How ISec Minority Shareholders May Lose Rs 1776 Cr In Merger Deal
Retail and minority shareholders of ISec (ICICI Securities) stand to lose around Rs1,776 crore in the merger deal with ICICI Bank. According to Quantum Mutual Fund (MF), the merger deal is flawed and bridled with irregularities and they have raised a strong objection against it. Quantum MF has also claimed that a few directors of ISec hold shares of ICICI Bank and are hence conflicted since they voted in favour of the deal and stand to gain from the flawed deal.
According to M&A experts, the deal could be controversial after Quantum MF's allegations, especially since Madhabi Puri Buch, the incumbent SEBI chief, was formally the MD of ISec and a director on the board of ICICI Bank. Quantum has registered its opposition to the deal with SEBI and has also threatened further legal action in the matter including filing applications before the National Company Law Tribunal and other regulatory bodies.
Quantum MF has also alleged that ICICI Bank used fraudulent means to get favourable votes from the minority shareholders for the deal. A letter from Quantum MF is in possession of BW wherein it has claimed that all of ISec's peers are trading at a much higher valuation. Quantum MF says that the deal process was manipulated since ICICI Bank was using a 9-month-old valuation report for the deal, which makes the valuation metrics flawed.
ICICI Bank plans to merge its financial services and equity brokerage arm ISec with it. As per the deal, ISec will be delisted post the merger and its shareholders will receive 67 shares of ICICI Bank for every 100 shares they hold. But Quantum MF says that ISec is being undervalued in the deal and hence its minority shareholders will suffer a massive loss.
The merger deal received a nod from the shareholders of ISec in March but Quantum MF claims that they had learned that the management of ICICI Bank was contacting the retail shareholders of ISec and coaxing them to vote in favour of the merger scheme.
"The disclosure of confidential shareholder data on the part of ISec to ICICI Bank shows the malafide conduct of ICICI, which vitiates the shareholder meeting and votes," says the letter written by Quantum Asset Management Company MD and CEO Jimmy Patel to ICICI Bank and ISec.
Flawed Valuations Of The Deal
Quantum MF says that ICICI Bank has determined the share swap ratio for the merger based on the valuation report of ISec procured on June 29, 2023. Based on the same 9-month-old valuation report, Isec shareholders were made to vote on the deal on March 27, 2024. Not only this, but a fairness report of the deal given by BofA Securities was also nine months old since it was dated June 29, 2003.
"The valuation report procured in June 2023 could not have been used to determine the swap ratio (for the deal) as it fails to account for the various dynamic market changes that took place between June 2023 to March 2024. There has been no independent application of mind by the merchant bankers and the fairness report did not dive deep into the valuation exercise," Quantum MF has said.
Quantum MF says that the valuation metrics in the Valuation Reports are not reliable due to its ignorance in considering the changes/developments which have occurred in the market.
"The competitive scenario which has changed quite rapidly over the last 9 months in favour and benefit of ISEC, which has not even potentially been considered at all in these Valuation Reports. As per our assessment, in the fourth quarter of the fiscal year ending March 2023, ISec has started expanding its retail cash market volume share of the broking business. ISEC has also seen a spectacular 66 per cent growth in net profits for the quarter ending December 2023, however, the share price has barely moved due to the cap limit placed by the arbitrary and unjust Swap Ratio," Quantum has said.
Further, Quantum also says that the undervaluation of ISEC as per the Swap Ratio is apparent based on the valuation of its listed peers. The merger ratio has valued ISEC at a 30 per cent to 77 per cent discount to its listed peers based on consensus earnings forecast for the fiscal year ending March 2024. The Valuation Reports and the proxy agencies failed to account for publicly available market information to make a judgement on a fair swap ratio, as per Quantum MF.
