ICICI Sec delisting hints at unbearable competitive pressure

ICICI Sec delisting hints at unbearable competitive pressure

Coming as a bolt out of the blue as it did, if brokerage ICICI Securities Ltd's announcement last week that it wants to delist its shares via a scheme of arrangement with its parent ICICI Bank Ltd is successful it will mark the end of an unfortunate tale. It will take the continuous spotlight on a listed large-sized corporate player, and top leader in its business, caught in the vortex of its own weight and nimble new-age competitors.

It will be become a classic example of a big listed company failing to deliver shareholder returns.

It is a stock market story that turned from the company aiming to enhance its market leadership position in the growing retail brokerage segment to "we have to start growing at the rate ahead of the market" as is what a senior management official told an analyst in the post Jan-Mar earnings investor call.

ICICI Securities is a subsidiary of ICICI Bank with 74.85% of its shares held by the parent bank as of Mar 31 and the remaining with public shareholders.

DIFFICULT START

The brokerage firm went public with an initial public offering, involving offer of sale by its promoter ICICI Bank, in Mar-Apr 2018. The start itself was ominous. Against a targeted IPO amount of 40.18 bln rupees the company got subscription of 34.8 bln rupees, or 13.4% less. The issue price was 520 rupees.

Then, on the day of listing in April that year shares opened for trading at 431.10 rupees, or 17.1% discount to the issue price. A month later it fell more, and was 29% below issue price at 369.15 rupees.

This by itself was a setback to investors who were allotted shares in the IPO. The fall was not on account of bearish market conditions at at that time. A week before ICICI Securities got listed the shares of Bandhan Bank Ltd had got listed at a premium of 29.3% over its IPO issue price. A month later it moved up further and was 34.6% higher than the issue price.

WEIGHED DOWN HEAVILY

Nearly a year later, at the end of 2018-19 (Apr-Mar), shares of ICICI Securities were still in the doldrums, 53% below the issue price. Investors in the IPO of the company had to wait till February 2020 to merely get their principal back after close to two years. But that window was also short lived since the shares slipped below the issue price again in that month and stayed there for five more months. No doubt, it was an ardous journey for the IPO investors of ICICI Securities.

A good stock market has prices of companies' shares tracking their earnings performance whether they are based on earnings estimates of 1-3 years ahead or current earnings. If price movement moves in conjunction with current year earnings it will be logical.

No wonder then that in the case of ICICI Securities its weak comparative earnings performance in the couple of years following its IPO also kept its shares lodged below the issue price. But the extent was magnified.

In 2018-19, for instance, the brokerage's revenue declined 7%, and operating profit and net profit fell 11% each. The shares were down 53% from the issue price when the year ended.

But when earnings improved the catch up in share price was missing. In 2019-20, ICICI Securities' revenue for the year was up marginally by 0.1%, operating profit was up 6%, and net profit was up 11%. The effect: shares of the company ended that year 14% higher than a year ago.

The following year too saw the brokerage's shares underperform its earnings. In 2020-21, when the stock market had seen a surge in new trading accounts and demat accounts following the nationwide lockdowns in Mar-Jul 2020, ICICI Securities' revenue also rose significantly by 52%, and its operating profit jumped 87% while net profit nearly doubled.

But to the dismay of the investors, when that year ended the shares were up by only 38% on year to 382.80 rupees and was still below the IPO issue price.

It was not just ICICI Securities which was bearing the brunt. The stock market was not being kind to the traditional large brokerage firms. Motilal Oswal Financial Services Ltd, a peer of ICICI Securities, faced the same phenomenon. Its shares were up by just 25% on year at the end of 2020-21, even though its revenue jumped 73% and net profit surged 3.8 times.

The same story was repeated last year when the entire brokerage industry's earnings were hit on account of fall in trading volume in cash market and subdued market conditions. At the end of 2022-23, shares of ICICI Securities were down 31% on year while that of Motilal Oswal were nearly 30% lower. But these decline rates were much more than the hit on their earnings.

ICICI Securities' revenue declined 1% to 34.15 bln rupees and net profit fell 19% to 11.12 bln rupees in 2022-23. Likewise, Motilal Oswal Financial Services' revenue went up by just 3% to 26.14 bln rupees and net profit fell 20% to 5.69 bln rupees.

NEW-AGE COMPETITION

It appeared that investors in the market were showing some discomfort with traditional large brokerage firms which had their shares listed on the stock exchanges.

