Why is SEBI facing flak over ICICI Bank-ICICI Securities merger case? | Explained

SEBI gave an exemption to ICICI Bank to bypass its own price discovery rule back.

The controversy surrounding ICICI Bank and the Securities and Exchange Board of India (SEBI) chairperson Madhabi Puri Buch is not limited only to the allegations related to payouts even though the bank has issued a clarification.

There is another matter in which the regulatory watchdog and the bank are connected and, interestingly, it has also seen its fair share of controversy with SEBI’s action being questioned in the courts as well.

The matter is related to the merger of ICICI Securities – which she headed for two years – with ICICI Bank and SEBI giving a controversial exemption to ease the merger process for the bank where she has worked for more than a decade.

So, what’s the big deal about ICICI Bank's plans to merge with its affiliate ICICI Securities, and why is SEBI receiving flak for it? We break it down for you in this edition of MC Explains:

What's the fuss about ICICI Bank and ICICI Securities merger?

ICICI Bank, which owns around 75 percent of ICICI Securities, announced plans to acquire the remaining ownership in the brokerage in June last year, offering 67 shares of the bank for every 100 shares of the affiliate.

Typically, when a listed company is bought out and subsequently delisted from stock exchanges, the regulator’s guidelines require a bidding process to determine the fair price.

However, there is one exemption, specified in the market regulator's 2021 rules, which ICICI Bank chose to use for its transaction – it sought SEBI’s approval and the watchdog gave it.
Interestingly, this exemption allows companies to bypass the price discovery process but can be used only if the target company is a subsidiary of the acquirer but, more importantly, both entities should operate in the same line of business. In such cases, shareholders of both companies are informed of the share swap ratio and asked to vote on the proposal instead of going through the lengthy bidding process.

But are ICICI Bank and ICICI Securities in the same line of business?

ICICI Bank is a lender, while ICICI Securities is a brokerage firm, which clearly means they operate in different lines of business. Despite this, ICICI Bank requested an exemption from the market regulator, which it received last June, allowing it to conduct a vote for the merger. SEBI's approval for an exemption was the first red flag raised by minority shareholders, who questioned the decision to bypass the price discovery process, arguing it contradicted the market regulator's own guidelines.

Additionally, SEBI chief’s previous connection with ICICI Securities – she has served as the chief executive of the brokerage firm before joining SEBI -- came under scrutiny. To be fair, Buch recused herself from any proceedings involving ICICI Bank to avoid any conflict of interest scenario. However, questions have still been raised about the validity of the exemption and those remain unanswered till date.

Why was there further controversy around the vote for the merger?

The tale doesn't end here. While minority investors were already irked with SEBI giving its approval for the exemption that, in turn, helped the bank bypass the price process discovery for shareholders of ICICI Securities, more concerns were raised over how the merger vote was handled.

Although the merger was approved in March this year with 72 percent of shareholders voting in favour, the process faced criticism due to ICICI Securities sharing the personal data of its minority investors with ICICI Bank. Thereafter, bank employees reached out to these investors, claiming the purpose was to explain the transaction and encourage participation in e-voting.

How did SEBI tackle the concerns?

SEBI deemed this data sharing “inappropriate,” pointing out that the bank had a “clear conflict of interest” given its stake in the outcome. But, it merely issued an administrative warning to both the acquirer and the target. Not surprising, minority shareholders considered the market regulator's response to the privacy breach as 'lenient'.

What happened next?

An unprecedented event in the Indian equity market followed: over 100 public, non-institutional investors of ICICI Securities joined hands to file a class-action lawsuit challenging the merger. Led by Bengaluru-based fund manager Manu Rishi Guptha, the contingent of shareholders contended that an unfair swap ratio had cost their group of investors over $200 million. In the midst of a booming bull market, Guptha claimed that the bank was taking advantage of the brokerage’s Rs 11,600 crore ($1.4 billion) reserve of cash and short-term investments at a bargain, at the cost of minority shareholders.

In their defence, both ICICI Securities and ICICI Bank clarified that the merger terms were determined by independent valuation experts, and the pricing was deemed fair by several proxy advisory firms as well.

Did it manage to assuage the concerns of the minority shareholders?

Embroiled in a legal battle, the merger of ICICI Bank and ICICI Securities has become a daily soap for investors. This has sparked high volatility in shares of ICICI Securities, which have seen erratic movements in recent months as investors bet on varying outcomes of the case.
But more importantly, the entire fiasco has cast doubts on the market regulator's fair treatment of M&As within the securities market. Adding fuel to the fire, concerns have been raised over Buch's prior association with the firm. On Monday, a Congress spokesperson alleged that Buch received an income of Rs 16.80 crore from ICICI Bank between 2017 and 2024, even after she assumed the role of a whole-time member of the market regulator in 2017, further complicating the situation.

The situation grows even murkier when considering the still-unanswered questions about why the market regulator allegedly went against its own rules to give an exemption to ICICI Bank, worsening the matter.

To clear things up, the Bombay High Court directed SEBI to share its June 2023 approval letter with the advocate of Aruna Modi, a shareholder of the brokerage firm who has contested the exemption. However, the letter's contents will remain confidential until the court decides otherwise.

Regardless, it will serve a key purpose: creating a framework for similar transactions in the future. Can any large company secure a regulatory waiver to absorb its listed subsidiary? What would define “similar line of businesses”? That is an important question that currently looms large, awaiting resolution.

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