There may not be any legal obstacles to the State Bank of Saurashtra's merger with the State Bank of India but it is the United Progressive Alliance's political compulsions that are holding back the deal, which is expected to pave the way for merger of the other six SBI associates with the parent.
In response to the law ministry's objections, the RBI has told the government that the Centre could go ahead with the merger without any immediate legal glitches.
The regulator has cited Section 35 of the SBI Act, which allows India's largest bank to acquire any other bank or financial institution, and the law governing the acquired entity can be repealed or amended later.
An official added that while the finance ministry was keen on pushing the merger, political compulsions due to the fear of antagonising the unions were holding back the North Block from approaching the Union Cabinet.
Sources pointed out that a key troubleshooter for the Congress party, who is also part of the Cabinet, had shot off a letter opposing the merger. Other politicians have also opposed the move, which could set off a wave of consolidation in the public sector arena, a move that the UPA has been trying to push ever since it came to power in 2004, but without any success so far.
"There is a feeling in the government that the amendments, for which an Ordinance was proposed earlier, may not get parliamentary nod due to the Left's opposition to mergers in general," said a source.
The law ministry's objections only complicated the matter for the government. The ministry suggested that in order to facilitate the SBI-SBS merger, the government needed amendments to the laws governing SBS. It cited the case of disinvestment in oil companies where the Supreme Court had ruled that parliamentary approval was required to go ahead with the sale of any company, which had been set up through a statute.
Alternatively, it suggested that a new legislation could be pursued to provide for the mergers of all PSU banks in future.
In its response, RBI has also contested this, saying, statutorily state-owned banks and companies have to be treated differently. Public sector undertakings, like oil companies are regulated as companies and their mode of merger and acquisitions will be different since they are governed by the Companies Act.
On the other hand, banks are regulated by the RBI and laws related to their establishment and governance, which provide for mergers and acquisitions.
While the boards of SBI and SBS had approved the merger last year, the finance ministry has been unable to convince neither the law ministry, nor the political class, leaving the management and employees of the banks in suspense.