MFs snap up I-Sec as key vote looms
Delisting plan has seen pushback from minority investors
Multiple mutual funds bought shares of ICICI Securities in February, ahead of a pivotal shareholder vote that will decide if the broking firm will remain publicly listed.
Interestingly, these funds bought ICICI Securities shares at a premium to the value of ICICI Bank shares they will get in exchange, if the delisting of ICICI Securities goes through. For every 100 shares of ICICI Securities, shareholders will get 67 shares of ICICI Bank, translating to a share swap ratio of 0.67.
However, throughout February, ICICI Securities shares traded at a premium to this swap ratio, throwing up questions over the rationale of these mutual funds investing in the brokerage firm.
The volume weighted average price (VWAP) of ICICI Securities shares for February was 0.79 times the VWAP of ICICI Bank shares during the same period, as per Mint’s calculations. The closing price of ICICI Securities shares throughout the month was between 0.75 and 0.81 times of ICICI Bank shares, data show. This translates to a premium of between 12% and 21% to the swap ratio.
Some market observers say mutual funds might be expecting the delisting to not go through, justifying their bullishness on the brokerage firm.
“The buying interest among funds is on hopes that the shareholders would vote against the resolution in its current form as they believe the standalone broking entity is more value-accretive. If the resolution fails, the price of ICICI Securities will rise to the benefit of the fund’s clients,” a veteran at a leading asset management company said on condition of anonymity.
When the swap ratio was first disclosed in June 2023, the spread between the listed bank and the broking entity was ₹21 a share. In such situations, buying the shares of
ICICI Securities would have been justified, as the funds can lock in a risk-free rate of return by implementing “special situation strategies”, said U.R. Bhat, co-founder of Alphaniti Fintech and a former director of JP Morgan India. In other words, this means that the funds buy the target company—ICICI Securities in this case—and sell the acquiring company, ICICI Bank, to pocket the risk-free spread of ₹21 without any tax implication for the fund.
However, this spread was negative in February, closing the opportunity of profiting from arbitrage.
The mutual funds that bought into ICICI Securities in February include UTI Banking and Financial Services Fund, Kotak ELSS Tax Saver Scheme, Kotak Multicap Fund, Axis Quant Fund, UTI Balanced Advantage Fund, ITI Banking and Financial Services Fund, Kotak Banking & Financial Services Fund, and ITI Value Fund. These funds collectively bought almost a million shares between them, worth just over ₹75 crore as of 29 February.
Interestingly, these funds had no exposure to ICICI Securities before February. Most of them also have a significant exposure to ICICI Bank shares. Data for share purchases in March is unavailable as yet, to see if the funds are still buying into ICICI Securities. Broadly, mutual funds were net sellers of ICICI Securities in December and January.
Mint sought comments from these funds on their rationale for buying ICICI Securities shares and how they plan to vote on the delisting proposal. UTI Mutual Fund, Kotak Mutual Fund and Axis Mutual Fund declined to comment. ITI Mutual Fund did not respond to Mint’s queries.
When contacted earlier on the swap ratio, an ICICI Securities spokesperson had said: “The valuation has been prepared by reputed independent valuers and confirmed by reputed investment bankers. A detailed valuation report has also been published and forms a part of the notice to the shareholders.”
In June 2023, ICICI Securities proposed to delist from the public markets and become a 100% subsidiary of parent
ICICI Bank. Investors will vote on the resolution between 22 and 26 March, before a meeting on 27 March.
Only minority shareholders of ICICI Securities, who collectively own 25.23% of the company, can vote on the resolution. ICICI Bank holds the remaining 74.77% shares of the company. To succeed, the resolution needs more than twothirds of the minority votes cast to be in its favour.
The resolution now hangs in a delicate balance. On one hand, two leading proxy advisory firms have given a thumbs-up to the delisting. With nearly 17% of ICICI Securities shares held by institutions like mutual funds, insurance companies and foreign portfolio investors, a green light by proxy advisors can go a long way in getting the delisting through.
However, many public shareholders are an unhappy lot, disputing the valuation at which the company is being delisted. Many retail shareholders have banded together on platforms like Telegram, WhatsApp and Twitter, gathering opposition to the delisting.
Some experts feel that delisting can still go through as it has several benefits for minority shareholders. Following delisting, the company will become a 100% subsidiary of ICICI Bank, effectively turning the transaction into a merger.
This will act as a “hedge” against the cyclicality of the broking business during market downturns and benefit minority shareholders, thanks to the business of wealth management and lending available to them under ICICI Bank, said Nirav Karkera, head of research at Fisdom. Karkera feels that the qualms of the shareholders are likely to be ironed out at the upcoming shareholder meeting, paving the way for the delisting.
ICICI Securities’ minority shareholders include foreign institutions like Norway’s Norges Bank Investment Management, the world’s biggest sovereign fund, which holds 3.2% of the company as of December-end. Life Insurance Corp. of India owns 2.58%, while Boston-based Fidelity, a large money manager with over $10 trillion in assets under management, owns 1.29%.