Under Section 45 of the Banking (Regulation) Act, the Reserve Bank has the "power to apply to the central government for suspension of business by a banking company and to prepare scheme for reconstitution or amalgamation".

The central government, after considering the Reserve Banks application, "may make an order of moratorium staying the commencement or continuance of all actions and proceedings against the company for a fixed period of time on such terms and conditions as it thinks fit and proper..."

The Reserve Bank move effectively draws curtains on the controversy surrounding the proposed merger of Bareilly Corporation Bank with Bank of Barodawhich holds over 98 per cent stake of the bank.

Earlier, the central bank had shot down the Bank of Baroda proposal of merging its subsidiary with the parent bank under the provision of Section 44(A) of Banking (Regulation) Act as no nationalised bank can opt for merger through this route since the Banking Companies (Acquisition and Transfer of Undertakings) Act 1970 has certain overriding clauses which made the Section 44A of Banking (Regulation) Act redundant. And yet the Bank of Baroda management went ahead with the extraordinary general meeting at Vadodara last week seeking shareholders approval for the merger scheme.

"The bank did not need to seek shareholders approval for the merger. It will have to initiate the entire process afresh," industry sources said.

During the moratorium period, Bareilly Corporation Bank will not be allowed to "make any payment to any depositors or discharge any liabilities or obligations to any other creditors". Bank of Baroda chairman K Kannan, away in Delhi, was notavailable for comment.

Going by the merger scheme, one fully paid-up equity share (of Rs 10) of Bank of Baroda will be issued for every 11 shares of Barielly Corporation Bank. The share swap ratio was arrived at based on the valuation carried out by SBI Caps.

The merger will call for transfer or issuance of shares or payment of cash up to 2 per cent of the shares of Bareilly Corporation Bank since Bank of Baroda is holding 98 per cent of the Rs 5.16 crore worth of equity of the bank while the rest is being held by the public. Its reserves stood at Rs 1.32 crore.

The Bareilly headquartered bank, established in 1927, currently has a deposit base of Rs 307 crore. The bank has posted a net profit of Rs 94.05 lakh in 1997-98, up from Rs 25 lakh in the previous financial year.