By buying the shares at a premium, and then voting for the delisting to get ICICI Bank shares in exchange, the funds hurt the interests of their unit holders, say the minority shareholders. The buying of ICICI Securities shares at a premium also gave a false impression that they expected the delisting to fail and the brokerage’s share price to rise, the investors said.

“What was the rationale for the mutual funds to buy the ICICI Securities shares at a premium if they knew they were going to vote in favour of delisting the company?” said Manu Rishi Guptha, a Bangalore-based fund manager and a minority shareholder in ICICI Securities. Guptha is also CEO and founder of MRG Capital, a Sebi-registered PMS.

Guptha is leading a group of over 100 shareholders of ICICI Securities who last week filed a class action suit with the National Company Law Tribunal (NCLT) against ICICI Bank Ltd’s proposal to delist ICICI Securities from the stock exchanges.

Fifteen asset management companies had bought shares of ICICI Securities in February and then voted in favour of the delisting, show data from public disclosures. Of these, relatively significant buyers were UTI Banking and Financial Services Fund, UTI Balanced Advantage Fund, and Axis Quant Fund, which bought more than 450,000 shares of ICICI Securities in February. These mutual fund schemes did not previously hold any ICICI Securities stock.

A spokesperson for Axis Mutual Fund declined to comment. UTI Mutual Fund did not respond to Mint’s queries.

Kotak Mutual Fund and ITI Mutual Fund, too, bought ICICI Securities shares at a premium in February, but they voted against the delisting proposal in March.

Another bone of contention

The minority shareholders are also crying foul about the valuation at which ICICI Securities is being taken private just six years after it was listed on the stock exchanges. They argue that while the brokerage was listed at a price-to-earnings ratio of around 32x, it is being taken private at a ratio of around 15x.

Not everyone is unhappy, though. A leading fund manager working with one of the funds that voted in favour of the delisting said the company had gained as it had entered ICICI Securities later than most other funds. and because the price of ICICI Bank’s shares had since outperformed those of ICICI Securities.

“For some fund managers who had entered earlier, the swap ratio might not have been favourable, but that was not the case with us,” the fund manager said, asking not to be named as they are not authorized to speak to the media. “Also, the share of ICICI Bank has risen since.”

As part of the delisting, shareholders of ICICI Securities will get 67 shares of ICICI Bank for every 100 shares of ICICI Securities they hold, translating to a share swap ratio of 0.67. The minority shareholders are peeved because ICICI Securities shares had traded at a premium to this swap ratio in February.

The volume weighted average price (VWAP) of ICICI Securities shares for February was 0.79 times that of ICICI Bank shares during the same period, as per Mint’s calculations. The closing price of ICICI Securities shares after every trading session throughout February was between 0.75 times and 0.81 times of ICICI Bank’s shares. This translates to a premium of 12-21% to the swap ratio of 0.67.

The spread between the VWAPs of ICICI Bank and the securities subsidiary widened from 220 per share in February to 368 in April.

The funds themselves have in their disclosures noted that while the delisting process was legally compliant, ICICI Securities did not offer its minority shareholders a chance to participate in a price discovery process or allow them an option to stay invested in the company even after the proposed delisting.

The delisting proposal and the swap ratio were declared on 25 June 2023.

Leveraging a new exemption

The swap ratio was arrived at by independent valuers appointed separately by ICICI Securities and ICICI Bank. ICICI Securities was the first company to use a new provision in Sebi’s regulations that grants an exemption from the reverse book building process for price discovery when delisting a listed subsidiary engaged in a similar business as the parent.

“The implied valuation of ICICI Securities Ltd was at a premium of 2% to the closing price one day prior to the announcement, and at 23% to the closing price four days prior to delisting—the stock price ran up by over 100 in just four days prior to the announcement,” Axis Mutual Fund said in its proxy voting disclosures.

“At current market prices, too, the implied valuation is at a 3% discount to the market price, but at a 43% premium to the market price four days prior to the date of the announcement.”

Minority shareholders of ICICI Securities have also objected to employees of ICICI Bank allegedly reaching out to them and urging them to vote at the company’s shareholder meeting on 27 March. Some investors allege that the bank’s employees had induced them to vote in favour of the delisting.

In a response to stock exchange queries regarding this, ICICI Bank conceded it had reached out to shareholders of its subsidiary.

“ICICI Bank and ICICI Securities have been undertaking efforts to reach out to equity shareholders with a view to explain the proposed scheme and the e-voting process with the primary objective of maximizing participation in the vote,” it explained.