In India, Some M&A Are More Equal Than Others

(Bloomberg Opinion) — Amid the ongoing row between a New York-based short seller and the Indian market regulator, a completely different controversy is brewing. It involves the country’s second-most-valuable bank, and its plan to swallow up its securities affiliate.
Some shareholders of the brokerage firm, upset over the terms of the buyout, want to know how the Securities and Exchange Board of India allowed the delisting of ICICI Securities Ltd., waiving the regulator’s own rules for compensating minority investors. A company-law tribunal in Mumbai quashed their challenge on Aug. 21 and allowed the deal to proceed. But that isn’t the end of the matter. There is a separate class-action suit before another tribunal in New Delhi. This dispute is also being heard by a higher court in Mumbai, the country’s commercial capital.
The Indian regulator is battling bigger trouble elsewhere. In an Aug. 10 note, Hindenburg Research drew attention to SEBI chief Madhabi Puri Buch’s past personal investments, and her ownership of a consulting outfit, to question the watchdog’s objectivity in probing the Adani Group, the target of the short seller’s original January 2023 report. The infrastructure conglomerate, which suffered a $150 billion drop in its market value in the aftermath of the publication, has strenuously denied the short seller’s claims of stock-price manipulation. The group’s shares have recouped most of their losses. Buch described the allegation of potential conflict as “character assassination” and said that she made all the appropriate disclosures and recusals.
Separately, the SEBI is also facing criticism from some aggrieved shareholders for its role in the merger between ICICI Bank Ltd. and ICICI Securities, a subsidiary in which the lender owns almost 75%. In June last year, it announced a plan to acquire the rest of the brokerage by offering 67 shares of ICICI for every 100 of ICICI Securities.
When it comes to buying out shares of a listed company and getting it delisted from stock exchanges, the regulator’s guidelines spell out a bidding process to discover the fair price. There is an exemption — also specified in the 2021 rules — when the target is the subsidiary of the acquirer and they are in the same line of business. In such cases, shareholders of both the companies are told the swap ratio and asked to vote.
Now, a bank and a securities firm are obviously not in the same line of business. So ICICI asked the SEBI for an exemption. In June last year, the bank got the approval. And on that basis, it went ahead and conducted a vote.
Although the ballot in March passed with 72% shareholders voting in favor, it came under a cloud because the brokerage had shared the personal data of its minority investors with the bank. ICICI employees had then contacted them. The bank said that the purpose of its outreach was to explain the transaction and maximize participation in e-voting. But the regulator said that sharing the data was “not appropriate;” it noted that the bank had a “clear conflict of interest” because it had a stake in the outcome. 
The SEBI issued an administrative warning to both the acquirer and the target. 
But that June admonition didn’t satisfy everyone. More than 100 public, non-institutional investors of ICICI Securities have come together in what is still a novelty for the Indian securities market: a class-action suit. Bengaluru-based fund manager Manu Rishi Guptha and other aggrieved shareholders claim that a skewed swap ratio has cost their class of investors more than $200 million. In a raging bull market, the bank is helping itself to the broker’s 116 billion rupee ($1.4 billion) pile of cash and short-term investments on the cheap, Guptha says.
However, ICICI Securities and ICICI Bank have said that the terms of the merger were determined by independent valuation experts, and the pricing was found to be fair by multiple proxy advisory firms.  
The bigger question, however, is for the SEBI to answer: Why was ICICI spared the effort of price discovery, and on whose authority did the regulator allow it to skirt the bidding process that its own rules spell out? I asked the SEBI, though it didn’t reply to my email. The decision maker can’t be Buch, the chair. As a former chief executive of ICICI Securities who started her career at the bank, she recuses herself from any proceedings involving the group. Still, the embattled institution needs to explain the logic of the waiver.
Recently, the Bombay High Court directed the SEBI to share its June 2023 approval letter with the advocate of Aruna Modi, a shareholder of the brokerage who has contested the exemption. Nobody else is to see its contents until the court says so.
This letter, however, will serve a public purpose. It will be of crucial importance in bringing certainty to similar transactions in the future. Can any large company obtain a regulatory waiver to swallow up its listed subsidiary? When minority investors participate in the price discovery, the process works just fine. During Covid-19, the Indian tycoon Anil Agarwal offered a floor price of about 87 rupees to delist the commodities giant Vedanta Ltd.; some investors asked for as much as 320 rupees. The plan flopped. Vedanta shares traded last week at 468 rupees.
The delisting of ICICI Securities has become a speculators’ delight. Both the scenarios — of the merger going through or getting nixed — are inviting large trades, leading to a spike in delivery volumes. The stock has become extremely volatile. 
Facing an unprecedented attack on its credibility, the last thing that the SEBI would want is to give the impression that while all M&A is equal, some transactions are more equal than others. So while Buch must continue to stay away from ICICI-ICICI Securities because of her past association with the parties, she still has to ensure that her colleagues on the board give a convincing answer to why the SEBI relaxed its rules to bless the merger. If disclosures and transparency are good things for market participants, they can’t be bad for the regulator.
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Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. Previously, he worked for Reuters, the Straits Times and Bloomberg News.
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