This was also evident from the earnings performance of a new-age listed competitor and a peer to ICICI Securities and Motilal Oswal Financial. Angel One Ltd's revenue rose 33% in 2022-23 while its net profit jumped 43%.

Angel One, RSKV Securities which operates under the brand name of Upstox, and Zerodha are among the new-age competitors to traditional brokerages. And their growth rates, in terms of number of clients, have been impressive. This is seen from the data from NSE's website on active unique client code numbers of brokers.

In the 2-year period from Sep 2020 to Sep 2022, the first half of which had seen a surge in new trading account opening by largely new investors, ICICI Securities' cash market clients jumped 2.58 times to 2.15 mln. Its derivatives clients rose 64% during that period to 136,259. Another traditional brokerage, Kotak Securities, recorded a near doubling of cash market client number to 870,000, and a jump of 2.85 times in derivatives client number to 97,000.

These growth numbers, however, trailed that of the new-age brokerage firms. Zerodha's cash market client number jumped 4.3 times to 5.18 mln as of Sep 2022 from Sep 2020 and derivatives client number to 4.5 times to 1.69 mln. Similarly Upstox's number of cash market clients surged 7.1 times to 3.35 mln while its derivatives client number jumped 5.1 times to 441,000.

THE FINALE

For ICICI Securities delisting appears to the endgame. If it is successful in getting its shares delisted will investors feel left out in the lurch or relieved that it's all over?

To add to the complexities, the brokerage has chosen an unusual route under Securities and Exchange Board of India's delisting regulations. SEBI's delisting norms provide for "a subsidiary company getting delisted through a scheme of arrangement wherein the listed holding company and the subsidiary company are in the same line of business."

ICICI Securities will have to establish to the stock exchanges and SEBI that ICICI Bank and it are in the same line of business.

In the meanwhile, as per ICICI Securities' proposed scheme of arrangement its shareholders will be allotted 67 equity shares of ICICI Bank for every 100 equity shares of the company. At recent market price, 100 shares of ICICI Securities is worth 60,885 rupees while 67 shares of ICICI Bank is worth 64,280 rupees.

Maybe, just maybe, the patient investor in ICICI Securities will be better off holding ICICI Bank shares instead. But then he didn't get into ICICI Securities to get an exposure on the banking sector, now did he?

SEBI Watch: Proposed suspicious trading norms, a slippery path to take

June 15, 2023

SEBI Watch: Proposed suspicious trading norms, a slippery path to take

Last month, Securities and Exchange Board of India laid out in the public domain its intention to come out with a new regulatory framework on the prohibition of what it termed as “unexplained suspicious trading activities in the securities market.” The consultation paper it issued in this regard gave the entire draft of the proposed SEBI (Prohibition of Unexplained Suspicious Trading Activities in the Securities Market) Regulations, 2023, and SEBI’s rationale behind it.

These new norms are not needed. It can also potentially leads to an undesired ‘guilty till proven innocent’ outcome.

SEBI’s raison d'etre for bringing these is the challenge it is facing in gathering direct evidence due to the usage of sophisticated technology such as disappearing messages in social media or messaging platforms by entities who may be violating norms on front running, price manipulation, and insider trading.

SEBI said in the consultation paper that it had always followed the 'preponderance of probability' principle to hold persons liable for breach of norms in stock market trading such as 'pump and dump' schemes, front running and insider trading. But "the use of innovative, vanishing, and encrypted methods of private communication, as well as complex and untraceable funding arrangements, makes it impossible to establish the preponderance of probability," it said.

Innovations in technology will always lead to good use and bad use. The misuse of such technologies is a problem for all regulatory bodies worldwide, particularly when it pertains to serious acts of misconduct.

But the solution, as put forth by SEBI in the draft norms, is not to forcibly put forth a “deemed to be violating the securities laws” tag on select trades which the regulator finds suspicious. Besides other fundamental problems with such a presumption, market participants who make legitimate use of innovative technologies will also get caught in the vortex of regulatory suspicion.

As per the draft of SEBI’s proposed new norms suspicious trading activity is defined as "any trading activity of a person or a group of connected persons found to be exhibiting unusual trading pattern in a security or a group of securities where such unusual trading pattern coincides with material non-public information in relation to a security or a group of securities."

One problem with this definition is that the scope is very wide and entails a high degree of subjectivity.

To be sure, the new norms do say that the unusual trading pattern will mean a repeated pattern of trading activity which "involves a substantial change in risk taken in one or more securities over short period of time.. (and which) consequently delivered abnormal profits or averted abnormal losses during the period." But there is no objective quantification of what constitutes a “substantial change in risk”, “short period of time”, and “abnormal profits or averted abnormal losses.”

