Sucheta Dalal :ICICI-ICICI Bank Merger (18 March 2002)
Sucheta Dalal

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ICICI-ICICI Bank Merger (18 March 2002)  



One can never accuse the ICICI management of not being aggressive enough. But while its belligerent expansion has kept it in the headlines, it has often failed to carry other stakeholders along. This time round its “Agenda for the new millennium” —- the much-hyped conversion to universal bank seems to have run into rough weather. It is obvious that ICICI’s investors are unhappy about the merger ratio and intend to fight for their rights. Several cases have already been filed in the Bombay High Court and the Investor Grievances Forum is also lobbying hard with institutions and bureaucrats against the merger ratio.

Ignoring the interests of other stakeholders is typical of ICICI’s management and has frequently landed it in trouble. It has been sued several times for trying to ram through restructuring proposals which protect its own lending at the cost of others. A recent example is that of Arvind Mills, where a group of secured foreign lenders, led by Commerz Bank have filed civil and criminal charges against ICICI. The merger of ICICI with ICICI Bank seems to be following a similar trajectory.

Although it is clear that ICICI has no future as a development financial institution, it will only succeed as a universal bank if it controls costs and reduces non-performing assets. There are no efforts in these two directions. Moreover it is in such a hurry to become a universal bank before the end of this financial year that it failed to take adequate notice of one important factor — the dissatisfaction of 23 per cent of its shareholders, who rejected the merger ratio at the Court convened meeting of January 30.

They are not the only ones with objections. A consortium of banks lead by Commerz Bank who have sued ICICI over Arvind Mills, have also the retained their right to object. The investors — G S Reddy, Aspi Behsania, Hiren Vyas and others, who moved the Bombay High Court last week — argue that the merger is detrimental to the interests of ICICI’s shareholders. It reduces their holding and will cause their post-merger dividend earnings to dwindle to a fraction. They also allege that unlike a previous merger of ICICI Bank with Bank of Madura (swap ratio 2:1), no proper weightage has been given to ICICI’s book value. During the BoM merger with ICICI Bank, certain large private investors had been the beneficiaries. The merger ratio this time (two shares ICICI to one of ICICI Bank), the petitioners say, is mainly based on market value, which gives an unfair deal to ICICI shareholders (which has a huge book value despite NPAs estimated at Rs 3,000 crore). The complainants legitimately ask how come ICICI’s management has always boasted about great profitability and given themselves hefty remuneration and commission, if shareholders are finally being asked to make huge sacrifices. They are demanding that ICICI management be asked to surrender their fat paychecks and bonuses.

When the matter came up for hearing last week, the High Court directed the Reserve Bank to submit a valuation report that it had commissioned on its own (reportedly through A F Ferguson) at the next hearing on March 28 which apparently recommended a valuation that was much fairer to ICICI’s investors. (Interestingly, while ICICI Bank is set to merge again, the Securities and Exchange Board of India with some prodding by the Joint Parliamentary Committee chairman, is expediting investigation into insider trading that preceded the BoM-ICICI Bank over a year ago.)

Let us examine the merger of ICICI with ICICI Bank. Firstly, it is curious that of the three valuation methods recognised by Sebi, ICICI has chosen one that hurts its own shareholders the most. ICICI is indeed saddled with large NPAs, but that did not stop the management from collecting fat pay packets every year. Moreover, the goodwill it commands as a development financial institution which is recognised under section 4A of the Companies Act has been ignored, as also the fact that it has frequently been able to raise large sums of money through what are dangerously termed ‘safety bonds’. Had these been factored in, it may have changed the merger ratio and also benefited ICICI’s other institutional shareholders. Let us now look at the various statements and disclosures made during the merger announcement and after.

As the name itself indicates, ICICI Bank’s parentage probably make it a passive player in the decision to merge, with very little freedom to protect its best interests. Its board was packed with ICICI nominees and the outside directors were apparently happy to be complaisant even though the bank’s identity will be totally submerged into the less attractive parent. ICICI, which holds 46 per cent of ICICI Bank’s shares, has announced that this stake would be transferred to a special purpose vehicle, which would also hold the reduced post merger stake of 16 per cent in the new entity. The explanatory memorandum circulated to the shareholders at the extraordinary general meeting said nothing about what was planned for the SPV stake. But ICICI has now announced that it will sell this 16 per cent stake to some foreign investors in order to create liquidity for the merger.

Media reports say that ICICI is already in negotiations to sell the stake and hopes to collect over Rs 1,100 crore at Rs 130, which is approximately the current market price of ICICI Bank. Given that its acquisition price after swapping its shares is just around Rs 135 crore, this gives ICICI a hefty profit. The money will be used to shore up the reserves of the universal bank that is formed after the merger and will help clean up its books, we hear.

The little question of the timing of this announcement has serious implications for ICICI’s shareholders. Although the sale of ICICI’s stake held by the SPV may prop up the universal bank’s books, it does nothing for the existing shareholders of ICICI. Look at it another way. If ICICI actually sells its stake (held in the SPV) before the merger, then we have a piquant situation where a set of individuals (ICICI’s management comprising KV Kamat, Lalita Gupte and company) who have no real ownership stake in it, will control the bank. Rather than merely look at different valuation methods and choosing the best option, the Courts ought to take the management factor into account and ensure that the swap ratio indeed protects the interests of small investors.


-- Sucheta Dalal



 



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