In today’s Finshots, explain why there was controversy over the delisting of ICICI Securities.

The Story

ICICI Securities will soon cease to exist on the stock market!

No, we don’t mean the company is winding up. But this week, ICICI Bank finally got the shareholders’ go-ahead to delist ICICI Securities from the stock market. It’ll continue to run as a subsidiary of the bank but shareholders like you and me can’t own its shares anymore.

But wait…this delisting event wasn’t without its fair share of drama.

See, there’s something you know about the typical delisting process in India.

Initially, the buyer initiating who's initiating the delisting does a valuation and sets a floor price. This is based on the price the stock traded during 26 weeks before the delisting. Think of it as the bare minimum price that the buyer will pay.

And then begins the reverse book-building process. This helps to discover what price shareholders actually expect the buyer to pay. And it can be way higher than the floor price. The shareholders are given a certain window of time. They can offer their shares and say, “I’ll give you my shares if you pay me ₹xx.”

And for the delisting to be a success, the buyer needs to snag a total of 90% of the shares (including their own). And pay the exiting shareholders in cash.

But there’s a flipside to this. Reverse book building can create too much price uncertainty. Investors can quote whatever price tickles their fancy. And it can be quite unrealistic in some cases. For instance, Bloomberg looked at delisting deals worth over $100 million in India in the 7 years preceding 2022. And they found that most deals happened at a premium of 45–67%.

That’s actually double the premium that buyers in other parts of the world had to pay!

This is why companies are always wary when it comes to delisting. They fear they’ll have to pay through the nose if they want to go through with it

But in this case, ICICI Bank faced none of that trouble. The bank simply decided the valuation by itself. And told investors to say yes or no. There was no reverse book building.

Huh? Why was that the case, you ask?

Well, that’s thanks to a tweak in the rules by the Securities and Exchange Board of India (SEBI) in 2021.

The regulator said, “Look, we know that the current delisting situation could be cumbersome at times. So we’ll make an exception. If you want to delist your subsidiary, you don’t have to go through the reverse book-building process. Rather, you first need to prove that the parent company and the subsidiary are engaged in the same line of business. And if that’s okay, you can swap the shares. Give the shareholders in the subsidiary some shares of the parent. And you can determine a valuation based on the average price over the previous 60 days. All you need to do after that is get at least 70% of your minority shareholders to agree.”

Now you could argue that ICICI Bank and ICICI Securities aren’t strictly in the same line of business. But it appears that SEBI gave them an exemption for this.

And that paved the way for ICICI Bank. Last year, it decided it would be the first company to attempt such a delisting endeavour under these rules. And it announced that for every 100 shares someone held in ICICI Securities, they would get 67 shares of ICICI Bank instead. It would be a share swap and not a cash transfer.

And the displeasure was immediate.

As soon as the delisting event was announced in July 2023, an anonymous minority shareholder penned a letter to the board members of ICICI Securities. They pointed out something quite pertinent.

When ICICI Bank listed ICICI Securities in 2018, they asked for a valuation of 30 times the company’s earnings.

Since then, sales and profits have almost doubled. And earnings have grown by 15% annually.

And now that ICICI Bank wants to buy back the company, it is only willing to pay 18 times the earnings.

So, why is the proposed exit multiple lower than the entry multiple at the time of IPO, considering the overall business quality has significantly improved? How was this fair?

Minority shareholders felt they were being short-changed. That they were being taken for a ride by not being consulted on the price.

And the folks at The Ken highlighted another argument that shareholders were making.

Between 2018 and June 2023 (when the delisting announcement was made), ICICI Bank’s shares had risen by 200%. But ICICI Securities’ shares were higher by only 30%. And since the folks in charge of valuing the delisting had assigned a 40% weight to the market price, it meant that ICICI Securities’ shareholders weren’t being undervalued even though the business was doing well.

ICICI Securities’ shareholders believed that the stock would catch up soon enough and reward them for their patience. But by delisting the shares, they would lose out.

With all this angst, you could bet that the delisting would be under threat. ICICI Bank still needed 70% of these minority shareholders to vote in favour of the deal. But it didn’t seem likely that it would be able to sway their minds.

And when the e-voting for delisting finally began last week, the drama intensified.

Retail shareholders of ICICI Securities began to complain that executives from ICICI Bank had called them and messaged them to convince them to support the delisting process. They shared screenshots of these conversations too.

And that definitely wasn’t a good look for ICICI Bank. Everyone thought the delisting would be unsuccessful.

But when the final votes were tallied up, lo and behold, it was a miracle.

Even though nearly 67% of individual, retail investors (folks like you and me) voted against the resolution, the big institutional investors saved the day. And by big institutional investors, we mean folks such as Norway’s Norges Bank Investment Management. An overwhelming 84% of them voted in favour of the delisting.

And with that, despite all the brouhaha, ICICI Bank has managed to climb over the line. It got 72% of the votes in favour of the delisting and that means, we’ll have to soon bid a stock market goodbye to ICICI Securities.

What did you think about the delisting process? Let us know.

Until then…

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