Dear Respected Investors,

I wish to inform you that Quantum Mutual Fund will continue to pursue the legal actions against the Scheme of Arrangement between ICICI Bank and its 75% listed subsidiary ICICI Securities (ISEC).

Investors in QMF schemes should note that, under existing SEBI (Mutual Funds) Regulations, the cost of the legal actions is borne by Quantum AMC while the benefits, if any, will be to the investors in the mutual fund schemes that see the benefit.

Despite this uneven cost- benefit ratio, QMF is taking legal actions because, in our opinion, there has potentially been a failure of governance on multiple fronts:

1. On what criteria did SEBI grant an exemption under Regulation 37 of SEBI Delisting Regulations (the first exemption ever granted by SEBI) to ICICI Bank from using the tried and tested Reverse Book Building process for ICICI Bank to buy out the 25% of ISEC which it did not own – potentially depriving minority investors in ISEC of over Rs.10,000 crore based on our estimates of the value of ISEC as a robust business. It is to be noted that Regulation 37 exemption can only be granted to companies in the same line of business and, as prescribed in a Reserve Bank of India Master Circular Para Banking Activities dated July 1,2014, banking and broking are not in the same line of business;


2. The unknown and undisclosed assumptions of the accounting firms that did the valuation exercise – an accounting process, potentially devoid of a market reality;


3. The silent agreement on the valuation process by the Independent Directors of the Board of ISEC whose responsibility it is to look after the minority shareholders of ISEC – and this also holds true of the Members of the Board of ICICI Bank where a loss of reputation and failure of governance can result in an erosion of trust in ICICI Bank and a loss in market value, thereby reducing the share price of ICICI Bank;


4. The role of the proxy agencies – gatekeepers created to protect the interests of the minority shareholders – who have all recommended a vote ‘For’ for a transaction that potentially cost the minority shareholders of ISEC over Rs.10,000 crore based on our estimates;


5. The role of the Management and the Boards of ISEC who shared a confidential list of shareholders of ISEC with hundreds of ICICI Bank employees is against the ‘spirit’ of the Companies Act, that upholds shareholders privacy and governance standards;


6. The alleged role of hundreds of employees of ICICI Bank who reached out to hundreds of investors in ISEC seemingly with a good intention of educating people how to vote but, by some accounts, advising these hapless individuals how to vote;


7. The role of the mutual fund industry - members of the Association of Mutual Funds of India which rightfully and proudly proclaims that ‘mutual fund sahi hai’ – where data available in the public domain indicates that many mutual funds may have voted in a manner that hurts investors in the specific schemes that own ISEC shares (by casting a FOR vote for the muted swap ratio to delist ISEC and convert the shares to ICICI Bank) but may have benefitted investors in other schemes that owned ICICI Bank shares (they get ISEC on the cheap).

As such, we voted against the Resolutions for the delisting on March 27, 2024.

In a questionable voting process, the Vote went against us.

Armed with the winning votes, ICICI Bank and ISEC proceeded to complete the delisting scheme as approved by their Boards on June 29, 2023 and subsequently approved by the ISEC shareholders on March 27, 2024. On April 10, 2024, after the vote, we wrote to ICICI Bank and ISEC noting our concerns and objections on valuation and the questionable reach out by ICICI Bank to ISEC shareholders. A copy was sent to SEBI, BSE and NSE. We did not receive any response to our April 10, 2024 letter from ICICI Bank or ISEC.

NCLT Mumbai judgement states that SEBI, BSE, NSE seem to have no objection.

The press reports in various newspapers and websites in the run-up to the vote of March 27, 2024 quoted investors who had allegedly received repeated telephone calls / messages from employees of ICICI Bank allegedly guiding these investors on how to vote and seeking screenshots of voting: this is a serious issue. We believe under local and international law, sharing of data of a shareholder without the explicit approval of that shareholder or person is a violation.

Furthermore, it was unlikely that these representatives of ICICI Bank who reached out to shareholders of ISEC were Investment Advisors registered by SEBI who is the regulator for the securities markets.

Given that we had no response to our letter of April 10, 2024 to ICICI and ISEC and the fact that ICICI Group approached NCLT to complete the Scheme of Arrangement, we filed an Interim Application with the National Company Law Tribunal (NCLT) in Ahmedabad (where ICICI Bank is Headquartered) on May 28, 2024 and in Mumbai (where ISEC is Headquartered) on May 29, 2024.

