Key Takeaways
- ICICI Bank is delisting ICICI Securities through the first court driven delisting in India
- Reverse book building process avoided – taking a specific exemption under Regulation 37 intended for companies in ‘same line of business’ – why did SEBI grant the exemption?
- Public shareholders contend valuations as unfair – jury out on fairness of valuations; does a 9 month gap merit a true-up even though not required per law?
- Why did ICICI Bank and I-Sec reach out to public shareholders to vote in the shareholders’ meeting? Should they have?
Key Takeaways
- ICICI Bank is delisting ICICI Securities through the first court driven delisting in India
- Reverse book building process avoided – taking a specific exemption under Regulation 37 intended for companies in ‘same line of business’ – why did SEBI grant the exemption?
- Public shareholders contend valuations as unfair – jury out on fairness of valuations; does a 9 month gap merit a true-up even though not required per law?
- Why did ICICI Bank and I-Sec reach out to public shareholders to vote in the shareholders’ meeting? Should they have?
What happened?
ICICI Securities (I-Sec), the broking arm and subsidiary of ICICI Bank, is in the midst of delisting its shares to become a wholly owned subsidiary of ICICI Bank. Some public institutional and retail minority shareholders are resisting the delisting as they contend that: (a) I-Sec shares have been valued unfairly; (b) the arbitrary failure to follow the Reverse Book-Building process (RBB), a fundamental price discovery mechanism in delisting; and (c) there is a lack of independence in the voting processes.
Why was RBB not followed – basis for alleging lack of price discovery?
Under Indian delisting norms1, the conventional delisting procedure involves the RBB, where public shareholders tender their shares at or above a calculated floor price. The exit price is based on public shareholder bids.
I-Sec, in its delisting, sought exemption from the RBB by going through Regulation 37 of the Delisting Regulations. Regulation 37 is a special route for delisting in cases of delisting listed subsidiaries which permitted when (i) it is driven by a court approved scheme and (ii) the listed holding and subsidiary companies are in the ‘same line of business.’
What does ‘same line of business’ of mean?
Existing SEBI guidelines prescribe criteria to determine ‘same line of business’ including: (i) the principal economic activities of both companies falling under the same 3-digit code in the National Industrial Classification Code 2008 (“Business Code”); and (b) at least 50% of both companies’ revenue and net tangible assets being attributable to the same line of business.2 However, I-Sec and ICICI Bank filings suggest that these criteria cannot be met. Hence, I-Sec sought and was granted an exemption from SEBI to go ahead with the Regulation 37 delisting.
How did SEBI grant this exemption?
Never mind the differing Business Codes, I-Sec and ICICI Bank contended that since both entities are under the same broad head of ‘Financial and Insurance activities’ (though not within the same 3-digit code in the Business Code), SEBI should allow them to delist under Regulation 37.3 SEBI granted the exemption through its letter to the bank on 20 June 2023. Whilst we do not have access to the SEBI’s order granting the exemption, a natural question that shareholders have is whether SEBI went beyond its remit disregarding the same Business Code requirements?
Valuation floor price is duly met – so what is the valuation concern raised by shareholders?
I-Sec’s delisting process was initiated in June 2023 when the share price was valued at INR 640.8 based on valuation reports procured from registered valuers at that time. However, as of the date of shareholders’ vote as of March 27, 2024, I-Sec’s share price stood at INR ~741 on the stock exchanges.
While the I-Sec board approved the delisting at the end of June 2023, the conclusion of the delisting process is expected to be in Q2FY24 – almost a year later due to the regulatory requirements for approvals from stock exchanges, regulators, tax authorities, courts and shareholders. A tabular depiction of the events as on date:
Considering legal and regulatory requirements for the delisting process, shareholders have raised concerns regarding the share swap ratio proposed: 67 shares of ICICI Bank for every 100 shares of I-Sec held by existing public shareholders, which shareholders argue does not take into account I-Sec’s most recent share price.
Valuation concerns – what’s the shareholders’ concern?
In the usual delisting route where public shareholders are required to be given an exit, the delisting must be approved by public shareholders within 45 days of the board’s approval of the delisting. It is unfortunate that in a Regulation 37 delisting, the valuation is fixed at the time of the board’s approval but involves a rather extensive time gap for shareholders to be given an opportunity to approve the delisting (due to various approvals required from courts and regulators) – which may cause considerable variation in the value of the shares. This was the case in I-Sec’s delisting as well. As discussed above, I-Sec’s share price had shot up to ~INR 740 on 27 March 2024 when the shareholders’ meeting was held.
Such large time gaps and variations in share valuations in comparison to the general delisting routes, naturally begs the question as to whether the Delisting Regulations or the company law courts should permit for a ‘true-up’ to reach a valuation closer to the value of the shares as on the date of the equity shareholders’ meetings.
In I-Sec’s case, some minority shareholders have raised concerns regarding the valuation methodology employed to procure the valuation report and the suppressed share price for I-Sec due to the delisting process. So, the question is – why did the shareholders vote in favour? They could have voted against the delisting as well.
