0:00

Hello and welcome to Fin's Shorts Daily.

0:02

In today's episode we explain why there

0:04

was controversy over the delisting of ICICI

0:07

securities. Before

0:10

we start today's episode, here's a quick

0:12

side note from Team Ditto. If

0:14

you are a person who is great at

0:16

communicating and are enthusiastic to join our team,

0:19

Ditto is looking to recruit new insurance advisors.

0:21

You don't even need to know about insurance.

0:23

We would train you from scratch and you

0:25

can enjoy working remotely with a great team.

0:28

If you are interested or know someone who is,

0:30

please click the link in the description below. Now

0:33

on to today's episode. ICICI

0:35

Securities will soon cease to exist on

0:38

the stock market. No, we

0:40

don't mean the company is winding up

0:42

but this week ICICI bank finally got

0:45

the shareholders go ahead to delist ICICI

0:47

Securities from the stock market. It will

0:49

continue to run as a subsidiary of

0:51

the bank but shareholders like you and

0:54

me can't own its shares anymore. But

0:56

wait, this delisting event wasn't without its

0:58

fair share of drama. See,

1:00

there's something you know about the typical delisting

1:02

process in India. Initially the buyer

1:04

who is initiating the delisting does a valuation

1:07

and sets a flow price. This is based

1:09

on the price the stock traded during 26

1:11

weeks before the delisting. Think of it as

1:13

the bare minimum price that the buyer will

1:15

pay and then begins the

1:17

reverse book building process. This helps to

1:19

discover what price shareholders actually expect the

1:22

buyer to pay. And it

1:24

can be way higher than the flow price.

1:26

The shareholders are given a certain window of

1:28

time. They can offer their shares and say,

1:31

hey, I'll give you my shares if you pay me X

1:34

rupees. And for the delisting to

1:36

be a success, the buyer needs to snag a total

1:38

of 90% of the shares

1:40

and pay the existing shareholders in cash.

1:42

But there's a flip side to this.

1:44

Reverse book building can create too much

1:47

price uncertainty. Investors can quote whatever price

1:49

tickles their fancy and it can be

1:51

quite unrealistic in some cases. For instance,

1:53

Bloomberg looked at the delisting deals worth

1:56

over $100 million in India in the

1:58

7th of March. years

2:00

preceding 2022 and they found that most deals

2:02

happened at a premium of 45 to 67%.

2:07

That's actually double the premium that buyers in other

2:09

parts of the world had to pay. This

2:11

is why companies are always worried when it comes

2:13

to delisting. They fear they will have to pay

2:15

through the nose if they want to go through

2:17

with it. But in this case, ICICI bank

2:20

faced none of that trouble. The bank

2:22

simply decided the valuation by itself and

2:24

told investors to say yes or no.

2:26

There was no reverse book building. But

2:29

why? Why was that the case you ask? Well,

2:31

that's thanks to a tweak in the rules by

2:33

the Securities and Exchange Board of India or SEBI

2:36

in 2021. The regulator said, look, we

2:39

know that the current delisting situation could be cumbersome

2:42

at times. So we'll make an exception. If you

2:44

want to delist your subsidiary, you don't have to

2:46

go through the reverse book building process. Rather,

2:49

you first need to prove that the parent

2:51

company and the subsidiary are engaged in the

2:53

same line of business. And if

2:55

that's okay, you can swap the shares. Give

2:58

the shareholders in the subsidiary some shares

3:00

of the parent and you can determine

3:02

a valuation based on the average price

3:04

over the previous 60 days. All

3:06

you need to do after that is to get at least 70%

3:09

of your minority shareholders to agree. Now,

3:12

you could argue that ICICI bank and

3:14

ICICI securities aren't strictly in the same

3:16

line of business. But it appears that

3:19

SEBI gave them an exemption for this.

3:22

And that paved the way for ICICI bank.

3:24

Last year, they decided it would be the

3:26

first company to attempt such a delisting endeavor

3:28

under these rules. And it announced that for

3:30

every 100 shares someone held

3:33

in ICICI securities, they would

3:35

get 67 shares of ICICI

3:37

bank instead. It would be

3:39

a share swap and not a cash transfer.

3:42

And the displeasure was immediate. As

3:44

soon as the delisting event was

3:46

announced in July 2023, an anonymous

3:48

minority shareholder penned a letter to

3:50

the board members of ICICI Securities.

3:52

They pointed out something quite pertinent.

3:55

Quote, When ICICI bank listed ICICI

3:57

securities in 2018, they asked

3:59

for a valuation. of 30 times the

4:01

company's earnings. Since then, sales and profits

4:03

have almost doubled, and earnings have grown

4:05

by 15% annually. And

4:07

now that ICICI bank wants to

4:09

buy back the company, it is

4:11

only willing to pay 18 times

4:14

the earnings. So why is the

4:16

proposed exit multiple lower than the

4:18

entry multiple at the time of

4:20

IPO, considering the overall business quality

4:22

has significantly improved? How is this

4:24

fair?" Minority

4:26

shareholders felt they were being shortchanged, they

4:28

were being taken for a ride by

4:30

not being consulted on the price, and

4:32

the folks at the can highlighted another

4:34

argument that shareholders were making. Between

4:37

2018 and June 2023, ICICI bank shares had risen

4:39

by 200%, but ICICI securities as shares

4:44

were higher by only 30%. And

4:46

since the folks in charge of

4:48

valuing the delisting had assigned a

4:50

40% weight to the market price,

4:52

it meant that ICICI securities as

4:54

shareholders weren't being undervalued even though

4:56

the business was doing well. ICICI

4:58

security shareholders believed that the stock would

5:01

catch up soon enough and reward them

5:03

for their patience. But by

5:05

delisting the shares, they would lose out. With

5:07

all these angst, you could bet that the

5:10

delisting would be under threat. ICICI

5:12

bank still needed 70% of

5:14

these minority shareholders to vote in favor

5:16

of the deal. But it

5:18

didn't seem likely that they would be able

5:20

to sway their minds. And when the E-voting

5:23

for delisting finally began last week, the drama

5:25

intensified. Retail shareholders of ICICI

5:27

securities began to complain that executives

5:29

from ICICI bank had called them

5:31

and messaged them to convince them

5:33

to support the delisting process. They

5:36

shared screenshots of these conversations too.

5:39

And that definitely wasn't a good look for

5:41

ICICI bank. Everyone thought the delisting

5:43

would be unsuccessful. But when the final

5:45

votes were being tallied up, lo and behold,

5:47

it was a miracle. Even though

5:49

nearly 67% Of individual

5:52

retail investors, folks like you and

5:54

me, voted against the resolution, the

5:56

big institutional investors saved the. They

6:00

were to remain fork That is

6:02

Norway's Norges Bank Investment Management. An

6:04

overwhelming eighty four percent of them

6:06

what it in favor of delisting.

6:09

And. With that, despite all the brouhaha I

6:11

see, I see I bag has managed to

6:13

climb borderline. It got seventy two percent of

6:15

the votes in favor of the delisting and

6:17

that means we have the soon but a

6:19

stock market goodbye to I see I see

6:22

a securities. What did you think of the

6:24

delisting process? Let us know by writing to

6:26

us at the the been shots. Thank

6:30

you for listening to today's episode And

6:33

if you want to say your feedback

6:35

or suggestions, do drop us an email

6:37

to High After the it's insurance Until

6:40

next.