A deep dive into curious case of delisting proposal of ICICI Securities

Pursuant to the Scheme, ICICI Securities will become a wholly owned subsidiary of ICICI Bank

Delisting of listed companies has always been a cumbersome process in terms of various approvals, expectation mismatch between the promoters and public shareholders in terms of delisting price which is arrived through a tricky reverse book building process, cash outflow of the promoters, etc. Over the years, the Market Regulator certainly brought in reforms to ease the delisting process. One of the welcome changes which were introduced during the year 2021 in the relevant regulation was to provide for the delisting of equity shares of a listed subsidiary company pursuant to a scheme of arrangement, without following a cumbersome voluntary delisting process including a reverse book-building process to determine the delisting price.

Applying the above provisions, probably an unprecedented one, the board of directors of ICICI Securities Limited (‘ICICI Securities’) and ICICI Bank Limited (‘ICICI Bank’) have approved a Scheme of Arrangement for the delisting of ICICI Securities. It is proposed to implement this by issuing equity shares of ICICI Bank to the public shareholders of ICICI Securities in lieu of cancellation of their equity shares in compliance with Regulation 37 of the SEBI Delisting Regulations. ICICI Bank will issue 67 shares for every 100 shares held in ICICI Securities. Currently, ICICI Bank holds 74.85% shares of ICICI Securities and a balance of 25.15% shares are held by public shareholders. Pursuant to the Scheme, ICICI Securities will become a wholly owned subsidiary of ICICI Bank. The Scheme is subject to receipt of requisite approvals from stakeholders like shareholders, creditors, RBI, NCLT, Stock Exchanges, SEBI, and other regulatory / statutory authorities.

It is interesting to note that a plain vanilla merger of ICICI Securities with ICICI Bank could not be considered as there are regulatory restrictions for a bank to undertake the securities broking business.

On the plain reading of the SEBI Regulations, one may think that it could be a straightforward approach for other corporate houses to delist their entities – However, the devil lies in the detail. There are several nuances in the relevant delisting regulation. To understand the same, it would be pertinent to appreciate the backdrop of this move by the SEBI. On March 16, 2020, SEBI issued a consultation paper to evaluate a proposal relating to the delisting of shares of listed subsidiary without following the provisions of the erstwhile delisting regulations. It was observed by the Market Regulator that there are many listed companies which have listed subsidiaries, both engaged in the same or similar business, and equity shares of both are actively traded on stock exchanges. SEBI also noted that by working together, both the companies could achieve significant synergies and create significant incremental shareholder value.

In the consultation paper, it is further discussed that a merger of a listed subsidiary with its listed parent entity would help achieve the intended synergies, but it may not be favorable for the following reasons:

• Industry-specific constraints (example, license conditions);
• Value-destroying transaction costs (for example, transfer costs, stamp duties, state-level constraints); and
• Cultural differences (for example, where the listed subsidiary was acquired by the listed holding company, and not set up by it organically).

With this backdrop, the SEBI inserted Regulation 37 in the Delisting Regulations which provides exemption from complying with the provisions of Delisting Regulations for delisting of equity shares of a listed subsidiary company, pursuant to a Scheme of Arrangement by an order of a Court or Tribunal, with its listed holding company. As per Regulation 37 of Delisting Regulations, exemption shall be permitted subject to certain conditions. Certain key conditions are as under:

• Both companies should be in the same line of business;
• The holding company shall issue its equity shares in lieu of cancellation of equity shares of public shareholders in the subsidiary company;
• At least 2/3rd of the minority shareholders of the subsidiary company should vote in favor of the scheme;
• Majority of minority approval from public shareholders of the holding company;
• Shares of both the companies are listed for at least 3 years and a holding-subsidiary relationship should be present for at least 3 years;
• Value at which swap is considered, shall not be less than 60 days volume weighted average price;
• Post scheme, holding company should not undertake further restructuring for a period of 3 years; and
• The subsidiary company shall not seek relisting for a period of 3 years.

SEBI has clarified that the following key criteria need to be fulfilled to meet the ‘same line of business’ test:
• The principal economic activities of both companies should fall in the same group under the National Industrial Classification (NIC) Code 2008; and
• At least 50% of revenue and 50% of assets of both the companies should be from/ in the same line of business.

This provides a clear framework for large corporate houses (such as Bajaj Finserve Ltd. and Bajaj Finance ltd., Cholamandalam Financial Holdings Limited and Cholamandalam Investment and Finance Company Limited) where this kind of situation prevails and in order to rationalize their group structure, one can definitely delve into this. It is also interesting to note that unlike a conventional delisting, under this route, there won’t be any cash outflow for the acquirer, i.e., the holding company.

What’s there in store for minority shareholders of ICICI Securities?

Apart from approval from various stakeholders and regulatory/statutory authorities, the scheme is subject to approval from at least 2/3rd of the minority shareholders of ICICI Securities. Hence, through this window, minority shareholders can decide the fate of the scheme. Apart from the regulatory framework, the other interesting aspects from a minority shareholders standpoint are as under:

Nitin Bohra,
Associate Partner,
Dhruva Advisors

• Tax impact – Unlike a swap or merger, it would be a taxable transaction.
• Date of transfer – Whether it should be the NCLT approval date, the date on which the companies make the scheme effective, or record date.
• Consideration for tax purposes – Since this is an exchange of shares, whether consideration should be the market value of the subsidiaries’ shares or the holding company’s shares as of the date of transfer.
• Rate of tax – This swap will not be entered through the stock exchange and as a result, ‘Securities Transaction Tax’ will not be payable. Hence, the lower rate of tax provided under the statute shall not be applicable.
• In the case of non-resident minority shareholders – how will withholding tax obligations be discharged?
• Cashflow to discharge the tax – In substance this being a swap should not be taxable. However, this is not a tax-neutral swap. Hence, the minority shareholders may need to cash out of the shares of ICICI Bank to discharge the tax liability upon the scheme being effective.From a minority shareholders’ standpoint, it is pertinent to have clarity on all the above aspects.

Accounting and tax implications for ICICI Bank

Ketan Sakhala,
Senior Associate,
Dhruva Advisors

Another interesting aspect to ponder upon could be the accounting and tax implications of this entire transaction in the books of ICICI Bank. In substance, ICICI Bank has acquired an additional stake in its subsidiary in lieu of issuance of its own shares. Ideally, it should account for this transaction by increasing the carrying cost of investment in ICICI Securities, and correspondingly credit its share capital and securities premium account on issuance of shares.

However, from an income-tax standpoint, whether the value of shares issued by ICICI Bank would be available as the cost of acquisition of ICICI Securities’ shares? One may argue that, in substance, ICICI Bank has acquired an additional percentage of the stake, which is more akin to the cost of improvement of existing shares. But in the absence of actual receipt of additional shares, this aspect should be evaluated in greater detail at the time of divestment of shares in ICICI Securities.


It will be interesting to see whether the other groups having similar structures follow suit if this scheme is approved by the minority shareholders. At the same time, it would be pertinent for the companies to examine and provide clarity to minority shareholders about their taxes. Also, it will be beneficial if the Legislature brings out appropriate amendments to the statute (similar to merger/ demerger transaction), to provide that the transfer of shares under this framework shall be a tax-neutral transfer.

Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of ET Edge Insights, its management, or its members

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