Why did the shareholders not vote against?
I-Sec’s shareholders’ voting results show that the public shareholders have approved the delisting by a 2x vote in favour as required by the Delisting Regulations. Interestingly, this vote was driven largely by institutional public shareholders, including mutual funds, etc. Retail shareholders have voted heavily against this delisting by a large margin.
Notably leading proxy advisory firms advised voting in favour arguing that the valuation was fair as of June 2023.
ICICI Bank influencing I-Sec shareholders?
There have been multiple reports and claims by I-Sec public shareholders that ICICI Bank through its employees, agents, and third parties have been contacting I-Sec public shareholders to vote in favour of the delisting. Shareholders have raised concerns about privacy breaches – why were these calls coming from ICICI Bank (I-Sec’s promoters)? How did the bank get the shareholders’ details? These concerns had prompted the Indian stock exchanges, the BSE and the NSE, to ask I-Sec and ICICI Bank to clarify as well. I-Sec on 28 March 2024 in its response to the exchanges stated that it reached out to equity shareholders to explain the proposed scheme and the e-voting process to maximise participation in voting considering that the delisting was the first of its kind in India under Regulation 37. Is this a violation of an explicit legal prescription under the Delisting Regulations? Seems no. However, from a spirit perspective, could such reach-out strategies be seen as side-stepping what should be a fair and transparent public approval process? Depending on the conversations in question, the answer could swing either-ways. However, the act of individually contacting shareholders might not have been the most prudent strategy.
A group of minority shareholders have filed a class-action suit against ICICI Securities. Reports state that the shareholders have taken issue with: (i) ICICI Bank contacting them to influence the shareholders’ vote, (ii) the share-swap ratio for the delisting, and (iii) the exemption granted by SEBI to go ahead with the Regulation 37 delisting. The National Company Law Tribunal’s decision in this matter is awaited.
Conclusion
While the I-Sec delisting will be going ahead, it has been in the limelight for the way the delisting has happened. Avoiding public price discovery through the RBB process, taking an exemption from SEBI to delist under Regulation 37 when RBB process was available, valuations seeming unfair, public institutional shareholder voting being largely in favour while retail shareholders were staunchly against, and arguable undue influence employed by ICICI Bank to persuade shareholders to vote in favour of the delisting raise a few eyebrows from a corporate governance lens. It will be interesting to see how SEBI deals with such delistings going forward and if any concerns raised by public shareholders of I-Sec will be addressed in the future.
1 SEBI (Delisting of Equity Shares) Regulations, 2021 (“Delisting Regulations”).
2 SEBI circular on ‘Standard Operating Procedure for listed subsidiary company desirous of getting delisted through a Scheme of Arrangement wherein the listed parent holding company and the listed subsidiary are in the same line of business’ dated 06 July 2021.
3 As per I-Sec equity shareholders meeting held on 27 March 2024.
What happened?
ICICI Securities (I-Sec), the broking arm and subsidiary of ICICI Bank, is in the midst of delisting its shares to become a wholly owned subsidiary of ICICI Bank. Some public institutional and retail minority shareholders are resisting the delisting as they contend that: (a) I-Sec shares have been valued unfairly; (b) the arbitrary failure to follow the Reverse Book-Building process (RBB), a fundamental price discovery mechanism in delisting; and (c) there is a lack of independence in the voting processes.
Why was RBB not followed – basis for alleging lack of price discovery?
Under Indian delisting norms1, the conventional delisting procedure involves the RBB, where public shareholders tender their shares at or above a calculated floor price. The exit price is based on public shareholder bids.
I-Sec, in its delisting, sought exemption from the RBB by going through Regulation 37 of the Delisting Regulations. Regulation 37 is a special route for delisting in cases of delisting listed subsidiaries which permitted when (i) it is driven by a court approved scheme and (ii) the listed holding and subsidiary companies are in the ‘same line of business.’
What does ‘same line of business’ of mean?
Existing SEBI guidelines prescribe criteria to determine ‘same line of business’ including: (i) the principal economic activities of both companies falling under the same 3-digit code in the National Industrial Classification Code 2008 (“Business Code”); and (b) at least 50% of both companies’ revenue and net tangible assets being attributable to the same line of business.2 However, I-Sec and ICICI Bank filings suggest that these criteria cannot be met. Hence, I-Sec sought and was granted an exemption from SEBI to go ahead with the Regulation 37 delisting.
How did SEBI grant this exemption?
Never mind the differing Business Codes, I-Sec and ICICI Bank contended that since both entities are under the same broad head of ‘Financial and Insurance activities’ (though not within the same 3-digit code in the Business Code), SEBI should allow them to delist under Regulation 37.3 SEBI granted the exemption through its letter to the bank on 20 June 2023. Whilst we do not have access to the SEBI’s order granting the exemption, a natural question that shareholders have is whether SEBI went beyond its remit disregarding the same Business Code requirements?
