SEBI Watch: Going back to fixed price delisting is not progressive

SEBI Watch: Going back to fixed price delisting is not progressive

August 18, 2023

Going by the proposals in the latest consultation paper on delisting regulations review, the Securities and Exchange Board of India is keen on turning back the clock back by 20 years on the issue of public shareholder empowerment and tilt towards facilitating ease of business in the securities market for unlisted and listed companies.

It wants to provide allow an option to listed companies to voluntarily delist by way of fixed price and not just compulsorily have to do reverse book building process as is the case currently. Voluntary delisting happens when a company's promoters or controlling shareholders offers to buy shares from all the public shareholders, and if in the process public shareholding falls below 10% as per current SEBI norm, then they could delist the shares from the stock exchanges.

The reverse book-built route replaced the fixed price route in 2003 when SEBI framed separate guidelines on delisting. Till then delisting norms were specified in an Apr 1998 circular of SEBI where voluntary delisting by a company was allowed only by a fixed price method where average of last six months traded price of the shares determined the exit price.

A closer look at the most vital proposal of doing away with compulsion of delisting by way of reverse book building process only reveals that the move is not aimed at protecting the interests of the public shareholders who invested in the shares of a listed company in good faith only to find that company wanting to get out of the listed market.

"As a part of SEBI’s constant endeavour to align regulatory requirements with the changing market realities as well as to enhance efficiency of the delisting mechanism, a need is felt for a comprehensive review" of the delisting regulations, said the regulator in the latest consultation paper inviting feedback from market participants and investors. The SEBI paper did not specify what the changing market realities were.

The actual unchanging reality is that public shareholders' interests need to be safeguarded from the whims of company promoters or new acquirers taking control. Reverse booking building process gives power to the shareholders to determine the fair price at which the company could take their shares and delist.

A delisting panel report in 2002 had recommended the introduction of reverse book building as it felt it "would provide the transparent, fair and reasonable mechanism for pricing of the shares and which ensures investors’ participation in the whole process of delisting." How could this shareholder empowering measure not deserve its full due now?

SEBI, in its wisdom, has decided to be concerned for the promoters or controlling shareholders wanting to delist and make the process easier and cheaper for them. The market regulator is going by the thinking that artificial barriers to free exit to companies ultimately prove to be entry barriers.

But what does to the core goal of SEBI Act to protect the interest of investors? In removing barriers to companies SEBI is creating new ones for investors, particularly long-term investors. The 2002 delisting committee report had warned that "fixed price exits based on recent market price would lead to higher incidences of delisting during depressed market conditions," and would not " not contribute to good corporate governance."

There is another reason put forward by SEBI which again indicates a definite tilt towards promoters or controlling shareholders of delisting companies. In a recent press conference, SEBI chairperson Madhabi Puri Buch said the regulator had looked at trading data in shares of companies under voluntary delisting and found that speculators were buying shares in bulk and moving up the share price. But she also clarified that the trades by such suspected speculators or operators were not illegal.

The point to note is that SEBI has not disclosed details of any such case in the consultation paper. Without clear evidence that operator manipulation of the reverse book-built price is happening and happening across the board it makes little sense to allude to it and use it a justification against the reverse book building process. Further, even if book-built prices are higher than they would be without the speculative trades it causes no detriment to public shareholders for whom a higher exit price is only better. The only affected party is the company seeking delisting.

The current delisting norms already give the freedom to the promoter or the controlling shareholder to reject the book-built discovered exit price. And if it rejects no harm is done to non-speculator public shareholders who placed bids below the final exit price. The shares would continue to be listed and traded on the stock exchanges giving them opportunity to avail of market-determined price to exit any time. As far as the promoter or controlling shareholder is concerned it already has the option to seek delisting again after six months. The world doesn't end for it either.

The additional fixed price option that SEBI now wants to provide delisting-seeking companies would mean an end to reverse book building. There will hardly be any company which will choose the reverse book building option. The only benefitting party will be the promoter or the controlling shareholder. It certainly won't be the public shareholder.

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?