5 mins read . 30 Jun 2023
This week, the board of ICICI Bank approved the delisting of ICICI Securities. One of the leading brokers and investment bankers in India, ICICI Securities debuted only in April 2018 and had been an unlisted company till then. Now, ICICI Bank has decided to delist ICICI Securities through a stock swap. Under the swap, shareholders of ICICI Securities will get 67 shares of ICICI bank for every 100 shares of ICICI Securities held by them. Interestingly, the swap has been stuck at a time when the price of ICICI Securities has been tepid for quite some time while the price of ICICI Bank has been among the top performers. What led to this delisting and what does it mean for shareholders of ICICI Securities? Will they be better off post the swap?
In the last few quarters, most brokers have struggled to create value. Brokers who relied on a mix of the traditional online plus brick & mortar model have found that to be largely unviable. Clearly, with discount brokers ruling the roost, the pressure on broking margins is obvious. The value creation has been happening with brokers who have made rapid strides in positioning broking as a fintech proposition. The traditional broking model is not finding too many takers and that is apparent from the way many mutual funds have been sellers in the stock. If ICICI Securities had to create value for investors, it had to be at the forefront of this change.
If you look at the large bank-based brokers, ICICI Securities was the only listed brokerage. For instance, the broking arms of Kotak Bank, Axis Bank, HDFC Bank or SBI are not listed. Generally, listing makes the business model of a stock quite vulnerable to the vagaries of the stock market. In fact, from the peak of October 2021, when retail broking participation had peaked, the price of ICICI Securities had almost halved. The recent spike in the price was more on the back of the swap ratio with ICICI Bank being attractive to shareholders. Also, listing is useful if the company has to consistently raise funds and leverage valuations. For ICICI Securities, the business model is self-funding. The volatile cycles in the capital market does not justify raising too much capital, nor does it need to raise outside capital. Hence, there is only so much value that a stock market listing can add for a stock like ICICI Securities.
One of the obvious advantages for the bank is that buying up its subsidiaries allows them to monetize the rally in ICICI Bank effectively. Why to deploy the funds elsewhere when these funds can be deployed in-house. It sort of hits many birds with one stone. It helps ICICI Bank gets back full control of the securities business. Secondly, it does not have to worry about the added accountability of being a listed corporate. For banks in India, the listing of fund based businesses like life insurance, general insurance, credit cards and even AMC business has been lucrative. However, the listing of the securities business has not really added too much value as an independent listed entity.
The securities business in India is tightly regulated, risks are high and yields are consistently falling. At the same time, once the securities business achieves scale, it is auto resource generating and does not need external funds via listing. The listed securities stocks typically belong to broking companies not affiliated to banks, which needed the IPO funds to foray into the fund-based business. Banks floating securities business have no such compulsions. It is hardly surprising that ICICI Bank is not keen to keep ICICI Securities listed any longer; and that will eventually add more value to shareholders too.