NCLT, typically, is primarily concerned with ensuring that steps were taken in a sequential fashion and there was no violation of established procedure. NCLT is not the forum to challenge SEBI on why they gave an exemption to ICICI Bank under Regulation 37 of SEBI Delisting Regulations, knowing that ICICI Bank and ISEC are not in the same line of business. What NCLT had to ensure was:

1. Is there a valuation report? After having received the exemption on June 20, 2023, from SEBI under Regulation 37 of SEBI Delisting Regulations, ICICI Bank did not need to adopt a market-driven process to determine the price of the ISEC shares and they decided to use the audit firms of PWC and E&Y to do a valuation report;


2. Have the Boards reviewed the valuation report? This valuation report of a complex business with a crystal-clear view of the future profitability of ISEC & ICICI Bank provided by the Managements of these companies was used to derive a valuation of ISEC and was submitted 9 days later on June 29, 2023 to the Boards of ICICI Bank and ISEC for approval;


3. Have the Boards approved the valuation report? The Board members, including the Independent Directors who represent the interests of the minority shareholders, had voted in favour of the valuation report on that same day of June 29, 2023;


4. Was information sent to shareholders and to the stock exchanges giving the cut-off date as March 20, 2024 for being eligible to vote on the Resolution for the delisting of ISEC?


5. Was the voting fair, under the aegis of a NCLT-appointed judge?


6. Has the Regional Director, Mumbai confirmed that all procedures have been followed.


7. After this is completed and verified, a Scheme of Arrangement is approved.

Our humble request to NCLT was: the voting process was debased and compromised because of the ‘outreach programme’ of ICICI Bank; kindly authorize a second vote.

SEBI issues a letter to ICICI Bank & ISEC on June 6, 2024 and labels ICICI Bank’s ‘outreach programme’ as ‘inappropriate’

While our matter was going through its cycles of hearings and adjournments at NCLT, securities market regulator SEBI issued a 3-page letter dated June 6, 2024 addressed to the CEO & MD of ICICI Bank with the subject line “Administrative Warning Letter with respect to outreach programme undertaken by ICICI Bank regarding the Scheme of Arrangement for Delisting of the equity shares of ICICI Securities Limited”. A 2-page letter to ISEC dated June 6, 2024 noted that they should not have shared the names and contact details of their shareholders with ICICI Bank. The letter to ISEC states that sharing of shareholders data with ICICI Bank is not appropriate and it is against the ‘spirit’ of the Companies Act, that upholds shareholders privacy.

In the letter of June 6, 2024 to ICICI Bank, SEBI has criticized ICICI Bank for its defense of the ‘outreach programme’ to ostensibly educate and guide investors by noting that:

1. 'your Bank officials went beyond the reach of the remit of the outreach programme'


2. ‘there was a clear conflict of interest as your bank is the promoter with a 74% shareholding in I-Sec and an interested party in the transaction.’


3. ‘the heightened outreach programme on the last day of voting citing holidays/weekend appears inappropriate’


4. ‘your bank officials asking for screenshot from the shareholders was inappropriate’


5. ‘it is accordingly observed that the outreach programme undertaken by your Bank was inappropriate’


6. ‘This has been viewed seriously’

On June 8, 2024, we added this SEBI letter to our plea before the Honourable Bench of the NCLT in Mumbai and on June 20, 2024, we added this letter to our plea before the Honourable Bench of the NCLT in Ahmedabad.

The NCLT, Mumbai verdict on August 21, 2024 said that we did not have a case and ICICI could proceed with the Scheme of Arrangement. The matter is reserved for order with NCLT, Ahmedabad.

The detailed order from NCLT Mumbai refers to the SEBI letter of June 6, 2024 and states on page 29 of 31 of the said order: ‘The contents of warning letter of SEBI demonstrates that SEBI was concerned with the sharing of information of shareholders to ICICI Bank, which otherwise is not permissible under the Companies Act, 2013, however, it had no observation to the effect that the public shareholders were misled or coaxed to cast vote. There is no evidence on record from any shareholder that he was coaxed to vote in favour of the scheme only. The Regulators BSE, NSE, and SEBI have not raised any objection to voting process before us. The Independent Chairman of the meeting appointed by the Tribunal, Justice Akil Qureshi (Retd.) has also not pointed out any error or deficiency in the voting process. Accordingly, we are of considered view that mere outreach program conducted by ICICI Bank cannot lead to the conclusion that the shareholders have casted their vote under duress or influence, and voting process is vitiated.’

SEBI as protector of interest of minority shareholders?

Meanwhile, arguments by learned counsel over the past few months in different courts related to the same matter have thrown up some surprising statements which go to the very heart of shareholder democracy and threaten the growing interest in stock markets from local and international investors.

The very essence of SEBI’s existence is to protect minority shareholders. All the intricately created architecture of Independent Directors, Trustees of a Mutual Fund, Listing Agreements with stocks exchanges such as BSE and NSE have all been carefully created and painstakingly built to protect minority shareholders’ rights in listed companies. These can either be treated as mere words and a hollow façade or as substantive checks and balances that ensure individual and minority investors are not left to the mercy of large / founder shareholders and misguided managements.

