Bank of Rajasthan’s scrip shot up 20% hitting the upper circuit ahead of a board meeting late Tuesday evening to consider a merger of the bank with the country’s largest private sector lender ICICI Bank. At Tuesday’s closing scrip price, Bank of Rajasthan is valued at Rs 1,471 crore ($ 325 million).

A Reuters report said, private sector lender Bank of Rajasthan said on Tuesday its founders have agreed to merge with ICICI Bank, India's second largest private sector lender. Bank of Rajasthan has a market value of $296 million.

The acquisition of Bank of Rajasthan by ICICI bank is the first consolidation of country's crowded banking sector since 2008.

ICICI is offering to pay 188.42 rupees per share, in an all-share deal, for Bank of Rajasthan, a premium of 89 percent to the small lender's closing price on Tuesday, valuing the business at $668 million.

The Bank of Rajasthan approved the deal, which will be subject to regulatory agreement, earlier on Tuesday. It's board will meet on May 23 to discuss the offer, it said in a statement to the stock exchange.

ICICI, the country's largest private sector lender, is offering the smaller bank's controlling shareholders 25 shares in ICICI for 118 shares of Bank of Rajasthan.

The deal, which will give ICICI a sizeable presence in the northwestern desert state of Rajasthan, values the small bank at about 2.9 times its book value, compared with an Indian banking sector average of 1.84.

"The deal is very expensive," said Vaibhav Agarwal, analyst with Angel Broking in Mumbai.

The Tayal family, which owned about 29 percent of Bank of Rajasthan at the end of December, according to Bombay Stock Exchange data, had been reported to be negotiating with potential buyers.

"The proposed amalgamation would substantially enhance branch network and presence in northern and western India," ICICI said in a statement.

Last month ICICI Bank said quarterly profit grew by a third and forecast strong growth in credit demand.

Bank of Rajasthan has a network of 463 branches and a loan book of 77.81 billion rupees ($1.7 billion).

Shares in Bank of Rajasthan closed up 19.95 percent at 99.50 rupees on Tuesday.

Listed in New York and Mumbai, ICICI's Mumbai shares ended down 1.45 percent at 889.35 rupees in a Mumbai market up 0.24 percent and ICICI's American Depositary Receipts were down 3.04 percent by 1738 GMT.

In March, the Reserve Bank of India appointed consulting firms to conduct a special audit of the books and accounts of Bank of Rajasthan.

The government has called for consolidation in the banking sector in order to make lenders more competitive but there has been little activity.

In 2008, HDFC Bank merged with Centurion Bank of Punjab in a deal valued at about $2.4 billion.

VCCircle adds: Bank of Rajasthan was promoted by Tayals who acquired it almost ten years back. However, the bank has been in trouble with both the central bank and the securities market regulator.

Early this year, Sebi had barred multiple entities allegedly owning the bank’s shares on behalf of the promoters from all stock market activities. Before that, RBI had imposed a penalty of Rs 25 lakh on Bank of Rajasthan for various violations.

Pursuant to these developments, RBI had appointed a new CEO for the bank and, at present, has five nominated directors on its board.

For the nine-month ended December’09, the bank had net loss of Rs 9 crore with total income of Rs 1,086 crore. For the year ended March’09, Bank of Rajasthan had net profit of Rs 117 crore with total income of Rs 1,507 crore.

ICICI Bank will gain marginally from the merger as Bank of Rajasthan has a reasonable penetration in its home state. As of March’09, it had 463 branches across the country. The deal will also help ICICI tackle increasing competition by HDFC Bank.

HDFC Bank, the country’s second-largest private bank, has been threatening to take the top slot from ICICI especially in the retail segment. HDFC Bank had acquired Centurion Bank of Punjab two years ago that expanded its India business.

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