There is also a potential problem that the trading data chosen to be analysed by SEBI or the stock exchanges may end up being selective, since detailed objective criteria are not supplied. It runs the risk of the regulators picking the cases they wish to punish so long as they can show suspicion.

What makes matters worse is what follows next after the regulator concludes that the trading activity was suspicious. SEBI will open an official probe charging the entities and persons with indulging in presumed suspicious trading activity. Show cause notices will be issued. At present SEBI can officially summon market participants and intermediaries to get information before reaching a preliminary conclusion and issuing a show cause notice.

In the next step, under the proposed new norms, the concerned entities and persons charged with having engaged in the suspicious trading activity will have to rebut the same with not just an explanation but also with documentary evidence.

Now, in some cases, it simply won’t be possible for market participants to rebut by way of high standards such as “documentary evidence.” For instance, if a trader or an investor has traded on hearsay market rumours and not due to an elaborate manipulative scheme, how will he or she prove that is so with documents?

Going ahead, if SEBI contends that the charged persons and entities "failed to effectively rebut the allegations and thus have engaged in unexplained suspicious trading activity," it shall go the full way of taking enforcement action such as a freeze on their demat and bank accounts, penalties, a bar on securities market activities.

SEBI must re-evaluate the need for having separate regulations for suspicious trades. Existing regulations prohibiting insider trading, price manipulation, and front running activities, provide enough leverage to show a preponderance of probability. These also have safeguards in place to ensure that an undesired regulatory overreach does not take place.

If all regulators worldwide go about deeming dealings or activities of market participants they regulate as violative then the securities markets will end up becoming a regulatory wild west and push away genuine investors and traders.

 (link to published story on informistmedia.com --> https://www.informistmedia.com/chome/draft-regulation-suspicious-trading-slippery-path/

ANALYSIS: SAT ruling in Kotak Bank case puts bourses on the back foot

1 September 2022

The recent order by the Securities Appellate Tribunal upholding an appeal by Kotak Mahindra Bank Ltd against National Stock Exchange of India's order to the bank to refrain from invoking the pledge of securities of defaulting broker Arcadia Share and Stock Brokers has again shined the spotlight on the bourses' jurisdiction over entities dealing with their members.

It also puts the bourses into a quandary on how to deal with a broker who siphons off securities from clients, pledging these to borrow funds for its own use and then refuse make good the shortfall of securities in client accounts.

The NSE had made a claim on the securities in the broker’s demat accounts saying it included clients’ securities and consequently the pledge of these securities was illegal.

The appellate body however said NSE did not have the legal jurisdiction to issue directions to banks and other entities other than its trading members.

While the NSE is expected to appeal against the SAT's ruling in the Supreme Court of India a recent difficult experience in the court on a similar matter will make it akin to walking on burning coal.

In a similar case the SAT had, in November last year, quashed NSE's order against Axis Bank directing it to freeze the bank accounts of defaulter broker Karvy Stock Broking to meet the claims of investors against the brokerage.

In that order, too, the SAT held that NSE's bye laws permitted it and its defaulter committee to issue directions only against a trading member, which was Karvy Stock Broking in the case being heard, and not against a third party, which was Axis Bank the appellant.

The NSE immediately went to Supreme Court of India appealing against SAT's order. The Supreme Court, however, dismissed the exchange's appeal on Feb 14 saying that "we are not inclined to interfere the order passed by the Securities Appellate Tribunal."

But there are reasons why NSE's hand can be seen to be stronger in the current case pertaining to Kotak Mahindra Bank.

For this one will have to first look at SAT's line of thinking in the Axis Bank case. The Securities and Exchange Board of India, which was a party to that case, had strongly argued before the  SAT that since the monies in Karvy's Stock Broking's bank accounts were proceeds from unlawful activities by the broker it had the first right of claims on it.

On the other hand, Axis Bank had argued that it had a banker's lien on Karvy's deposit accounts as it had extended loans to the broking firm which became non-performing.

The SAT made an important point in that ruling that it would have accepted SEBI's contention had evidence been shown to exist that the monies in the broker's bank accounts were linked to the siphoning off of clients' securities and were not the exclusive monies of the broking firm.

But now in the Kotak Mahindra Bank there may be evidence to show that a chunk of the securities lying in Arcadia Share and Stock Broker's demat account were not the broker's own shares bought by it from its own funds but were rather clients' securities that had been illegally siphoned off by the broker.

