Why ICICI Securities’ merger with ICICI Bank isn’t above board

“Corporate governance is the application of best management practices, compliance of law in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders.”

This is how the Institute of Company Secretaries of India defines corporate governance.

However, the recent proposal to merge ICICI Securities with ICICI Bank has been put through forgetting ethical standards and adopting questionable methods, sacrificing the interest of retail shareholders of the former. 

Post-IPO actions

ICICI Securities came out with an initial public offering (IPO) in 2018 with a price band of Rs 519-520 a share. Shares were allotted at the rate of Rs 520 apiece. However, it got listed on the National Stock Exchange (NSE) at an opening price of Rs 435.

Subsequently, the stock plunged 56 per cent to hit a low of Rs 188 on February 5, 2019, after which it rebounded to record levels.

After the merger proposal, it hit a record price of Rs 865 but declined subsequently by 16 per cent.

Bid to influence voting

A merger proposal has recently been put through to merge ICICI Securities with ICICI Bank. Under the proposal, ICICI Securities shareholders will receive 67 shares of ICICI Bank for every 100 shares held in ICICI Securities.

The existing law requires that a scheme for merger and/or any arrangement should be approved by a majority in number representing three-fourth in value of shareholders/creditors present and voting. Hence this process was initiated with a facility for e-voting also.

Surprisingly, the retail shareholders started receiving repeated phone calls from ICICI Bank representatives with a desire to influence the voting in favour of the merger. The representatives even offered to make a house visit to ensure voting in favour of merger.

They were also requesting a screenshot of the voting once it is done. All these show that the ICICI Bank management was aggressive in getting the resolution passed, which is something strange in Indian corporate history.

Voice of majority

It was finally declared last week that 83.8 per cent of public institutional shareholders supported the proposal. However, only 32 per cent of public non-institutional shareholders voted in favor of ICICI Securities delisting.

To put it in another way, 68 per cent of the retail shareholders were against the resolution of merger. However, as the total votes in favour of the resolution stood at 71.88 per cent, the merger proposal was taken as approved by shareholders.

Shares of ICICI Securities dropped by more than 4 per cent after shareholders approved the delisting of the company.

Bullying small shareholders?

It is true that all the equity shareholders have equal claim on a company and all the shareholders should be treated equally and the value of voting depends on the number of shares one is holding. However, a company is not expected to bully the small shareholders by using the brutality of institutional shareholders.

It will not be out of place to quote from a report of the Expert Committee on Law (as published by Union Ministry of Corporate Affairs): “Minority Interest: The committee examined the view that quite frequently shareholders/creditors with insignificant stake raise objections to schemes of merger/acquisition and the process of dealing with such objection becomes vexatious. After a detailed discussion, the committee recommended that while protection of minority interest should be recognised under the law, only shareholders/creditors having significant stake at a level to be prescribed under law should have the right to object to any scheme of mergers. The philosophy behind such a move would be to streamline the procedure of articulation of the minority interest while restricting obstructionist attitude on the part of any section of minority.”

Complaints on X

Though the merger resolution has been approved, shareholders of ICICI Securities have taken to social media platform X (formerly Twitter) to complain about the relentless calls received from ICICI Bank's managers and branch officers.

Users reported that employees of the bank were contacting retail shareholders in an attempt to sway the voting process. ICICI Bank executives also contacted shareholders to confirm if they had cast their vote on the delisting process. Further, they asked stakeholders to share their email confirmation of the vote.

It seems that as a majority holder and interested party in ICICI Securities, ICICI Bank could not vote in the resolution and they called shareholders and asked them to vote, which was just pushing for an approval. While there is no legal embargo for such an activity, it does not speak well about the corporate governance of the institution.

Quantum MF's observation

Quantum Mutual Fund, which holds a minor stake in ICICI Securities, voted against the proposal saying that the move would be detrimental to the interests of the fund house’s unitholders. It said it estimates that the merger will result in a net loss of at least Rs 6.08 crore to its unitholders.

In its rationale, the fund house believes that ICICI Bank's proposal undervalues ICICI Securities and gives ICICI Bank access to the full business of the latter at less than the fair market price.

Per Quantum Mutual Fund, the current swap ratio values ICICI Securities at a 30-77 per cent discount to its other listed peers based on consensus earnings forecast for fiscal year ending March 2024. Had the IPO price been used as the benchmark, the share swap ratio would have been 1.9 shares of ICICI Bank for every share of ICICI Securities, which is at a premium of 183 per cent to the current offer.

It will be better if the Company Law Board and the market regulator SEBI (Securities and Exchange Board of India) intervene in such matters so as to protect small shareholders.

(The views expressed are those of the writer.)