ICICI Bank, ICICI Securities And SEBI, A Handshake Of Convenience And Potential Bending Of Rules?

Not only SEBI but also its chairperson, Madhabi Puri Buch, are currently embroiled in high-profile controversies that have brought the regulator under intense scrutiny.

These issues have not only sparked widespread debate about SEBI’s role in ensuring the integrity and fairness of India’s financial markets but also questioned if it is indeed being run by a competent leader!

One of the most prominent controversies of the current time sent shockwaves across the financial markets following damning allegations from Hindenburg Research, a New York-based short seller who later dug a deeper hole – SEBI’s investigation into the Adani Group.

The January 2023 report from Hindenburg accused the Adani Group of stock-price manipulation and accounting fraud, lead to a staggering $150 billion drop in the conglomerate’s market value.

While Adani has vehemently denied the allegations and managed to recover much of its lost value, the controversy has cast a long shadow over SEBI’s handling of the case.

Hindenburg has questioned SEBI chairperson Buch’s objectivity in the investigation, pointing to her past personal investments and her involvement with a consulting firm.

Buch has strongly rejected these claims, labeling them as unfounded “character assassination” and asserting that she has made all necessary disclosures and recused herself from related proceedings.

Nonetheless, the situation has raised concerns about potential conflicts of interest at the highest levels of the regulatory body.

ICICI Bank, ICICI Securities And SEBI, A Handshake Of Convenience And Potential Bending Of Rules?

In parallel, SEBI is now facing backlash over its approval of the merger between ICICI Bank and its securities arm, ICICI Securities Ltd.

This merger has become a lightning rod for criticism, particularly regarding the regulator’s decision to grant ICICI Bank an exemption from the usual price discovery process required when delisting a company.

The Budding Controversy

As a significant controversy erupts in India’s financial sector, around the country’s second-most-valuable bank, ICICI Bank, and its plan to absorb its securities affiliate, ICICI Securities Ltd-has raised serious concerns among shareholders, particularly over the terms of the buyout and the role of the SEBI in the process.

Some shareholders of ICICI Securities are upset about the delisting of the brokerage firm and want to know how SEBI permitted it, seemingly bypassing its own rules meant to protect minority investors.

Although, their challenge was quashed by a company-law tribunal in Mumbai on August 21, allowing the deal to proceed, but the controversy persists.

A separate class-action lawsuit is still pending before another tribunal in New Delhi, and the issue is also being reviewed by a higher court in Mumbai.

The controversy stems from ICICI Bank’s plan, announced in June last year, to acquire the remaining shares of ICICI Securities by offering 67 shares of ICICI Bank for every 100 shares of the brokerage.

Potential Flouting Of Rules

Typically, SEBI’s guidelines require a bidding process to determine the fair price for delisting a listed company. However, these guidelines also provide an exemption when the target is a subsidiary of the acquirer and both operate in the same line of business.

ICICI Bank requested and received this exemption from SEBI in June last year, despite the fact that a bank and a securities firm do not traditionally operate in the same business line.

The merger vote, which took place in March, passed with 72% of shareholders in favor, but the process was marred by concerns over a conflict of interest.

It was revealed that ICICI Securities had shared personal data of its minority investors with ICICI Bank, which then contacted these investors to encourage participation in the e-voting process.

SEBI noted that this data sharing was “not appropriate” and that ICICI Bank had a “clear conflict of interest” due to its stake in the outcome, issuing an administrative warning to both ICICI Bank and ICICI Securities.

How?

Despite this warning, dissatisfaction among some shareholders remains high-over 100 public, non-institutional investors, led by Bengaluru-based fund manager Manu Rishi Guptha, have filed a class-action lawsuit, claiming that the skewed swap ratio in the merger has cost their class of investors over $200 million.

Guptha argues that ICICI Bank is effectively acquiring the brokerage’s substantial cash reserves at a discounted rate. However, both ICICI Bank and ICICI Securities have defended the merger terms, stating that they were determined by independent valuation experts and deemed fair by several proxy advisory firms.

The broader question now facing SEBI is why ICICI Bank was allowed to bypass the price discovery process, which is generally required under its own rules.

Given Buch’s recusal from any proceedings involving ICICI Bank due to her past connections with the group, it falls upon her colleagues to provide a convincing explanation.

Recently, the Bombay High Court ordered SEBI to share its June 2023 approval letter with the legal representative of Aruna Modi, a shareholder who has contested the exemption, although the contents remain sealed until further notice.

The Viewpoint

These recent situations raise critical concerns about the regulatory fairness in India’s financial markets and Madhabi Puri Buch’s competency.

The delisting of ICICI Securities has turned into a speculator’s playground, with large trades and increased volatility as investors gamble on whether the merger will proceed or be overturned.

As SEBI faces these outstanding challenges, it must be careful not to give the impression that it selectively enforces its rules and while Buch may have recused herself from this particular case, it is crucial that SEBI as an institution provides clear and transparent explanations for its decisions, maintaining the integrity of the market and the trust of all its participants.

These controversies have not only put SEBI’s regulatory practices under the microscope but have also raised broader concerns about transparency and fairness in India’s financial markets.

Sadly, today the credibility of SEBI is being questioned, the ability of SEBI and its leadership to provide a clear picture of these issues with integrity and clarity will be crucial in not only restoring public trust but also maintaining the stability of the market.