New Delhi

The Securities and Exchange Board of India (SEBI) is under intense scrutiny following its decision to approve the merger between ICICI Bank and its securities affiliate, ICICI Securities. The move, which has sparked a wave of criticism and legal challenges, has raised questions about the regulator’s impartiality and the application of its own rules as detailed by Andy Mukherjee in a recent opinion piece in Bloomberg.

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Why the controversial merger sparks investor backlash?

The controversy centers around SEBI’s decision to allow the delisting of ICICI Securities without requiring the usual price discovery process, which is typically mandated to protect minority shareholders. ICICI Bank, which already owned nearly 75 per cent of ICICI Securities, offered a swap ratio of 67 shares of ICICI Bank for every 100 shares of the brokerage firm. This ratio was approved by SEBI despite the two companies operating in different lines of business a condition that would normally disqualify them from such an exemption.

The exemption granted by SEBI has not sat well with many minority shareholders. Despite a majority vote in favor of the merger, concerns were raised when it was revealed that ICICI Securities had shared personal data of its minority investors with ICICI Bank, which then contacted them to influence the e-voting process. SEBI issued an administrative warning, acknowledging a "clear conflict of interest," but this did little to quell the unrest among investors.

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Class-action lawsuit and High Court intervention

The controversy escalated when over 100 public, non-institutional investors, led by Bengaluru-based fund manager Manu Rishi Guptha, filed a class-action lawsuit. The plaintiffs argue that the skewed swap ratio undervalues ICICI Securities, causing them to lose over $200 million. Guptha and his fellow investors claim that ICICI Bank is unfairly capitalizing on ICICI Securities' significant cash reserves and short-term investments, valued at approximately Rs 116 billion ($1.4 billion).

Despite ICICI Bank’s assertion that the terms of the merger were determined by independent valuation experts and endorsed by proxy advisory firms, the investors remain unconvinced. Their concerns have caught the attention of the Bombay High Court, which recently directed SEBI to share the approval letter that granted the merger exemption with the plaintiff's legal representative, though the contents remain confidential pending further court orders.

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Further, this case has broader implications for SEBI, particularly in light of the ongoing criticism the regulator faces in relation to its handling of the Adani Group investigation. Hindenburg Research, a New York-based short seller, has questioned SEBI Chairperson Madhabi Puri Buch’s objectivity due to her past investments and consulting activities. Although Buch has recused herself from decisions involving ICICI Group, her previous role as CEO of ICICI Securities adds another layer of complexity to the situation.

The fallout from the ICICI Bank and ICICI Securities merger raises critical questions about regulatory transparency and the consistency of SEBI’s rule enforcement. As the case progresses through India’s legal system, the outcome could set a significant precedent for how similar mergers are handled in the future.