The NSE had got a forensic audit carried out on the broker's operations which had shown that it were the clients' securities that were illegally pledged by the broker. The SAT order mentions this aspect but does not consider the implications from it.

The NSE may consider using the evidence from the forensic auditor's report to tell the Supreme Court that the securities in the broker's demat accounts were unlawful and therefore the broker could not be considered as the legal owner of the securities as Kotak Mahindra Bank had argued before SAT.

The NSE had declare the broker a defaulter and expelled it from the exchange’s membership on Jul 2, 2021, for the misuse of clients' funds and securities and failure to resolve investor complaints against it.

The market regulator is also expected to see that stock exchanges' stand is vindicate since its own circulars require stock exchanges to direct banks and depositories to freeze bank and demat accounts when dealing with a case of broker default.

ACC's CFO Yatin Malhotra resigns, held position for two years

1 September 2022

ACC Ltd's Chief Financial Officer, Yatin Malhotra, has resigned with immediate effect, the company said in a filing with stock exchanges on Wednesday.

The reason behind the resignation was not provided by the company or the CFO. Securities and Exchange Board of India's listing regulations requires disclosure of reason behind resignation in the case of independent directors but not when the CFO of a company resigns.

Malhotra was the CFO of ACC from September 1 2020. Prior to him, Rajani Kesari was the CFO from August 1 2019 to August 31 2020.

According to the company's annual report for 2021 (Jan-Dec) Malhotra was paid a remuneration of 20.7 mln rupees in 2021 which included 1.61 mln rupees performance linked incentive for Sep-Dec 2020 and "performance shares of Holcim Ltd (ultimate holding company)" of 1.18 mln rupees.

ACC's promoter holding was recently been acquired by the Adani Group and the open offer by the acquirer under the takeover rules is currently going on.
Holcim Group recently sold its entire stake in ACC and Ambuja Cements Ltd to the Adani Group for 501.8 bln rupees and the open offer by the acquirer under the takeover rules is currently underway.

MOIL cuts prices of manganese ore by 10-15%

1 September 2022

--[I] MOIL: Cut prices of grades of ferro by 15% today
--[I] MOIL: Cut prices fines and chemical grades by 10%

MOIL Ltd has cut prices of select ferro grades of manganese ore by 15% with immediate effect, the company said in a filing with stock exchanges today. This applies to ore with "manganese content of Mn-44% and above," the company said.

For other manganese ore grades the prices have been reduced by 10%. The prices of fines and chemical grades of manganese ore have also been revised downwards by 10%.

The company also said that the price of electrolytic manganese dioxide has been increased with effect from today to 1,65,000 rupees per tn from 1,55,000 rupees per tn.

High input costs, weakening demand pose challenges, says Excel Ind

1 September 2022

Chemical producer Excel Industries Ltd has pointed to prices of key raw materials rising to "new highs" in recent weeks in its annual report for 2021-22 (Apr-Mar).

"In addition to the unfavourable input cost situation... we are seeing a weakening of demand in several key end user segments and geographical areas," the company said.

The company was also encountering a "customer pushback to further price increases"

The profitability of Excel Industries is likely to get impacted by these factors in the current and next quarter.

The company admitted in its annual report that it expected the business environment in the current financial year "to be very challenging."

An equity fund manager at a large fund house told Informist that yellow phosphorus prices have stayed elevated in the current quarter and that this was a major raw material for Excel Industries.

Excel Industries imports its key raw materials. Yellow phosphorus prices are steered by Chinese producers, who have access to domestic supplies.

The company noted this risk in its annual report. "China has a track record of taking advantage of this situation by pegging the price of the Raw Materials at a high level and at the same time pricing the downstream intermediates and finished goods aggressively," it said.

But current reports from China are pointing to temporary shutting down of yellow phosphorus manufacturers in Sichuan due to lack of power supply. Operational producers are reluctant to offer reliable quotations according to these reports.

Prices of yellow phosphorus in Yunnan and Guizhou regions of China have jumped by over 20% in the last one month, data from Shanghai Metals Market, a leading online metals data provider. The yellow phosphorus with benzene content of 99.9% or more was quoted at around 26,500 yuan per tn in early August and it was quoting at 31,900 yuan per tn.

Excel Industries produces specialty chemicals, intermediates and actives and sells to end user segments like soaps and detergents, lube oil additives, mining chemicals, polymer additives, agrochemicals and pharmaceuticals.