The Securities and Exchange Board of India (SEBI) is currently under scrutiny over its handling of the merger between ICICI Bank Ltd. and its brokerage affiliate, ICICI Securities Ltd. The controversy revolves around the terms of the merger and SEBI’s decision to waive certain regulatory requirements, raising concerns about the protection of minority shareholders’ interests.
The controversy at a glance
ICICI Bank, the second-most-valuable bank in India, announced a plan in June last year to acquire the remaining shares of its subsidiary, ICICI Securities, by offering 67 shares of ICICI Bank for every 100 shares of ICICI Securities. The merger would effectively delist ICICI Securities from the stock exchange. However, this proposal sparked discontent among some minority shareholders of ICICI Securities, who felt that the terms of the buyout were unfair and that SEBI had not adequately protected their interests.
Under SEBI’s guidelines, when a listed company is to be delisted, a bidding process is usually required to determine a fair price for the shares. However, there is an exemption in the 2021 rules when the target company is a subsidiary of the acquirer, and both operate in the same line of business. Despite ICICI Bank and ICICI Securities clearly not being in the same line of business — one being a bank and the other a brokerage firm — SEBI granted ICICI Bank an exemption from the bidding process.
Shareholder backlash and legal challenges
The exemption led to a series of legal challenges and shareholder backlash. Some minority investors argued that SEBI’s decision bypassed the fair price discovery mechanism that would have otherwise ensured a better deal for them. On August 21, a company-law tribunal in Mumbai dismissed a challenge to the merger, allowing the deal to proceed. However, a separate class-action lawsuit has been filed by over 100 non-institutional investors of ICICI Securities, led by Bengaluru-based fund manager Manu Rishi Guptha, who claims that the skewed swap ratio has resulted in a loss of more than $200 million for minority shareholders.
The legal dispute is also being heard by another tribunal in New Delhi and a higher court in Mumbai. Recently, the Bombay High Court directed SEBI to provide its June 2023 approval letter for the merger to the advocate of Aruna Modi, a shareholder contesting the exemption. This letter could play a crucial role in determining the legality and fairness of the transaction and set a precedent for similar mergers in the future.
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SEBI’s role and allegations of favoritism
Critics have questioned SEBI’s decision to grant the exemption, especially since it deviates from the regulator’s own rules. The controversy has been further fueled by the regulator’s involvement in a separate, high-profile dispute with Hindenburg Research, which has accused SEBI of bias in its handling of the Adani Group investigation. The combination of these events has led to allegations of favoritism and a lack of transparency in SEBI’s decision-making process.
While SEBI has maintained that the merger terms were independently verified by valuation experts and deemed fair by multiple proxy advisory firms, the regulator’s decision to bypass the bidding process remains contentious. SEBI issued an administrative warning to both ICICI Bank and ICICI Securities over the improper sharing of minority investors’ personal data during the merger vote. However, this warning has done little to appease disgruntled shareholders who are demanding more stringent oversight and accountability.
Implications for future mergers and acquisitions
The outcome of the ongoing legal battles and the broader scrutiny faced by SEBI will have significant implications for future mergers and acquisitions in India. If SEBI is seen as favoring certain entities over others or allowing regulatory loopholes to be exploited, it could undermine investor confidence in the Indian securities market.
In a volatile market where the rules of fair play are seen as paramount, SEBI must ensure that its actions are transparent and that its regulations are applied uniformly to all market participants. This is crucial not only for maintaining market integrity but also for protecting the rights of minority shareholders, who form a critical part of the investor ecosystem.
