In the midst of an ongoing dispute between a New York-based short seller and the Indian market regulator, a new controversy is unfolding in India’s financial sector. This controversy involves ICICI Bank, the country’s second-most-valuable bank, and its plan to acquire its securities affiliate, ICICI Securities Ltd.
ICICI Securities has paid Rs 69.82 lakh to the Securities and Exchange Board of India (Sebi) to settle a case related to alleged violations of regulatory norms. The subsidiary of ICICI Bank Ltd is also moving ahead with its plans to delist from the stock market.
The Mumbai bench of the National Company Law Tribunal (NCLT) has approved the company’s delisting proposal, rejecting objections raised by minority shareholders.
Some shareholders of ICICI Securities are frustrated with the buyout terms and are questioning how the Securities and Exchange Board of India (SEBI) approved the delisting of the brokerage, bypassing its own rules for compensating minority investors. On August 21, a company-law tribunal in Mumbai dismissed their challenge, allowing the deal to move forward. However, this is not the end of the matter. A separate class-action suit is ongoing in New Delhi, and another case is under review by a higher court in Mumbai.
SEBI Under Scrutiny
The Indian regulator is already grappling with other challenges. On August 10, Hindenburg Research raised concerns about SEBI chief Madhabi Puri Buch’s past personal investments and her ownership of a consulting firm. These issues were used to question SEBI’s impartiality in its investigation of the Adani Group, the subject of Hindenburg’s January 2023 report. The Adani Group, which saw its market value plummet by $150 billion after the report, has denied any wrongdoing related to stock-price manipulation. Despite this, the group’s shares have mostly recovered. Buch has called the allegations “character assassination” and defended her disclosures and recusals.
The ICICI Securities Merger Controversy
Aside from the Adani investigation, SEBI is facing criticism for its role in the merger between ICICI Bank and ICICI Securities. In June of the previous year, ICICI Bank announced a plan to acquire the remaining shares of ICICI Securities that it did not already own. The plan involved offering 67 shares of ICICI Bank for every 100 shares of ICICI Securities.
SEBI’s guidelines for such mergers typically require a bidding process to determine a fair price. However, there is an exemption for mergers involving a subsidiary of the acquirer if both companies are in the same line of business. Since ICICI Bank and ICICI Securities are not in the same business, ICICI Bank sought an exemption from SEBI. This exemption was granted in June, allowing the bank to proceed with the vote on the merger.
In March, the vote passed with 72% approval. However, the process was clouded by concerns over the brokerage sharing personal data of minority investors with ICICI Bank. While ICICI Bank claimed this outreach was to explain the transaction and boost participation, SEBI deemed the data sharing inappropriate and noted a potential conflict of interest. SEBI issued an administrative warning to both parties involved.
Shareholders’ Legal Challenge
The situation has prompted over 100 public investors in ICICI Securities to file a class-action suit, a novel move in the Indian securities market. Fund manager Manu Rishi Guptha and other investors argue that the merger’s terms unfairly benefitted the bank, costing their group more than $200 million. They claim that in a booming market, ICICI Bank is acquiring ICICI Securities’ substantial cash reserves and investments at a bargain.
Both ICICI Securities and ICICI Bank have defended the merger terms, stating that they were set by independent valuation experts and approved by proxy advisory firms as fair.
SEBI’s Role and Future Implications
The crucial question remains: why was ICICI Bank granted an exemption from the standard price discovery process? This decision, made by SEBI, is now under scrutiny. The Bombay High Court has directed SEBI to disclose its approval letter for the exemption to a shareholder’s advocate, though the details are restricted from public view until further notice.
The outcome of this case will have significant implications for similar transactions in the future. It raises concerns about whether large companies can easily obtain regulatory waivers to acquire their listed subsidiaries. While the merger of ICICI Securities has led to increased market speculation and volatility, it’s important for SEBI to address these concerns transparently. Maintaining credibility and fairness is crucial for the regulator, especially when its own rules are being questioned.
SEBI’s handling of this case could set a precedent for how such transactions are managed and regulated in the future.
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