In a separate case before the Honourable High Court of Bombay filed by an individual shareholder challenging the Exemption Order issued by SEBI to ICICI Bank on June 20, 2023 (under the Regulation 37 of SEBI Delisting Regulations), Moneylife (an online financial magazine) ( https://www.moneylife.in/article/icici-securities-delisting-saga-bombay-hc-asks-sebi-to-disclose-exemption-letter/74892.html ) while reporting on the proceedings in the High Court wrote on August 16, 2024: ‘During the proceedings, the Court emphasised that a shareholder has a right to know about the company’s affairs. The stance was maintained, despite attempts by ICICI’s counsels to argue that Ms. Modi’s shareholding of 500 shares was insignificant. The Court rejected this argument, reinforcing the principle that even minority shareholders have the right to information.’

It seems from the above article that learned counsel for ICICI Bank opposed the release of information to a shareholder because the quantum of shares held, 500, was insignificant.

I am not sure how Independent Board members who are supposed to represent the interests of the minority shareholders should interpret this statement by the learned counsel of ICICI Bank.

I am not sure what the thousands of minority, individual shareholders of ICICI Bank should make of this statement by the learned counsel of ICICI Bank – keeping in mind that an attributable portion of their money as shareholders in ICICI Bank is being used to pay the legal fees of learned counsel who apparently told the court that minority shareholders have no rights to the information that was being asked for by the petitioner: information that has a material impact on the value of the shares of ISEC held by minority shareholders.

From what we gather and based on the article of Moneylife on August 16, 2024, we do not know whether the learned counsel for SEBI in the High Court challenged the reported statement of learned counsel of ICICI Bank on the rights of minority shareholders owning insignificant number of shares.

I am not sure how the stock exchanges, NSE and BSE, should react to this statement from learned counsel of ICICI Bank that minority shareholders with “insignificant” shareholding should not have access to information.

We now need SEBI, BSE, NSE to make a statement on the voting process.

As the Founder of Quantum Advisors, the Sponsor of Quantum AMC, I am proud of what my colleagues have achieved in this episode of dealing with the Scheme of Arrangement of ICICI Bank and ISEC.

Our lonely presence as the sole mutual fund house taking on the fight for unit owners in Quantum Mutual Funds in any court battle will likely be a losing proposition as clearly seen in the contents of the NCLT Mumbai order UNLESS SEBI, BSE, NSE lands up at NCLAT with a clear statement on the voting process.

The Honourable NCLT Mumbai has made an important observation that ‘The Regulators BSE, NSE, and SEBI have not raised any objection to voting process before us.’

That sounds like an invitation to SEBI, BSE and NSE to step in to the ring and clarify the matter and either:

1. Send a letter to ICICI Bank and ISEC clarifying that the outreach programme and the sharing of confidential shareholder information as outlined in SEBI’s letter of June 6, 2024 is proof that the voting process was vitiated and, as such, SEBI does not recognize the voting results of March 27, 2024 and instruct ICICI Bank and ISEC to immediately inform their Boards, the stock exchanges and NCLT of this rejection of the March 27, 2024 vote via a public notice; or


2. bless the compromised voting process in a further clarification letter to ICICI Bank and ISEC and allow the Scheme of Arrangement to carry through and make SEBI’s position on minority protection clearly known to the public.

If SEBI believes that ‘inappropriate’ acts vitiated the voting process, it is now up to SEBI to step up to the plate.

If SEBI does step in with such a statement confirming that their June 6, 2024 letter proves that the voting process was vitiated, a second vote is a possible outcome of this forced disclosure to be made by ICICI Bank and ISEC to NCLT and NCLAT.

A second vote will be a significant win for insignificant minority shareholders: a vote of reason with no meddling and interference under the scanner of the public eye in open sunlight is badly needed in an environment that has been dominated by opacity. We need to reinforce the rights of Minority Investors in individual stocks and ‘sahi’ mutual funds.

Thank you for your continued faith in Quantum Mutual Fund where the insignificant minority will always find a significant voice on our journey to build portfolios for sensible, long term, risk-adjusted returns.

Kind regards,

Ajit Dayal
Founder, Quantum Advisors, Sponsor of Quantum AMC - Investment Manager of Quantum Mutual Fund

Links:

1. In the March 22, 2024 communication from Quantum Mutual Fund we explained in detail our studied view that the academic valuation done by ICICI Bank for acquiring the ~25% of shares which it did not own in its listed subsidiary, ISEC, was detrimental to the interest of our unit owners. Our internal assessment (as noted in this communication of March 22, 2023) was a belief that the offer from ICICI Bank should be 30% to 183% higher than the current offered price.


2. Letter from QMF to ICICI Bank, ISEC, SEBI, BSE, NSE; April 10, 2024 :


3. SEBI letter to ICICI Bank and ISEC dated June 6, 2024


4. NCLT Mumbai Judgement, August 21, 2024