Valuation floor price is duly met – so what is the valuation concern raised by shareholders?
I-Sec’s delisting process was initiated in June 2023 when the share price was valued at INR 640.8 based on valuation reports procured from registered valuers at that time. However, as of the date of shareholders’ vote as of March 27, 2024, I-Sec’s share price stood at INR ~741 on the stock exchanges.
While the I-Sec board approved the delisting at the end of June 2023, the conclusion of the delisting process is expected to be in Q2FY24 – almost a year later due to the regulatory requirements for approvals from stock exchanges, regulators, tax authorities, courts and shareholders. A tabular depiction of the events as on date:
Considering legal and regulatory requirements for the delisting process, shareholders have raised concerns regarding the share swap ratio proposed: 67 shares of ICICI Bank for every 100 shares of I-Sec held by existing public shareholders, which shareholders argue does not take into account I-Sec’s most recent share price.
Valuation concerns – what’s the shareholders’ concern?
In the usual delisting route where public shareholders are required to be given an exit, the delisting must be approved by public shareholders within 45 days of the board’s approval of the delisting. It is unfortunate that in a Regulation 37 delisting, the valuation is fixed at the time of the board’s approval but involves a rather extensive time gap for shareholders to be given an opportunity to approve the delisting (due to various approvals required from courts and regulators) – which may cause considerable variation in the value of the shares. This was the case in I-Sec’s delisting as well. As discussed above, I-Sec’s share price had shot up to ~INR 740 on 27 March 2024 when the shareholders’ meeting was held.
Such large time gaps and variations in share valuations in comparison to the general delisting routes, naturally begs the question as to whether the Delisting Regulations or the company law courts should permit for a ‘true-up’ to reach a valuation closer to the value of the shares as on the date of the equity shareholders’ meetings.
In I-Sec’s case, some minority shareholders have raised concerns regarding the valuation methodology employed to procure the valuation report and the suppressed share price for I-Sec due to the delisting process. So, the question is – why did the shareholders vote in favour? They could have voted against the delisting as well.
Why did the shareholders not vote against?
I-Sec’s shareholders’ voting results show that the public shareholders have approved the delisting by a 2x vote in favour as required by the Delisting Regulations. Interestingly, this vote was driven largely by institutional public shareholders, including mutual funds, etc. Retail shareholders have voted heavily against this delisting by a large margin.
Notably leading proxy advisory firms advised voting in favour arguing that the valuation was fair as of June 2023.
ICICI Bank influencing I-Sec shareholders?
There have been multiple reports and claims by I-Sec public shareholders that ICICI Bank through its employees, agents, and third parties have been contacting I-Sec public shareholders to vote in favour of the delisting. Shareholders have raised concerns about privacy breaches – why were these calls coming from ICICI Bank (I-Sec’s promoters)? How did the bank get the shareholders’ details? These concerns had prompted the Indian stock exchanges, the BSE and the NSE, to ask I-Sec and ICICI Bank to clarify as well. I-Sec on 28 March 2024 in its response to the exchanges stated that it reached out to equity shareholders to explain the proposed scheme and the e-voting process to maximise participation in voting considering that the delisting was the first of its kind in India under Regulation 37. Is this a violation of an explicit legal prescription under the Delisting Regulations? Seems no. However, from a spirit perspective, could such reach-out strategies be seen as side-stepping what should be a fair and transparent public approval process? Depending on the conversations in question, the answer could swing either-ways. However, the act of individually contacting shareholders might not have been the most prudent strategy.
A group of minority shareholders have filed a class-action suit against ICICI Securities. Reports state that the shareholders have taken issue with: (i) ICICI Bank contacting them to influence the shareholders’ vote, (ii) the share-swap ratio for the delisting, and (iii) the exemption granted by SEBI to go ahead with the Regulation 37 delisting. The National Company Law Tribunal’s decision in this matter is awaited.
Conclusion
While the I-Sec delisting will be going ahead, it has been in the limelight for the way the delisting has happened. Avoiding public price discovery through the RBB process, taking an exemption from SEBI to delist under Regulation 37 when RBB process was available, valuations seeming unfair, public institutional shareholder voting being largely in favour while retail shareholders were staunchly against, and arguable undue influence employed by ICICI Bank to persuade shareholders to vote in favour of the delisting raise a few eyebrows from a corporate governance lens. It will be interesting to see how SEBI deals with such delistings going forward and if any concerns raised by public shareholders of I-Sec will be addressed in the future.
1 SEBI (Delisting of Equity Shares) Regulations, 2021 (“Delisting Regulations”).
2 SEBI circular on ‘Standard Operating Procedure for listed subsidiary company desirous of getting delisted through a Scheme of Arrangement wherein the listed parent holding company and the listed subsidiary are in the same line of business’ dated 06 July 2021.
3 As per I-Sec equity shareholders meeting held on 27 March 2024.
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Austin Thomas
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Ruchir Sinha
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