The below chart shows how ISec is undervalued compared to its peers
Company FY24 Consensus EPS PE multiple
(Rs/share)
ICICI Securities (ISEC) 46.1 15.7x
Angel One 130.7 20.4x
360 One 20.7 34.2x
Anand Rathi Wealth 54.9 70.1x
Source: Bloomberg, Data as of 11 March 2024, ISEC valued at a swap ratio
"Assuming for the sake of argument that even if ISEC was to be valued at the lowest PE multiple reflected in its peer set (20.4x for Angel One) the merger offer would have been at least 30 percent higher. The Scheme of Merger transfers INR 17.8 billion to ICICI Bank shareholders from ISEC minority shareholders. It is apparent that the Valuation Reports have not only ignored current market peer comparison data but also fail to disclose the basis of the valuation and the information based on which the Valuation Reports have been made," Quantum says.
Manipulation and ICICI Bank Director's Conflict of Interest
Quantum has said that the Independent Director of ISEC holds equity shares of ICICI Bank and has voted in favour of the scheme despite the obvious conflict of interest.
Independent Directors of ISEC voted in favour of the Scheme of Merger in a meeting held on June 29, 2023 and this Scheme of Merger has apparently been approved by the Committee of Independent Board of Directors.
The meeting held on June 29, 2023, was attended by 8 directors of ISEC, namely Vijayalakshmi lyer, Subrata Mukherji, Dr Gopichand Katragadda, Rakesh Jha, Vijay Chandok, Ajay Saraf, Vinod Kumar Dhall and Ashvin Parekh who all voted in favour of the scheme of merger. The publication by ISEC reveals that one of the Independent directors of ISEC Subrata Mukherji who voted in favour of the scheme of merger holds about 447,000 equity shares in ICICI Bank. Further, Ajay Saraf, the executive director of ISEC, holds about 735,000 equity shares in ICICI Bank.
"These interested Directors who each have a substantial shareholding in ICICI Bank clearly amount to a conflict of interest, as the said directors directly stand to gain out of the delisting of ISEC. They could not have voted on the resolution for the scheme. It was also incumbent on each of them to disclose how much they would stand to gain or lose from such a delisting. In the event, it is found that an interested director with monetary interest in the outcome of the scheme of Merger has voted, the voting should be annulled and a fresh Board meeting for ISec should be convened," said Quantum MF.
The letter further states that it is ex-facie apparent that the above conduct on the part of ICICI Bank and ISec is not in the interests of ISEC minority shareholders and in view of the fact that this scheme of merger will substantially and adversely affect the interest of the Unitholders of the schemes of Quantum Mutual Fund as well.
"ICICI securities today is trading at almost half the valuation multiples being enjoyed by its peers. There are significant issues that have been raised by public shareholders, including valuation and alleged malpractices in voting for this delisting. It is surprising that the Exchanges and SEBI have accorded their approval without getting to the bottom of these issues. If public shareholders have to approach courts for their rights, the regulator obviously is not doing its job right. A somewhat similar matter in Federal Moghul Goetze had also witnessed regulators' apathy and shareholders got their due only after the intervention of courts. Unfortunate...." said a former chief of surveillance at SEBI.
Coaxing Minority Shareholders
"Prior to the voting, we were shocked to learn that the management of ICICI Bank was contacting the retail shareholders of ISEC and coaxing them to vote in favour of the scheme of merger. This disclosure of confidential shareholders' data on the part of ISec to ICICI Bank shows the mala fide conduct of ICICI which vitiates the shareholder's meeting and votes," Quantum says.
In this regard, a clarification was sought by the NSE and BSE, wherein the conduct of ICICI Bank in contacting and speaking to the various shareholders of ISec was questioned. In response to the same, a clarification was issued on March 28, 2024, by ISec, wherein ISec claimed that the outreach to the shareholders was to facilitate maximum voting participation.
Quantum says that the clarification response was nothing but a smokescreen to hide the actual motives of ISEC and based on a prima facie perusal of the clarification response, there is no justifiable reason provided to the query raised by the stock exchanges. The notice convening the shareholder’s Meeting had already been issued in February 2024 itself and therefore there could have been no reason to contact the shareholders separately, the MF says.
"This conduct is mala fide and clearly establishes that the voting has not been done in a fair and transparent manner but has been influenced with oblique motives. The fact that you solicited favourable voting for the scheme of the merger is itself enough to vitiate the Scheme of Merger, which prejudices ISEC’s shareholders," Quantum's letter states.
