The corporate affairs ministry has turned down the Reserve Bank of India's request for a blanket exemption from the Competition Act for forced mergers of distressed banks initiated by RBI. The central bank had sought exemption under Sections 5 and 6 of the Competition Act, which requires prior approval from the government before a merger.

In January this year, the government had issued a notification exempting failing banks from the applicability of the provisions relating to the regulation of mergers for five years under section 54 of the Competition Act. This was applicable to bank mergers where section 45 of the Banking Regulation Act, 1949 was invoked by the RBI.

The central bank had invoked the section in the forced merger of Global Trust Bank (GTB) with Oriental Bank of Commerce and other mergers. The same provisions were invoked by the RBI when the Satara-based United Western Bank was amalgamated with IDBI Bank and when Kerala-based Nedungadi Bank was merged with Punjab National Bank.

RBI's forced mergers of banks have been the equivalent of top-secret commando operations in the banking sector. In the case of Global Trust Bank, the bank placed a moratorium on a Friday. The moratorium included a freeze on the bank's management from dealing with any assets and limited depositors from withdrawing funds. On the following Monday, Oriental Bank of Commerce was named as the acquirer. According to bankers, a forced merger needs secrecy because if word gets out, promoters have an opportunity to deal with the shares or assets.

The January notification giving exemption to failing banks was issued following the decision of a group of ministers that a specific proposal for an exemption could be put up to the ministry of corporate affairs if a government ministry felt it was necessary to provide such an exemption.

According to the Ministry of Corporate Affairs, there should not be any general carve-out for any sector from the purview of the competition act. Moreover, the job of the competition commission was regulation of mergers, compulsory or otherwise, the ministry said.