified of any changes impacting them in a timely way and to minimise disruption," it added.
HSBC, which is fighting a crisis of confidence following its alleged involvement in money laundering activities both in India and abroad, will now have to re-work its branch expansion strategy here.
The bank, which has the second largest number of branches among foreign lenders in India, has not been permitted to open a new branch since 2010. It currently has 50 branches in India.